Filed by AmeriSource Health Corporation pursuant
to Rule 425 under the Securities Act of 1933 and
deemed filed pursuant to Rule 14a-12 of the
Securities Exchange Act of 1934
Subject Company: AmerisourceBergen Corporation
Commission File Number: 333-61440
Forward-Looking Statements
--------------------------
The following communications contain certain "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements are based on management's
current expectations and are subject to uncertainty and changes in
circumstances. Actual results may vary materially from the expectations
contained in the forward-looking statements. The forward-looking statements
herein include statements addressing future financial and operating results of
AmeriSource and Bergen Brunswig and the timing, benefits and other aspects of
the proposed merger.
The following factors, among others, could cause actual results to differ
materially from those described in the forward-looking statements: inability to
obtain, or meet conditions imposed for, governmental approvals for the
transaction; failure of the stockholders of AmeriSource and Bergen Brunswig to
approve the merger; the risk that the businesses of AmeriSource and Bergen
Brunswig will not be integrated successfully; failure to obtain and retain
expected synergies; and other economic, business, competitive and/or regulatory
factors affecting the businesses of AmeriSource and Bergen Brunswig generally.
More detailed information about these factors is set forth in AmeriSource's and
Bergen Brunswig's filings with the Securities and Exchange Commission, including
each of their Annual Reports on Form 10-K for fiscal 2000 and their most recent
quarterly reports on Form 10-Q. AmeriSource and Bergen Brunswig are under no
obligation to (and expressly disclaim any such obligation to) update or alter
their forward-looking statements whether as a result of new information, future
events or otherwise.
Additional Information
----------------------
In connection with their proposed merger, AmerisourceBergen, together with
AmeriSource and Bergen Brunswig, filed a preliminary joint proxy
statement/prospectus with the Securities and Exchange Commission. INVESTORS AND
SECURITY HOLDERS ARE ADVISED TO READ THE DEFINITIVE JOINT PROXY
STATEMENT/PROSPECTUS WHEN IT BECOMES AVAILABLE, BECAUSE IT WILL CONTAIN
IMPORTANT INFORMATION. Investors and security holders may obtain a free copy of
the definitive joint proxy statement/prospectus (when available) and other
documents filed by AmerisourceBergen (as well as by AmeriSource and Bergen
Brunswig) at the SEC's web site at www.sec.gov. The definitive joint proxy
statement/prospectus and such other documents may also be obtained for free from
AmeriSource or from Bergen Brunswig by directing such request to AmeriSource
Health Corporation, General Counsel, 1300 Morris Drive, Suite 100, Chesterbrook,
Pennsylvania 19087-5594, telephone: (610) 727-7000; or to Bergen Brunswig
Corporation, Attention: Corporate Secretary, 4000 Metropolitan Drive, Orange,
California 92868-3510, Telephone: (714)385-4000.
Participants in Solicitation
----------------------------
AmeriSource and Bergen Brunswig and their respective directors, executive
officers and other members of their management and employees may be deemed to be
participants in the solicitation of proxies from their respective stockholders
in connection with the proposed merger. Information concerning AmeriSource's
participants in the solicitation is set forth in AmeriSource's Current Report on
Form 8-K filed with the Securities and Exchange Commission on March 19, 2001,
and information concerning Bergen Brunswig's participants in the solicitation is
set forth in Bergen Brunswig's Current Report on Form 8-K filed with the
Securities and Exchange Commission on March 19, 2001.
Contact: Michael N. Kilpatric Donna Dolan
610/727-7118 714/385-4226
mkilpatric@amerisource.com donna.dolan@bergenbrunswig.com
-------------------------- ------------------------------
AMERISOURCE AND BERGEN BRUNSWIG CERTIFY
COMPLIANCE WITH THE FEDERAL TRADE COMMISSION'S
"SECOND REQUEST" FOR INFORMATION
VALLEY FORGE, PA, and ORANGE, CA, July 27, 2001 - AmeriSource Health Corporation
(NYSE:AAS) and Bergen Brunswig Corporation (NYSE:BBC) announced that today each
of them has certified compliance with the Federal Trade Commission's request for
additional information in connection with their previously announced plan to
merge the two companies.
Pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
today's certification starts the FTC's 30-day review period, which will expire
at midnight eastern daylight time on Monday, August 27, 2001. Termination or
expiration of the review period is a condition to the consummation of the
business combination.
The companies expect to complete the merger by the end of August 2001.
On March 19, 2001, AmeriSource and Bergen Brunswig announced that they had
entered into a merger agreement to create a new company named AmerisourceBergen
Corporation. Under the terms of the agreement, each share of Bergen Brunswig
common stock will be converted into 0.37 shares of AmerisourceBergen common
stock and each share of AmeriSource common stock will be converted into one
share of AmerisourceBergen common stock.
About AmeriSource
-----------------
AmeriSource Health Corporation, with approximately $14 billion in
annualized operating revenue, is a leading distributor of pharmaceutical and
related healthcare products and services, and the industry's largest provider of
pharmaceuticals to acute care/health systems customers.
2
Headquartered in Valley Forge, PA, the Company serves its base of about 15,000
customer accounts through a national network of 22 strategically located drug
distribution facilities. For news and additional information about the company,
visit its web site at www.amerisource.com.
--------------------
About Bergen Brunswig
---------------------
Bergen Brunswig Corporation, headquartered in Orange County, California, is
a leading supplier of pharmaceuticals and specialty healthcare products as well
as information management solutions and consulting services. Bergen's customers
include the nation's healthcare providers (hospitals, nursing homes,
physicians), drug stores, manufacturers and patients. Through its subsidiary
companies, Bergen provides product distribution, logistics, pharmacy management
programs, and Internet fulfillment strategies designed to reduce costs and
improve patient outcomes across the entire healthcare spectrum. Bergen Brunswig
press releases are available on the Company's web site at
www.bergenbrunswig.com.
----------------------
Forward-Looking Statements
--------------------------
The foregoing communication contains certain "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements are based on management's
current expectations and are subject to uncertainty and changes in
circumstances. Actual results may vary materially from the expectations
contained in the forward-looking statements. The forward-looking statements
herein include statements addressing future financial and operating results of
AmeriSource and Bergen Brunswig and the timing, benefits and other aspects of
the proposed merger.
The following factors, among others, could cause actual results to differ
materially from those described in the forward-looking statements: inability to
obtain, or meet conditions imposed for, governmental approvals for the
transaction; failure of the stockholders of AmeriSource and Bergen Brunswig to
approve the merger; the risk that the businesses of AmeriSource and Bergen
Brunswig will not be integrated successfully; failure to obtain and retain
expected synergies; and other economic, business, competitive and/or regulatory
factors affecting the businesses of AmeriSource and Bergen Brunswig generally.
More detailed information about these factors is set forth in AmeriSource's and
Bergen Brunswig's filings with the Securities and Exchange Commission, including
each of their Annual Reports on Form 10-K for fiscal 2000 and their most recent
quarterly reports on Form 10-Q. AmeriSource and Bergen Brunswig are under no
obligation to (and expressly disclaim any such obligation to) update or alter
their forward-looking statements whether as a result of new information, future
events or otherwise.
Additional Information About The Merger
---------------------------------------
In connection with their proposed merger, AmeriSource-Bergen, together with
AmeriSource and Bergen Brunswig, filed a joint proxy statement/prospectus with
the Securities and Exchange Commission. INVESTORS AND SECURITY HOLDERS ARE
ADVISED TO READ THE JOINT PROXY STATEMENT/PROSPECTUS WHEN IT BECOMES AVAILABLE,
BECAUSE IT WILL CONTAIN IMPORTANT INFORMATION. Investors and security holders
may obtain a free copy of the joint proxy statement/prospectus (when available)
and other documents filed by AmeriSource-Bergen (as well as by AmeriSource and
Bergen Brunswig) at the SEC's web site at www.sec.gov. The joint proxy
statement/prospectus and such other documents may also be obtained for free from
AmeriSource or from Bergen Brunswig by directing such request to AmeriSource
Health Corporation, General Counsel, 1300 Morris Drive, Suite 100, Chesterbrook,
Pennsylvania 19087-5594, telephone: (610) 727-7000; or to Bergen Brunswig
Corporation,
3
Attention: Corporate Secretary, 4000 Metropolitan Drive, Orange, California
92868-3510, Telephone: (714) 385-4000. AmeriSource and Bergen Brunswig and their
respective directors, executive officers and other members of their management
and employees may be deemed to be participants in the solicitation of proxies
from their respective stockholders in connection with the proposed merger.
Information concerning AmeriSource's participants in the solicitation is set
forth in AmeriSource's Current Report on Form 8-K filed with the Securities and
Exchange Commission on March 19, 2001, and information concerning Bergen
Brunswig's participants in the solicitation is set forth in Bergen Brunswig's
Current Report on Form 8-K filed with the Securities and Exchange Commission on
March 19, 2001.
* * * * *
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 1
AMERISOURCE CORP.
July 25, 2001
10:00 a.m. CDT
Moderator Ladies and gentlemen, thank you for standing by. Welcome to the
AmeriSource Corporation Third Quarter Earnings conference
call. At this time all lines are in a listen-only mode.
Later there will be an opportunity for questions and
answers. As a reminder, today's conference call is being
recorded.
I would now like to turn the conference call over to your host,
Mr. Michael Kilpatrick. Please go ahead.
M. Kilpatrick Good morning, everybody and welcome to AmeriSource Health
Corporation's conference call covering third quarter
results. I'm Mike Kilpatrick, Vice-President Corporate
Investor Relations. Joining me today are David Yost,
AmeriSource's Chairman and CEO, Kurt Hilzinger, President
and Chief Operating Officer, and Jay James, Chief
Financial Officer.
As always, a caution concerning forward-looking statements and
the additional information about the merger with Bergen
Brunswig Corporation
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 2
contained in the company's earnings news release also
apply to this conference call. AmeriSource assumes no
obligation to update the matters discussed in this
conference call and this call cannot be taped without the
expressed permission of the company.
As most of you know, AmeriSource looks to forums, such as this,
as our primary vehicle for communicating our results. I
want to welcome many of you who may be joining for the
first time and are listening via our Web site. On the
AmeriSource Web site 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 in the past, those connected by telephone will
have an opportunity to ask questions after our opening
comments.
Here is Dave Yost, AmeriSource Chairman and CEO, to begin
our remarks.
D. Yost Good morning, everyone and thank you for joining us. The June
2001 quarter was another outstanding performance for
AmeriSource where our demonstrated ability to focus on
execution again resulted in a record quarter in revenue
and earnings. As noted in the press release, our revenue
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 3
for the quarter, excluding negligible bulk shipments,
reached a record $3.5 billion, increasing about $600
million over the same period last year. That's a strong
20.5% increase. Good, solid revenue growth in this
quarter, and 20% as well, for the first nine months of our
fiscal year. Our bottom line performance was also a record
for June quarter with net income of 25% over the same
period last year. EPS for the quarter reached a record
$0.57, a 21% increase over the $0.47 earned last year,
which excludes the reversal of restructuring reserves in
the prior year.
We achieved these record results despite the impact of Health
Nexus, formerly known as New Health Exchange, which cost
$0.02 per share this quarter and merger expenses which
cost an additional $0.01. We continue to be disciplined in
controlling our operating expenses to a record low as a
percent of revenue and in managing our assets. The result
was a robust return on committed capital of 26.4%, the
best single measurement of our performance.
As noted by the $900,000 in merger-related charges, the work is
well underway to achieve the successful integration of
AmeriSource and Bergen Brunswig Corporation following the
close of our merger. We have filed all of the documents in
response to the Commission's second request for
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 4
information, but we have delayed certification at the
request of the FTC staff. Importantly, we would
characterize this request as routine given the size of the
transaction and what has been viewed as a quick response
to the FTC's information request by the companies. We
expect to certify shortly, and as most of you know, once
we certify, the Commission has a 30-day review period,
after which, if there is no objection, the merger will
proceed. We remain on schedule to complete the merger of
these two strong, service-oriented companies by the end of
August following shareholder votes and the Federal Trade
Commission review.
Our integration activities are moving forward smoothly under the
direction of Terry Haas and supported by Deloitte
Consulting. Terry has extensive corporate and field
experience at AmeriSource and was the unanimous choice of
AmeriSource and Bergen to head this important function.
Deloitte Consulting was unanimously selected to assist in
the integration effort by a steering committee of
AmeriSource and Bergen Brunswig executives after
interviewing a number of qualified candidates. Kurt and I
will continue to be actively involved in the integration
process, of course.
We have completed phase one of the integration, gathering the
data needed to understand each company's business
processes using ... in some circumstances to
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 5
avoid compromising competitive information. In phase
two we are completing the details of the day one
activities and laying out in detail the integration
activities that will follow the close. The third and final
phase will be the implementation. Combining these two
companies is a large and challenging task and the efforts
of the associates in both companies has been
extraordinary.
Both companies have extensive integration experience and
their successful track record is proving a tremendous
asset to the planning process. As the process has
progressed, we remain confident that at least $125 million
of pre-tax operating cost synergies will be delivered by
the end of year three. As a reminder, this kind of
integration work is what this industry and these companies
have done successfully numerous times as acquisitions were
made and these companies created.
Turning to industry issues, the Medicare drug benefit
continues to be in the news with the latest developments
being the Bush administration's drug discount card and the
Senate Democrats talking about passing a Medicare
pharmaceutical benefits plan. Although it is unclear
exactly how the cards will work or even if that is the
mechanism that will be
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 6
utilized, nearly all scenarios, including pending
legislation, point to added volume for the industry and
AmeriSource, which of course, will be incremental, handled
at a very low additional cost, and we expect, generate
incremental profits.
Reimportation of pharmaceuticals was again raised in
Congress with the House passage of an amendment allowing
reimportation of pharmaceuticals for personal use. Because
of the safety and liability concerns, we don't believe
reimportation legislation will pass. Although, with our
repackaging facility we would be well positioned to take
advantage of this type of opportunity should we elect to
do so.
The shortage of pharmacists has also been in the news
lately, and as many of you know, AmeriSource has been
addressing this critical industry issue with the
development of a central processing center called
Autonomics. Introduced in testing last year, it has been
certified by the Ohio State Board of Pharmacy and is in
operation in Ohio. The program significantly reduces over
20% of the pharmacists' time spent on prescription
adjudication and other processing activities, increasing
productivity, and providing pharmacists more time to
assist patients and run the pharmacy.
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 7
The industry remains strong. According to the latest IMS
health data, pharmaceutical sales this year will be well
ahead of last year and dollar sales are expected to
increase at a compound annual growth rate of almost 14%
over the next five years, which we consider to be
conservative. It is not economic growth that is fueling
this expansion, but rather the demographic impact of the
aging of America, increased utilization of existing
medications, and new products.
Regarding the manufacturer's pricing environment, we do
not see any fundamental change occurring and anticipate
none going forward. While it is always difficult to
predict exactly when manufacturer's price increases occur,
we do not think there will be a fundamental change to the
roughly 4% annual price increases that have been
experienced in the last few quarters.
Health Nexus, the new name for the New Health Exchange,
our industry initiative with several other distributor
investors, continues to move actively forward. Health
Nexus released their first product at the end of March and
expect two additional releases soon. For those of you who
are not familiar with Health Nexus, the investor's plan is
to make this an
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 8
important utility that will allow all distributors and
manufacturers to lower cost in the healthcare supply
channel by moving together to common transaction formats
that none of us can implement alone. Significantly, it is
a complement to our own proprietary technology
initiatives, such as AmeriSource's iECHO ordering and
inventory system.
Our ability to sustain growth remains anchored in our
passion for customer service. We continue to strive to
improve our service, and we empower our distribution
center general managers and regional managers to make the
key customer decisions locally and quickly. Earlier this
year two national acute care purchasing organizations,
Novation and Premier, again voted AmeriSource number one
in customer service among the national pharmaceutical
distributors.
It was another terrific quarter for AmeriSource. We
delivered strong sales momentum. We controlled our
expenses and receivables. We delivered record third
quarter profits, and continued our disciplined deployment
of assets with a robust return on committed capital of
over 26%. We again demonstrated that we focus on more than
revenue. We are very excited about our pending merger with
Bergen Brunswig, and we are doing the
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 9
integration planning work carefully so that the execution
will reflect the performance you have come to expect from
AmeriSource. These are truly exciting times for our
company.
Now I want to turn the floor over to Kurt for some
operational specifics and then Jay will cover the
financials.
K. Hilzinger Thank you, Dave, and good morning everyone. As Dave mentioned,
this was another very strong, well-balanced quarter from a
sales and operating standpoint. Our sales growth in the
quarter was driven by our ability to add new accounts
while growing our current base of business. Importantly,
during the quarter we continued to focus our efforts on
those new customer opportunities where we could achieve an
adequate return on committed capital and where our higher
service capability and offerings will be recognized.
Jay will detail the specific customer group statistics, but in
terms of highlights, in our market leading health systems
group, we again benefited from the full impact of the $500
million annualized net new business from Novation, which
we were awarded late last summer. In addition, we continue
to add
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 10
new hospital and acute care business and renew agreements
with a number of long-standing AmeriSource customers. In
the Alternate Site group we gained numerous mid-sized and
smaller accounts during the quarter while enjoying the
positive impact of the large Anthem Prescription
Management contract, which began late last year.
Our retail business continued to show accelerated growth.
During the quarter we were awarded an incremental $200
million annualized contract with Family Meds Group, Inc.,
a rapidly growing national drugstore chain. While we have
been doing business with Family Meds since January, we
believe this additional reward was the result of our
demonstrative responsiveness to Family Meds' needs and our
overall customer service.
We continued our focus on the independent and retail chain
customer segments. These retail customers rely on and pay
us for our many value-added programs and services. In
fact, later today Dave and I will be headed to our annual
trade show for these customers, which are being held this
week in Nashville. This forum provides a unique
opportunity for us to interface directly with these
customers and hear about their needs and challenges.
Meeting attendance will be a record, with more than 1,000
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 11
customers and hundreds of suppliers participating.
In addition to contributing to the pharmacy profession through a
number of continuing education and technology training programs,
during the trade show we will showcase our many existing
programs, introduce new programs, and seek our customers' input
on new offerings currently under development.
For example, at the show we will launch a version 3.0 of our
highly successful iECHO ordering and inventory management portal
designed to help pharmacies better manage their inventories with
accurate, real-time information. iECHO has been growing in
popularity with nearly 5,000 customers actively using the system.
Version 3.0 upgrades, which are based on input from our pharmacy
customers, include new group reporting capabilities, hand held
order unit uploading, as well as a new on-line inventory
reporting function. This industry-leading technology offering has
been instrumental to our ability to capture new business.
At the trade show we will also be releasing our latest edition of
AmeriSource Index, our quarterly survey of key issues facing the
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 12
pharmacy profession. We introduced this index this spring and
it's begun to gain broad acceptance, with three appearances in
USA Today and numerous trade press articles. The index is part of
a broader strategy to expand AmeriSource's presence in the health
care supply chain.
Let me turn to some of our own productivity initiatives for the
moment. During the quarter our centralization program, which we
completed last year, continued to contribute to our results, most
notably in terms of record low operating expense performance and
improved procurement performance. Total operating expense as a
percentage of operating revenues, including all IT costs,
corporate overhead, and related expenses increased only 3.5%,
including $900,000 spent on merger integration activities. That's
an improvement of 39 basis points over the prior fiscal year to
an all-time record low of 2.41%, and down sequentially in dollar
terms from the March 2001 quarter. Record low operating expense
ratios were reported in each of our 22 pharmaceutical
distribution centers for the quarter.
Significant productivity gains were achieved in IT, warehouse
operations, and selling expenses, the very areas our
centralization initiative was
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 13
designed to address. On a year-to-date basis, our operating
expense ratio is 2.47%, putting us on track to meet our full-
year target of below 2.5%.
In addition, two major technology initiatives were completed
this quarter, which will provide further productivity gains.
First, we completed the implementation of a new best in class
procurement system. This system, in combination with our now
centralized procurement function, generated an improved vendor
margin contribution compared to year ago levels. During the
quarter we successfully sourced more buying opportunities, and
executed on those opportunities at more optimal levels while
continuing to target returns on capital of greater than 20%.
Further, as Jay will comment on in a moment, we completed a
highly successful implementation of a new, company-wide
financial and accounting system, which will allow us to improve
our closing cycle, strengthen our general management
capabilities to improve the access to data, and capture
additional staff savings.
Strong capital management discipline was again in evidence this
quarter. Our net working capital investment as a percentage of
sales improved over
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 14
year ago levels, driven by a very strong one point day
improvement in days sales outstanding, offset in part by an
increase in inventory levels to take advantage of attractive
vendor margin opportunities we sourced during the quarter.
Lastly, our new Atlanta facility, which supports the new
Novation business gained in the Georgia market, began shipping
during the quarter and is running smoothly. Atlanta met our
expectations as a modest contributor to operating income in the
quarter.
I want to make clear that in all of these efforts, both recent
and going forward, we remain committed to a highly responsive,
locally driven customer service model. This is the backbone of
our competitive edge and we will continue to enhance it. We will
continue to perform at the local level those activities that
directly touch our customers.
While during the quarter we have been actively engaged in a
number of merger approval and integration activities, it's clear
that based on the level of activity I've just outlined and the
results of the quarter, that we remained focused on our
business. In the third quarter fiscal 2001, we continued to
build momentum, which gives us a high degree of confidence
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 15
in AmeriSource's performance in the coming quarter and for the
year.
Now I'll turn the call over to Jay to review the financial
results for the quarter.
J. James Thanks, Kurt. Good morning, everyone. This clearly was a well-balanced
quarter with strong improvements in a number of areas including
revenues, earnings, return on committed capital, and the balance
sheet. The future continues to look strong and I'll talk more
about that at the end of my comments.
Before I begin, let me mention that my comments and year-to-year
comparisons will exclude special items for the third quarter of
2000. You will remember that in that period we reversed previous
and no longer necessary restructuring reserves, which added about
$0.01 to the quarter. At that time we viewed the quarter as a
$0.47 quarter rather than the $0.48 reported. That is still our
point of reference.
Now let me give you the particulars of the quarter. Overall operating
revenue for the quarter came in at a robust $3.52 billion. The
revenue growth for the
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 16
quarter at 20.5% reflects continuing top-line momentum and the
impact of a number of new accounts, both large and small, as well
as growth in existing accounts. This brings sales for the first
nine months to $10.3 billion, up 20.1% from the same period of
2000.
Let me give you more details on our institutional retail sales
breakdown. For the quarter, our hospital or health system sales
were 42% and Alternate Site was 12%, totaling 54% for
institutional. Independents were 32% and non-warehousing retail
chains accounted for 14% or 46% in total for retail. The
comparable numbers for third quarter 2000 were health systems,
42%; Alternate Site, 9%; Independents, 37%; and retail chains,
12%. This represents strong double-digit growth in all areas
except independents, which were up 5%. This primarily reflects
the discontinuation of business with a retail buying group. On a
same store basis, growth continues at a double-digit rate for the
independents.
Our gross margin in the quarter, as expected, declined by 32 basis
points. The year-to-year decline reflects the net impact of a
number of factors, including the changing customer mix to a
higher level of larger institutional accounts and the continuing
competitive environment, partially offset by improved
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 17
vendor margins compared to third quarter 2000. For the nine
months, the year-to-year decline in gross margin was 23 basis
points. The LIFO provision for the quarter was a charge of $5.2
million compared to a charge of $4.2 million in the same period
of the prior year. For the first nine months, the LIFO charge was
$8.8 million versus $8.4 million in fiscal year 2000.
Total operating expense for the quarter was $84.7 million, up from
$81.9 million in the prior year third quarter. The $81.9 million
excludes the impact of the reversal of the $1.1 million in
previously accrued restructuring reserves. These operating
expenses include depreciation and amortization costs of $4.2
million in third quarter 2001 versus $3.9 million in the prior
year. Four hundred sixty-one thousand dollars of this quarter's
$4.2 million in DNA represents amortizations, which are at about
the same level as the prior year. The increase in DNA is
primarily due to depreciation, which reflects the higher capital
expenditures due to some of our project implementations.
Looking at total operating expense as a percentage of operating
revenue, this represents an improvement of 39 basis points to
2.41% from 2.80% in the prior year. This reflects, in part, our
changing customer mix and efficiencies of scale,
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 18
as well as the continued elimination of cost and continued
productivity improvement throughout our distribution network. It
also reflects bad debt expenses of $3.8 million in this quarter
versus $5.3 million in third quarter 2000, implementation
expenses relative to a number of our new systems and project
initiatives, and $903,000 in merger integration planning
expenses, which equates to about $0.01 per share. For the first
nine months, operating expenses increased 7.9% to $255 million,
while total operating expenses to operating revenues decreased 28
basis points to 2.47% from 2.75%.
Our operating income for the quarter increased by 26% to $60.2
million. We showed an increase in operating margin of seven basis
points year to year to 1.71%. For the first nine months of 2001,
operating income increased 23.4% to $178.5 million and the
operating margin improved by four basis points to 1.73%. The
operating margin was impacted by the lower gross profit margin,
but more than offset by the lower operating expense as a
percentage of sales.
Our results reflect the impact of the investment in Health Nexus,
which is currently being accounted for on the equity method and
which we are
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 19
showing as a separate line item below operating income. This
reduced income by approximately $2 million pre-tax or about $0.02
per share for the quarter, and $4.6 million pre-tax or about
$0.05 per share for the first nine months.
During the last conference call, I mentioned that we had
successfully completed the first phase of our new financial
systems project, which gives us better and more timely
information. We now have successfully completed the second phase,
which includes the centralization of our accounts payables
process. This will allow us to reduce the head count associated
with this function and generate a very good return on committed
capital on the systems investment.
Interest expense for the quarter decreased to $7.4 million from
$8.4 million in 2000. The interest expense reflects higher
average levels of debt offset by lower borrowing costs due to the
lower spreads and lower interest rates, as well as the impact of
the convertible financing. Average gross borrowings for the
quarter were $532 million versus $505 million a year ago. Ending
debt was $643 million versus $534 million in third quarter 2000.
Cash increased to $94.3 million from $36.2 million in third
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 20
quarter 2000. Therefore, on a net debt basis, reducing debt in
both periods by cash, this year-to-year increase would be about
$50 million. This year-to-year increase in debt reflected, among
other factors, significant discretionary inventory opportunities,
which made additional investment attractive. We would expect a
significant amount of these discretionary inventories to be sold
in the September quarter.
Our borrowing spread under our existing revolving credit facility
is currently at 37.5 basis points over LIBOR, reflecting our
improved financial structure. For the quarter, average three-
month LIBOR rates were down over 200 basis points compared to the
same period the prior year. We continue to have ready access to
the capital markets to meet the needs of our business, and I want
to remind everybody that during the September quarter we did
complete the issuance of $300 million in convertible debentures
with a fixed interest rate of 5%. These bonds represented a
valuable addition to our capital structure and should be
accretive to earnings as we go through 2001 on a diluted basis.
However, they do impact the calculation of EPS as explained by
the supplemental table in the earnings release.
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 21
The effective tax rate for the quarter, as expected, was 38%.
This is the same as the 38% for third quarter 2000 and year to
date 2001. Average shares outstanding in the quarter of 52.9
million increased by 1.3 million from third quarter 2000,
primarily due to option exercises. Diluted shares of 59.6 million
for the quarter increased by 7.5 million from third quarter 2000
reflecting the dilutive impact of stock options, and 5.7 million
shares reflecting the issuance of convertible notes in December
2000.
Bringing this all to the bottom line, we delivered net income of
$31.5 million, up 29% before special items in 2000. Diluted EPS
for the quarter was $0.57, an increase of 21.3% versus the $0.47
of third quarter 2000, again excluding the special items
mentioned earlier. For the first nine months, net income was up
26.9% to $89.2 million, and diluted EPS was $1.64, an increase of
20.6% over the $1.36 for the first three quarters of fiscal year
2000, again excluding the special items in 2000. Please note that
EPS for 2001 rounds up to $1.64 for the first nine months versus
the sum of the $0.49 reported in the first quarter and the $0.57
reported in both the second quarter and in this quarter.
Moving to the balance sheet, for the quarter DSOs were down to a
record
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 22
17.2 days from 18.6 days a year ago. With the improvement driven
both by customer mix as well as a strong focus on asset
management at the local level. DPOs were up to 45 days versus
39.6 days a year ago, reflecting the timing of inventory buying
opportunities. Inventory levels of $1.96 billion were increased
from prior year levels, and reflected necessary inventories to
support the 20% revenue increase as well as the previously
mentioned inventory buying opportunities. As a result, inventory
turns decreased to 6.7 versus 7.2 a year ago. However, our net
working capital investment as a percentage of sales for the
quarter improved slightly to the lowest level in the last several
years at 6.70% versus 6.71% at third quarter 2000 despite the
increased level of inventories. Capital expenditures in the
quarter were $5.9 million versus $4.7 million one year ago,
reflecting the previously mentioned systems projects.
Turning to return on committed capital, which you will recall is
our primary financial metric in which we define as operating
income excluding amortization, divided by fixed assets plus
inventory and receivables less payables on a rolling 12-month
basis. This reached a very strong level of 26.4% this quarter,
continuing well above our stated target
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 23
of 20% or better. This continues to reflect our disciplined use
of capital and reflects a continuing trend of improvement from
already impressive levels.
Looking ahead to the rest of fiscal year 2001. We continue to be
comfortable with a revenue growth rate of 20% for fiscal year
2001, which is clearly well above our long-term target of 15%. We
also continue to be confident that strong cost discipline and
additional productivity improvements, as well as changes in our
customer mix, will deliver a lower operating expense for the
year, below 2.5%. We anticipate good vendor margin opportunities
will continue and we expect to be able to increasingly benefit
from them. As a result, we are comfortable with the current
analyst estimates for the year. These estimates reflect a
consensus number of $2.27 for the year, which represents an
increase of 20% over the $1.89 of fiscal year 2000. Importantly,
we still anticipate ending the year with positive free cash flow
of at least $50 to $100 million, driven by inventory reduction.
All in all, a very solid quarter and the expectation for a very
solid year.
For a longer-term perspective, let me take a moment to remind you
that we
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 24
are now in the middle of our normal, extensive, bottoms-up
planning process. This would normally lead to a guidance on
the outlook for fiscal year 2000 at our fourth quarter
conference call. This year we are clearly involved in an
equally intensive integration process addressing the
expected merger of two strong businesses. While it is still
too early to give guidance for next year on either basis,
let me reaffirm our continuing long-term financial goals,
which will also apply to the combined companies, and those
are to achieve at least 15% revenue growth, 20% return on
committed capital, and 20% EPS growth.
Now let me turn you back to Mike.
M. Kilpatrick Thank you, Jay. We will now open the call to questions. I would
remind you to limit yourself to one question with a follow
up until all have had an opportunity. Then you may ask
additional questions. Go ahead, Alan.
Moderator Thank you. We'll take a question from the line of Ray Faltche
with Bear Stearns. Please go ahead.
R. Faltche Yes. Good morning. It's Ray Faltche with Bear. You touched
briefly in the
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 25
prepared remarks on the inventory build that we saw on the
balance sheet, and I guess a little bit of an increase in the
short-term debt. You talked about significant discretionary
opportunity. I was wondering if you could put a little bit more
color around that, if you think that's going to be an ongoing
opportunity for the next several quarters, or was there something
special in this last period that gave you some opportunity?
J. James Again, one thing I would point you to is that we do expect to
significantly reduce those inventory levels in the next quarter,
and again, that's one of the key drivers on cash flow.
K. Hilzinger Ray, this is Kurt. I'll comment on the question a little bit from
the standpoint that I think it's been an ongoing initiative here
at AmeriSource to increase our procurement capabilities over the
last year to 18 months. I think we're starting to see that come
to fruition here a little bit. We've got new systems. We're now
centralized. The net effect of what we're finding here is we're
seeing more opportunities to make some buys than we have before.
But, as always, we remain disciplined in our use of that capital.
Those discretionary investments go in with an intent to return no
less than 20% on a capital basis.
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 26
So with regards to a forward look here, as long as our procurement
function continues to find opportunities and we can get at least
a 20% return, we will continue to put the capital to use that
way. In a 4% steady inflation environment, which is what we're
anticipating, I think we're going to continue to have great
opportunities in future periods.
R. Faltche Great. I appreciate that. Thanks.
K. Hilzinger Yes.
Moderator Pardon me. Then for our next question we will go to the line of
Glen Santangello. Please state your firm followed by your
question.
G. Santangello Yes. It's Glen Santangello from Salomon. David, I just have a
couple of quick questions related to the merger. You know
you gave us some comments earlier, but with respect to the
FTC process, could you just sort of give us the background
for why you decided to delay the certification? Was it the
FTC that maybe gave you an indication up front that it might
take them longer than 30 days to begin with or you just
thought it would be a good
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 27
idea? Isn't it my understanding that the information has
been in their hands for quite some time?
Then sort of as a follow up to that, I know as part of their
review process they also solicit customer feedback, and if
you can give us a sense for how they do that and sort of how
that's progressing at this point? I know in the past we
talked about one GPO, potentially in the Midwest, that was
squawking a little bit and I think there were some
independents on the West Coast. So if you could just give us
some additional color on those issues I think it'd be
helpful.
D. Yost Okay, Glen. First of all, in terms of the schedule, we really
view the schedule that we're on right now as very routine,
particularly given the size of this transaction, which was
very, very large. Some observers would point out that we
responded to the FTC's request faster than they expected us
to do. We responded very, very quickly. So the request for
delay is coming from the Federal Trade Commission, but we're
looking to accommodate that. But again, I want to stress the
word here, routine, because we really think that we're
progressing exactly as we thought we would all along, and I
think from the get-go back in March we were talking about
this transaction
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 28
closing the end of August and we're still absolutely there.
In terms of the customer response, Glen, you know, we think
we've gotten very favorable support from our customer base.
As Kurt and I mentioned, we're on our way to our annual
trade show where we'll see a lot of these customers eyeball
to eyeball, but I have talked with a large number. We will
deliver to the FTC, literally hundreds of letters of support
from our customers. So we do not think adverse customer
reaction will be an issue here at all. In fact, we think
that the customers will be very supportive of this
transaction in part because they view this as the coming
together of two service-oriented companies, which gives them
a strong alternative in the marketplace. So we're very
optimistic about the support we've gotten and will get from
our customers.
G. Santangello Can you just remind me, you know I hate to bring up the past,
but back, last time around, did you receive favorable
customer support last time around? What sort of reaction did
the customers have back in '98?
D. Yost Actually, Glen, it was a little mixed last time. We had some
customers, some buying groups, who were opposed to the
transaction. We would note that
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 29
the transaction we're bringing forward today is dramatically
different than the situation last time. Some customers
perceived that only having two large wholesalers last time
around as decreasing their choice. This time around most
customers perceive the playing field, in some sense, being
even more level with three wholesalers of similar size; two
very service-oriented customers coming together. So last
time there was some adverse reaction, not this time around.
G. Santangello Okay. Thanks for those comments.
D. Yost Okay, Glen.
Moderator And for our next question we go to the line of Michael
Fitzgibbons. Please state your firm followed by your
question.
M. Fitzgibbons Good morning. It's Morgan Stanley. Could you just tell us
about whether you're working with Bergen on the roll out of
your new financial procurement systems and to what extent?
Are they already implementing or is there input there or are
you coordinating that roll out or is that something that
you're going to have to sort of start over at Bergen once
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 30
you close the deal?
D. Yost Michael, we've got a very intense, disciplined integration
process under way. It's headed up, as I mentioned in my
remarks, by Terry Haas who was unanimously selected by both
companies. We've hired Deloitte Consulting. They have
identified a number of threads of what they say are
disciplines. That process is moving along very well.
We have not made final decisions on what systems will be used,
including procurement systems, but one of the things that's
being encouraged is by how robust we have found both systems
to be.
Kurt, do you want to add anything?
K. Hilzinger I would just kick in that Deloitte is doing a review. One of the
rationales for selecting Deloitte, frankly, was that they
knew Bergen's systems up and down the line. They've done a
lot of work with Bergen through the years so they started
with a leg up. They are in the process of doing a very
comprehensive capability study for both sets of systems.
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 31
I think it's important to note this may not be an either/or
decision here. There may be elements of either system that
can be put together to have the system supporting the
combined entities being more capable than either one
independently. Procurement is a good example. We've gone to
a state of the art procurement system here. Bergen was under
review with its own analysis to whether they wanted to
upgrade their procurement system. This made a logical place
where we've, in fact, saved the combined company a step here
because we've already got it in place and running well.
M. Fitzgibbons Did you consider ever holding off on implementing these two
systems until those reviews with Deloitte and Terry Haas and
everybody else were complete?
D. Yost We actually had committed to our system last fall, so we were
well underway in our own process and we just elected to move
forward with it because there was money to be gained for our
shareholders.
K. Hilzinger That's true for both systems.
M. Fitzgibbons Okay. And one other question. Did you say what the bad debt
charge was
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 32
in the quarter?
J. James Yes. It was $3.8 million in the quarter, which again, runs a
little bit higher than what our expectation would be.
M. Fitzgibbons Okay. Hasn't that been the case for a number of quarters
now? I remember last summer you mentioning that you felt
like you'd be back to sort of $1.5 million.
J. James Right. Well, we ran $3.7 million in the first two quarters, $3.8
in the third quarter. That takes us to a rate that's about
11 basis points of sales. I would expect on a normal basis
that to be more in the eight to nine basis point range. So
we are running a little higher than normal and we do expect
to trend back to those lower levels in the future.
D. Yost I would also point out that if you looked at our bad debt
reserves as a percent of our total revenues, I think that
you would find that they are very strong in the industry.
We're kind of a conservative group.
J. James Yes. We have a total reserve out there now of $40.2 million,
which is approximately 3% of sales, and again, when you
consider that a significant
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 33
portion of our sales base is the government, which is a
pretty good credit risk. Those are pretty good numbers.
M. Fitzgibbons Okay. And was there anybody in past quarters when you've
been...particular customers involved, you know, like Grand
Union in general. Is there anybody this quarter that led to
a...?
D. Yost Yes. Nobody really visible out there. Previous quarters it's been
the jitneys and the Grand Unions and the Response
Oncologies. This quarter there was, I think, one small
hospital group out there, but nothing significant.
M. Fitzgibbons Okay. Thanks very much.
D. Yost You bet.
Moderator And next we will go to the line of Robert Willeby with Credit
Suisse First Boston. Go ahead, please.
R. Willeby Thank you. Can you give us an idea as to the merger costs you
might be expecting for July and August? And is it reasonable
to assume, maybe,
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 34
Bergen's incurring similar types of costs?
D. Yost I really can't comment, Bob, on what to expect from Bergen.
J. James And I would say the activities will clearly, I can't say
specifically about July and August, but they'll clearly step
up following the merger. That's when, you know, there'll be
more things going on.
R. Willeby Okay. And just from the standpoint of the Autonomics unit, you
said it's up and running in Ohio. Can you give us an idea of
the customer base and maybe the economics of a customer
relationship?
D. Yost We're really uncomfortable talking about specific customers, Bob,
but I will tell you we mentioned that Kurt and I are on our
way to the trade show. We hope to have a lot more customers
at this time next week than we have now. But this saves the
pharmacist a considerable amount of time. As you're well
aware of, pharmacists are becoming very expensive people.
There's a huge shortage of them. The national association of
chain drug stores is estimating that shortage at some 7,000
physicians across the United States. So this is going to
really allow the pharmacist to be a lot
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 35
more productive. It really kind of kicks in that that amount
where the pharmacist is filling, say, 110 prescriptions or
so, and wants to increase his productivity, and he's right
at that verge of do you hire another pharmacist or do you
try to come up with a system to become more productive and
that's when Autonomics kicks in. So we're very excited about
this and we think a large number of our regional small
chains and entities will be as well.
R. Willeby How do you get paid, though, I guess? That's what I'm trying to
figure out.
D. Yost We get paid for the service on a per scrip charge.
R. Willeby Excellent. Thank you.
D. Yost You bet.
Moderator Thank you. For our next question we will go to the line of Seth
Tesch and Mr. Tesch is with First Union. Please go ahead.
S. Tesch Hi. Good morning. Should we view the merger charge this quarter
kind of like
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 36
we did for the quarter last year where this is really a
$0.58 quarter versus a $0.57 quarter? How would you ask us
to view that going forward?
J. James Seth, this is Jay. We left it in, if you read our normal results
this year, because we haven't closed the merger yet. I think
going forward we'll look at it as being separate. You can
view it how you want to, but that's the way we reported it
and it ties in, clearly, with a 20% growth rate, which is
clearly our long-term financial target.
S. Tesch Okay. Great. And then secondly, I was curious to know, with your
LIFO provision being about $9 million for the first nine
months of the year, I was curious to know what your target
would be for LIFO for the fourth quarter or the fiscal year?
J. James Again, each quarter's LIFO charge or credit is based on our
outlook at that time, and as we've stated, we had higher
inventories in the June quarter than we expect to have in
the September quarter, which is all part of the calculation.
Again, we have to manage this on a quarter-to-quarter basis.
The one thing I will point out to you is that, historically,
we have in the last four years ended up with a credit in the
fourth quarter. And again,
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 37
history may not be an indicator of the future, but I'll just
point out that we have ranged in that credit from $1 million
to $8 million for the last four years.
S. Tesch But no guidance as to where you think that's going to come in?
J. James No. I mean I think we'll clearly do our best to bring it in at as
a low a level as possible, but we believe that the charge in
the third quarter was appropriate for the circumstances.
S. Tesch Great. And then lastly, I just wanted to make sure. You can't
have your shareholder vote until after you hear from the
FTC, is that correct?
D. Yost That is not correct. That's not correct, Seth. We can have the
shareholder vote whenever we schedule it. It is not unusual
for companies to have shareholder vote before you hear from
the FTC.
S. Tesch Okay. But you don't have it scheduled as of yet?
D. Yost It is not scheduled as of yet.
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 38
S. Tesch Great. Thanks very much.
Moderator And for our next question we go to the line of Ray Louis with
McDonald Investments. Go ahead, please.
R. Louis Thank you. Good morning, everyone. Just a couple of quick ones
that I missed in the prepared remarks. Jay, what was the cap
ex number in the quarter?
J. James The cap ex was $5.9 million.
R. Louis $5.9 million?
J. James Yes.
R. Louis Okay. And at this point you don't have any indication in terms of
what the total magnitude or timing of charges might be
relative to the Bergen transaction, is that correct?
J. James No. We would want to complete the process and we would prepare to
tell you what we can following the completion of the merger.
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 39
R. Louis Okay. And perhaps backing up just a little bit on a more general
kind of question, just looking at the overall market and the
sort of 13 or 14% growth rate for the aggregate, and
obviously, the expectations that you guys have to probably
be slightly ahead of that, and likewise, some of your
competitors out there. Could you guys talk a little bit
about who you're taking share from and what the outlook
continues to be in terms of that front just given the growth
in the total pharmaceutical market?
J. James We try to be a non-discriminatory share grabber when we have a
chance, Ray. We take it from whoever we can get, whenever we
can get it. So I think it really varies. I mean we've got
strong revenue growth in all of our segments. We've picked
up a lot of singles and doubles, as Jay likes to talk about
with our independents. We've made several strides in the
regional chains. Some of these regional chains are large,
you know, well over 100 stores. I'd say the places where you
have not seen us as of late is in these big contracts that
have moved from time to time. Frequently that's because we
perceive them to be very price sensitive. So we're out there
trying to get customers where we can provide them more than
just product at a price. We find those customers, literally,
in every segment that we do business in and we'll continue
to keep working on them.
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 40
D. Yost And let me add a thought here too, which is again, even though
our financial model is a little bit more aggressive than,
say, the IMS statistics, which is, as they've mentioned, we
feel are possibly on the conservative side. Our model works
at a lot lower level of growth than 20%. You know that mid-
teen level allows us to deliver ongoing strong financial
results.
R. Louis Thank you very much.
D. Yost You bet.
Moderator And for our next question we will go to the line of John Green
with Dresner, Klineworth, Washerstein. Go ahead, please.
J. Green Thanks. I was wondering if you guys could give us your view of
the pharmacist shortage sort of across your various customer
bases, institutional, retail, and independent? And then sort
of your assessment of your relative strengths and
capabilities in helping each of those segments deal with
that shortage.
D. Yost John, I'll take a stab at it. I'm not sure I'm totally qualified
to respond, but that's
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 41
never stopped me before. You know, I would say that the
pharmacist shortage is probably hitting the largest chains the
hardest. They look for a large number of pharmacists, the working
conditions there are not always perceived as as pleasant as in
some of the smaller chains and the independents and the like. I
think that to the extent that there is a pharmacist shortage, I
think it will result in the independents and the small chains
continuing to gain momentum and strength.
This year the number of independents went up about one percent, you know,
and a couple of hundred new pharmacies opened. I think that is in
part a reaction to the pharmacist shortage. The idea being there
is more opportunity, I might as well just hang up a shingle, if
I'm going to have to work long hours and get the full rewards for
it.
So I think what's going to emerge and the opportunities that are going to
emerge are more systems to make the pharmacist a lot more
productive. Clearly, our Autonomics is a step in that direction.
We also have some opportunities, we think, with our packaging
operation where we can take the pharmaceutical pills, the
pharmaceuticals in bulk, and package them in unit of use, unit
dose, and the likes of the pharmacist does not have to
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 42
spend time counting out pills, pouring, licking and
sticking, as they say. So I think it's going to represent an
opportunity as we go forward for companies like AmeriSource.
J. Green Great. What do you think about it on the institutional side? Do
you think the shortage is hitting there and is there
anything you can do to help out in that area?
D. Yost You know the hospitals also have had some demands. As a general
rule, they do not have the same kind of problems because
many of the people who go to the hospital pharmacists are
attracted to the very clinical setting that occurs there,
where they have the opportunity to "practice" their
profession more.
We do have a number of productivity initiatives launched for the
hospitals, as well, so that the pharmacist can spend more
time up on the floor and not spend time worrying about their
inventory.
J. Green Okay. Great. Thanks a lot.
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 43
D. Yost You bet.
Moderator And next we will go to the line of Andy Speller, and Andy Speller
is with AG Edwards. Go ahead, please.
A. Speller Good morning, guys. I just wanted to get some more color around
the FTC issues. Can you give a comment as to what they're
looking at? Are there going to have to be any divestitures
in terms of distribution centers or customer areas or
anything like that?
D. Yost Andy, it's Dave. I'm not sure we know what they're looking at. We
don't have any insight to that. I would be very surprised if
any divestitures or the like were called for, Andy. In this
kind of a business, it just does not lend itself to that
kind of thing. It's not necessarily just the distribution
centers you've got, but rather the customers and the systems
and the like. So I would be very surprised to hear about any
divestiture request.
A. Speller So would that mean if whatever their second request issues
weren't satisfied by your response, then it would either be
termination of the merger or there would be no way to get
over their concerns? I'm just trying to reconcile what
they're trying to get at.
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 44
D. Yost Well, Andy, the truth of the matter is we don't know what they're
trying to get at or where they will come out. If they had
some concerns, we would certainly entertain them and see if
we could give them some comfort on that. So we're certainly
not ruling out anything as we go forward, but it's important
to know we have not heard from them yet and we probably will
not hear from them for some time, we think.
A. Speller Okay. If I could just get another follow up in. In terms of how
are you positioned with your current distribution network?
If this merger doesn't go through, what sort of investments
do you have to make in the long term in terms of keeping
your customer base and moving forward if the merger doesn't
happen to go through?
K. Hilzinger Andy, it's Kurt. You know, prior to the agreement with Bergen,
AmeriSource had just completed its own distribution network
study. So we had gone through, in a very systematic fashion,
pinpointed where we wanted to make additional investments in
our network, which included a handful of build outs and a
handful of consolidations so that we were properly fitted
to, one, our existing account base, and two, what we thought
were going to
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 45
be attractive market opportunities down the road. So that
was for the physical plant.
In addition to that, you had heard us talk in the past about
Warehouse Management System, which is, basically, an
automation-enabling technology. It goes in the warehouse,
makes our warehouses basically a paperless environment. So
that was on the boards as well. Frankly, ..., in fact, the
technology offering that's available to the combined network
for AmeriSource Bergen, but on a stand-alone basis, you
know, we've got those plans in place and we're ready to
execute on those if for some reason the FTC doesn't see the
world our way. But again, that's not what we're anticipating
at this point.
A. Speller Could you quantify the dollars there?
K. Hilzinger I think we could be looking at facility builds, you know there
could be three to four new facilities that could go up in
the AmeriSource network in the next three to four years. You
know, you're talking anywhere between $10 and $20 million
for a facility, depending on whether you own the land and
the building. If you throw the land and the building in,
you're closer to $20 million. If you do not and you're
leasing a facility, you're down at the
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 46
$10 to $12, $13 million range. And we're talking about,
these are large-scale, highly automated facilities, 200,000
to 250,000 square feet from a footprint standpoint.
A. Speller Okay. Thanks a lot. I appreciate the color there.
K. Hilzinger You bet.
Moderator And next we have in queue a question from the line of Christopher
McFadden with Goldman Sachs. Go ahead, please.
C. McFadden Thanks. Good morning, everyone.
D. Yost Good morning, Chris.
C. McFadden A couple of questions if I might? First of all, could you talk
about the Health Nexus expenses this quarter again, some
acceleration over the previous. What you think we'll see or
should anticipate as we complete this calendar year. And
what is your commitment to Health Nexus and its funding
requirements looking out into calendar '02 and beyond? Also,
I was hoping you could update us on a trend at the VA and
how additive the VA
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 47
was to the strong institutional growth in the quarter?
Thanks.
D. Yost First let me talk about Health Nexus, Chris. As we look out over
the next couple of quarters, our September and our December
quarter, I think it's reasonable to expect that Health Nexus
could be a similar amount to where they are now. They're
going to market with a couple of new products very soon. We
look for them to be cash neutral in two more quarters or so.
So the ramp up has come from the development cost. It's
primarily people. We spend a lot of time watching those
expenses, but I think they've got another couple of quarters
to go before they turn the corner. They're signing up
customers as we speak so we're optimistic that they'll meet
their plan.
The VA continues to be a strong performer. They're growing similarly
to what our total business is and we continue to be happy
with that account.
C. McFadden Dave, if they don't hit their internal targets for cash flow
neutrality, will these consolidated costs to your P&L
continue to move into '02? Should that be our expectation?
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 48
D. Yost I would expect to see something there, Chris, at least for the
first quarter of '02 for us.
C. McFadden Very good. Thank you.
Moderator Then next we go to the line of Larry Marsch with Lehman Brothers.
Go ahead, please.
L. Marsch Yes. Good morning, everyone. Just maybe a point of clarification
to the extent you can comment. I know in your press release
you suggest you anticipate completing the merger still by
the end of August, which you had said is consistent with
what you said in the past. Wouldn't that, by definition,
mean that you're going to declare certification within the
next week?
D. Yost It would.
L. Marsch So that would be the definition of shortly.
D. Yost That would be a good definition of shortly.
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 49
L. Marsch Okay. And just to back up your commentary about some feedback
that your information request was submitted earlier than,
kind of, the norm. Do you have any general comment about
what the norm usually is and how much quicker you were
versus that?
D. Yost The only thing I can tell you, Larry, is what we've heard from
some of our attorneys, and they say that in a transaction
this size, not unusual to take ten/twelve weeks, you know,
something like that to respond to the FTC request. So that's
all I've got to go on, but we were very diligent in moving
forward to getting the information pulled together.
L. Marsch Okay. Maybe as a follow up, in terms of bad debt expense.
Obviously, a smaller customer, Horizon, has declared Chapter
11 and named you as a creditor. What is the extent of your
exposure there and do you feel like you've already had some
reserving against that?
J. James We feel our exposure is pretty limited there. We've been selling
them on a secured basis and we feel we've got strong
security there. So we think we're in pretty good shape.
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 50
L. Marsch All right. So we would not anticipate any charge associated with
that?
J. James That's our expectation, again, based on where we are in terms of
having a secured position.
L. Marsch Great. Okay. And maybe a quick follow up to, I think, Chris's
question on Health Nexus, which is, do we have any
confidence that these expenses may not continue to tick up a
little bit before they round the bend? And how much control
do you have as a partner in this process to make sure that
doesn't happen?
D. Yost I think we've got good cost controls in place, Larry. Being
involved with Health Nexus is a little unusual because we
are a partner, you know, we don't control it. Whereas Kurt
runs a pretty tight ship on everybody and keeps them under
their thumb, and in this case we've got a couple of
partners. But I will tell you that they will continue to
demonstrate good fiscal responsibility, and I remain
confident that they are going to be able to deliver value to
the marketplace and get paid for it probably by the end of
this calendar year.
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 51
L. Marsch Okay. Great. That's all I had. Thanks.
D. Yost Thank you.
J. James Thank you, Larry.
Moderator And next we go to the line of Lynn Yaffi with Bank of America. Go
ahead, please.
L. Yaffi Hi. If you've answered these, please feel free to skip them and
I'll listen on the replay. I missed part of the beginning. I
was just wondering if you could go through and break down
further the sales, institutional versus retail in terms of
hospital versus other and chain versus independents? And
secondly, what was the Health Nexus loss in the quarter? And
the final question is did you go through the ending debt
average debt numbers and the average interest rate?
J. James Lynn, this is Jay. We did go through all of that. It's on the
replay, but I'd be happy to give it to you separately if you
want to give me a call after this.
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 52
L. Yaffi That's fine. Okay. Thanks.
D. Yost You bet.
Moderator And next we go to the line of David Risenger. Please state your
firm followed by your question.
D. Risenger Yes. Merrill Lynch. Congrats on a strong quarter.
D. Yost Thank you.
D. Risenger Would you please just give us a sense for merger document
filing? Is that something that you can comment on and just
what type of timing we should expect looking forward?
D. Yost Are you talking, David, about the S-4?
D. Risenger Yes.
D. Yost I would say shortly you could expect that to be cleared. I would
say shortly.
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 53
D. Risenger And then the time line from when you file it, could you just
walk us through that?
D. Yost You know, it has been filed, David. It hasn't been cleared yet.
There is a series of iterations where the SEC comes back and
has comments and you respond to it. We're in the process of
clearing those. After the SEC signs off on it, then you're
free to go out to the shareholders, and, I think, the
statutory requirements or regulatory requirements are simply
in the neighborhood that after the mailing you have to give
your shareholders 21 days in which to respond. That is, you
cannot schedule a meeting prior to 21 days from when they
get notice. So that kind of dovetails with the end of August
as well. That's why we're confident that we can close this
transaction by that time frame.
D. Risenger That's great. Thanks very much.
D. Yost You bet.
Moderator Our next question will be from the line of Lori Grumley with
John Hancock Advisors. Go ahead.
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 54
L. Grumley Hi. Lori Grumley at John Hancock. My question's been asked and
answered. Thank you.
D. Yost Thank you, Lori.
J. James Good to hear from you, Lori.
Moderator And next we'll go to the line of Bruce Babcock. Mr. Babcock
with Seabrook Capital. Please go ahead.
L. Farron This is actually Laura Farron for Bruce Babcock. When we spoke
to you earlier in the quarter, you mentioned that you were
going to have a meeting after the close of the merger. Is
that still the plan?
D. Yost Yes. We do plan it. We have not scheduled that of yet, but our
intent is to have a meeting.
L. Farron Okay. Thank you.
D. Yost You bet.
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 55
Moderator And next we go to the line of Leo Murphy with Pioneer
Investment Management. Go ahead, please.
L. Murphy Good morning. I guess it's good afternoon.
D. Yost That's right, Leo.
L. Murphy It just keeps rolling along. I was going to hold them, but I
guess I'll do what everybody else does. I'll give you all of
the questions. I'm trying to understand, there was a comment
regarding the inventories by year end. Did I hear correctly
that the inventory levels will be at a point where you will
have basically reduced the current number by about $2 to
$300 million by the end of the year, in other words, this
quarter? Did I hear that correctly?
K. Hilzinger We didn't quantify the number, but we do expect to reduce
inventories from current levels by the end of September.
L. Murphy But if I heard you correctly, taking $50 to $100 million, in a
sense ending the year at $50 to $100 on that operating cash
flow basis would tend to imply
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 56
reducing that by about $300 million. Am I in the right
church? I just want to get a feel for it.
K. Hilzinger I think you're in the right church.
L. Murphy The other question I had, I have two other questions. Comment if
you would on the volume of scrips at the retail side. We've
heard a lot about the shortage of pharmacists and so on, but
when I saw scrips a couple of weeks ago, in terms of new
scrip volume, go to a zero plus one percent, it's kind of an
eye opener in a sense. I'm trying to understand why you
think that's happening. And I have one other question.
D. Yost You know, Leo, I don't know. To be brutally honest, this is the
kind...probably should. I look more at volume so I don't
know. I will tell you it surprises me, but I don't know the
answer to that.
L.Murphy I'm especially surprised, I mean the refills are running 4% or
5%, but new scrips, scrips for new drugs are running at
zero. And your industry is pumping out high, double-digit
numbers so I'm scratching my head.
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 57
The last question. You talked about your service you're
developing to provide to the pharmacist to make his life
somewhat more pleasant in terms of cutting down his time. Is
that a natural fit with what Bergen is attempting to do with
the remote scrip fills in the sense of having this central
filled?
D. Yost It is, Leo. In fact, it's a great opportunity for synergies, I
think, because of the development costs involved in both. At
this point, from what I know about the Bergen system, which
is basically public information, they're going down a very
similar path to what we are. So we think having these two
programs together will decrease our development cost and it's
a good example of the kind of synergies that we can have
together.
L. Murphy I appreciate it. Thank you.
D. Yost You bet.
M. Kilpatrick This is Mike. We'll take one more call.
Moderator That will come from the line of Wayne Cooperman. Please state
your firm followed by your question.
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 58
W. Cooperman Hi. Cobalt Capital. I think you might have answered this. But
does the equity in that loss, are you projecting that to
stay at this level or decline going forward and is that in
the estimates that are out there?
K. Hilzinger Let me clarify that. You are asking whether the...
W. Cooperman You lost $2 million this quarter in your investment. Are you
projecting the losses to increase or decrease, and when you
give a guidance, I mean, are you factoring in this loss or
do you consider that a non-operating number?
D. Yost We're expecting those losses to consider at about that rate for
the next couple of quarters.
W. Cooperman And that's in the guidance?
D. Yost Yes.
W. Cooperman So the year after you'll get a pick up as those losses decline?
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 59
J. James Yes.
D. Yost That would be our hope.
J. James Let me clarify one thing you said. We don't have it in
operating. It's actually below the operating income line.
W. Cooperman Right.
J. James So it's not in operating expense.
W. Cooperman No. But I guess on the EPS, that's factored into your
EPS?
J.James It is in EPS, yes, and net income.
W. Cooperman All right. Thanks.
D. Yost Okay.
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 60
M. Kilpatrick Well, I want to thank everybody for joining us on the call
today. For those of you who are interested in hearing more
about AmeriSource's story, we'll be presenting at three
investor conferences during the coming quarter, and those
are in New York with Bear Stearns on September 13th, with
Merrill Lynch in London on September 25th, and in
Nashville we'll be there the first part of October with
Raymond James.
With that I'd like to turn it over to Dave for some final
comments.
D. Yost I just want to thank you all for joining us today. We're very
excited about our quarter. We're very excited and
enthusiastic about our future. We think we have good
revenue momentum, good expense control, good control of
our assets in a soild and growing industry. We're on our
way to complete an outstanding merger with an outstanding
merger with an outstanding company. We're very focused on
our business and we look forward to visiting you next
quarter. Thank you very much.
Moderator Ladies and gentlemen, your conference will be made available for
replay beginning at 2:30 p.m. today the 25th of July,
2001 running until August 1, 2001 at 11:59 p.m. During that
time you may access the AT&T Executive
AMERISOURCE CORP.
Host: Michael Kilpatrick
July 25, 2001/10:00 a.m. CDT
Page 61
Teleconference Service by dialing 1-800-475-6701 and
international participants may dial 320-365-3844. The
access code is 593131.
That does conclude the conference call for today. Thank you for
your participation and for using AT&T's Executive
Teleconference Service. You may now disconnect.
* * * * *
[LOGO] AmeriSource
Delivering Healthcare Solutions(TM)
Third Quarter FY 2001 Financial Results Conference Call & Webcast
July 25, 2001
11:00 am Eastern Time
[LOGO] AmeriSource
Your Hosts
. Dave Yost, Chairman & CEO
. Kurt Hilzinger, President & COO
. Jay James, CFO
. Mike Kilpatric, VP Corporate & Investor Relations
[LOGO] AmeriSource
Comment Regarding Forward Looking Statements
Certain information contained in this conference call includes forward-looking
statements (as defined in Section 27A of the Securities Act and Section 21E of
the Exchange Act) that reflect the Company's current views with respect to
future events and financial performance. Certain factors such as competitive
pressures, success of restructuring or systems initiatives, market interest
rates, regulatory changes, continued industry consolidation, changes in customer
mix, changes in pharmaceutical manufacturers' pricing and distribution policies,
changes in U.S. government policies, customer insolvencies, the loss of one or
more key customer or supplier relationships and other matters contained in the
Company's 10-K for fiscal year 2000 and other public documents could cause
actual results to differ materially from those in the forward-looking
statements. The Company assumes no obligation to update the matters discussed in
this conference call. Also you may not tape this conference call without the
expressed permission of AmeriSource.
[LOGO] AmeriSource
Record Performance
. Record Operating Revenue
Up 20% for 3rd Quarter
. Record Net Income
Up 25% for 3rd Quarter
. Record Earnings Per Diluted Share
Increased 21% to $.57 in 3rd Quarter
. Return on Committed Capital 26.4%
[LOGO] AmeriSource
Amerisource Overview
. Revenue Momentum
. New Value-Added Solutions
. Merger Expected to Close in August
. Number One in Customer Service
[LOGO] AmeriSource
Industry Overview
. Industry Growing
-- IMS Health projects 13.8% growth
. Medicare Benefit
-- New volume incremental & profitable
-- AmeriSource can handle added volume
. AmeriSource Addressing Pharmacist Shortage
[LOGO] AmeriSource
3Q Financial Performance
($ in millions except EPS)
[GRAPH] [GRAPH]
Net Income EPS*
+ 25% + 21%
3Q'00 $25.1 3Q'00 $.47
3Q'01 $31.5 3Q'01 $.57
* Based on $0.47 EPS in 3Q 2000
[LOGO] AmeriSource
Total Operating Expenses*
(% to operating revenues)
[GRAPH]
'96 3.69%
'97 3.27%
'98 3.16%
'99 3.07%
'00 2.75%
Q1 '01 2.53%
Q2 '01 2.49%
Q3 '01 2.41%
* Excluding special charges
[LOGO] AmeriSource
Return on Committed Capital (ROCC)
[GRAPH]
'97* 24.5%
'98* 24.2%
'99* 24.6%
'00 25.2%
Q1 '01 25.9%
Q2 '01 26.2%
Q3 '01 26.4%
Return on Committed capital = EBITA divided by
--------------------------
+ Accounts Receivable
+ Inventory
+ Net Property & Equipment
- Accounts Payable
* Excludes CD Smith pooling
[LOGO] AmeriSource
Long Term Financial Targets
[GRAPH]
Revenue 15% +
EBIT 15% +
ROCC 20% +
Earnings 20% +
[LOGO] AmeriSource
Bright Future
[GRAPH]
Pharmaceutical Distribution Remains Core
Revenue Momentum
Discipline & Commitment
Continuing to Deliver