美源伯根 (ABC) 2003 Q1 法說會逐字稿

Welcome to the AmerisourceBergen first quarter earnings conference call.

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

Later, we will conduct a question-and-answer session with instructions given at that time.

If you should require assistance during the call, please press 0 then star.

As a reminder this, conference is being recorded.

I would now like to turn the conference over to your host, Mr. Mike Kilpatrick with AmerisourceBergen.

Please go ahead.

Good morning, everybody.

Welcome to AmerisourceBergen conference call covering the fiscal 2003 first quarter results.

I'm make Kilpatrick, Vice President of Corporate and Investor Relations.

Joining me today are David Yost, AmerisourceBergen's CEO;

Kurt Hilzinger, Chief Operating Officer; and Mike DiCandilo, Chief Financial Officer.

During the conference called it, 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 filing including our 10-K report for the fiscal year 2002.

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're welcome to follow along.

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

Here is David Yost, AmerisourceBergen's President and Chief Executive Officer to begin our remarks.

Good morning, thank you for joining us.

As noted in our press release this morning, we reported a very strong quarter and are pleased to share the results with you.

Our total operating revenues for our December quarter were up 15% year over year for our first $11 billion quarter.

An EPS of 84 cents was up 33% on a GAAP basis on top of the very strong quarter reported last December.

This strong quarter follows our very strong first full year of AmerisourceBergen into September 30, so we no longer have to deal with proformas.

Both pharmaceutical distribution and PharMerica, our two reported segments, had strong quarters.

Operating revenues in the pharmaceutical distributions segment for the quarter were 10.9 billion.

Excuse me.

Up 14% over the same quarter last year with the same number of working days.

That 14% increase equals an additional $1.4 billion from pharmaceutical distribution this December quarter versus last December.

Total operating expenses as a percent to revenue reached a historic low, more than offsetting the depreciated gross margin.

PharMerica delivered a strong quarter.

Revenues were up 13% to over $400 million and operating income and was up 22%.

For the total company, continued discipline in use of working capital grew committed capital at key company metric to a robust 25.5%.

Lots to like about this quarter.

In addition, we were active on the acquisition front.

Since our last earnings release, we have announced and closed the acquisition of Bridge Medical.

Bridge Medical markets the best bedside patient drug-scanning system available in the market today and ensures the five rights for all patients where it is installed.

The right patient, the right drug, the right dose, the right time, the right route.

Bridge Medical system is in various stages of implementation in over 40 institutions, including pediatric facilities.

Bridge Medical was an extremely important strategic addition to the ABC value added service offers because it completed the drug delivery process from receiving doc to patient administration for our institutional customers.

Patient safety will continue to emerge as one of the highest priorities for hospitals in the month ahead, and bridge Medical solutions will combination this area.

ABC customers can now get the best pharmaceutical drug delivery, the best packaging solution through American health packaging, the best scalable automation solution through Automed, and now the best patient safety solution through Bridge Medical.

During the quarter, the performance, our comprehensive pharmacy automation company acquired in July exceeded our internal expectations.

At the American society of hospital pharmacists meeting in Atlanta in December, Automed and Bridge were simply inundated with interested prospects.

In December, we also announced and closed the acquisition of U.S. bioservices.

U.S.

Bio strengthened our offering to the biotech and specialty pharma manufacturers and sells high-value therapies and reimbursements support.

U.S. bio recently acquired Documenix, a west coast complement to our lush organization, the market leader in outsourced reimbursement consulting services.

U.S.

Bio is important to ABC because it expands our capabilities to manufacturers.

We have noted previously that specialty distribution will be an important growth engine of AmerisourceBergen in the future, and our acquisition of U.S.

Bio reinforces that commitment.

These businesses, in combination with our service reputation, continue to differentiate and enhance our market-leading position.

And speaking of service, Premier, one of the largest hospital group pursing organizations in the country, recently announced the results of their annual member survey.

And, once again, AmerisourceBergen received the highest service rating.

This is the second national hospital survey released in the last six months, and in both AmerisourceBergen received the highest rating.

These surveys confirm our own internal surveys that AmerisourceBergen continues to meet or exceed customer expectations for service quality.

It's particularly gratifying to receive this service recognition at the same time that we are consolidating distribution centers and have integrated the sales portions of the two pharma companies.

Lots to like about this company and we are just getting started.

Since revenues have seemed to be in such high profile of late, I would like to address that topic from an industry perspective in terms of industry stability and size and reconfirm our confidence in growing with the market in the long-term and more importantly, our confidence in growing our earnings at 20% or more on an annual basis.

First, in terms of industry stability, had I listed all the $1 billion accounts, accounts that were 1 1/2 or 1% of the $200 billion industry, the $100 billion accounts that changed suppliers in 2002, it would be a short list.

None, not a single account.

In 2001, the year before, the number would be one account.

My point here is there is lots of stability among the account base of this industry.

Big accounts don't move around much.

The norm is for contracts to be renegotiated when they come due, often before they come due.

The pharmaceutical industry, distribution industry, is approaching $200 billion in revenue.

Of that, ABC does less than $50 billion in total revenues, leaving, of course, $150 billion we don't do.

Some estimates are that a minimum of with $25 billion does not touch any wholesaler, large or small, but goes directly from the manufacturer to the account, bypassing the wholesaler completely.

My point here is there are lots of revenues available to ABC, and we're highly confident of our ability to grow with the market the next five years based on our comprehensive and expanding value-added service offer.

The risk of sounding defensive about revenues, let me recount that issue for the reported quarter.

During our September fiscal year-end earnings call, we stated that you could expect our revenue to grow with the market for the long-term, and that long-term market growth was forecasted to be 11 to 14% by IMS Health.

The long-term part of that statement was overlooked by some and speculation began immediately that we were signaling a slowdown in revenues, lost accounts or something else.

We were not.

We were taking what we thought was the most responsible long-term course as the market leader.

On December 5, at our investor day, we stated that we expected revenues to grow at approximately 13% for the December quarter versus the prior year.

As you know today, we reported revenues up over 14 1/2% versus last year.

Revenues were higher than we forecasted in early December because brand to generic and OTC switch didn't impact us as originally forecasted for the December quarter.

The last half of December turned out to be ahead of our internal forecast and the new business began earlier than anticipated in late-December versus January.

Did we lose some accounts during the quarter?

Yes, we did.

Did we gain some accounts during the quarter?

Yes, we did.

Are we confident the gains offset the losses?

Yes, we are.

We continue to expect to grow our revenues with the market and based on our visibility, we expect to be 13% for the balance of the year and are optimistic about the strong industry growth rated 2004 and beyond with the approval of new drugs.

I know our policy of not announcing customer wins and losses is frustrating to some, but it is a policy we will continue for several reasons.

First, where do you draw the line on the size of announcements?

At a billion-dollars, $500 million? $250 billion, so forth.

Next, when do you announce the win or loss, and with what if there is a timing issue between the win and the loss.

Some accounts want no announcement at all.

How about we pick up a piece of the very large account?

Do we announce an extraordinary growth in an existing account and so on?

Here's the most important reason not to announce the account gains and losses: Such a policy puts inappropriate attention on revenue and encourages the account at any price so announcements can be made.

It puts too much emphasis on the top line instead of the bottom line.

You can expect us to be very disciplined; you can expect us to grow EPS at 20% or greater each year.

Rest assured we will continue to expand our value-added proposition to our customers and suppliers and expand our pharmaceutical business.

That's why in the last six months we have added Automed and Bridge Medical and U.S.

Bioservices to our company, all of which will eventually contribute to expand our operating margin.

With that, let me turn the floor over to Kurt.

Thank you, Dave, good morning, everyone.

Today will focus my comments on the operating highlights of our business units and again provide a progress report on our integration activities.

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

Cost savings from our integration activities were again evident with operating expenses up at less than half the rate of revenues driving operating margin expansion for the fifth consecutive quarter since the merger.

The buying side component of our gross margin exceeded our internal expectations in the quarter as product inflation remains strong.

We also continue to benefit from the accelerated growth of generic pharmaceuticals through higher gross profit contributions and lower working capital requirements in the form of inventory and receivables.

As always, we remain focused on capital management, drive and return on committed capital well above year-ago levels, which Mike will detail.

During the quarter, we continued to make solid progress with our merger integration activities.

As we commented in on November with the integration of our key functional and support areas complete, our integration efforts in 2003 will focus almost entirely on executing the work plan of our future state distribution network.

We have now closed the merger integration office and transition key resources into an operations management office in order to better execute our network plans.

We referred to our total network plan as the optimized program.

A $350 million multi-year capital program.

Through the application of state-of-the-art information and automation technologies, many new to the U.S. pharmaceutical distribution industry, the optimized program is designed with a specific intent of creating the highest-quality, lowest-cost capability in the industry.

In the December quarter, our integration plans continued on schedule and on budget with synergy capture again ahead of our internal expectation.

During the quarter, we completed the expansion of our Mansfield Massachusetts facility and consolidated our other Boston area facility into Mansfield with no customer interruption.

During the quarter, we also tested and successfully completed the first installation of our new warehouse management system.

This was an important accomplishment because as we discussed in New York and early December, this system is the basis upon which all of our future state distribution centers will operate and will significantly improve our warehouse productivity rates, pick accuracy, and utilizations in the years ahead.

During the quarter, we began expansion of the second facility and continue to make solid progress toward the construction of our now greenfield distribution centers.

Our plans remain on track for the remainder of the fiscal year.

Since the inception of a merger, we have now completed eight distribution center consolidations, each on plan, on budget, with minimal to no customer disruption.

Consequently, while doing this work, we continue to rank highest among system our national peers in customer-service surveys.

This performance directly reflects the customer-first philosophy we adopted at the outset of the merger, wherein our customers' needs and requirements remain paramount in our planning activities.

We view our premier service reputation in the industry as an important competitive advantage, and all of our integration activities are designed to have a positive impact on our customers as we make available to them the combined capability capabilities of the two former companies.

As always, we remain disciplined in evaluating new customer relationships.

As the premier customer service provider, we lead with value and service.

Requiring returns to on committee capital greater than 20% will continue to be the primarily metric by which we evaluate new customer opportunities.

Now, let me turn to our specialty group.

AmerisourceBergen specialty group continued the 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 pharmaceutical manufacturers.

As we indicated in the press release, annualized revenues for the group now exceed $3 billion.

The businesses which make up the specialty group exceeded our internal expectations for the quarter on every key measure.

Revenue growth, operating income and ROC.

This was due to a very attractive group of high-growth, high-ROC businesses growing substantially faster than our corpharmaceutical distribution businesses.

In terms of specific highlights for the quarter, ICS, the group's third party logistics provider, signed six new man manufacturer clients in the quarter.

Last group, the specialty groups, reimbursement support and consulting business, added 11 new manufacturing clients in the quarter.

Bessie medical, the group's vaccine distributor added over a thousand accounts in the quarter and is now servicing over $10,000 active accounts in any given months.

Oncology supply continued its rapid growth with the addition of new sales resources and by our estimates is the largest oncology supplier in the country.

In addition, the group is very excited about the acquisition of U.S.

Bioservices and looks forward to integrating it into the business in months ahead.

As we indicated last quarter in fiscal 2003, particular emphasis would be placed on leveraging the unique capabilities of these individual businesses into a comprehensive service model offering for biopharmaceutical manufacturers, and we anticipate making an important announcement demonstrating this capability in the near future.

As we have continued to emphasize, the specialty groups businesses taken as a whole provide a significant future in revenues growth platform for AmerisourceBergen.

Now, let me turn to PharMerica.

The strong lines we saw in fiscal '02 continued through the first quarter with substantial gains in revenues and operating income, up a percent and 22% and respectively.

The increase revenues and operating earnings were driven by the strong performance was company's worker's compensation division and improved revenue growth at the company's long-term care pharmacy division.

During 2002, PharMerica added sales and marketing resources to accelerate this long-term care revenue growth which clearly benefited the first quarter of 2003.

Focus on asset management, particularly in the area of credit and collections lowered our capital investment business and improved PharMerica's ROC over a year ago level.

PharMerica continued to leverage its recently implemented common I.T. platform in the long-term care division, driving further operating expense efficiencies to through a consistent application of practices at the pharmacy level and continued to place additional emphasis on leveraging the clinical expertise resident in PharMerica through greater therapeutic interchange recommendations, increasing their value proposition to customers and manufacturers alike.

Chuck Carpenter, PharMerica's President, recently advised us of his decision to retire from PharMerica and AmerisourceBergen to pursue a number of personal and family interests.

He will remain active with the business into the second calendar quarter to ensure a smooth transition and will be available for further assistance through the end of September.

When Chuck took the PharMerica assignment in 1999, he was asked to improve PharMerica's operations, consolidate a number of administrative activities, instill greater financial discipline, and most importantly, put in place a strong management team; all of which he clearly accomplished.

We will look both internally and externally for Chuck's replacement.

We wish to thank Chuck for his many contributions to the company through the years.

Lastly, we remained confident in our initial forecast of achieving annual synergy cost savings of $150 million by the end of fiscal 2004 and additional incremental savings beyond 2004 as we complete our distribution network buildout plan.

Now, I would like to turn the call over to Mike for a review of the financials.

Thank you, Kurt, good morning, everyone.

AmerisourceBergen's first fiscal quarter results includes strong operating performance across business segments and capital usage resulting in operating market expansion, record-low operating expense ratios, interest expense control, strong return on committed capital, and EPS growth at greater than 20%.

Allow me to begin by mentioning that my comments in year-over-year comparisons will exclude special items representing a net credit to the PNL of 0.8 million for the current-year quarter, net of tax related to the reversal of previously accrued facility consolidation and employee severance cost, which was set out as a separate item in our operating statements.

Special charges in the prior year quarter consisted of merger costs of 4 1/2 million net of tax.

Note that we're no longer breaking out merger costs as a separate line-item in fiscal '03 as the company has successfully converted its integration office to operations, and any ongoing costs of the merger integrations are considered normal operating costs.

Such costs are included in distribution selling and admin expenses in fiscal '03 and are expected to be approximately $7 million for the year.

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 $11.1 billion for the quarter, up 15% over the prior year.

Our top-line growth for the first quarter exceeded our previous guidance of 13%, and as Dave mentioned, due to a stronger-than expected month in December, reflecting the impact of new customer accounting, generics and higher-than expected growth in existing accounts.

Operating income was up a strong 17% compared to last year's quarter, resulting in operating margin expansion of four basis points.

Earnings per share for the quarter increased 24% to 83 cents per diluted share before special items, compared to 67 cents per share reported last year on the same basis.

The earnings growth for the quarter was positively impacted by ongoing merger synergies and low interest expense, which in turn was driven by continued improvements in working capital.

Moving to the pharmaceutical distribution segment.

Operating revenue for the segment was $10.9 billion, up 14% compared to last year's quarter.

The customer mix in the quarter between institutional, which includes health systems, on-site pharmacies, mail-order pharmacies, and our specialty group at 55%, and retail, which includes independents and chains at 40 -- at 45%, changed slightly from the prior-year quarter as our institutional business grew 19% and our retail business grew 10% versus the prior year quarter.

In the pharmaceutical distribution segment, gross profit margins declined 11 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 offset in part by the strong performance of a progenerics program and a strong by-side environment.

With regards to accounting, we recorded a charge of $8.8 million this quarter, compared to a charge of $5 million in the first quarter last year as a result of stronger price appreciation in the first fiscal quarter of '03 versus '02 including several significant price increases on generic drugs.

We continue to expect drug price inflation to be in the same 5 to 5 1/2% range in fiscal '03, than it was in fiscal '02.

Operating expenses as a percentage of revenue, decreased 13 base points for the quarter compared to last year's quarter to a record low 2.10%.

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

As a result, operating income as a percentage of operating revenue increased by three basis points over the prior-year quarter.

Turning to PharMerica.

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

Revenues increased 13% over last year's quarter to $403 million.

The gross profit margin declined to 32.2% from 33.6% primarily due to the sales gains in the lower gross margin workers' compensation business, which continued to grow at a faster rate than a long-term care business.

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

The change in mix, as well as continued improvements in operating practices and reduction in bad debt expense, drove operating expenses down to 26.3% of revenue in the quarter, a reduction of 185 basis points from the prior-year period.

As a result, operating income for the quarter was up a strong 22 percent and the operating margin expanded by 41 basis points to 5.84% for the quarter.

PharMerica continues to produce strong results in fiscal 2003.

We expect the revenue to grow in the low teens and their EBIT to grow to slightly faster rate with operating margins expanding to greater than 6% for the year.

Looking again at the company as a whole, interest expense for the current quarter was $34.4 million dollars, compared to 37.0 million in the prior year as we continued to benefit from improved capital usage and lower interest rates.

Net average borrowings in the first fiscal quarter of '03 were $1.8 billion, compared to $2.2 billion in the prior year, once again, reflecting strong discipline asset management.

The effective income tax rate for the quarter was 39.5%, compared to 39.7% in the prior year.

As we said during our investor day in December, we expect to drive this rate down to the 38% range over the result of next two years as a result of implementing state tax planning strategies.

Turning to the balance sheet and cash flows, we again showed strong working capital management in the quarter.

For the pharmaceutical distribution segment, day sales outstanding for receivables were reduced to a historic low of 16.1 days in the quarter, compared to 16.9 days in last year's first quarter.

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

Recently-purchased collection software in both the specialty and drug businesses should continue to improve our receivable management going forward.

PharMerica also had excellent performance reducing their DSOs down to 40 days from 44.4 days in the prior-year -- prior year quarter.

Inventory levels of 6.4 billion at the end of December increased by over 900 million from September 30, 2002, as expected, reflecting seasonal and holiday requirements as well as inventory building and in anticipation of manufacturer price increases.

Inventory turns in the quarter were 6.7 compared to 6.6 last year and continue to outpace the industry.

Our net working capital investment as a percentage of revenue was 6.8% in the current year quarter, compared to 7.2% in the prior year quarter.

Capital expenditures were $16 1/2 million during the quarter, and we continue to expect Cap Ex to be 100 to $130 million for the year.

These expenditures primarily related to our distribution network plan and technology investments.

Total debt to total capital at quarter end was 39.2%, compared to 43.7% at the end of December last year, reflecting the efficient use of working capital during the 12-month period.

Net debt to capital also significantly improved to 34.9% compared to 40.8% at December 31 last year.

As previously announced, we successfully raised $300 million via a senior note offering in November on which we will pay 7 and 1/4% interest for the 10-year term of the notes.

In January, we used the proceeds of these notes to repay $150 million of senior notes and intend to repay $125 million of 8 3/8% PharMerica bonds recalled in '03.

We also increased our availability under our receivables securitization facilities from $850 million to $1.1 billion during the quarter and continue to explore opportunities to combine the two separate facilities into one.

Cash use from operations for the quarter was $666 million compared to usage of $413 million in the prior-year quarter as expected, reflecting our seasonal inventory build.

By the end of our current fiscal year, we continued to expect cash flow from operations will approximate $300 million.

Return on committed capital, which you recall is one of our primary financial measures, was 25 1/2% for the quarter, well above our goal of 20% and an improvement in the prior-year quarter.

Each of our business units also exceeded 20%.

All in all, another very strong quarter reflecting strong execution and attention to details.

For the remainder of the year, we expect to grow operating revenue approximately 13% and we expect to grow EPS 20% before special charges.

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

Thank you, Mike Kilpatrick for a few additional comments.

Thank you, Mike.

We will now open the call to questions.

I would ask to you limit yourselves to one question only until we have had a chance for everyone to have an opportunity.

Then if there is time, we can ask additional questions.

Go ahead, Stacey.

Thank you.

Ladies and gentlemen, if you wish to ask a question, please press one on your touch-tone phone.

You will hear a tone indicating you have been placed in queue.

You may remove yourself from the queue at any time by pressing the pound key.

If you're using a speaker phone, please pick up the handset before pressing the numbers.

One moment for our first question.

We'll go to the line of Robert Willoughby with CS First Boston.

Please go ahead.

Thank you.

Given the massive jump that you saw in the specialty business, I think from over 2.5 billion to over 3 billion, I'm surprised there was not a more material jump or just a less slight decline in the gross margin in the quarter.

Robert, I -- I lost you at the end.

You can please repeat that question.

Yeah, I just -- the specialty business grew so dramatically during the quarter on a sequential basis, I was surprised the margin deteriorated as much as it did.

When do you see more of an impact from that business that you're consolidated numbers?

Well, a good part of that growth in the specialty business was, um, in the oncology business, most of which is distribution and pretty close in nature, you know, to the rest of our distribution business, you know after saying that, we continue to see great improvement in our services to manufacturers and continue to look for margin expansion opportunities in the future.

Thanks.

Next question.

Thank you, next we'll go to the line of Tom Galluci with Merrill Lynch.

Please go ahead.

Good morning, everyone.

Mike, I think in, um, your comments you mentioned strong by-side opportunities, drug price inflation as being one aspect to that.

Can you maybe give me color on any other factors that might be at work there, at least at a high level?

And for example, maybe recent trends in activity or actions by the manufacturer's side.

Well, we continued, Tom to have good opportunities from the manufacturer as I said.

The individual product price increases were, um, were very good compared to last year, and um, reinforce our belief that price inflation is going -- going to be in excess of 5% for the year.

One of the things I mentioned on the call was generic manufacturers very aggressively raised prices on certain individual SKUs and some cases, 100 and 200%-type price increases, which is, um, relatively a new dynamic to our industry and really, um, was a boost to us as well.

The other thing, Tom, as a result of our strong balance sheet, we had all the cash available we had, you know, we needed to make whatever purchases were represented to us that we thought were good ones.

We're in a really good spot.

Just maybe a follow up, um, on some of your competitors this week, you're talking about maybe different actions on behalf of manufacturers and how much product they had available out there.

Are you seeing a different trend or maybe you were not as active last year so it doesn't effect you as much.

You can give us a color on what you're seeing out there?

Hi, Tom, this is Kurt.

I'll chime in on that one.

This has been an ongoing thing, you know, that we work through every -- at the end of every calendar year, um, you know, where -- where you know, there are, in some cases, product allocation issues Sand some cases it's a result of manufacturers having hit their own quotas.

Plants shut down and other things.

We try to anticipate for that, but there are always some distribution in -- disruption in product flow at the end of December, and we try to anticipate that and plan for it and after we roll through the end of the calendar year, that product tends to be made available to the wholesale community again, and we go about servicing our customers once it's rolling again.

Great, appreciate the color.

You bet.

Thank you, next we'll go to the line of Glen Santangelo with Solomon Smith Barney.

Please go ahead.

Yeah, hi, Dave.

I have a quick question.

I appreciate some of the comments around all the contracting noise, but I want to make sure I'm clear on a couple of things.

Ignoring wins and losses for a second, do you believe that the industry is experiencing contract movement, you know, at a greater rate, roughly the same or at a slower rate today?

It just seems like there has been a flurry of announcements and people think there that there has been some massive acceleration on that front.

If you can comment on that.

As a follow-up, do you think any of this movement has created any incremental fundamental pressure on the gross marriage know line.

If you add color on that, that will be great.

I will be happy to, Glen.

They got your name right this time.

I think that's the first time we had an announcer do it right.

The first thing I would say, Glen, in terms of the whole flurry activity, I'm not sure that is an adequate characterization of what is going on in the market.

Even with the announcements, you know, that have been made out there, it's a small number of accounts when you view a $200 million industry that -- billion industry that has thousands of accounts and hundreds of big accounts, so I think it's been a little blown out of proportion, um, you know, in reference to the strength of the market now verses, you know don't we see the market being stronger now than we saw it, um, when we reported in September, you know, the answer is yes.

We do think the market's a little stronger in the 11 to 14%, which is a very long-term, um, goal that IMS, you know, had.

We think the market growth is more in the neighborhood of 13% in the foreseeable future, why we reflected that and our growth rate for the balance of this year.

I don't -- I don't think that, um, the recent activities, um, you know, are that much out of line, you know, Glen with what has been true of the industry in the past has always been a really competitive industry, I know, as long as I have been around, um, and we're certainly not anywhere near the level we were, you know, back in the days of when Fox Meyer was out there with a real renegade strategy, so, you know, I would say, you know, from an industry perspective, it's kind of, you know, business as usual in terms of competitiveness.

Okay, thanks for the comments.

You bet.

Thank you, next we'll go to the line of Kevin Berg with First Albany.

Please go ahead.

Yes, just a clarification, Dave.

You said that gains offset losses into the business.

Is that a net basis -- basis into 2003?

We were trying to make the case there is an ebb and flow in the business, Kevin, and that there are going to be losses from time to time, gains from time to time, and we're highly confident on this $50 billion, you know, revenue basis, approximately what we have that, you know, there is no cause of, you know, for concern as you look out in the future at our revenues.

Related to that in terms of the pricing competition, can you give a little color on that, customer service, or is pricing service the many driver in your view?

Well, Kevin, you never know for sure, you know, I mean there is a good reason and the real reason and it's hard to focus in on that.

The one insight we do have is the one that got so much, you know, publicity with the issue of 10et, and 10et ended up putting out a press release saying they were going to save $6 million a year on a $450 million contract.

That tended to be from a press release to be, you know, somewhat price oriented.

I think you have have to be careful about not drawing too much conclusion, you know, from one single, um, account, um, and, you know, we continue to lead on value, we have done a big job of enhancing our value-added services, added some, actually this quarter through acquisition and we think at the end of the day that strong value proposition will continue to be very, very attractive to our customers as well as to our prospects.

Thank you very much.

You bet.

Thank you, we'll go next to the line of John Souter with SG Cowen & Company.

Please go ahead.

Thanks, Dave or Mike, when you talk about your growth assumptions, is it based on your growth, your customer mix consistence, what you reported here, the retail 10% and in the high teams?

I think our growth is going to continue to be a little faster in the institutional.

I think that -- that parallels -- you know, we do include mail order in institutional, and I think that sways it a little bit and mail order continues to grow a little faster than the rest of the business, so I -- I think those trends will probably continue for the foreseeable future.

We spent a lot of time here, John, you know, literally building these plans up from the grassroots level, literally distribution center by distribution center, territory by territory to get a pretty good feel on what is happening out there.

We take that all into account.

You have a little bit, when you start talking about the account size we have, you have large numbers here.

You have such a large account that, um, you know, it shouldn't, you know, it should all kind of work out.

Okay, a follow-up on operating margins, would it be safe to assume that as you, um, increase the number of DC consolidations here, that we might see in the next several quarters some operating margin expansion acceleration?

Go ahead, Mike

Yeah, I think we have been consistent, John in, stating we expect operating margin expansion in the single digit basis point range, and that's that's really throughout the integration period.

We're very happy with our performance this quarter with the operating margin expansion, with the strong return on committed capital and continuing to grow, you know, the bottom line faster than the top-line, I think, our model that we have talked about worked very well this quarter, and we expect that to continue to work going forward.

Thank you, Mike.

You bet.

Thank you, next we'll go to the line of Andrew Speller with AG Edwards.

Please go ahead.

Could you comment on the $7 million with the merger, expenses that are going to continue to flow through this year.

Did we see any in this quarter and how should we look at it in terms of break it out the next three quarters for the fiscal year?

I think the $7 million, um, Andy will be incurred evenly over the course of the year and the first quarter saw its ratable share.

If you remember we expensed $24 million in the prior fiscal year that we called merger costs, that we incurred fairly early on in the merger process through the use of incremental outside resources, a good part of those dollars were in consol -- consulting expense.

As we go forward now, we've -- we've -- we've put the plan together, we have closed the integration office, and we're into executing on our plan.

As such, we consider those ongoing expenses normal operating expenses.

And, andy, we think this is really in keeping with the SCCs, you know, falls on 55 -- philosophy of not having a large number of special charges and the likes.

We think we're really playing this straight.

And this would be, um, inclusive of your current 20% earnings growth rate for this year.

That's correct.

Okay, um, if I could change the subject here, on I get a dealt refinancement that you guys just mentioned.

Is there anything else in the balance of the fiscal year that will perhaps change on the fixed side of the debt equation?

Probably not at this time.

Certainly things can come up to make us reconsider that.

We have nothing really don't Nato contemplated on the fixed side.

I mentioned we had increased our availability on our securitization facilities to 1.1 billion, and I think one of the things we like to do going forward is combine the facilities and that's -- that's probably next on our list from a capitalization standpoint.

And what did you have outstanding, um, this quarter in terms of either on your credit line or your securitization?

I believe we had $100 million outstanding it on our receivable securitization financing.

And nothing on the credit line?

On the credit line, I think it was the 55 million that we have, um, on our Puerto Rican subsidiaries credit line outstanding virtually every quarter.

Okay, great, thanks.

Great availability.

Thank you, next we will go to the line of Lisa Gill with J.P. Morgan.

Please go ahead.

Great, thank you very much.

Dave, I was wondering if you could talk about the premier customer satisfaction survey that was out there.

Could you talk about what was in there?

Was it fill rates, price, what were some of the things looking for?

Secondly, if you could talk about novation has a survey as well.

Has that been done yet?

The novation survey has been completed as far as we know.

It's not been published yet.

We're expecting it to be published within the next 30 days.

I will be a very, very, very surprised, um, very surprised if -- when that is published.

We're not ranked number one again as we had been in the past with the national wholesalers ranked number one month our national peers and I would expect our performance rating to have been approved on that one, but that one has not come out yet.

In the case of -- in the case Premier, Lisa, they really list a myriad of factors.

It not only includes, you know, raw service rates and, um, but includes, you know, sales support, on-time deliveries, um, problem, resolutions, you know, how quickly you solve the problems, you know, the ability to get now products into the system, response, um, to emergencies -- it's a pretty wide, pretty comprehensive survey, and people get the chance to, you know, add on comments and the likes, so, you know, premier use this is, um, um, -- this is a very important tool for Premier.

They take it very, very seriously as do we, so, you know, we were very happy to get that recognition, and as I noted in my commenting, particularly the time premier survey was taken at the time we integrated two sales forces, and you know, had integration activity going on as we will in the future.

Dave, just a follow-up.

Is there anything along the price that is included in the satisfaction survey or is it only on the other metrics?

They usually have a separate category for price, Lisa.

They have a service category, price category, one another category.

I can't remember what it is.

I think they're three separate categories, so they, um, they -- they issued the, um, they deal with the price separately.

The price ends up being not much variance among the price because the GPO course, you know, negotiates the matrix.

So the price ends up not being a, you know, not being a very big issue and price ends up being sensitive to making sure the contracts are loaded, you know, at the right time at the right price.

Great, thanks, Dave.

You bet.

Next, we'll go to the line of Andy Weinberger with Bear Stearns & Company.

Please go ahead.

Hi, guys.

Had a question with regard to interest expense going forward and your inventory Bill, it seems like inventories were up real substantially this quarter.

Did that have anything to do with you building inventories, as you -- to better service your customers during the integration phase, or is this more to just prepare for the positive inflationary environment?

The summer considered serving our customers as well as building, you know, for the normal, seasonal reasons, end and in anticipation of price increases, so I think all of those things were -- were considered.

And just a quick follow-up question on cash flows, I think, you know, they came in real strong last quarter, much better than anyone anticipated.

Were there potential timing issues there, that um, you know, if -- a day or two of inventory, if it were to fall into this quarter rather than last quarter, could have been a hundred, 200 million difference in operating cash flow?

We do 150 million a day of business, so timing is always a factor in our cash flows.

The most important metric to look at is what our average borrowings were outstanding during the period, and our outstanding borrowings were down 400 million quarter to quarter.

On average.

That's why our interest expense was down $2.6 million year to year, so I think that's the most important indicator of our performance.

We have always had the first quarter be, um, be a period -- be our first quarter, be the period in which we build inventories and use our most cash and as I said, we continued to expect our cash flow for the year to be in accordance with our prior guidance of $300 million.

Okay, that's great.

Thanks a lot.

Thank you.

Thank you, next we'll go to the line of Michael Fitzgibbons with Morgan Stanley Dean Witter.

Please go ahead.

Morning.

Could you talk about the -- in your integration efforts, we spent a lot of time and last year talking about your internal efforts putting the companies together.

Since TENET made a decision, have you -- has there been any change on your external efforts, especially with Bergen customers.

You can just talk about, you know, sort of the face you're presenting to Bergen customers and when you have increased any focus or shifted your focus since -- since, um, since that contract.

Hey, Mike, it's Kurt.

I will take that one.

There has been no -- no real shift.

I mean I think one of the things about the way we operate here at AmerisourceBergen is we view everybody in the company as responsible for sales and from the outset of the merger, um, you know, we -- we were active with former Bergen accounts, when I see we, Dave and I in particular, and obviously the Bergen folks, um, you know, kept up their relationships as well, so we really tried to lever, um, you know, all of that history in those relationships.

So it's really, I mean, what we have been doing more and more, um, as we have gotten better at integration is we have been doing a better job of communicating ahead of time to our customers, you know, what they can be expecting, um, and -- and we really have a great opportunity here because in most cases, it's a good news story.

In fact, almost in every case it's a bad good news story.

We're able to offer these accounts more in the capability and services and offers once they -- they, um, their distribution center or their -- what -- the businesses that are supporting them are integrated, so we have been out actively.

I mean I can't go back and count the number of days I spent with customers, Dave as well and others.

It's been all hands-on efforts since the beginning.

I don't want to pile on more, Mike, but the one thing I would say about the whole sales team, we had the -- since we last reported, we had a sales meeting in November and it was really the first time the sales, um, team has come together since the integration was completed.

We had once before but nobody anyhow where they were going to be.

I'll tell you what, it was about the most exciting sales meeting I have been to.

The sales time error very really coming together, they really embraced all the value-added services we had, the accusations we made really got them fired up, so we think our sales force is one of our key elements going forward here.

Okay, um, thanks very much.

You bet.

We'll take one more question.

Thank you, next we'll go to the line of Larry Marsh with Lehman Brothers.

Please go ahead.

Thanks, um, first of all, Dave, I wanted to say I appreciate the specificity of your top-line guidance.

It's certainly very helpful and thank you so much for your comments.

I did want to ask you, I think you had said that, um, you felt like, um, one of the reasons you were able to give more specific top-line is some strings in the market since September.

You talked about it in December.

Maybe elaborate a bit on that.

You have seen any follow-through in January, and also, just a sense of your, um, better feel of how your Bobbing is going to look for the full year, you know, versus when you first gave the guidance back in November, or is it more just market related?

Yeah, I -- I would say, you know, when we continue to think that we're going to grow with the market, and I guess the uncertainty, you know, that we have is what the market growth is going to be and I think that, you know, when we were talking about the 11 to 14% in echoing, you know, IMS health and they were looking at a really broad perspective.

I mean there was like a five year growth rate, I think, that was causing some people some confusion on where we were going in the short-term.

So that's why we, you know, we tried to tighten it up and talk about approximately 13%.

And, um, you know, that's going to be heavily influenced by what happens with the Mark.

And as we get out to the latter part of, you know, 2003, early part of '04, we're expecting, you know, some good, new products to be coming down the pike.

And so for example, what we were trying to do with that guidance, the balance of the year is give people the best insight we have right now, you know, where we're going and also to, you know, make sure there was no doubt in anybody's mind on our continued focus and earnings, you know, that we're really, you know, committed to growing the earnings at 20% or greater as we go forward.

We're very, very disciplined, um, in our use of capital, which continues to be reflected in our, um, our numbers.

I say those DSO numbers, the DSLs outstand -- outstanding, you know, really relate to, um, our field effort in collecting the money.

So, the specificity, the more exact -- [ Laughter ] -- I will say, Larry, was a better insight Bo where we're going and to try to narrow it down for people so they don't think we're kind of, you know, bouncing all over the place or don't have a good idea where our business is headed.

I got you, but the message is also that you have seen some strengthening in the market, um, since September.

Is that right?

I would say as we sit here today, Larry, yeah.

We think the market is a stronger place and we're, you know, than what we were looking at, um, when we were making our report in early November.

Okay, and just one quick follow-up, um, the -- I know you guys have been very expeditious in, you know, bringing on some announced changes in management.

You mentioned Chuck retiring.

Yeah.

Any sense of timing when you would hope to have something, um, you know, somebody put in place, um, um, for him here this year?

Well, clearly I mean, we're -- we're active on it, um, Larry, and, um, you know, I'm going to have -- I'm going to be spending a fair amount of time here in the weeks ahead.

I -- I would expect that we would have this thing pretty well figured out by the end of the March quarter, um and, um, and be able to be in a position to make some announcements at that point.

I do again want to take the opportunity to just let everybody know how much, how great a job we think Chuck has done.

We're sorry to see him go, but he's built a terrific team down there, and they really operate well as a team.

They have made terrific contributions and we expect them to continue to.

It will be an enjoyable tonight for whoever winds up going in to lead the organization.

Very good.

Thanks.

You bet.

I want to thank everybody and now turn it over to David Yost who would like to make final comments.

We appreciate everybody's time in the interest of time, we won't keep this going long but, you know, we want to you know we continue to be very, very excited about the industry we operate, the market-leading position, that we have got in it, um, we appreciate the support you have given us and we look for the forward to another good quarter of report 90 days from now.

Thank you very much.

Thank you, Ladies and gentlemen.

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