美源伯根 (ABC) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the ABC fiscal year-end teleconference.

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

Later there will be a question and answer session and I will give you instructions at that time.

Should you require assistance while you are on the call, simply press star, then zero and an operator will come on to your line to assist you.

As a reminder, we are recording this call today at the host's request and there will be a digitized replay available.

If you would you like the replay information, stay on the line at the conclusion of the call.

I would now like to turn the conference over to our host, Mr. Michael Kilpatrick.

Please go ahead.

Good morning everybody and welcome to AmerisourceBergen's conference call covering fiscal 2003 fourth quarter and yearly results.

I am Mike Kilpatrick, VP, Corporate and Investor Relations, and joining me today are David Yost, AmerisourceBergen Chief Executive Officer, Kurt Hilzinger, President and COO and Mike 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 a discussion of some key risk factors, we refer you to our SEC filings including our 10(K) report for fiscal 2002.

Also AmerisourceBergen assumes no obligation to update the matters discussed in the 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 comments.

Here is Dave Yost, AmerisourceBergen CEO, to begin our remarks.

Good morning and thank you for joining us.

We are excited to share our fourth quarter and year-end results for our second full year as AmerisourceBergen.

Mike will get into the details, but let me hit the highlights.

For both the quarter and the year we grew our revenues in double digits, up 13 percent, drove our operating costs down as a percent of revenue and by increasing the services we provide within the channel, we increased our operating margin.

We increased the company's income before special charges by 24% and net income by 26% in the quarter.

For the year, the increases were even higher.

Income before special charges, up 25 percent, and net income up 28%.

We accomplished our strong financial results while being disciplined in the use of our capital, generating over $350 million dollars in cash and delivering a return on committed capital of over 24%.

We kept our receivables to 17 days and continued to have the best inventory productivity in the industry.

I think it is important to note that we had the lowest inventory of our peers by a substantial dollar amount at the same time that we delivered the largest operating revenue.

Our performance is a great demonstration of our discipline.

Double-digit revenue growth, increasing margins, strong earnings, discipline you can expect to continue.

Strong performance was evident in both of our operating segments as Mike will detail, but let me emphasize that expanding margins were delivered in both pharmaceutical distribution and PharMerica, along with strong return on committed capital at Key, a key company metric.

This performance comes on top of strong performance last year.

You may recall we characterized FY '02 as [inaudible] in the first and our first year of operation we grew our revenues to over $40 billion, increased our EPS over 40 percent, actually to 42%.

Let me take just a minute to talk about the pharmaceutical supply channel because there has been a lot of publicity of late regarding the integrity and safety of the channel.

The FDA reports that incidents of counterfeit merchandise are increasing, but they are still very rare when put in the context of the $200 billion dollar-plus annual prescription supply channel.

Many of the incidents reported recently are relatively old and although the crooks may be getting better, so are the primary wholesalers in securing the channel.

We at AmerisourceBergen and our peers continue to up great our safety procedures and standards.

We get more sophisticated every day but here's the most important concept.

Full service wholesalers are clearly a part of, and a significant part, of the solution to securing the pharmaceutical supply channel.

The movement of merchandise from manufacturer to primary wholesaler to provider continues to be the gold standard of security and reliability.

The quality and reliability of the distribution system in the U.S. remains unequaled anywhere in the world today and we expect to be a leader in keeping it that way.

Both market forces and regulatory force will continue to move to eliminate the so-called secondary market which will enhance the role and value of companies like AmerisourceBergen and result in more product flowing through us.

AmerisourceBergen will continue to work aggressively to enhance the security of the supply channel.

We strongly endorse the work the FDA is doing to stop importation and other efforts to secure the safety of the channel.

We believe new procedures are a step in the right direction but are only a part of the answer to securing the channel.

We will continue to take a leadership position on this issue.

On September 19, the Wall Street Journal featured headlines in section B referring to an investigation dating back to June of 2000.

In responding to the article we stated that we have had no official communication from any regulatory agencies regarding this investigation for some 2.5 years.

That is still the case and there is nothing new to report on this matter.

Before I turn the floor over to Kurt and Mike for the particulars, let me try to put the results of ABC into perspective.

When ABC was created just over two years ago, we said we would move quickly to capture synergies and we did that.

We began immediately to capture synergies through extensive planning before the merger was completed.

We said we would use our new scale to enhance our role in the pharmaceutical supply channel.

We continue to do that and have acquired and developed value-added services.

We have made five acquisitions totalling $500 million dollars since the merger and the impacts are beginning to be evidence.

Our operating margin is expanding.

We said we would consolidate our pharmaceutical distribution network and enhance it with state-of-the-art facilities.

We continue to do that.

During our first 24 months we consolidated 13 distribution centers, 25% of our physical facilities and have begun construction on three new buildings with an additional two to start this year.

These buildings will set a new standard for size, throughput and efficiency.

The first will be operational in the summer.

We are on plan and on track to deliver what with said we would do.

From an industry perspective, we continue to view the pharmaceutical supply channel as a positive and stable environment with regard to both customers and suppliers.

The basic fundamental drivers of this industry, demographics, the aging of America and America's demand for new drug therapies have not changed.

The industry has continued to evolve toward a model where wholesalers may have the traditional opportunity for speculation profits replaced by our suppliers with incentives to more closely match our demand from the supplier with a demand from our customers.

Over time, this will result in a more efficient channel.

It's important to note, however, that this trend will have less impact on AmerisourceBergen than our peers because AmerisourceBergen has run with lower inventory than our peers and have been the least dependent over time on speculation profit.

It is also important to note that in my 30 years in the industry, I have observed many evolutionary changes and watched the industry successfully adapt to them all.

We see the industry growing in the low double digits with price appreciating moderating modestly but continuing in the 5% range.

As has been true for the last several years, we see the customer base remaining stable.

We continue to work closely and effectively with our key suppliers to make the a pharmaceutical supply channel even more secure and efficient and with our recent Anderson acquisition we continue to expands our service offering to suppliers.

We expect to continue to broaden our position in the channel with acquisitions in the $100 to $200 million dollar range.

We will be looking for opportunities to provide more value-added services to either our suppliers or customers or both.

Our largest single contract, the Veterans Administration multi-year contract, is up for renewal this year and we hope to have positive news regarding this new eight-year contract during the quarter.

Though the VA is required to re-bid their contract this year, we remain optimistic that based on our service history and technological enhancement, the contract will be renewed.

There is a single word to describe ABC and its discipline.

We will be disciplined in our relationships with our suppliers and customers as is evident in our continued operating margin performance.

We will be disciplined in our operations as is evidenced by our decreasing operating expenses as a percentage of revenue.

We will be disciplined in our use of capital as is evidenced in our inventory levels and DSO.

We will be disciplined in our integration as is reflected in our very successful distribution center consolidation and new building program and disciplined in our acquisition program as is evidenced by the size and scope of the acquisitions we have made.

AmerisourceBergen is solidly on track and tracking in a solid industry.

Here is Kurt.

Thanks, Dave.

Good morning, everyone.

Today I will touch on the performance of each of our key business units, summarize our integration accomplishments during the quarter and outline some of our key objectives for next year.

In our pharmaceutical distribution business which includes the drug company and the Specialty Group, we again posted strong results driving both solid top line growth, up 13 percent, and solid operating income performance, up 17%.

Cost savings from our integration activities were again evident with continued leverage over operating expenses, driving operating margin expansion for the eighth consecutive quarter since the merger.

In fact, operating expenses in the drug company decreased in absolute dollars in the quarter versus year-ago levels.

This is a very tangible confirmation that our integration activities are working and that our cost savings are real, setting the stage for operating margin expansion again in 2004.

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

During the quarter we completed two consolidations, one of our two Dallas, Texas, facilities and Toledo, Ohio, our first $1 billion plus consolidation in terms of revenues.

Both consolidations occurred on schedule, below budget and with no customer disruption.

So for the full year, we completed six consolidations in line with our goal at the outset of the year and 13 since the merger.

We now operate 38 pharmaceutical distribution centers in the U.S. with approximately half of those with annual revenues of $1 billion dollars or greater, offering significant operating leverage in 2004 and beyond.

With fewer distribution centers in the network, we were able to reduce the number of regions in the drug company from six to five.

We expect no further changes in the number of regions going forward.

During the quarter, we also successful completed the implementation of our new warehouse management system, PKMS, at our Corona, California, facility, one of our largest, setting a stage for a more aggressive roll-out schedule in 2004.

Construction of our six Greenfield D.C.s remains on track.

Construction is proceeding smoothly at our three previously announced locations, Sacramento, California, Columbus, Ohio and Dallas, Texas.

During the September quarter, we finalized and announced plans for our fourth location, Kansas City, Missouri.

Land purchases and plans remain on track for the remaining two locations.

Our facility remodeling plans remain on track as well with one major and two minor expansions completed in the September quarter.

Our integration efforts in 2004 will almost entirely be devoted to executing the work plan of our future state distribution network.

In 2004 we plan to accomplish the following: consolidate three existing distribution centers.

These facilities will be smaller than those consolidated in fiscal 2003 and therefore will drive less cost savings on a per-facility basis.

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

Second, we will continue to build out our six planned Greenfield distribution centers with our first go-live next summer.

In addition, we will begin and nearly complete a large expansion project at one of our existing distribution centers.

Lastly we will install a new warehouse management system in four of our largest facilities and complete the installation of productivity standards in three facilities.

By the end of 2004, or the third year since the merger, we'll have completed 16 of the 28 consolidations called for in the network plan.

Significant cost savings remain to be captured beyond 2004, driven by the remaining 12 distribution center consolidations which will occur upon completion of the six new builds.

Signature capture statements will be less than 2004 than in the last two years due to early capture in 2002 and 2003 and fewer consolidations and other discreet overhead reduction events in 2004.

We do, however, remain confident in our goal of attaining $150 million dollars in annual costs savings by the ends of 2004.

Having said all this, perhaps it's worth a moment to step back and discuss how our integration activities and ongoing technology investments fit into the broader industry dynamic, picking up a little bit on Dave's earlier comments.

First, as it relates to changing vendor margin equation, much has been said regarding inventory management agreements.

In our view, inventory management agreements represent good business practice.

These agreements are in a new compensation model with potentially greater margin predictability and less capital invested, a model more closely aligned with ABCs historical practice than the industry as a whole, and therefore we expect a relatively smoother transition of for ABC as wholesaler profitability models converge.

We are particularly supportive of the fee for service approach taken by MERK as it ties specific compensation to a myriad of services and activities we provide to our vendors.

This approach helps clarify our value proposition, improves our ability to customize our services and ultimately provides the foundation of a much better channel partnership.

A fee for service compensation model is best served by excellent activity-based cost fitting.

We know our cost, but we can get much better.

Investments we are making in new warehouse management software will provide the basis for true and traceable costing for many of our key activities.

These investments will also provide greater visibility to product levels and positions in our system and, importantly, the foundation for new track and trace technologies under consideration by the FDA to insure the security and safety of pharmaceuticals in the U.S.

In sum, we feel we are ahead of the curve on some of the changes in the industry dynamics here.

That's on the vendor margin side.

On the selling margin side, a different dynamic exists.

In our view, the industries historical pricing practices have been driven in part by each competitor's internal operating leverage and in part by the roll up of the industry as redundant overhead costs have been eliminated.

With the creation of the big three that roll up is now complete and the industry's ability to gain efficiency has slowed.

As such, the degree of price discounting to our customers will have to slow as well.

We have begun to discuss these issues with our customers.

A change in expectations is required.

While AmerisourceBergen still has the opportunity to further eliminate redundant overhead costs through our remaining merger synergies, in the end, we recognize this to be a finite proposition.

Let me now turn to our Specialty Group.

During the quarter, the group continued its historical progression of rapids growth and development, exceeding $1 billion dollar mark in revenues.

Each of the businesses which make up the Specialty Group exceeded our internal expectations on nearly every key measure for both the quarter and for the year.

U.S. overall focus remained on the distribution of difficult-to-handle and administer by biologic and other injectable-type pharmaceuticals to physicians around specific disease states and by providing an increasing array of services and solutions to pharmaceutical manufacturers.

We are planning a step up in our investment spending in fiscal 2004 to support key initiatives which will further build out the the group's drug commercialization capabilities and assist by biopharmaceutical manufacturers to bring new products to market.

As we have continued to emphasize, the Specialty Group of businesses provide an attractive growth platform for AmerisourceBergen.

The group has excellent positioning and a fast growing, rapidly evolving marketplace.

All in all, we expect the group to have another excellent year in 2004.

In our packaging group, now comprised of American Health Packaging and Anderson packaging, the integration of Anderson Packaging is proceeding smoothly and the group reported a solid performance in the fourth quarter.

In 2004, American Health Packaging, our down channel repackaging operation, will focus on key initiatives to support other ABC affiliates.

The expansion of our punch card line with PharMerica long-term care segment, unit dose solutions for bridge bedside administration and unit of use for automated dispensing.

In 2003, Anderson Packaging successfully launched over $50 million dollars of new packaging projects with eight of the largest pharmaceutical manufacturers.

To meet increased demand for these services and support these recent manufacturer contract wins, Anderson Packaging will undertake two large capital expansion projects in 2004, the construction of a new 150,000-square-foot facility located directly across from its current headquarters building as well as a 60,000-square-foot expansion to its existing headquarters building, bringing total production capacity to over 1 million square foot.

Importantly, ABC is committed to maintaining the excellent historical quality and regulatory profiles of these businesses.

Changing to our technology offerings for just a moment, the acute shortage of skilled labor in the form of both pharmacists and technicians, in combination with both increased utilization of script volume is driving adoption of automation and other productivity enhancement tools at ever-increasing rates.

In 2004, we plan to aggressively pursue the growth of Auto Med.

We believe the time is right.

With the recent implementation of new leasing and rental programs, plans are under way to significantly expand our Auto Med and Bridge sales force.

While this may have a near term dampening effect on earnings contribution, it is the right long-term solution for ABC.

The deployment of Auto Med equipment may make senses within other parts of AmerisourceBergen as well, particularly in the long-term care pharmacies of PharMerica.

Auto Med equipment is being tested and validated in these settings and may provide a significant boost to PharMerica productivity levels in the years ahead.

Now let me term to PharMerica.

PharMerica continued to demonstrate solid perform in the fourth quarter with gains in revenues and operating income up six and 26%, respectively.

In the long-term care division, PharMerica continues to drive further operating efficiency to focus on cost, the consistent application of best practices at the pharmacy level and continued emphasis on leveraging its clinical expertise to greater therapeutic interchange recommendation.

Looking back over the last eight quarters, operating margins at PharMerica have expanded 168 basis points or 5.4%, slightly over 7% this quarter for the first time.

Focus on Asset Management, particularly in the area of credit collections again lowered our capital invested in the business and dramatically improved PharMerica's [inaudible] over years ago levels.

PharMerica has clearly improved its expense and asset utilization efficiency over the last two years, making the business increasingly attractive to the whole of ABC.

In 2004, PharMerica will continue to focus on those activities which have driven a dramatic performance improvement over the last two years.

I will now turn the call over to Mike for review of the financials.

Thanks, Kurt, and good morning, everyone.

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

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

Before I get into the details of the quarter, allow me to review our key financial results for the year, against the guidance we gave at the beginning of fiscal '03.

Our guidance for operating growth for fiscal '03 was 11 to 14% in line with market growth and we came in solidly within that range with 13% growth for the year.

We said that pharmaceutical distribution growth margins would decline at a rate less than fiscal '02, and would be more than offset by a reduction in the operating expense ratio, resulting in operating margin expansion.

Actual reduction in gross margins for the year of 10 basis points overall and two basis points in pharmaceutical distribution met this expectation and operating margin expansion for the year of 11 basis points overall and nine basis points in pharmaceutical distribution were pharmaceutical distribution were at the high end of our guidance.

Actual interest expense for the year was at the low end of our $140 to $160 million dollar range, and our diluted EPS of $3.96 per share before special items met our 20% guidance.

Finally, operating cash flow for the year of $355 million dollars exceeded our guidance of $300 million dollars.

All in all, excellent operating performance for fiscal '03 on top of a great year in fiscal '02.

My comments and year-over-year comparisons exclude special items, representing a net charge to the P&L of $1.5 million and $5.4 million for the current year quarter and year respectively, related to facility consolidation and employee severance costs which are set out as a separate line in our operating statement.

In addition, my comments exclude the effects of the $2.6 million net of tax cost of retiring the PharMerica bonds which was completed in early April.

Special charges in the prior quarter and year consisted of merger costs and were $2.3 million and $14.6 million dollars net of tax, respectively.

Now turning back to the fourth quarter and starting with our results for the consolidated company.

Operating revenue for the company was $11.7 billion dollars for the quarter, up 13% over the prior year.

Both delivery revenue was down approximately $300 million dollars as the company converted a portion of its bulk delivery business to being serviced through our warehouses earlier in the year.

Operating income was up a strong 18% in total compared to last year's quarter with good performance in both segments, resulting in consolidated operating margin expansion of eight basis points.

Earnings per share for the quarter increased 19% to $1.05 per diluted share before special items, compared to 88 cents per share reported last year on the same basis.

The earnings growth for the quarter was positively impacted by ongoing merger synergies and continued low interest rates.

Moving to the pharmaceutical distribution segment.

Operating revenue for the segment was $11.5 billion dollars, up 13% compared to last year's quarter.

The customer mix in the quarter between institutional, which includes health systems, alternate site pharmacies, mail order pharmacies and our Specialty Group, had 58 %, and retail which includes independent and chains at 42%, changed from the prior year as our institutional business grew a strong 21% while our retail business grew 4% compared to the prior year quarter.

The institutional growth was driven by the mail order customer group as well as by continued above-market growth in our specialty distribution business.

The prior conversion of both bulk delivery and direct business contributed 6% to the operating revenue growth during the current quarter.

Our retail growth in the current year quarter was affected by the impact of the previously announced loss of a large food and drug combo account and the performance of certain of our large regional chain customers.

Independent drug stores had their strongest quarterly growth of the year in the quarter.

In the pharmaceutical distribution segment, gross profit margins were down by six basis points compared to last year's quarter.

The shift in mix to lower gross profit margin businesses such as mail order and the continuing competitive environment in the quarter were offset in part by the positive impact of our higher gross margin acquisitions.

These acquisitions added approximately 20 basis points to gross margin in the quarter.

With regards to LIFO accounting, we reported a cr edit of $13.7 million dollars this quarter compared to a credit of $0.6 million dollars in the prior year fourth quarter.

For the year, our LIFO charge was $33.3 million dollars compared to $60.6 million dollars in fiscal '02.

Operating expenses as a percentage of operating revenue of 2.09% improved by 11 basis points for the quarter compared to the same period last year.

In addition to customer mix, this improvement in the operating expenses ratio reflects efficiencies of scale and merger synergies which offset the adverse expense impact of the acquisitions previously mentioned.

Excluding acquisition and the fast growing Specialty Group, operating expenses in absolute dollars decreased in the fourth quarter of fiscal '03 compared to the same period last year and were well under 2% of revenue.

As a result, operating income as a percentage of operating revenue expanded by five basis points over the prior year quarter.

Turning to PharMerica.

They again had a very strong quarter as Kurt mentioned.

Revenues increased 6% over last year's quarter to $408 million dollars.

The gross profit margin was up slightly to 33.9% from 33.7%, while continued improvements in operating practices drove the expense ratio down to 26.8% in the quarter, a reduction of 95 basis points from the prior year period.

As a result, operating income for the quarter was up a strong 26% and the operating margin expanded by over 100 basis points to 7.08% for the quarter, the first time we have broken the 7% barrier.

We continue to expect single-digit operating revenue growth for PharMerica in fiscal '04 and we expect EBIT growth to be in the mid to high teens with operating margin exceeding 7% for the year.

Looking again at the company as a whole, interest expense for the current year quarter was $34.7 million dollars compared to $31.7 million in the prior year, an increase of 10%.

Net average borrowings in the fourth fiscal quarter of '03 increased to $2.2 billion compared to $1.3 billion in the prior year quarter due to higher levels of inventory outstanding during the current year quarter.

The increase in average borrowings was offset in part by lower market interest rates and rate reductions due to the company's long-term debt refinancing and improved credit rating.

The effective income tax rate for the quarter was 38.8%, lower than the 39.7% in the prior year as expected, and reflects the impact of some of the tax planning strategies we implemented after the merger.

We would expect that the tax rate in fiscal '04 would be in the mid to high 38% range.

Turning to the balance sheet and cash flows.

For the pharmaceutical distribution segment, day sales outstanding for receivables were 17.1 days in the quarter compared to 16.4 days in last year's fourth quarter.

The increase similar to last quarter was due to the strong growth in the specialty business, the businesses within the Specialty Group generally have a significant higher receivable investment compared to our core distribution business.

At PharMerica, DSOs were once again well under 40 days, dropping to our record low 37.7 days from 43.4 days in the prior year quarter, continuing their strong performance.

Inventory levels of $5.7 billion dollars at the end of September increased by approximately 5% from the end of the prior year.

The inventory turns in the quarter were 9.1 compared to 9.7 in the prior year, quarter and DPOs were up slightly by about a half a day versus the prior year quarter.

CapEx was $40 million dollars during the quarter and $91 million dollars for the year as we expected.

We would expect CapEx to be in the $150 to $200 million dollar range in '04 as we get deeper into our network expansion plans during fiscal '04.

Total debt to total capital at quarter end was 30.8% compared to 35.4% at September 30 of last year.

Net debt to capital was 19.7% compared to 25.8% last year.

During the year, our company and debt ratings were upgraded by S&P and we continue our strong progress towards investment-grade status.

Cash generated from operations for the quarter was a strong $1.1 billion dollars, compared to generation of $400 million dollars in the prior year quarter.

We generated more cash in the current year quarter due to reduction in inventory levels from unusually high levels at the end of June.

For fiscal '03 we generated $355 million dollars of cash, exceeding our cash from operations goal of $300 million.

We would expect cash flow from operations to be in the $350 to $400 million dollar range in fiscal '04.

Return on committed capital, or rock, which you recall as one of our primary financial measures and is defined as EBITDA, before special charges divided by receivables plus inventory plus PP&E less payables on a rolling twelve-month basis, was 24.1% for the quarter, well above our long-term goal of 20% with each of our business units also exceeding the 20% level.

As we look ahead, we expect our top line operating revenue to grow with the market over the next few years.

Market growth has generally been defined as ten to 13% through 2007.

In fiscal '04 we would expect operating revenue to be in the lower end of that range.

We would expect to have single-digit basis point operating margin expansion in fiscal '04 and would expect interest expense to be in the $140 to $155 million range.

On a long-term basis, we expect to grow EPS before special items at 15% or greater and in fiscal '04 we expect approximately 15% growth in the range of $4.50 to $4.60 per share.

Rock for fiscal '04 and for the long-term is expected to continue to exceed 20%.

We continue to be very excited about our company and our industry's prospects and expect to deliver the same disciplined performance we have in the past.

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

Thank you, Mike.

As always, those connected by phone will have the opportunity now to ask some questions.

I would ask you to limit yourself to one question only until all have had an opportunity.

Then if there's time you can ask additional questions.

Go ahead, Kim.

Ladies and gentlemen, if you wish to ask a question, please press star, then one.

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

If you're using a speakerphone, please first pick up your handset.

Our first question is coming from Lisa Gill at J. P. Morgan.

Please go ahead.

Thanks very much and congratulations on the quarter and the year.

Dave, you sound very confident in keeping VA contract.

I'm just wondering as you looked at the pricing for that if the new negotiated number that you put out there, is that in the guidance at this point?

It is, Lisa.

We sort of don't want to appear cocky, but we have a long standing relationship with the VA.

We have a lot of technological enhancements that we developed over the last few years, so we expect to keep that and we have included that in our guidance, Lisa.

Also, you said it was an an eight-year contract with the VA.

Wasn't it a five-year contract the last time?

Last time it was a five-year contract, it was actually five one-year contracts that were renewed before it went up to bid.

This time it's four two-year contracts so it extends over eight years.

But if we were to win we would of course expect it to be extended each time as it has always been in the past.

And then just one last question on the VA.

Do you see continued opportunities to enhance that relationship with the VA to sell them on the specialty pharmacy side?

Obviously they have a lot of Auto Med in their facilities at this time but can you talk about some of the other opportunities you have with the VA with some of your other service offerings now?

We think we have a great -- you know, almost every service that we've got, Lisa, we think has application to the VA, it's one of the reasons that they are such a good business partner for us.

So whether it's automation specialty, the stuff we are doing in patient safety, packaging, all has an application to VA so we continue to be very, very excited about it.

Thanks very much.

Our next question comes from the line of Tom Gallucci at Merrill Lynch.

Go ahead.

Good morning.

First, with respect to guidance, I was wondering, obviously the VA questions have been answered to some degree.

I was wondering on Advanced PCS that's the the other contract that has gotten a lot of speculation in the investment community, if there's any way to frame your potential exposure to that contract with respect to your guidance, if it were in fact to go away at some point due to the consolidation of that company?

And then my question on specialty would be, I think you mentioned, Kurt, potentially increasing your investment spending in that business, if you could tell us in relative terms or in absolute terms what you are looking at there, maybe some of the areas where would you seek to invest in.

Thank you.

Thank you, Tom.

I'll take the advanced one as well.

I've got to say because we don't like to talk about specific customers, but since this one has been in the press of late we will address it.

As a reminder, we are kind of early in the process here.

Our contract, our existing contract goes through March.

In terms of our guidance for next year, retaining that account is in our guidance.

But I would tell you as we have intimated in the past in discussions with folks that if we were to lose that business, we would not change our guidance at the earnings line.

The business is processed basically through three distribution centers.

We could easily take out the cost at our cash to processing that business for us today so we would not change our guidance if for some reason we were not to renew the advanced business.

With regards to the Specialty Group, we will continue to, there are some build outs that they have planned.

For example, we are opening up and upgrading our leased space out on the West Coast with Lash as part of the acquisition we made last year.

They picked up a business call Documentics, so they are in fact opening up a West Coast office.

We will be doing that.

We will be doing some investment spending on some systems and the like.

And obviously, we will continue to be in the market for acquisitions and so forth as that group continues to identify attractive opportunities.

Thank you.

Our next question comes from Robert Willoughby at Bank of America.

Go ahead.

Thank you.

With the consolidation of your distribution centers this year and some of the new manufacturer relationships, we are having a hard time pegging where you think the inventory balances will trend over the course of the year.

Can I expect them to be up another 5% or is that aggressive?

Robert, this is Mike.

I mean, we expect to grow the inventories with our business.

We brought the inventories down under $6 billion at year end to $5.7b as we mentioned.

Part of that due to the fact that we have completed our consolidations prior to year-end and were able to get out the excess inventory related to those consolidations.

We expect to grow that pretty much in line with our overall business growth.

Certainly we are factoring in changes in some of the manufacturer practices in that expectation.

We don't comment on individual quarters but the whole industry has a general list in inventories and when you look at the December quarter based on when the factors, holidays, opportunities [inaudible] so you will see some changes from quarter to quarter, of course.

Thank you very much.

Our next question comes from the line of Larry Marsh.

Please go ahead.

Okay.

Thanks.

Could you give a little bit of elaboration, David and Mike, on the inventory at quarter.

I know there is some seasonality pulling that down and a great cash flow quarter was there any reduction in inventory this quarter shift in moving toward more of the fee for service model or is that not really part of the quarter?

And then just a comment, Mike, on the LIFO credit.

You had a pretty big reserve coming into the fourth quarter so you are pretty conservative there.

Were there any factors in particular that caused the credit and what would you expect this year?

Sure.

Larry, let me start with the inventory first.

We were at a very high level at the end of June and as I mentioned that had to do at that time with two factors.

One was some vendor opportunities we had, and secondly the duplicate inventories from the consolidations we had in progress.

As I mentioned by the end of September we had finished those consolidations, and therefore that duplicate inventory which existed at the end of June and throughout most of the September quarter was not there at period end.

The second piece of that, some of the opportunities that we got in our third fiscal quarter in June resulted in inventory buys, the opportunities that hit us in the fourth quarter were more in the form of other compensation such as credits and cash in some instances under our IMA agreement.

So there weren't any unusual inventory buys right at the end of the quarter which brought that down.

Switching to LIFO, we had a credit in the quarter as I mentioned bigger than the credit we had in last year and as I said in the past, our LIFO charge is directly related to our five FFO inventory profits.

While we had price inflation that was very strong in Q4 it was less than the strong inflation we had in the prior year quarter.

I think we have also seen shifts in the profit again from inventory speculative buying as we've entered into more IMAs and more of our spec profits are coming from these agreements rather than weighting our inventory.

And this has had the effect of reducing the inflation rate within our inventory on a year-to-year basis.

That's a trend I think we would expect to continue in '04 and have some effect on our LIFO credit and I would expect our LIFO charge for the year and I would expect the LIFO charge next year to be somewhat moderately less than this year's.

Great.

Are you expanding your cash, I know you talked about cash before but is the message hear that less inventory will help your cash flow this year?

The cash flow is really being generated from operations, Larry, and where we have modest improvements built into our inventory it's not significantly from a mass reduction in inventory.

Okay.

Great.

Thanks.

Our next question comes from Glen Santangelo at SoundView.

It's actually Charles Reed sitting in for Glen.

You guys talked a lot about the status of your DC integration and about the synergy captures.

As we think about beyond this next year fiscal '04, you talked about capturing additional synergies when you start to consolidate the remaining DCs.

Can you give us a sense at this time how much more synergies we might expect over maybe another couple of years?

Are we talking about another $150 million over another three-year period or can you give us some sense on sort of magnitude?

Charles, it's Kurt.

We have not come forward with guidance on that.

We have obviously said and we said it today that there are additional savings in the network.

It's driven primarily by the remaining consolidations.

There's 12 or so of those left once we begin to get the Greenfields on line and then I think there will still be productivity ehancements from the investment that we will be making around warehouse management systems and so forth.

I would like to suggest it's nowhere near the $150 that you're talking about.

It's substantially less than, that but there is still some room for us and so there's some future benefit but not on the magnitude of what we've achieved in the first three years.

Is that because the 12 DCs that we are talking about remaining, they are just not mere nearly as big as the initial DCs you consolidated?

The $150 million dollar target that we outlined at the time of the merger included a lot of different elements of synergy capture beyond just the DC consolidations themselves.

So those are one-time in nature, they were administrative cost savings, procurement savings, a whole host of things and those are now captured and part of our history.

Okay.

Great.

Our next question comes from Michael Fitzgibbons at Morgan Stanley.

Go ahead.

Okay.

We will close that line.

We will go to Chris McFadden at Goldman Sachs.

Thank you and good morning everyone.

If I could, two quick questions.

One, Kurt, I was hoping you could expand a little bit on your comment concerning the operating environment and this move towards more rational expectations required.

Can you talk about how you are communicating that message to your customers?

And I guess as an investment community how we should try to monitor how those discussions are going, both AmerisourceBergen specifically and then perhaps for the industry more generally?

And then as a follow on, Mike, if I could get you to comment on bad debt provisioning, experienced dynamics in the long-term care market?

Are you as a seeing any credit quality issues there?

Have you in any way changed your reserving policies?

An update there would be helpful.

Thank you.

Chris, it's Kurt.

I will take the first part here.

This is a process that has a lot of elements to it.

Obviously, as large RFPs are coming to market this year, our reaction to those RFPs are going to be in a very disciplined fashion.

We are being conservative in terms of the expectation on the vendor margin side.

Our assumptions are changing there and so we need to, the market will begin to adjustment based on how we respond to those particular RFPs.

In addition to that, there's an educational process that needs to occur, frankly with our sales force, that we need to drive a solution sale, not a price sale, and we are undertaking those training programs as we speak.

Then the third piece I would tell you is I just think we have a generation or two of pharmacists in the U.S. that are used to every two or three years when they renew a contract with their wholesale provider that they had tended to get a fairly nice reduction of price as the industry has consolidated.

They haven't seen this environment before, so we need to have direct conversations with them that our industry has changed and there isn't the available efficiency now that there was over the last two or three decades.

So we are talking to our people about that who are then talking to the marketplace about that.

I think, we will see how quickly it evolves.

I think it's going to be a very difficult time, or difficult for the investment community to see that.

Obviously you will see it in our quarterly results over time, but beyond that it will be hard for you to measure.

I can understand that.

Chris, as long as the long-term care environment around receivables and bad debt provision, there's been no significant changes in any of our practices.

It's a business for us that the bad debt ratio has fallen well below 2% and I think that's the result of some of the centralization of billing and collection that we've been talking about that we've been doing over the last two to three years and I think the improvement in the operating practices have driven a reduction in the bad debt expense ratio over time but we have not changed our reserving practices at all.

The final clarification, relative to the full year guidance that you provided are very specific in terms of the EPS range for the year.

In terms of thinking about the quarterly sequence regarding those earnings, is the earnings guidance target that you gave, should we think about that as evenly applied across the four quarters or will there be any trend within the quarter they are reporting?

Thanks.

Chris, our guidance is for the whole year and intentionally we did not get into the quarters because there's a lot of moving parts within the industry right now and that can have an effect on how the profits flow from quarter to quarter.

So I think we will stick with the annual guidance.

Very good.

Thank you.

Our next question will come from Michael Fitzgibbons at Morgan Stanley.

Hi, sorry about getting cut off earlier.

We lost you.

We are glad you're back.

I apologize if this came up while I was off, but I was wondering if you could talk about was your, the growth in the retail side of the business of 4% looks like, I think it's a little bit better than what you had last quarter but still below historical levels and I'm wondering, can you talk about your expectation for that side of your business in fiscal '04, specifically for the market as well as your business and the customers that you're looking at and how much that plays into your expectation on being at the low end of that range that you talked about for '04?

Mike, this is Mike.

I will take a run at this one.

Our retail growth as you said was 4% in the quarter and that was a little bit higher than in the last quarter and I mentioned in my comments that some of that was driven by increased performance from the independent sector.

I think what you will see as you go into fiscal '04 some of the same trends we had we still have to anniversary half a year of our loss of the [inaudible] drug combo that I mentioned.

And we also have several large regional chain customers that have publicly said that their revenue growth is going to be conservative in comparison to market in '04 like it was in '03.

So I think both of those factors will continue to be there in '04 and be a little bit of drag on our retail growth and, yes, is one of the reasons that we are on the low end of that range that we gave you.

Okay.

Thank you.

Our next question comes from Ray Falci at Bear Stearns.

Go ahead.

Good morning.

Question, Dave, based on what we've seen out of your results over the last several quarters but particularly this quarter.

You are seeing a lower degree of gross margin degredation relative to your peers and you noted your business model has been different than theirs historically.

The question is, given that there's a dynamic between the buy and the sell-side margins that sort of lock you into sell-side contracts for several years, whether or not you think you may have the opportunity in the near term on some new pieces of business that might be coming up given that your competitors may be locked into some longer term deals with less than favorable economics.

Do you see that as an opportunity?

I think the biggest opportunity we have, Ray, is the is in the value-added services we've got.

We continue to enhance our role in the supply channels.

We are excited about the acquisitions we've made and they clearly help with that.

What's really helping our margins and what we see some of our great strength going forward, is to enhance our role, provide more of these value-added services which provide great value to the customer and therefore are not quite as price sensitive.

That's the position we are taking as we go forward and it's really paying off for us.

Kurt mentioned in his remarks the traction we are getting with Anderson and the packaging component, our specialty business is doing well, the patient safety program we've got with Bridge, also a recent acquisitions are paying off.

So we really think that these new value-added services and the enhancement we've got in the supply channel is really the key here.

Great.

Thanks.

Our next question comes from Eric Coldwell of Robert Baird.

Go ahead.

Thanks and good morning.

I just had a quick follow up on your CapEx number, the $150 to $200, a little bit larger than I was looking for and you mentioned several areas in this call where you are going to step up investment.

I'm curious if you can break out for us the allocation of that $150 to $200 million perhaps in percentage terms and what's going to be split between Greenfield Investment and the new DC, upgrades to existing facilities, and then also your investments in Anderson and the Specialty Group, if you could kind of lay out for us where that CapEx will be allocated?

Thank you.

Eric, this is Mike.

As far as our CapEx, one of the things we had talked about is as our Greenfields become live we will end up paying for them and a lot of the increase in '04 versus '03 is the fact that we have expectations for at least one and potentially two Greenfields coming live some time in fiscal '04 or shortly thereafter.

That's going to be a big reason for the increase in CapEx year-to-year.

You also mentioned Anderson.

Anderson is a different business than the wholesale drug business and the CapEx requirements for that business are greater, probably contributing $10 to $15 million dollars annually to that CapEx.

I've said before that if you would look at a maintenance CapEx, X our distribution and expansion plan you would probably be in a $60 million dollar range.

That may now have gone up a little bit with the addition of Anderson and again the excess over that would be to be to our network expansion project and, again, some of that whether the range is a little bit large and some of that depends on the timing when we complete the build outs and how much is leased versus how much is paid for up front.

If I may have a follow up.

I'm just curious on PharMerica, we didn't go down the path really of Workers' Comp. and there was sort of a unique circumstance there several month ago with a group breaking out of PharMerica.

I'm just curious if you could give us an update on Worker's Comp. and what you are seeing in that unit.

Thank you.

Eric, it's Kurt.

The Workers' Comp. business did have that contract loss.

We thought it was an unusual set of circumstances.

I think that's proven to be the case.

The group is actively in the marketplace and in fact recently won a nice piece of business that replaces a good piece of what they had leave them during '03.

So they are not going to have the kind of performance in '04 that their historical track record has been over the last three or four years but we are very confident that they are going to get their model right and grow attractively for the long-term.

We go to Kevin Berg of Credit Suisse.

Go ahead.

Can you talk about your range of $450 to $460, what's going to impact that?

Is it purely a function of pharmaceutical industry revenue?

Are there other factors involved?

And I guess secondly, the gross margin being held 20 basis points by acquisition could you equate that to how much the operating margin was helped by acquisitions?

Let me talk about the second question first, Kevin.

The gross profit was enhanced approximately 20 basis point range.

The expenses were detrimented by probably about mid-teen basis points.

So you had single-digit operating margin help from the acquisitions.

As far as the factors within the range, there's a lot of moving parts in the industry right now and a lot of those can influence us, particularly where we end up in the revenue range and also how fast some of the changing parts on the manufacturer side happen during the year.

So I think we've factored all those things in there and given the range we think is suitable.

You have a lot of moving parts here Kevin.

You have what's happening with inflation.

You have what's happening with the industry as a whole.

You have a big enterprise here, a bunch of $50 billion dollars of revenues.

There's a lot of moving parts and that's why we provided a range so we didn't get too focused in on one number.

Thank you very much.

Well take one more question.

Our next question comes from the line of John Souter of Susquehanna.

A question on operating margin expansion.

You did give some guidance for '04, operating margin expansion.

It appears that you are going to bear the brunt of some expansion spending such as the couple of sales forces that you mentioned.

Could you comment, Dave, on the outlook for margin expansion, perhaps exiting '04 once some of these expense items start to be productive, which I would assume would be maybe exiting '04?

We think this trend towards single digit expansion, John, is something that we can look forward to as we go forward.

We have a lot of moving parts here.

Clearly you identified some of them but as we begin to get our new buildings on board which are going to be a very, very efficient, we think that's going to be very good.

We're going to anniversary some of our numbers as we go forward, we have some sales force expansion, as you mentioned, but clearly as we look in 2004 as we mentioned, we are comfortable with single-digit basis point expansion in our operating margin and I think we will look for similar type of guidance as we get beyond 2004.

Great.

Thank you.

Thank you, everybody very much for joining us today.

For those of you interested in hearing more about the AmerisourceBergen story and the company we will hold an investor meeting on December 4 at the Grand Hyatt in New York City.

The meeting will start with lunch and go until about 2:30 in the afternoon and we will be sending out invitations this week and the meeting will be webcast.

Also on November 12 we will be speaking at CSFB Healthcare conference for those who will be there and now Dave would like to make some final comments.

I would just like to say again that we appreciate you very much for joining us.

We continue to be very, very excited about the industry and the role we play in it.

We look forward to sharing with you some more insight into our company on December 4 in New York and we thank you very much.

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