McKesson (MCK) Earnings Report: Q2 2016 Conference Call ... · PDF fileRobert Willoughby; Bank of America; Analyst ... Raymond James & Associates; Analyst MANAGEMENT DISCUSSION SECTION

CompanyName:McKessonCorpCompanyTicker:MCKSector:ServicesIndustry:Wholesale

EventDescription:Q22016EarningsCallMarketCapasofEventDate:42.22BPriceasofEventDate:186.25

©2014TheStreet,Inc.Al l R ightsReserved Page1of22

McKesson(MCK)EarningsReport:Q22016ConferenceCallTranscriptThefollowingMcKessonconferencecalltookplaceonOctober29,2015,08:30AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

ErinLampert;McKessonCorporation;SeniorVicePresident-InvestorRelationsJohnHammergren;McKessonCorporation;Chairman,President&ChiefExecutiveOfficerJamesBeer;McKessonCorporation;ChiefFinancialOfficer&ExecutiveVicePresident

OtherPart icipants

LisaGill;JPMorganSecuritiesLLC;AnalystStevenValiquette;UBSSecuritiesLLC;AnalystRickyGoldwasser;MorganStanley&Co.LLC;AnalystRobertJones;GoldmanSachs&Co.;AnalystRobertWilloughby;BankofAmerica;AnalystGarenSarafian;CitiInvestmentResearch;AnalystEricColdwell;RobertW.Baird&Co.,Inc.;AnalystGeorgeHill;DeutscheBankSecurities;AnalystCharlesRhyee;Cowen&Co.;AnalystEricPercher;BarclaysCapital;AnalystDaveFrancis;RBCCapitalMarkets;AnalystDavidLarsen;LeerinkPartners;AnalystRossMuken;EvercoreISI;AnalystJohnRansom;RaymondJames&Associates;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

WelcometotheMcKessonCorporationquarterlyearningscall.

(OperatorInstructions)

Today'sconferenceisbeingrecorded.Ifyouhaveanyobjections,youmaydisconnectatthistime.

IwouldnowliketointroduceMs.ErinLampert,SeniorVice-President,InvestorRelations.Pleasegoahead

ErinLampert (SeniorVicePresident-InvestorRelations):

Thankyou,[Audra].Goodmorning,andwelcometotheMcKessonFiscal2016SecondQuarterEarningsCall.I'mjoinedtodaybyJohnHammergren,McKesson'sChairmanandCEO;andJamesBeer,McKesson'sExecutiveVice-PresidentandChiefFinancialOfficer.JohnwillfirstprovideabusinessupdateandwillthenintroduceJameswhowillreviewthefinancialresultsforthequarter.AfterJames'comments,wewillopenthecallforyourquestions.Weplantoendthecallpromptlyafteronehourat9:30a.m.EasternTime.

Beforewebegin,Iremindlistenersthatduringthecourseofthiscallwewillmakeforward-looking




statementswithinthemeaningofFederalSecuritieslaws.Theseforward-lookingstatementsinvolverisksanduncertaintiesregardingtheoperationsandfutureresultsofMcKesson.Inadditiontothecompany'speriodic,current,andannualreportsfiledwiththeSecuritiesandExchangeCommission,pleaserefertothetextofourpressreleaseforadiscussionoftherisksassociatedwithsuchforward-lookingstatements.Finally,pleasenotethatontoday'scall,wewillrefertocertainnon-GAAPfinancialmeasuresinwhichweexcludefromourGAAPfinancialresultstheamortizationofacquisitionrelatedandintangibleassets,acquisitionexpensesandrelatedadjustments,andLIFOrelatedadjustments.

Wealsorefertocertainnon-GAAPmeasurescalculatedonaconstantcurrencybasis.Webelievethesenon-GAAPmeasureswillprovideusefulinformationforinvestors.Pleaserefertoourpressreleaseannouncingoursecondquarterfiscal2016resultsavailableonourWebsiteforareconciliationofnon-GAAPperformancemeasurestotheGAAPfinancialresults.AdditionalinformationonconstantcurrencyeffectsisavailableinourSECreports.

Thanks,andhere'sJohnHammergren.

JohnHammergren (Chairman,President&ChiefExecutiveOfficer):

Thanks,Erin,andthankseveryoneforjoiningusonourcall.BeforeIrecapourquarter,Iwanttotakeafewmomentstodiscusstheissuethatmustbeoneveryone'smind

CustomerswantadeeperrelationshipwithMcKesson,notonlybecauseofthecompetitivenessofourofferingbutalsobecausewe'vebuiltabroadarrayofcustomer-centricprogramsthatdeliverrealvaluewellbeyondcoredistribution.InadditiontoourrelationshipwithRiteAidwe'vealsohadastrongbusinessrelationshipwiththemanagementteamatWalgreensBootsAlliance.Wehavegreatrespectforwhatthey'veaccomplished.

There'snodoubtourindustryisgoingthroughaperiodofdynamicchange.I'vebeenCEOofthiscompanyfor15yearsandinhealthcaremyentirecareer.I'veseenthisindustrygothroughtransformativechangeonanumberofoccasions.IbelieveoneofthefundamentalstrengthsofMcKessonhasbeenourabilitytoconstantlyadaptandleadduringtimesofchangebystayingfocusedonourcustomersandourtruecorevalues.McKessonleadersarethebestinthebusinessandwe'vedemonstratedourabilitytoinnovateandtodriveconsistentandsteadygrowthovermany,manyyears.AndIbelieveweremainexceptionallywellpositionedacrossallofourbusinessesaswelooktothefuture.

Nowturningtoourfinancialresults,forthesecondquarterweachievedtotalcompanyrevenuesof$48.8billion,up14%,andadjustedearningsperdilutedshareof$3.31,up20%,bothonaconstantcurrencybasis.InamomentI'llprovidehighlightsofwhatwasanothersolidquarterofoperatingperformanceacrossourbusinesses.ButbeforeIdo,Iwillmentionafewitemsthatareimportanttounderstandwithrespecttooursecondquarterresults.Duringthesecondquarter,wecompletedthesaleofZEEMedical,abusinessthatwaswithinourMcKessonMedical-Surgicalbusinessandrecordedagainof$0.14perdilutedshare.

Andwerecordeda$25millionfavorabletaxiteminthesecondquarterasaresultofarecentU.S.TaxCourtruling.Thisdroveabenefitofapproximately$0.11perdilutedshareinthequarter.Excludingthesetwoitems,oursecondquarterresultswerebetterthanourexpectations,primarilydrivenbythetimingofbrandpriceinflation,whichoccurredearlierintheyearthanwehadanticipated.AswellassomefavorabletiminginourTechnologySolutionssegment.Overall,I'mpleasedwiththeperformanceofourbusinessinthesecondquarter.

Comingbacktothebroaderindustryenvironment,pharmaceuticalpricingtrendshavebecomethefrequentsubjectofnewsheadlinesaswegetdeeperintothispresidentialelectioncycle.The




observationIwouldmakeisthatthispharmaceuticalpricingdiscussionstendtoebbandflowovertime.However,whatremainsclearisthatpharmaceuticalsarestillthemosteffectiveandaffordablewaytotreatpatients.Andinnovationanddrugdevelopmentandthetrendtowardhigherlevelsofgenericpenetrationcontinuetodeliverrealvalueandcostsavingsthroughthehealthcareindustry.

Thedesiretotiepaymentstovalueandexpandmedicationadherenceinaworldoffeeforvalueistremendous.Andtheissuesofquality,access,andcostremainatthecenterofimprovinghealthcaredelivery.AndMcKessonisextremelywellpositionedtohelpourcustomersnotonlycompetebutthriveastheylooktothefuture.

Turningnowtoourbusinessresultsforthequarter,DistributionSolutionsrevenueswere$48billion,up14%,andadjustedoperatingprofitwas$1.1billion,up11%,bothonaconstantcurrencybasis.OurNorthAmericapharmaceuticaldistributionandservicesbusinesses,whichincludeU.S.Pharmaceutical,McKessonSpecialtyHealthandMcKessonCanada,allturnedinimpressiveresultswithacombinedrevenuegrowthof17%inconstantcurrency.

RevenueinourU.S.Pharmaceuticalbusinesswasaheadofourexpectationsinthesecondquarterdrivenbycontinuedstronggrowth,primarilyfromourlargestcustomers,andthetimingofcertainbrandpriceincreaseswhichoccurredearlierinthefiscalyearthanwehadpreviouslyanticipated.Duringthesecondquarter,wewereexcitedtoannounceourexpandedrelationshipwithAlbertsons.Asyouknow,wesignedanewfive-yearagreementthatincludesthesourcinganddistributionofbothbrandandgenericpharmaceuticalstoAlbertsons'networkofnearly1,700pharmaciesintheU.S.

I'malsopleasedtoreportthatwe'vesignedanagreementwithCVSHealthtoretainOmnicare'slong-termcareandSpecialtydistributionbusiness.WeareproudoftheexceptionalvalueandserviceweprovidetobothCVSHealthandOmnicare,andthegreatrelationshipwehaveenjoyedwithbothcompaniesovermany,manyyears.Weareprivilegedtocontinuetoservethemgoingforward.

AndIwouldnotethatHealthMartisnowmorethan4,200membersstrong,anincreaseofover300storesinthefirstsixmonthsofthisfiscalyear.Thisisatremendousresult.AndI'mconfidentinthestrengthandscaleofourvaluepropositionforourcustomersandourmanufacturingpartners.AndIbelievethatweremainextremelywellpositioned.

TurningnowtoMcKessonSpecialtyHealth.WecontinuetodeliverexcellentrevenuegrowthinourSpecialtybusinessdrivenbythestrongperformanceacrossourcommunityOncologybusiness,thestrengthinourmulti-specialtycategories,andthestrengthofourU.S.Oncologynetworkpractices.InthesecondquarterwesawthefirstbiosimilarlaunchintheU.S.,thebiosimilarforNeupogen.Weanticipatedanincreasingnumberofbiosimilarlaunchesintheyearstocomeandweareconfidentthatweareverywellpositionedgivenourmulti-channelpresence,particularlyourstrengthinthecommunityclinicsettingandourcomprehensiveserviceofferingtobeapartnerofchoiceforourcustomersandmanufacturers.

AndourCanadianbusinessgotanotherquarterofsolidrevenuegrowthdrivenbygreatperformanceinourcoredistributionbusiness,andtheexpansionofourindependentpharmacybannerbusinessalongwithoutstandinggrowthinourCanadianSpecialtybusinesscomparedtotheprioryear.

TurningnowtoourresultsinInternationalPharmaceuticalDistributionandServices.Revenuesforthesecondquarterwere$5.9billion,up2%year-over-yearinconstantcurrency.AndCelesio'soperatingperformancewasslightlyaheadofourexpectationsforthefirsthalfoffiscal2016.We'reexcitedabouttheacquisitionofpharmacyoperationsofSainsbury'swhichwilladd281pharmaciestoourleadingLloydspharmacybrandintheUnitedKingdom.AndwealsoannouncedtheacquisitionofthepharmaceuticaldistributionbusinessoftheUnitedDrugGroup,whichprovidesusastrongplatformfor




growthintheIrishmarket.

TheseacquisitionscomplementtheexcellentpositionofCelesiobusinessesintheEuropeanmarketandfurtherenhanceMcKesson'sandCelesio'sglobalvaluepropositiontoourcustomersandmanufacturingpartners.WeremainencouragedbythesteadyimprovementweareseeingintheoperatingresultsofCelesioaswecontinuetomakeimportantinvestmentsinmodernizingtheITinfrastructureofthebusiness,whichwillprovideafoundationforfurtheroperatingimprovementsgoingforward.

Andfinally,ourMedical-Surgicalbusinessperformedwellinthequarterwithrevenueof$1.6billion,anincreaseof3%overtheprioryear.IamreallypleasedwiththegrowthwearedrivingacrossMedical-SurgicalwithaspecialfocusonourPrimaryCarebusinesswhichincludesphysicianoffices,clinics,surgerycenters,andhealthsystems.Andalthoughprimarycarewas,asanticipated,themostcomplexpartoftheintegrationwork,we'vemadetremendousprogresswiththePSSintegrationthroughtheretentionofourworldclasssalesforce,thealignmentofourtechnology,andtheoptimizationofourdistributionnetwork,allwithoutmissingabeatinservingourcustomers.

WealsohavedoneaterrificjobofcreatingvaluewithourMcKessonbrandproducts.Ispendafairamountoftimespeakingaboutglobalsourcingasitrelatestoourpharmaceuticalbusiness,butit'salsoimportanttohighlighttheglobalsourcingstrengthofMcKessoninourMedical-Surgicalbusinesswherewe'vebuiltexceptionalexpertiseandcapabilitiesoverthelastdecade.It'scleartomethatweareemergingfromtheeffortofthePSSintegrationnotonlyasamorescaledbusinessbutalsoasapartnerthatcandeliverbestinclasscustomerserviceandselectioninthisindustry.

InsummaryI'mpleasedwiththeperformanceofourDistributionSolutionssegmentinthesecondquarter.WenowexpectDistributionSolutionsrevenuegrowthatmid-singledigitscomparedtotheprioryearwhichincludestheexpirationofourcontractwithOptumatthestartofthethirdquarter.AndwenowexpectthatthefullyearadjustedoperatingmargininDistributionSolutionswillbeuplow-doubledigitscomparedtotheprioryearreflectingthegainonthesaleofZEEMedical,andtheexpirationoftheOptumcontract.Thisispartiallyoffsetbygenericpharmaceuticalpricingtrendsthatweexpectwillremainweakinthesecondhalfofourfiscalyear,andsimilartothelevelweexperiencedinoursecondquarter.

TurningnowtoTechnologySolutions,revenuesweredown6%forthesecondquarterto$721milliondrivenprimarilybythesaleofourNurseTriagebusinessinthefirstquarterandananticipatedrevenuedeclineinourhospitalsoftwarebusiness.Adjustedoperatingmargininthesegmentwasapproximately22%whichwasdrivenbystrongperformanceinourpayersolutionsandrelayconnectivitybusinessandfavorabletiminginourMedicalImagingbusiness.Weexpecttoachieveafullyearadjustedoperatingmarginforthesegmentattheupperendofthehighteens,whichincludesthegainwerecordedinthefirstquarterfromthesaleofourNurseTriagebusiness.

Nowtowrapupmycomments.McKesson'sfiscalsecondquarterresultsrepresentsolidexecutionacrossbothsegments.Weareupdatingourfullyearguidanceandnowexpectadjustedearningsperdilutedshareof$12.50to$13forfiscal2016,anincreaseof$0.14comparedtotheguidanceweprovidedinJuly.Ourfull-yearguidanceincludesthepositiveimpactofthreeitems,anetgainof$0.11forthefullyearinthesaleofZEEMedical,arevisedfull-yeartaxrateof31%comparedtoourpreviousassumptionof31.5%,primarilydrivenbythefavorablediscreteitemrecognizedinthesecondquarter,andthefullyearimpactofa$500millionsharerepurchasecompletedlateinthesecondquarter.

Now,thesepositiveitemsarepartiallyoffsetbytheexpirationofourcontractwithOptumatthestartofthethirdquarter,ourviewthatgenericpharmaceuticalpricingtrendswillremainweakinthesecondhalfofthefiscalyear,butatsimilarlevelstowhatweexperiencedinoursecondquarter.Andasyouknow,ourpriorguidancedidnotcontemplateachangetooursourcingordistributionagreementwith




Omnicare.WeareverypleasedthatwehavesincereachedanagreementtoretainthedistributionportionofthatrelationshipwithOmnicareandCVSHealthandareupdatingourguidancetoreflectthisrevisedagreement.

Forthesecondquarter,wegeneratedcashflowfromoperationsof$1.3billion,andourexpectationtodelivercashflowfromoperationsofapproximately$3billionforfiscal2016remainsunchangedfromouroriginalguidance.Theboardofdirectorsapprovedanewsharerepurchaseauthorizationof$2billionandweareextremelywellpositionedtocontinuetoexecuteourportfolioapproachtocapitaldeploymentanddelivervalueforourshareholdersfromamixofinternalcapitalinvestments,acquisitions,sharerepurchases,anddividends.

Withthat,I'llturnthecallovertoJamesandwillreturntoaddressyourquestionswhenhefinishes.James?

JamesBeer (ChiefFinancialOfficer&ExecutiveVicePresident):

Thankyou,John,andgoodmorning,everyone.Wearepleasedwithoursecondquarterresultsandourperformanceinthefirsthalfoffiscal2016.AsJohndiscussedearlier,weareraisingourpreviousoutlookforfiscal2016andnowexpectadjustedearningsperdilutedshareof$12.50to$13.Thisrevisedoutlookisdrivenbythefollowingfiveitems.First,apre-taxgainof$51millionor$0.14perdilutedsharefromthesaleoftheZEEMedicalbusiness,whichisreflectedinbothourGAAPandadjustedearningsforthesecondquarter.

Thebenefittoourfull-yeartoourearningsfromthisdivestitureis$0.11whichisnetofthe$0.03centsinadjustedoperatingprofitthatwenolongerexpecttoearnfromtheZEEbusinessduringfiscal2016.Second,adiscretetaxbenefitofapproximately$25millionrelatedtoaU.S.TaxCourtrulingduringthesecondquarter,whichallowedustorevisitaprevioustaxfilingposition.Third,thereductioninourexpectedweightedaveragesharesoutstandingforfiscal2016fromrepurchasing$500millionincommonstocklateinthesecondquarter.Ourupdateddilutedweightedaveragesharesoutstandingassumptionforthefiscalyearisnow234million.Fourth,ourviewthatgenericpharmaceuticalpricingtrendswillremainweakinthesecondhalfofthefiscalyearbutatasimilarleveltowhatweexperiencedinthesecondquarter.Andfifth,theimpactofcertaincustomercontractingdecisionssinceourpreviousearningscallinlateJuly,includingtheexplorationofourcontractwithOptumandournewrelationshipwithCVSOmnicare

Beforereviewingoursecondquarterresults,Iwouldliketohighlightanupdatetothescheduleaccompanyingourearningspressrelease.WehaveexpandedtheSchedule3toincludesupplementalconstantcurrencyinformationtooutlineboththedollarandpercentageimpactofcurrencymovementsonourreportedresults.Thissupplementalinformationprovidesaframeworktoassesshowourbusinessperformedexcludingtheimpactofforeigncurrencyratefluctuations.Ihopeyouallfindthistobeavaluableadditiontoourongoingdisclosuresgiventhenowglobalnatureofourbusiness.

Duringthesecondquarterandthefirsthalfoffiscal2016,ourreportedadjustedearningsperdilutedshareincludedcurrencyheadwindsofapproximately$0.03and$0.08respectivelyyear-over-year.Therefore,duringmypreparedremarks,IwillreferenceboththereportedandconstantcurrencyfigureswhichareprovidedinSchedule3.Nowlet'smovetoourresultsforthesecondquarter.MyremarkstodaywillfocusonoursecondquarteradjustedEPSfromcontinuingoperationsof$3.31whichexcludesthreeitems:amortizationofacquisitionrelatedintangibles,acquisitionexpensesandrelatedadjustments,andLIFOrelatedadjustments.

TurningnowtoourconsolidatedresultswhichcanbefoundonSchedules2and3,consolidatedrevenuesincreased10%forthequarterto$48.8billion.Revenueswerenegativelyimpactedby$1.4




billionasaresultofforeigncurrencyratemovements.Onaconstantcurrencybasis,revenueswere$50.2billion,anincreaseof14%ledbystronggrowthinourDistributionSolutionssegment.Adjustedgrossprofitforthequarterdecreasedby1%to$2.9billion.Onaconstantcurrencybasis,adjustedgrossprofitincreased4%drivenbytheperformanceofDistributionSolutions.Totaladjustedoperatingexpensesof$1.8billionweredown7%forthequarteronareportedbasis,anddown1%onaconstantcurrencybasis.ExcludingthegainonthesaleofZEEMedical,whichwasrecordedintheDistributionSolutionsoperatingexpenseline,totalcompanyoperatingexpenseswereup1%onaconstantcurrencybasis.Adjustedotherincomewas$17millionforthequarter.Interestexpenseof$91milliondecreased4%onareportedbasisand2%inconstantcurrency.

Nowmovingtotaxes,duringthesecondquarter,thepreviouslydiscusseddiscretetaxbenefitof$25milliondroveareductioninouradjustedtaxrateto29.1%.Forthefullyear,wenowexpectouradjustedtaxratetobeapproximately31%.Asareminder,ourfull-yearadjustedtaxratereflectsourexpectedmixofdomesticandforeignincomeandanticipateddiscretetaxitems.Adjustedincomeforthequarterwas$776millionwithouradjustedearningsperdilutedshareat$3.31,up19%onareportedbasisandup20%inconstantcurrency.AsImentionedearlier,theyear-over-yearcurrencyheadwindtoQ2adjustedearningsequatedtoapproximately$0.03pershare.

Wrappingupourconsolidatedresults,dilutedweightedaverageshareswereflatyear-over-yearat235million.Asmentionedearlierinthesecondquarter,weexecutedasharerepurchaseofcommonstocktotaling$500millionwhichexhaustedthepreviouslygrantedboardauthorization.Asaresult,wenowexpectourweightedaveragedilutedsharesoutstandingwillbe$234million(sic)[234million]forthefiscalyear.Andourboardhasrecentlyapprovedanewsharerepurchaseauthorizationof$2billion.

Whilewecontinuetoplanforandrepaysignificantdebtmaturitiesinfiscal2016,ourrecentlyannouncedacquisitions,increaseddividend,executedsharerepurchase,andnewsharerepurchaseauthorizationareconsistentwithourportfolioapproachtocapitaldeploymentwhichwehaveimplementedforseveralyears.Nowlet'sturntothesegmentresultswhichcanbefoundonSchedules3Aand3B

DistributionSolutionssegmentrevenuesof$48billionwereup11%onareportedbasis.Revenueswerenegativelyimpactedby$1.4billionasaresultofforeigncurrencyratemovements.Constantcurrencyrevenueswere$49.4billionforthesecondquarter,reflectinggrowthof14%.NorthAmericapharmaceuticaldistributionandservicesrevenueswere$40.6billioninthesecondquarter,up16%onareportedbasisand17%onaconstantcurrencybasisprimarilyreflectingmarketgrowthinourU.S.pharmaceutical,U.S.Specialty,andCanadianbusinesses.Demand,primarilyfromourlargestcustomers,whichincludesagrowingmixofSpecialtypharmaceuticals,drovestrongrevenuegrowthbutalsoacorrespondingimpactonourmarginprofileduringthequarter.

Inaddition,thisquarter'srevenuealsobenefitedfromthetimingofcertainbrandeddrugpriceincreases,whichcameearlierinthefiscalyearthanwehadoriginallyanticipated.Forthefullyear,wecontinuetoexpectNorthAmericapharmaceuticaldistributionandservicesrevenuestoincreasebyalowdoubledigitpercentage.However,itisimportanttonotethatthisrevenueforecastnowincludesexpirationofourcontractwithOptumatthestartofourthirdfiscalquarter.Internationalpharmaceuticaldistributionandservicesrevenueswere$5.9billionforthesecondquarter.Internationalrevenueswereimpactedbyapproximately$1billioninunfavorablecurrencyratemovements,primarilyattributabletoaweakereurorelativetotheU.S.dollarwhencomparedtotheprioryear.

Adjustingforthiscurrencyimpact,revenueswereapproximately$6.8billioninthesecondquarter,up2%onaconstantcurrencybasis,primarilydrivenbymarketgrowth.Medical-Surgicalrevenueswereup3%forthequarter,primarilydrivenbymarketgrowthoffsetbythesaleofZEEMedical.Forthefullyear,wenowexpectmedicalsurgicalrevenuestoincreasebyalowtomid-singledigitpercentageversustheprioryearasaresultofthesaleoftheZEEMedicalbusiness.DistributionSolutionsadjustedgrossprofit




of$2.6billiondecreased1%onareportedbasisandincreased4%onaconstantcurrencybasisto$2.7billion.

Adjustedgrossprofitwasimpactedbygrowthindemandfromourlargestcustomersandweakergenericpricingtrendscomparedtotheprioryear,offsetbythetimingbenefitofcertainbrandpriceincreases.Adjustedoperatingexpenseforthesegmentdecreased8%forthequarteronareportedbasis.Onaconstantcurrencybasis,segmentoperatingexpensedecreased1%year-over-year.ExcludingthegainonthesaleofZEEMedical,adjustedoperatingexpensesincreased3%onaconstantcurrencybasisforthequarter.

Segmentadjustedoperatingprofitof$1.1billionincreased8%onareportedbasisand11%onaconstantcurrencybasis.Thesegmentadjustedoperatingmarginrateforthequarterwas239basispoints,adeclineof5basispointsyear-over-year.Onaconstantcurrencybasis,thesegmentmargindeclined7basispoints.ExcludingthegainonthesaleofZEEMedical,thesegmentadjustedoperatingmargindecreased17basispointsonaconstantcurrencybasisversustheprioryear.

Thedeclineinyear-over-yearsegmentadjustedoperatingmarginwasdrivenbyourbusinessmixandweakerthanexpectedgenericpricingtrendsrelativetotheprioryear,offsetbythefavorabletimingofcertainbrandeddrugpriceincreases.Asareminder,forthefullyear,ourexpectationsforbrandeddrugpriceinflationremainunchanged,althoughwedoexpectsomevariabilityintheimpactofbrandedpharmaceuticalpricesfromquartertoquarter.

BasedonthenetgainonthesaleofZEEMedicalandtheexpirationoftheOptumcontractatthestartofthethirdquarter,offsetbyourbusinessmixandweakerpricingtrendsongenericpharmaceuticals,wenowexpecttheDistributionSolutionssegmentadjustedoperatingmargintoexpandbylowdouble-digitbasispointsversustheprioryear.

TurningnowtoTechnologySolutions.Revenuesweredown6%forthequarterto$721million.ThisdeclinewasprimarilydrivenbythesaleofourNurseTriagebusinessinthefirstquarterandanticipatedrevenuesoftnessoftheHorizonClinicalsoftwareplatform,partiallyoffsetbygrowthinourothertechnologybusinesses.Duringthequarter,adjustedoperatingexpensesinthesegmentdecreased7%onareportedbasisand6%onaconstantcurrencybasis,drivenbyourongoingexpensemanagementefforts.Secondquarteradjustedoperatingprofitforthesegmentincreased13%to$157million.Andtheadjustedoperatingmarginratewasapproximately22%representinganincreaseof373basispointsversustheprioryear.

Onaconstantcurrencybasis,adjustedoperatingprofitincreased9%,representinganadjustedoperatingmarginincreaseof281basispointsversustheprioryear.ThisincreasewasdrivenbystrongperformanceinourPayerSolutionsandRelayConnectivitybusinesses,alongwiththebenefitoffavorabletiminginourMedicalImagingbusiness.Forthefullyear,weexpecttheadjustedoperatingmarginforthesegmenttobeattheupperendofthehighteens,whichincludesthegainwerecordedinthefirstquarterfromthesaleofourNurseTriagebusiness.

Movingnowtothebalancesheetandworkingcapitalmetrics.Asyou'veheardmediscussbefore,eachofourworkingcapitalmetricscanbesignificantlyimpactedbytiming,includingwhichdayoftheweekmarksthecloseofagivenquarter.Forreceivables,ourdayssalesoutstandingwereflatat26days.Ourdayssalesininventoriesincreasedbyonedayto31days.Ourdaysalesinpayablesincreasedbyfivedaysto53days.Wegenerated$1.3billionincashflowfromoperationsforthequarter.Andforthefullyearwecontinuetoexpectourcashflowfromoperationstobeapproximately$3billion.Weendedthequarterwithacashbalanceof$5.4billion,with$2.2billionheldoffshore.Internalcapitalspendingwas$274millionforthequarter,andwerepurchasedapproximately2.5millionsharestotaling$500millionwhilerepayingapproximately$500millioninlong-termdebt.




NowI'llturntoouradjustedEPSoutlookfortheyear.AsImentionedearlier,weareraisingourfiscal2016guidanceforadjustedearningsperdilutedsharefromourpreviousrangeof$12.36to$12.86toanewrangeof$12.50to$13,anincreaseof$0.14.AsJohnmentionedinhisremarks,ourfull-yearguidanceincludesthepositiveimpactofthreeitems.Anetgainof$0.11forthefullyearonthesaleofourZEEMedicalbusiness;arevisedfullyeartaxrateof31%comparedtoourpreviousassumptionof31.5%,primarilydrivenbythefavorablediscreteitemrecognizedinthesecondquarter;andthefull-yearimpactofa$500millionsharerepurchasecompletedlateinthesecondquarter.

ThesepositiveitemsarepartiallyoffsetbytheexpirationofourcontractwithOptumatthestartofthethirdquarter,ourviewthatgenericpharmaceuticalpricingtrendswillremainweakinthesecondhalfofthefiscalyear,butatasimilarleveltowhatweexperiencedinthesecondquarter.AndasJohnjustmentioned,ourpriorguidancedidnotcontemplatethechangetooursourcingordistributionagreementwithOmnicare.WeareverypleasedthatwehavesincereachedanagreementtoretainthedistributionportionofthatrelationshipwithCVSOmnicare,andourupdatedguidancereflectsourrevisedagreement.Ouroutlookassumesafull-yearaverageexchangerateof$1.10pereurowhichisunchangedfromourpriorguidance.

Inaddition,wenowexpect$1.25pershareinamortizationofacquisition-relatedintangibleassetsand$0.33ofacquisitionexpensesandrelatedadjustments.Wealsoexpectbetween$0.89and$0.99pershareinLIFOrelatedadjustments.

Insummary,McKessondeliveredsolidfinancialresultsduringthefirsthalfoffiscal2016,andweareconfidentinouroutlookforthefiscalyear.

Thankyou,andwiththat,Iwillturnthecallovertotheoperatorforyourquestions.Intheinterestoftime,Iaskthatyoulimityourselftojustonequestionandabrieffollow-uptoallowothersanopportunitytoparticipate.[Audra]?

QUESTIONS&ANSWERS

Operator :

Thankyou.We'llgofirsttoLisaGillatJPMorgan.

LisaGill(Analyst-JPMorganSecuritiesLLC):

Thanksverymuch,andgoodmorning,everyone.Thankyou,Johnforallthedetail.IwaswonderingmaybeifwecouldjuststartwithEuropeandCelesio.Thelasttwoacquisitionsyou'vemadehavebeeninEurope.CanyoumaybejustgiveusanupdateonhowyouviewtheEuropeanmarket?Whataresomeoftheopportunities?And,youknow,howhasitplayedoutoverthelastyearandahalfversusyourexpectationswhenyouboughtCelesio?


Thanks,Lisa,forthequestion.ClearlywewentintoEuropewithoureyeswideopenontwofundamentalthings.OnewasthatCelesiowasn'toperatingatthelevelwethoughtitcouldandshould,andcertainlyunderMcKesson'sownership.AndsecondwasthattheEuropeanmarketdoeshavesomeriskrelatedtothedemandprofileaswellastheregulationsandreimbursementstructuresthatexistthere.Havingsaidallofthatandknowingwhereweareheaded,we'rereallypleasedwiththequalityoftheresultsthusfar.

Webelievethere'ssignificantopportunitiesforustogrowbothorganicallyinthatbusinessbypenetratingtheareasofthemarketthathaveyettobetouchedbywholesaledistribution,andcertainlynottouchedbyus.LikeSpecialtyorOncologyorHospitaldistribution.Andclearlywethinkthere'sagreatopportunityforustodeploycapitaleffectively,efficiently,andappropriatelyinEuropetohelpbuild




ourvaluepropositioninthatmarket.

Andalso,asyouknow,webroughtwithusaverylargeretailfootprintwhichgrowsthroughtheacquisitionofSainsbury'sanditisgrowingalsojustorganicallyinEuropeaswecompleteourbannerrolloutswithourEuropeanpharmacynetwork,etcetera.Soallsaid,Ithinkwefeellikewe'reinreallygoodshape.Wehaveacouplemoreyearsofbuildingoutourtechnologycapabilitiesthere.We'reinthemidstofinstallingSAPandwehavesomeotherworktodo,butwedobelievethatwe'llgetintobusinesspositiontonotonlyinvestinitthewaywehavestartedto,butalsotogetorganicgrowth.


John,doesthecompanyhaveagoalforhowmuchofoperatingprofitorrevenueofthecompanywillcomefromoutsideofNorthAmerica,sayoverthenextseveralyears?AndIknowI'mnotallowedthreequestions,butIjustneedaclarificationonthecommentsoutofCelesiothatyouclearedthetransferagreement.Doesthatmeanthatyou'rede-listingthestock?AndthenI'llstopthere.


Well,certainlyonthefirstpartofthatquestion,Lisa,wedohaveanexpectationtogrowinallofourbusinesses,andtogrowatratesthatareatorabovemarketlevels,particularlyinmarketswhereweareunder-penetratedandthere'ssignificantopportunityforus.AndthatwouldbethecaseinEurope.Wethinkthere'ssignificantgrowthprospectsforusinmostofthemarketsinwhichwecompete.AndasImentioned,IthinkthisideaofcontinuingtobringabannerHealthMart-likeapproachtoEuropehasbeensuccessfulandiscontinuingtoshowgreatpromise.Soyou'llseeusrolloutmoreLloydsorLloyds-likepharmaciesthroughoutEurope.AndJames,perhapsyoucantalkalittlebitaboutthe...


Yes.IntermsoftheCelesiostock,whenwegainedoperatingcontrolofCelesio,CelesiowastradingonfiveGermanexchanges,andwehavesincethende-listedfromthreeofthefive.Andontheremainingtwo,we'restillapartoftheregulatedunofficialmarket.ThosemarketsareMunichandDusseldorf.Ican'tcommentonanyfutureplansaroundde-listing.ThereareavarietyofGermanlegalrequirementsforustoadhereto,butthat'sanupdateonourprogress.


Great.Thankyouverymuch.

Operator :

We'llmovenexttoStevenValiquetteatUBSFinancial.

StevenValiquette (Analyst-UBSSecuritiesLLC):

Allright,thanks.Goodmorning,JohnandJames.Congratsontheresults.SoIguess,John,inyourpreparedcomments,youreinforcedthenotionthatthere'salotofchangegoingonintheU.S.pharmaceuticalsupplychannelmarketplace.AndIguessinlightofthat,doyouthinkwe'vereachedaneranowintheU.S.wherelargedrugdistributorscouldpotentiallyownandoperatefairlylargeretaildrugchainsintheU.S.similartowhatMcKessonandothersarealreadydoinginEurope?IsthissomethingthatyouthinkyoucouldconsidernowjustgivenalltheU.S.alliancesthathavealreadybeenformed?


Well,thankyou,Steven,forthequestion.AndobviouslyinEurope,theconstructoftheindustry'salittle




bitdifferentinseveralofthemarketswherethewholesalersandretailersarepartofthesameorganization.Andinmostofthosecases,it'sthesameforalltheindustryparticipants,thattheyarebothintheretailbusinessaswellasinthewholesalingbusiness.

We'velookedatthatphenomenonforalongtimeinEuropeandwonderedifitmadesenseinaU.S.context.Icantellyouthatwecontinuetobelievethatourcustomersappreciatethefactthatwebringtothemafocusontheirsuccessandthatfocusisnothamperedbyourowninterestinabusinesssimilartotheirsorcompetingwiththem.AndsoIthinkthatthere'sstill,atleastatMcKesson,afocusonnotcompetingwithourcustomersinthesesegmentsandhelpingthembemoresuccessfuleachandeveryday.


Okay.CanIsneakinjustaquickoneontheOmnicare?Justforthegeneric,I'mguessingthesourcingwillprobablygothroughRedOak,butareyousayingthatyou'llstilldojustthephysicaldistributionofthegenericsforOmnicare?Orisyourdistributionretentionjustonthebrandside?Justwanttoclarifythatpiece.Thanks.


Well,youmightrecallthatwewhenwestartedtherelationshipwithOmnicaremanyyearsago,theyreliedonusfortheirbranddistributionandpurchasedtheirGenericsdirectlythemselvesandputitintotheirownwarehousinginfrastructure.Withourmorerecentagreementthatweworkedthroughwiththem,youknow,wetookontherestofthatresponsibilitywhichIthinkwasextremelybeneficialtoOmnicare.ThenewstructureoftheongoingrelationshipwithCVSwilltakeusbackinthedirectionwhereouroriginalagreementwaswithOmnicare,principallyfocusedonthebrandside.Now,havingsaidthat,almostwithallofourcustomers,thereissomegenericbusinessthatwedoprincipallywhenthere'sashortfallfromacentralizedwarehouseapproachoradirectapproach.Butwe'llgobacktomoreofouroldrelationship.Andwe'rereallypleasedtobeabletodothatandtoabletocontinuetoservicetheseOmnicaresites.


Okay,gotit.Thanks.


Yes.

Operator :

AndournextquestioncomesfromRickyGoldwasseratMorganStanley.

RickyGoldwasser (Analyst-MorganStanley&Co.LLC):

Yes,hi,goodmorning,andcongratulationsfortheOmnicarecontract.Twoquestionshere.Thefirstofall,isthereanimpactofthedealsyou'regoingbacktokindofliketheoldOmnicaregenerics,someuncertaintyaroundotherdeals.Doeslosingkindoflikegenericbusinessfromthesekindoflikeassetsthatnowhavebeenacquiredhasanyimpactonyourgenericpurchasingpowerasitrelatesfortherestofyourbusiness?


Thanks,Ricky,forthequestion.Clearlywehavehadalongrunofbuildingsignificantscaleingenericsourcing.Andwhat'sinterestingaboutthemodelthatwe'vebuiltisourcustomersarechoosingtorelyon




ourabilitytocontinuetogrowscaleandtonegotiatefavorableagreementsandthenuseusandourassetsandourservicedeliverymodeltofulfilltheirneeds.Wecontinuetogrowourpresencequitesignificantlyfromasourcingperspective.YouheardmementionalittlebitaboutitwhenItalkedtoourcontinuedgrowthinHealthMartandournewarrangementwithAlbertsons.

Andwehaveover20,000pharmaciesnowthatareprincipallybuyingalloftheirgenericsfromMcKesson.Andsothatbulkofbusinessisquitesignificantandquiteattractivetogetaccesstoourchannelbythegenericmanufacturers.So,onecouldarguewhetherwe'renumberone,numbertwo,numberthreeatanyonepointintimeinanyspecificmarketintermsofourgenericsourcing.ButIbelievewehavesignificantscaleandareretainingandgrowingthatscaleinawaythatwillbeattractiveandwillbringmanufacturerstousinapositive,collaborativewaywherewecangetrealvalueforourcustomersandforthemanufacturers


Okay.Andthenthefollow-upisaroundthebrandedside.Imean,inthepreparedremarkobviouslyyoutalkedaboutthefactthatyourassumptionsregardingbrandinginflationareunchanged.Thereissomeuncertaintyinthemarketplacearoundinflation,especiallygiventheelectiondebatethat'sshapingout.HowshouldwethinkaboutMcKesson'sexposuretobrandedinflationoverallandespeciallywhenwethinkabouttheMarchquarter,right,beingusuallyaquarterwithmoreinflationthantherestoftheyear?


Well,inourpreparedcomments,wetalkedaboutthefactthatwebelievethefirsthalfoftheyearwasslightlystrongerfromabrandedinflationperspective.Butforthefullyear,weexpectedittobeinlinewithourexpectations.Andthatisstillourpointofview.Now,clearlythereismoremediaattentionandthereismorediscussionaboutpriceinflationinthemarket.ButIhappentobelievethatthemanufacturersthatweworkwithatleastwilllargelycontainorretaintheircurrentstrategy.Andtheremaybesomeoutliersthatbegintochangetheirperspectiveslightly,butoverallIthinkweexpectthetrendstocontinue.


Okay.Thankyou.


Yes.

Operator :

We'llgonexttoRobertJonesatGoldmanSachs.

RobertJones (Analyst-GoldmanSachs&Co.):

Great.Thanksforthequestions.John,IactuallyjustwantedtogobacktothecommentsaboutEuropeandCelesiospecifically.IknowinthepreparedremarksyousaidCelesiohasbeenexceedingyouroperationalexpectations,butI'mcuriousifyoucouldgiveusanupdateonthesynergyprogressionthere,mayberelativetosomeofthetargetsyouguyshadsharedpreviously.AndIguessspecifically,justhowthegenericpurchasingbenefitsaregoingandifthey'reflowingthroughthecombinedentitytoday


Ithinkwe'vemadeverygoodprogress.Asyouknow,weestablishedourglobalsourcingandprocurementoperationsinLondon,andwehavesuggestedtoyouinthepastthatthesynergiesof$2.75




to$3.25wouldbemorefirsthalfloadedoverafour-yearperiod.AndsoweareinthatcyclenowandIthinkwe'remakingverygoodprogressandareontracktoaccomplishourobjectives.Soonceagain,IthinkthemanufacturingcommunityhasrespondedfavorablytoourglobalfootprintandbelievebeingastrongpartnerwithMcKessonwillhelpthemgrowtheirbusiness.Andthat'sreallythevaluepropositionthatwe'reputtingforthandaredelivering,isthatit'sawin-winforpeoplethatareworkingcloselywithusinthiscollaborativeway.Somakinggoodprogress.

AndthecommentsImadeearlieraboutCelesiowasmoreonanoperatingperspective,thatwe'rebeginningtostabilizetheoperationsofthebusiness,putthesystemsinplaceandthecultureinplacealongwithbuildingonthegreatmanagementteamthatisalreadypresent.Infact,IwasrecentlybothinItalyandintheUKmeetingwiththemanagementteamsthere,andthere'ssomeexcitingthingsgoingonandIthinktheteamisreallyenergizedabouttheopportunityofbeingpartofMcKessoninthefirstinstance,butalsothefactthatinvestmentisflowingbothintermsofinternalinvestmentinwarehousesandstrategyandinITsystemsandinfrastructurebutalsointermsofbringingacquisitionstothetablethatmakesensetogrowourbusinessandtogrowourplatform.SoIthinkthattheperspectiveisquitepositive.

Now,havingsaidallofthat,it'sawhilebeforethisthingisgoingtogrowthewayyouknowwecangrowit.Itjusttakesussometimetoputthefoundationinplace.


No.Iappreciateallthat.AndthenIguessjustonemorespecificone,James.IfIgobacktothechangeinguidance,ifImaybeexcludetheZEEMedicalandthetaxbenefit,tryingtojustgetmyheadaroundthe$0.11reduction.Itlookslikebuybacksaddedmaybearound$0.10.Couldyoumaybejustwalkthroughtheothermovingpieces,specificallyaroundthecontractdecisionsyoumentionedandthenthechangeingenericinflationassumptions?


Yes,well,aswelaidoutalittlebitduringthepreparedremarks,wehavetheZEEgainfor$0.11,theupdatestoourfullyeartaxdrivesaround$0.06,thesharerepurchase,the$500millionactivitythatwewentintoinQ2drivesaround$0.09.SowhenyouoffsetthatagainstthelossoftheOptumcontract,andwe'vealsotalkedaboutthefactthatourguidenowforthefullyearincludesthenewrelationshipwithCVSOmnicareandourexpectationsforgenericpriceincreases,thatreallyfillsoutthevariousdrivers.


Okay,I'msorry.Justaclarificationthen.Sodidthegenericassumptionchange,andthat'spartofthechangeinguidance?


Well,what'simportanttorememberiswhenwewerelasttalkingtoyouandtalkingabouttheguide,wedidnothaveanychangeforthebackhalfoftheyeartohowwehadbeenthinkingaboutgenericpricingrightatthestartoftheyear.Sowhatwe'redoingnowisupdatingthebackhalfoftheyearfromagenericpricingperspective,andwe'resayingthatyouwouldseeasimilarlevelofweaknessthereinlinetowhatwesawinQ2.


Okay.That'sreallyhelpful.Thankyou.

Operator :




We'lltakeournextquestionfromBobWilloughbyofBankofAmerica.

RobertWilloughby(Analyst-BankofAmerica):

Justaquickone.You'dmentionedinanearliercallthatsomeoftheassetsinBrazilforCelesiowereforsale.Isthereanupdateonthat?


Well,you'reright.Wedidmentionthat.AndthebusinesshasbeenIthinkworkingwithpotentialbuyerstoportraythehighqualityassetsthatwehavethere,andIthinkwe'restillinaprocesswithseveralinterestedparties.SoI'mhopefulthatwe'llgetthatconcludedwithinthisfiscalyear,ifnotinthethirdquarter.Sowe'remakingprogressandwe'llkeepyouupdatedasthatgoes.Butyes,thatisexactlywhatwesaidandweplantocontinuewiththatplan.


Isthereanywaytosizethat,John?Isitbiggerthanabreadbox?Isthereagainoralossassociatedwithit?Doyouexpecttoassociatewithit?


Well,allI'dsayisrememberthatthisispartofourdiscontinuedoperationsnow.


Right.


Soitwouldn'timpacttheendresultwon'timpactouradjustedEPS.


AndIwouldsaythatit'sonthesmallsideasbreadboxesgo.Iwouldn'tfretaboutittoomuch.


Okay.Perfect.Thankyou.

Operator :

We'llgonexttoGarenSarafianatCitiResearch.

GarenSaraf ian (Analyst-CitiInvestmentResearch):

Goodmorning,John.Goodmorning,James.FirstonOmnicare,IappreciatethefurtherclarificationyoumadeearlierintheQ&A,butI'mcuriousaroundthedynamicsleadingtothisresult.Iwouldhavethoughtthatfromaclientperspective,allelseequal,they'dwanttokeepbothsidesofthedistributionwithasinglevendor.Andfromthedistributorside,Ithoughtthatbrandedalonewasfairlystandardizedlowmarginofferingandprettymuchacommodity.SoI'mjustwonderingifthere'sanythinguniquethatyouwereabletoprovideoranyotheruniquedynamicthatyoucanoffertohelpthinkthroughthis.


Well,it'sdifficultformetomakeblanketstatementsaboutwhateverycustomerchoosestodo.IwouldsaythatourcurrentrelationshipwithCVSontheretailsideoftheirbusinessisprincipallythedistribution




ofbrandedpharmaceuticals,andtheirstrategyaroundgenericsisactuallytoshipthoseproductsdirectlyfromtheirownCVSwarehousesandnottoorderthemthroughdistribution.SoalbeitIcan'tspeaknecessarilytowhattheyultimatelywilldowithalloftheOmnicarebusiness,butusuallythedecisionthatlargecustomersmakeiseithertoputallthegenericsandallofthebrandintothesinglewholesalerthatthey'veselectedtopartnerwith,atleastforthatstoreorthatbusinessline.Ortobifurcatethetwoofthemandpurchasethegenericsonadirectbasis,putthemintotheirownwarehouse,managetheirownlogistics,andshipthemtothestores.

YoumightrecallwhenwehadthediscussionrelatedtoRiteAidlastyearwhentheymadeadecisiontogetoutofthegenericbusiness.WhattheyweredoingwasnotmovingRiteAid'sgenericvolumefromanotherwholesalertoMcKesson.TheywereactuallymovingtheirgenericvolumeoutoftheirowninfrastructureandintoMcKesson'sinfrastructure.SoIwouldsaythatmybeliefisthatCVSisstillaself-warehousingcustomerongenerics,andIwouldimaginethatatleastthere'sastrongpossibilitythatwhatthey'lldoismovetheOmnicaremodelbacktothemodelthat'sfrequentlyusedwithintherestofCVS.SoIdon'tbelievethere'llbetwodistributorsatOmnicare.Ithinkthere'llbeaMcKessonrelationshiponbrandandperhapssomegenericfill-in,andtherestofitwillcomeoutofCVSonacentralized,coordinatedbasisliketheydofortherestoftheiroperation.


Gotit,okay.That'shelpful.AndthenjustmovingtoTechSolutions.Yourmarginswereclearlystrongleadingtotherevisiontothehighendofguidance.Butinthepreparedremarks,outofthethreereasonsbehindthestrength,twoofthethreewerearguablysustainable.Socouldyoujustelaborateonhowyou'rethinkingaboutthemarginprofileofthissegmentmovingforward?I'mjusttryingtogetanideaofwhythiswouldn'tcontinueitstrajectory,atleastonthemarginfront.


Well,whatwehavesaidinthepreparedremarksisthatwewouldexpectthefull-yearguideforTechnologySolutions'operatingmargintobeattheupperendofthehighteens.Sorecallthatwhenwegaveyouoriginalguidanceatthestartofthefiscalyear,wewereexpectingtobearoundthelowendofthehighteens.Now,theprimarydeltathereisthecaremanagementgainthatwerecordedinthefirstquarter.Now,peelingbackfromthat,wecontinuetobepleasedwiththegrowthwe'reseeinginourpayerproviderbusinessesandtherelayconnectivitybusinesses.ButofcoursethegrowththereishavingtobeoffsetbyourdecisiontoexittheHorizonHospitalsoftwarebusiness.Sothatwillhaveanimpactontechnologysolutions.


Buttoreinforce...


(inaudible)


Butobviouslytoreinforcewhatyou'resaying,we'repleasedwiththemargintrajectoryofthatbusinessandwe'repleasedwiththeprogresswe'vemadeintakingasmuchcostoutaswecanaswetakethatHorizonbusinessdownoverthenextcoupleofyears.

Operator :

We'llgonexttoEricColdwellatBaird.




EricColdwell(Analyst-RobertW.Baird&Co.,Inc.):

Hey.Thanksverymuch.John,IthinkIgenerallyagreewithyourviewsonbrandedinflationandclearlybrandinflationisnotasimportantasitwasmorethanadecadeagoundertheoldindustrystructure.ButIwouldloveitifyoucouldgiveusalittlemoredetailonsortofthecurrentstateofcontracts,maybethepercentofsalesthatarenotunderfeeforservicerelationships.Andthenunderfeeforservice,suspendingdisbelief,ifbrandedpriceinflationdidpareback,whatwouldhappenwiththemodel?Howwouldyouadjust?Whatkindofimpactmightwesee?AndI'llleaveitatthat.Thankssomuch.


Well,thanksforthequestion.Clearlyasyoumentioned,ifyougobackinhistory,therehavebeenlotsofdifferentmodelsthatMcKessonhasusedtocreaterelationshipswithmanufacturersthatarebeneficialtothemandbeneficialtoourselvesandcertainlyonwardtoourcustomers.Andovertimewehavecreatedrelationshipswiththemanufacturersthathavebeenlessdependentonpriceinflation,providingmorevisibilitytothemanufacturersonoursupplychainandworkinginpartnershipwiththemtogivethemthedataandthethingsthattheymightfindusefultothemintheirownproductionactivitiesandtheirgo-to-marketstrategies.Andinreturn,they'vegoneandpaidusforthatworkinthesefeeforserviceordistributionrelationshipscontractsthatthey'vehavesigned.

Thathasfranklytakensomeofthetopofftheopportunityonpriceinflationandtakensomeofthebottomoffonpriceinflationrisk,sothebandofperformanceisprobablycertainlyalittlemoreforecastable.Andwe'vealsotalkedinthepastthatroughly80%plusorminusofourbusinessareinstructuredarrangementsthatarefeeforservicetypeofdialogueorcertainlymoreconstructedanddocumentedthantherestofthebalance.SothatalsohashelpedreducesomeofthevolatilityyoumightfindinthisparticularleverofprofitabilityinsideofourP&L.


Withtheyoutalkaboutthe80%,andIthinkthatisaprettyconsistentmessage.Isthe20%isacertainpercentageofthatyourSpecialtybusiness,orareyoutalkingcoretraditionalbrandatretailwhenyougivethe80%figure?


Well,it'sreallysortofacrosstheboard.AndIthinkanotherresponseIcouldgivetoyouandyourassociates,whenyouthinkaboutinflationriskforMcKesson,therearelotsofleversweuseinourbusinesstodriveourperformance.Andwhenwetrytogiveyouthesehighlevelthemes,it'sbecausetheyareimportantthemes,andwetalkaboutthemattheannualguidancepoint.Wegiveyouourassumptionsbecausetheyaredriversofourvalue.Butclearlyasyougothroughtheyear,therearealotofthingsthataren'tquiteasyouexpectedatthebeginningoftheyear,andifthey'repartoftheselargerforces,we'llupdateyouastheyeargoeson.AndJamesspentsometimetalkingaboutgenericinflationanditsrelativepositionagainstourexpectationswhenwestartedtheyear.

Buttherearealsolotsofotherdriversinourbusinessthataregoingbothpositiveandinnegativethroughouttheyear,andIcanassureyouthatthecompanyremainsextremelyfocusedondrivingourperformanceaswehaveoverthelast15years,andweusetheseothervehiclestooffsetriskthatmightbeapparenttousinourbusinessasthoserisksmaterialize.

So,dowehaveriskoninflation?Clearlywetalkedaboutgenericstoday,andwetalkedaboutourviewsofbrandinflation.Butit'salsoourresponsibilitytonotonlytellyouaboutthesethingsbutmanagetheserisksonaproactivebasisandbeassertiveandontopofit.Andiftherewassomefundamentalseachangeinourindustryrelativetoourviewsofwherethesemetricsmightgoovertime,thenwewould




begintoreformatourrelationshipwithourcustomersandoursupplierpartnersandwe'dfindwaystocontinuetogrowourbusiness.AndsoIthinkthatthatlevelofconfidenceiswhatyoushouldbegettingfromustoday.


Okay.Thanksverymuch


Yes.

Operator :

We'llgoinnexttoGeorgeHillatDeutscheBank.

GeorgeHill(Analyst-DeutscheBankSecurities):

Hey,goodmorningguys,andthanksfortakingthequestion.John,appreciateallthecommentsaroundkindoftheRiteAidannouncement.Iguess,butthecompanyseemsalittlebitsnake-bitbyindustryM&Alately.IguesseitherJohnorJames,canyouguysquantifytheriskaroundtheRiteAidrelationship?AndJohn,Iwouldaskasyouthinkaboutindustryconsolidationstrategically,doyoufeellikethecompanyneedstobemoreaggressivethanithasbeenhistoricallyanddoesitchangetheriskprofileatallforhowyouthinkaboutacquisitions?


Well,thanksforthequestionhere.Clearlywe'vehadalongstandingrelationshipwithRiteAidandwe'lldoeverythingwecantohelptheminthistransition.AndwehaveagreatdealofrespectforMr.PessinaandhisteamatWalgreensandthekindofvaluethey'vedeliveredoveralongtime.Andwe'vebeenworkingwithWalgreensfor20years,andIknowStefanoforover18years,havingtraveledbackandforthtoEuropebeforehegottothescalethattheyaretoday.Andso,theseworkingrelationshipsusuallyhelpusasweworkthroughtransitionsinourindustry,andwe'rereallyproudofthefactthatourlongstandingrelationshipwithCVSbothonthemailsideaswellasthestoresideatleastcameintoplaywhenwehadthedialogueregardingOmnicare.

Soarewesometimesonthewrongendofthesetransactions?Absolutely.Butastothesecondpartofyourquestion,itdoesn'tmeanwe'regoingtodeploycapitalinarecklessway.We'vegotalongtrackrecordofbuildingvaluethroughaportfolioapproachandwe'llcontinuetodothat.We'renotoblivioustotheriskthatexistsasourmarketconsolidatesbothonthesupplierandthecustomerside.Andclearlysometimeswe'rewiththeconsolidatorsandsometimeswe'renot.Andwhenwe'renot,wehavetofindawaytoeithercreatearelationshiporbuildonanexistingrelationshiporfindanotheravenuetogrowourbusiness,whichisourultimateobjective.

Andwehavechosenthusfar,andwebelievethisistherightpath,tonotcompetewithourcustomers.SoIdon'tthinkwe'llbeginacquiringprovidersinanefforttooffsettheriskofproviderconsolidationinourbookofbusinesstodealwithit.Whatwe'llcontinuetodoisfocusonthevaluewecandeliverforourpartners.Andasthatvaluecreationopportunityexpands,thenhopefullyeventhroughacquisitions,peoplewillfindthatMcKessonisthepartnerofchoice,andthey'llbuildtheirrelationshipwithusasopposedtodiscontinuingit.Butyoucantellalsofromourguidancethatsometimeswhentheserelationshipschange,ithasanegativeeffectonourmarginstructure,andthat'sreallywhatwe'rereflectingwhenwetalkedaboutsomeoftheputsandtakesinthequarter.





I'djustaddthatanexample,averyrecentexampleofwherewe'rebuildingwiththeconsolidatorisAlbertsonsSafeway.Soit'samix,anaturalebbandflowofthebusinesscycle.

GeorgeHill(Analyst-DeutscheBankSecurities):

Yes,andIguessmaybethenjustthequickfollow-upwouldbedoesindustryconsolidationmaybefromanM&Aperspectivethinkabouthowfarjustfromthecorethatyoulook?AndIguesshow,whenIthinkaboutMcKesson'sexpertises,it'sinprocurement,it'sinsupplychain,it'sinlogistics,it'sindistribution.Doyoustarttolookintotangentialspacesinhealthcareoraretherecustomergroupsthatyoudon'tservenowwhereMcKesson'sexpertisecanbeleveragedthatyouseeopportunities?Thankyou


Thanksforthequestion.Clearlyourjobistofindwaystogrowourbusinessandtodoitintelligentlyandtodoitinarisk-boundedwayandtodeploycapitalintelligently.SoIthinkournumberonepriorityistodeploycapitalinplaceswherewehaveabaseandanexpertiseandwhereit'snotacompletelynewlegofthestool,butit'ssomethingthat'sadditivetowhatwe'recurrentlydoing.So,Ithinkweevaluateeverythingandclearly,everyhealthcareoralmosthealthcaredistributionopportunitythatcomesonthemarketcomesthroughMcKessonandmanyofthemwepassonbecauseit'snotstraightupouralleyorwebelievethatthepriceistoohigh.Butotherwise,we'regoingtostayprettyfocused.


Yes,andI'djustaddintermsofthebreadthofourbusinesses,whetherit'sCanada,Europe,Specialty,Medical-Surgical,TechnologySolutions,andthereareavarietyofbusinessesthatwehavewheretherewillbeopportunitiesthataredownthemiddleofthefairway


Exactly.We'vejustbeentoldthereareafewmorequestionspendingsowe'regoingtorunthiscalljustalittlebitlaterforthoseofyouthathavetimetodothat.Sowe'llgoontothenextquestion.

Operator :

Andwe'llmovetoCharlesRhyeeatCowen.

CharlesRhyee (Analyst-Cowen&Co.):

Thanksfortakingthequestionhere.John,James,JohnIthinkinyourremarksyoutalkedaboutbiosimilarswithNeupogenbeingthefirstlaunch.Justcuriouswhatyou'veseenintermsoftheuptakeinthatproductandhowthatmightbeshapingyourviewsonbiosimilarsinthefuture.


Well,thankyouforthequestion.Clearlybiosimilarsaregoingtobeanimportantaspectofourbusinessportfoliogoingforwardandwewillcontinueto,Ithink,seebenefitofthesebiosimilarlaunchesoverthecomingyears.Astothespecificlaunchthatwe'verecentlyseen,itfranklyhasnotgottenatonoftractionyet,atleastnotinourbusiness,andit'sbehavingmuchmorelikeabrandedproductthanitisatypicalquicktosubstitutegeneric.Atsomepointthesebiosimilarsprobablywillbemoresubstitutablebecausetheirclinicaleffectivenessandefficacywillhavebeenproveninsomefashion.Andthat'swherewe'llhavemoreopportunitiestomakefastertransfersoftheproduct.Andwethinkwe'reverywellpositioned,particularlywhentheproductarerightdownthealleyofcommunityoncologyandwecanuseourU.S.oncologynetworktohelpvalidatetheefficacyoftheproductandthenmovemarketshareveryquickly,eitherkeepthemarketsharewiththeoriginatorormoveittothebiosimilartotheextentthatthey're




replaceable.Sowewilllookforopportunitiesgoingforward.


IfIcouldjustfollowuptherethough,rightnowthenwouldyousaythemarginprofilealsolooksmorelikeabrandthanageneric?Andthenintermsofsubstitutabilitythough,itseemslikeinthebiosimilarpathwaythatitdoesn'thavethesametypeofA-Bsubstitutabilitythattraditionalgenericsdo.Doyouthinkthatregulationshavetochangetoallowthatfordistributorstoreallybenefitfromthatabilitytomoveshare?Thanks.


Well,itisbehavingmorelikeabrand,andevennotonlyintermsofthewayit'sbeingtakentomarketanditspricingstructure,butalsointhewaythatthephysiciansareviewingit.Ithinktheywanttohaveadiscussionabouttheproductitselfasopposedtoacceptinganautomaticsubstitutionbyapharmacyorbyawholesaler.Idobelievethough,overtime,thatsubstitutabilityquestionwillbecomelessandlessaquestionandtotheextentthatwecanhelppeoplecreateevidencethatsupportstheA-Binterchangeabilityortherapeuticsubstitution,thenwecertainlywillpursuethat.Inthemeantimethough,welookatthatasalong-termpriority,andIwouldn'tconsideranyoftheupandcomingpendingthingsinthenextsixmonthstoayearasbeingblockbusterbigsuccessesforus,atleastrightoutofthegate


Great.Thankyou.


Yes.

Operator :

We'llgonexttoEricPercheratBarclays.

EricPercher (Analyst-BarclaysCapital):

Thankyou.I'dliketogobacktooneofyourearlycomments,John,onconsistency.AndthismaybeaquestionmoreforJames.ButIlookatthebalancesheetandthinkthisisalargeleverforyoutobeabletodriveconsistencyaswelookouttotheforwardyears.Particularlytoday,youmentioned$5.4billionofcashand$1.7billionofCFOtocome.Wesawtherevolverputinplace.Aswelookoverthebalanceoftheyear,Iknowtherewassomedebtmaturity.We'vegottheinternationalacquisitions.Butitfeelslikethere'llstillbeaprettysubstantialcapability.Socouldyouwalkusthroughwhatwillbedueandmaybewhatwasbehindtherevolverandwhereyousitasyoulookattheremainderoftheyear?


Well,we'recertainlypleasedwiththefinancialflexibilitythatwehave.AndI'llstartoffbyjustreallyremindingyouoftheportfolioapproachthatwehavetocapitalallocation.Andwithinthatportfolio,internalcapitalexpendituresandM&Aarethefirstandsecondpriorities.Socertainlywanttobeclearaboutthat.Butgiventhedegreeofflexibilitythatwehave,obviouslywe'realsogoingtolookregularlyatwhatwethinkisarealisticM&Apipelineintheshort,mediumterm.Contrastthatagainstourcashbalanceandourcomingprojectedfreecashflowandmakeanassessmentastowhetherthere'sexcesscashavailableforsharerepurchases.Andyou'veseenustakethatactionintermsofbuybacksnowbothinthislastQ2andinthefourthquarterofthelastfiscalyear.




Sowe'repleasedthattheboardauthorizedthenew$2billionauthorizationforsharerepurchases.Soitfeelsasthoughwehavetheliquidityandtherightportfolioapproach,therightflexibility,tocontinuetodeploycapitaleffectivelyonyourbehalf.


Andthechangein,ortheelementthathasimpactedguidancewasthe$500millionbeingdoneearlierintheyear.There'snochange?The$2billionissuedisnotimpliedtobeusedinyourcurrentguidance?AndIguessitalsobegsthequestionwhenyoulooktoEurope,arethere$10billiondeals,oraremostofthese$2billion,$3billion,ormuchsmaller?


Well,intermsoftheweightedaveragesharesoutstanding,thefull-yearnumberthatImentionedwas234million.Embeddedwithinthatisthe$500millionbuyback.Thereisnothingassumedaboutprogressagainstthenew$2billionauthorization.Intermsofthetransactionsizesavailabletous,Iwouldn'twanttoreallycommentonanythingspecifictoM&A.You'veseentherecentdealsizeswithUDGandSainsbury's.Butthere'sawiderangeofopportunitiesacrosstheverybroadsetofbusinessesthatweoperate.


Thankyou.

Operator :

We'llgonexttoDaveFrancisatRBCCapitalMarkets.

DaveFrancis (Analyst-RBCCapitalMarkets):

Hi.Thanks,andcongratulationsonasolidquarter.Justarealquickone,John.Biggerpicture,Iappreciatethecommentaryonwhatyou'reseeingfrompricingtrendperspectiveacrossboththebrandandgenericbaskets.Canyoutalkalittlebitaboutwhatyou'reseeingvolume-wiseintermsofanymeaningfulchangeinthemarketplaceupordowndomestically?Isthereanythinggoingoninthebroadeconomythat'simpactingvolumetrendsasyou'reseeingthemintheU.S.business?Thanks.


Thanksforthequestion,Dave.Ithinkweseethingsprettymuchinlinewithwhatwehadexpectedfortheyearonavolumebasis.Andclearlyyoucanseethatthenumbersthatarebeingpostedbythevarioussourcesastoprescriptionvolumes.Ithinkwedon'tseeanymajorchanges.Thereareperhapssomechangesthatyoumightseeinthephysicianofficeperspective,butIwouldsaythatthebiggestchangeortrendthatwecontinuetoseeisthatsomeofourlargercustomersaregrowingmorerapidlythantherest.Andinparticular,ourlargestmailcustomerhashadprettynicegrowth.Andsothatputsalittlepressureonourmarginstructure,particularlyontheSpecialtyproductsthatgothroughthatparticularcustomer.Butotherwise,everything'sprettymuchinlinewithwhatwe'danticipated.

DaveFrancis (Analyst-RBCCapitalMarkets):

Verygood.Thankyou.


Yes.




Operator :

AndournextquestioncomesfromDavidLarsenatLeerink.

DavidLarsen (Analyst-LeerinkPartners):

Hey,guys.Canyoutalkaboutthegenericinflationcomp?Like,whendoyouexpectthattostarttoease?Soinflationrateswereobviouslyveryhighincalendar2014.They'vepulledinoverthepastcoupleofquarters.Sonextyear,andjustanygeneralthoughts.Wouldyouexpectthecompforgenericinflationtoeaseabit?


Well,genericinflationisnotforecastableandwecertainlydon'thaveanyinsightfromwhatthemanufacturersareplanningtodointheirbusinesses.We'veupdatedourassumptionforthebackhalfofthisfiscalyear.Andofcoursewereallywanttotakeastepbackandemphasizehowgenericpriceinflationisjustoneofanumberofvariablesthatdriveagainthisbroadsetofbusinesses.SoIwouldurgenottohaveanoverfocus,ifyouwill.It'sanimportantissue,asJohnwasmentioningearlier.Weincludedinourinitialannualguide,andweupdateyouastheyeargoesalong.ButIreallythinkwewanttokeepthisinperspectiveintermsofthebroadnumberofdriversofourbusinesses.


Okay.Great.AndthenjustanyquickthoughtsonTarget?HaveyouhadanydiscussionswithCVSaroundTargetandthataccount?


Well,unlessyou'veheardsomethingdifferent,we'venotheardoftheTargettransactionclosing,andIwouldimagineourconversationswithCVSwouldbemoreworthwhilepostthatprocessthantoday.SoI'mnotreallypreparedtocommentorspeculateonitotherthantosaywe'recontinuetoservicetheTargetbusinesswithallofourfocusandwewanttomakesurethosestoresareingreatshapeprethetransitiontoCVSownership.


Okay.Allright.Thanksalot.

Operator :

We'lltakeRossMukenwithEvercoreISI.

RossMuken (Analyst-EvercoreISI):

MaybejustnottobeatthehorseonRiteAid,butjustgoingback,oneofthebigquestionswe'vegottenfromalotofinvestorsisjustsortofunderstandinghowchangeofcontrolprovisionsworkonthesekindofcontracts.Obviouslyyou'vedealtwithquiteafewofthemrecently.AndIguess,secondarily,understandingthesortofpushesandpullslong-termofbeingakeyprovidertoalargeretailchain.ObviouslyyoustillhavearelationshipwithCVSandwe'llhavetoseewhathappenswithRiteAid.Butthat'sonthemailside.Howdoyouthinkaboutthat?Doesithelpyouatallwiththeindependents?I'mjusttryingtounderstandthelong-termimplicationsofthataswell.


Well,justtomakesurethatI'mclear,thatourCVSrelationshipiswithboththemailaswellasmanyof




theirretailstoresandnowourcontinuedrelationshiponOmnicare.AstoWalgreensandRiteAid,we'vehadalong-termrelationshipwithWalgreens.Itjusthasn'thappenedtohavehaddistributionasakeycomponentofitforperhapsacoupleofdecades.Likeanythingelsewe'regoingtoworkhardtomakesurethatthoseRiteAidstoresareservicedandcontinuetofocusonmakingourcustomerssuccessfulthere.Andwe'llseewherethingsheadovertime.

Butremember,customerskindofcomeandgoinpeople'sbusiness,andalbeitwe'vehadabadrunherewithtwoorthreeM&Atransactionsthatwere"notourfault"relatedtolosingcustomers.Butyoualsoshouldexpectthatwe'llcontinuetoworkhardtogrowourbusiness.AndItalkedbeforeaboutthefactthatwehaveaverylargebaseofpeoplewhoaredependentonusfromagenericperspective.Andalbeitthatbasecontinuestogrow.Wethinknomatterwhathappensfromacustomerperspective,wewillstillbeoneofthelargestsuppliersofgenericsintheworldandaveryvaluablepartnertothemanufacturers.

RossMuken (Analyst-EvercoreISI):

Great.Thanks.I'msorryforthepoorlywordedquestion.


No,that'sokay.IjustsaidIwanttomakesureeverybodyelselisteningwasclearonit,Ross.Ithinkwehavetimeforonemorequestion.

Operator :

Andwe'lltakethatfromJohnRansomatRaymondJames.


John?

Operator :

Mr.Ransomyourlineisopen.Pleasegoahead.

JohnRansom(Analyst-RaymondJames&Associates):

Hi.Sorry.Tryingtomulti-taskhereanddoingitverypoorly.I'msorryifthishasbeenasked,buttheRiteAidcontractexpiresin2019.Isthereachangeofcontroloutontheotherside?Ordoyouexpectthattoremaininplacethrough2019?


Well,wedon'ttalkspecificallyaboutthetermsofouragreementsotherthanwhatwesayatthebeginningofthem.AndIthinkthatthecommentImadeinanswertothequestionearlierisweplantocontinuetoservetheirbusinesswithallofoureffortandmakesurethatthey'reverysuccessfulastheycontinuethroughthistransactionprocess.

JohnRansom(Analyst-RaymondJames&Associates):

Okay.That'sallIhad.Thankyou.


Allright.You'rewelcome.




Well,Iwanttothankyou,[Audra].Thanksalsoforallofyouonthecallforyourtimetoday.Ourindustryexperiencesperiodsofdynamicchange,andthisiscertainlyoneofthem.AndI'mconfidentthatwewillcontinuetoparticipateinthatchangeinanextremelypositiveway.Weremainextremelywellpositionedtodeliverthebestserviceandvalueintheindustryonbehalfofourcustomers.

Andwiththat,I'llnowturnitbackovertoErinforherreviewofupcomingeventsforthefinancialcommunity.Erin?

ErinLampert (SeniorVicePresident-InvestorRelations):

Thankyou,John.OnNovember10wewillpresentattheCreditSuisseHealthConferenceinScottsdaleArizona.AndonJanuary12,wewillpresentattheJPMorganHealthcareConferenceinSanFrancisco.We'llreleaseourthirdquarterearningsresultsinlateJanuary.

Thankyou,andgood-bye.

Operator :

Andthatdoesconcludetoday'sconference.Again,thankyouforparticipation.

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