mckesson (mck) earnings report: q2 2016 conference call ... · pdf filerobert willoughby; bank...
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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
CompanyName:McKessonCorpCompanyTicker:MCKSector:ServicesIndustry:Wholesale
EventDescription:Q22016EarningsCallMarketCapasofEventDate:42.22BPriceasofEventDate:186.25
©2014TheStreet,Inc.Al l R ightsReserved Page2of22
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
CompanyName:McKessonCorpCompanyTicker:MCKSector:ServicesIndustry:Wholesale
EventDescription:Q22016EarningsCallMarketCapasofEventDate:42.22BPriceasofEventDate:186.25
©2014TheStreet,Inc.Al l R ightsReserved Page3of22
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
CompanyName:McKessonCorpCompanyTicker:MCKSector:ServicesIndustry:Wholesale
EventDescription:Q22016EarningsCallMarketCapasofEventDate:42.22BPriceasofEventDate:186.25
©2014TheStreet,Inc.Al l R ightsReserved Page4of22
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
CompanyName:McKessonCorpCompanyTicker:MCKSector:ServicesIndustry:Wholesale
EventDescription:Q22016EarningsCallMarketCapasofEventDate:42.22BPriceasofEventDate:186.25
©2014TheStreet,Inc.Al l R ightsReserved Page5of22
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
CompanyName:McKessonCorpCompanyTicker:MCKSector:ServicesIndustry:Wholesale
EventDescription:Q22016EarningsCallMarketCapasofEventDate:42.22BPriceasofEventDate:186.25
©2014TheStreet,Inc.Al l R ightsReserved Page6of22
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
CompanyName:McKessonCorpCompanyTicker:MCKSector:ServicesIndustry:Wholesale
EventDescription:Q22016EarningsCallMarketCapasofEventDate:42.22BPriceasofEventDate:186.25
©2014TheStreet,Inc.Al l R ightsReserved Page7of22
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.
CompanyName:McKessonCorpCompanyTicker:MCKSector:ServicesIndustry:Wholesale
EventDescription:Q22016EarningsCallMarketCapasofEventDate:42.22BPriceasofEventDate:186.25
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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?
JohnHammergren (Chairman,President&ChiefExecutiveOfficer):
Thanks,Lisa,forthequestion.ClearlywewentintoEuropewithoureyeswideopenontwofundamentalthings.OnewasthatCelesiowasn'toperatingatthelevelwethoughtitcouldandshould,andcertainlyunderMcKesson'sownership.AndsecondwasthattheEuropeanmarketdoeshavesomeriskrelatedtothedemandprofileaswellastheregulationsandreimbursementstructuresthatexistthere.Havingsaidallofthatandknowingwhereweareheaded,we'rereallypleasedwiththequalityoftheresultsthusfar.
Webelievethere'ssignificantopportunitiesforustogrowbothorganicallyinthatbusinessbypenetratingtheareasofthemarketthathaveyettobetouchedbywholesaledistribution,andcertainlynottouchedbyus.LikeSpecialtyorOncologyorHospitaldistribution.Andclearlywethinkthere'sagreatopportunityforustodeploycapitaleffectively,efficiently,andappropriatelyinEuropetohelpbuild
CompanyName:McKessonCorpCompanyTicker:MCKSector:ServicesIndustry:Wholesale
EventDescription:Q22016EarningsCallMarketCapasofEventDate:42.22BPriceasofEventDate:186.25
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ourvaluepropositioninthatmarket.
Andalso,asyouknow,webroughtwithusaverylargeretailfootprintwhichgrowsthroughtheacquisitionofSainsbury'sanditisgrowingalsojustorganicallyinEuropeaswecompleteourbannerrolloutswithourEuropeanpharmacynetwork,etcetera.Soallsaid,Ithinkwefeellikewe'reinreallygoodshape.Wehaveacouplemoreyearsofbuildingoutourtechnologycapabilitiesthere.We'reinthemidstofinstallingSAPandwehavesomeotherworktodo,butwedobelievethatwe'llgetintobusinesspositiontonotonlyinvestinitthewaywehavestartedto,butalsotogetorganicgrowth.
LisaGill(Analyst-JPMorganSecuritiesLLC):
John,doesthecompanyhaveagoalforhowmuchofoperatingprofitorrevenueofthecompanywillcomefromoutsideofNorthAmerica,sayoverthenextseveralyears?AndIknowI'mnotallowedthreequestions,butIjustneedaclarificationonthecommentsoutofCelesiothatyouclearedthetransferagreement.Doesthatmeanthatyou'rede-listingthestock?AndthenI'llstopthere.
JohnHammergren (Chairman,President&ChiefExecutiveOfficer):
Well,certainlyonthefirstpartofthatquestion,Lisa,wedohaveanexpectationtogrowinallofourbusinesses,andtogrowatratesthatareatorabovemarketlevels,particularlyinmarketswhereweareunder-penetratedandthere'ssignificantopportunityforus.AndthatwouldbethecaseinEurope.Wethinkthere'ssignificantgrowthprospectsforusinmostofthemarketsinwhichwecompete.AndasImentioned,IthinkthisideaofcontinuingtobringabannerHealthMart-likeapproachtoEuropehasbeensuccessfulandiscontinuingtoshowgreatpromise.Soyou'llseeusrolloutmoreLloydsorLloyds-likepharmaciesthroughoutEurope.AndJames,perhapsyoucantalkalittlebitaboutthe...
JamesBeer (ChiefFinancialOfficer&ExecutiveVicePresident):
Yes.IntermsoftheCelesiostock,whenwegainedoperatingcontrolofCelesio,CelesiowastradingonfiveGermanexchanges,andwehavesincethende-listedfromthreeofthefive.Andontheremainingtwo,we'restillapartoftheregulatedunofficialmarket.ThosemarketsareMunichandDusseldorf.Ican'tcommentonanyfutureplansaroundde-listing.ThereareavarietyofGermanlegalrequirementsforustoadhereto,butthat'sanupdateonourprogress.
LisaGill(Analyst-JPMorganSecuritiesLLC):
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?
JohnHammergren (Chairman,President&ChiefExecutiveOfficer):
Well,thankyou,Steven,forthequestion.AndobviouslyinEurope,theconstructoftheindustry'salittle
CompanyName:McKessonCorpCompanyTicker:MCKSector:ServicesIndustry:Wholesale
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bitdifferentinseveralofthemarketswherethewholesalersandretailersarepartofthesameorganization.Andinmostofthosecases,it'sthesameforalltheindustryparticipants,thattheyarebothintheretailbusinessaswellasinthewholesalingbusiness.
We'velookedatthatphenomenonforalongtimeinEuropeandwonderedifitmadesenseinaU.S.context.Icantellyouthatwecontinuetobelievethatourcustomersappreciatethefactthatwebringtothemafocusontheirsuccessandthatfocusisnothamperedbyourowninterestinabusinesssimilartotheirsorcompetingwiththem.AndsoIthinkthatthere'sstill,atleastatMcKesson,afocusonnotcompetingwithourcustomersinthesesegmentsandhelpingthembemoresuccessfuleachandeveryday.
StevenValiquette (Analyst-UBSSecuritiesLLC):
Okay.CanIsneakinjustaquickoneontheOmnicare?Justforthegeneric,I'mguessingthesourcingwillprobablygothroughRedOak,butareyousayingthatyou'llstilldojustthephysicaldistributionofthegenericsforOmnicare?Orisyourdistributionretentionjustonthebrandside?Justwanttoclarifythatpiece.Thanks.
JohnHammergren (Chairman,President&ChiefExecutiveOfficer):
Well,youmightrecallthatwewhenwestartedtherelationshipwithOmnicaremanyyearsago,theyreliedonusfortheirbranddistributionandpurchasedtheirGenericsdirectlythemselvesandputitintotheirownwarehousinginfrastructure.Withourmorerecentagreementthatweworkedthroughwiththem,youknow,wetookontherestofthatresponsibilitywhichIthinkwasextremelybeneficialtoOmnicare.ThenewstructureoftheongoingrelationshipwithCVSwilltakeusbackinthedirectionwhereouroriginalagreementwaswithOmnicare,principallyfocusedonthebrandside.Now,havingsaidthat,almostwithallofourcustomers,thereissomegenericbusinessthatwedoprincipallywhenthere'sashortfallfromacentralizedwarehouseapproachoradirectapproach.Butwe'llgobacktomoreofouroldrelationship.Andwe'rereallypleasedtobeabletodothatandtoabletocontinuetoservicetheseOmnicaresites.
StevenValiquette (Analyst-UBSSecuritiesLLC):
Okay,gotit.Thanks.
JohnHammergren (Chairman,President&ChiefExecutiveOfficer):
Yes.
Operator :
AndournextquestioncomesfromRickyGoldwasseratMorganStanley.
RickyGoldwasser (Analyst-MorganStanley&Co.LLC):
Yes,hi,goodmorning,andcongratulationsfortheOmnicarecontract.Twoquestionshere.Thefirstofall,isthereanimpactofthedealsyou'regoingbacktokindofliketheoldOmnicaregenerics,someuncertaintyaroundotherdeals.Doeslosingkindoflikegenericbusinessfromthesekindoflikeassetsthatnowhavebeenacquiredhasanyimpactonyourgenericpurchasingpowerasitrelatesfortherestofyourbusiness?
JohnHammergren (Chairman,President&ChiefExecutiveOfficer):
Thanks,Ricky,forthequestion.Clearlywehavehadalongrunofbuildingsignificantscaleingenericsourcing.Andwhat'sinterestingaboutthemodelthatwe'vebuiltisourcustomersarechoosingtorelyon
CompanyName:McKessonCorpCompanyTicker:MCKSector:ServicesIndustry:Wholesale
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ourabilitytocontinuetogrowscaleandtonegotiatefavorableagreementsandthenuseusandourassetsandourservicedeliverymodeltofulfilltheirneeds.Wecontinuetogrowourpresencequitesignificantlyfromasourcingperspective.YouheardmementionalittlebitaboutitwhenItalkedtoourcontinuedgrowthinHealthMartandournewarrangementwithAlbertsons.
Andwehaveover20,000pharmaciesnowthatareprincipallybuyingalloftheirgenericsfromMcKesson.Andsothatbulkofbusinessisquitesignificantandquiteattractivetogetaccesstoourchannelbythegenericmanufacturers.So,onecouldarguewhetherwe'renumberone,numbertwo,numberthreeatanyonepointintimeinanyspecificmarketintermsofourgenericsourcing.ButIbelievewehavesignificantscaleandareretainingandgrowingthatscaleinawaythatwillbeattractiveandwillbringmanufacturerstousinapositive,collaborativewaywherewecangetrealvalueforourcustomersandforthemanufacturers
RickyGoldwasser (Analyst-MorganStanley&Co.LLC):
Okay.Andthenthefollow-upisaroundthebrandedside.Imean,inthepreparedremarkobviouslyyoutalkedaboutthefactthatyourassumptionsregardingbrandinginflationareunchanged.Thereissomeuncertaintyinthemarketplacearoundinflation,especiallygiventheelectiondebatethat'sshapingout.HowshouldwethinkaboutMcKesson'sexposuretobrandedinflationoverallandespeciallywhenwethinkabouttheMarchquarter,right,beingusuallyaquarterwithmoreinflationthantherestoftheyear?
JohnHammergren (Chairman,President&ChiefExecutiveOfficer):
Well,inourpreparedcomments,wetalkedaboutthefactthatwebelievethefirsthalfoftheyearwasslightlystrongerfromabrandedinflationperspective.Butforthefullyear,weexpectedittobeinlinewithourexpectations.Andthatisstillourpointofview.Now,clearlythereismoremediaattentionandthereismorediscussionaboutpriceinflationinthemarket.ButIhappentobelievethatthemanufacturersthatweworkwithatleastwilllargelycontainorretaintheircurrentstrategy.Andtheremaybesomeoutliersthatbegintochangetheirperspectiveslightly,butoverallIthinkweexpectthetrendstocontinue.
RickyGoldwasser (Analyst-MorganStanley&Co.LLC):
Okay.Thankyou.
JohnHammergren (Chairman,President&ChiefExecutiveOfficer):
Yes.
Operator :
We'llgonexttoRobertJonesatGoldmanSachs.
RobertJones (Analyst-GoldmanSachs&Co.):
Great.Thanksforthequestions.John,IactuallyjustwantedtogobacktothecommentsaboutEuropeandCelesiospecifically.IknowinthepreparedremarksyousaidCelesiohasbeenexceedingyouroperationalexpectations,butI'mcuriousifyoucouldgiveusanupdateonthesynergyprogressionthere,mayberelativetosomeofthetargetsyouguyshadsharedpreviously.AndIguessspecifically,justhowthegenericpurchasingbenefitsaregoingandifthey'reflowingthroughthecombinedentitytoday
JohnHammergren (Chairman,President&ChiefExecutiveOfficer):
Ithinkwe'vemadeverygoodprogress.Asyouknow,weestablishedourglobalsourcingandprocurementoperationsinLondon,andwehavesuggestedtoyouinthepastthatthesynergiesof$2.75
CompanyName:McKessonCorpCompanyTicker:MCKSector:ServicesIndustry:Wholesale
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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.
RobertJones (Analyst-GoldmanSachs&Co.):
No.Iappreciateallthat.AndthenIguessjustonemorespecificone,James.IfIgobacktothechangeinguidance,ifImaybeexcludetheZEEMedicalandthetaxbenefit,tryingtojustgetmyheadaroundthe$0.11reduction.Itlookslikebuybacksaddedmaybearound$0.10.Couldyoumaybejustwalkthroughtheothermovingpieces,specificallyaroundthecontractdecisionsyoumentionedandthenthechangeingenericinflationassumptions?
JamesBeer (ChiefFinancialOfficer&ExecutiveVicePresident):
Yes,well,aswelaidoutalittlebitduringthepreparedremarks,wehavetheZEEgainfor$0.11,theupdatestoourfullyeartaxdrivesaround$0.06,thesharerepurchase,the$500millionactivitythatwewentintoinQ2drivesaround$0.09.SowhenyouoffsetthatagainstthelossoftheOptumcontract,andwe'vealsotalkedaboutthefactthatourguidenowforthefullyearincludesthenewrelationshipwithCVSOmnicareandourexpectationsforgenericpriceincreases,thatreallyfillsoutthevariousdrivers.
RobertJones (Analyst-GoldmanSachs&Co.):
Okay,I'msorry.Justaclarificationthen.Sodidthegenericassumptionchange,andthat'spartofthechangeinguidance?
JamesBeer (ChiefFinancialOfficer&ExecutiveVicePresident):
Well,what'simportanttorememberiswhenwewerelasttalkingtoyouandtalkingabouttheguide,wedidnothaveanychangeforthebackhalfoftheyeartohowwehadbeenthinkingaboutgenericpricingrightatthestartoftheyear.Sowhatwe'redoingnowisupdatingthebackhalfoftheyearfromagenericpricingperspective,andwe'resayingthatyouwouldseeasimilarlevelofweaknessthereinlinetowhatwesawinQ2.
RobertJones (Analyst-GoldmanSachs&Co.):
Okay.That'sreallyhelpful.Thankyou.
Operator :
CompanyName:McKessonCorpCompanyTicker:MCKSector:ServicesIndustry:Wholesale
EventDescription:Q22016EarningsCallMarketCapasofEventDate:42.22BPriceasofEventDate:186.25
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We'lltakeournextquestionfromBobWilloughbyofBankofAmerica.
RobertWilloughby(Analyst-BankofAmerica):
Justaquickone.You'dmentionedinanearliercallthatsomeoftheassetsinBrazilforCelesiowereforsale.Isthereanupdateonthat?
JohnHammergren (Chairman,President&ChiefExecutiveOfficer):
Well,you'reright.Wedidmentionthat.AndthebusinesshasbeenIthinkworkingwithpotentialbuyerstoportraythehighqualityassetsthatwehavethere,andIthinkwe'restillinaprocesswithseveralinterestedparties.SoI'mhopefulthatwe'llgetthatconcludedwithinthisfiscalyear,ifnotinthethirdquarter.Sowe'remakingprogressandwe'llkeepyouupdatedasthatgoes.Butyes,thatisexactlywhatwesaidandweplantocontinuewiththatplan.
RobertWilloughby(Analyst-BankofAmerica):
Isthereanywaytosizethat,John?Isitbiggerthanabreadbox?Isthereagainoralossassociatedwithit?Doyouexpecttoassociatewithit?
JamesBeer (ChiefFinancialOfficer&ExecutiveVicePresident):
Well,allI'dsayisrememberthatthisispartofourdiscontinuedoperationsnow.
RobertWilloughby(Analyst-BankofAmerica):
Right.
JamesBeer (ChiefFinancialOfficer&ExecutiveVicePresident):
Soitwouldn'timpacttheendresultwon'timpactouradjustedEPS.
JohnHammergren (Chairman,President&ChiefExecutiveOfficer):
AndIwouldsaythatit'sonthesmallsideasbreadboxesgo.Iwouldn'tfretaboutittoomuch.
RobertWilloughby(Analyst-BankofAmerica):
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.
JohnHammergren (Chairman,President&ChiefExecutiveOfficer):
Well,it'sdifficultformetomakeblanketstatementsaboutwhateverycustomerchoosestodo.IwouldsaythatourcurrentrelationshipwithCVSontheretailsideoftheirbusinessisprincipallythedistribution
CompanyName:McKessonCorpCompanyTicker:MCKSector:ServicesIndustry:Wholesale
EventDescription:Q22016EarningsCallMarketCapasofEventDate:42.22BPriceasofEventDate:186.25
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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.
GarenSaraf ian (Analyst-CitiInvestmentResearch):
Gotit,okay.That'shelpful.AndthenjustmovingtoTechSolutions.Yourmarginswereclearlystrongleadingtotherevisiontothehighendofguidance.Butinthepreparedremarks,outofthethreereasonsbehindthestrength,twoofthethreewerearguablysustainable.Socouldyoujustelaborateonhowyou'rethinkingaboutthemarginprofileofthissegmentmovingforward?I'mjusttryingtogetanideaofwhythiswouldn'tcontinueitstrajectory,atleastonthemarginfront.
JamesBeer (ChiefFinancialOfficer&ExecutiveVicePresident):
Well,whatwehavesaidinthepreparedremarksisthatwewouldexpectthefull-yearguideforTechnologySolutions'operatingmargintobeattheupperendofthehighteens.Sorecallthatwhenwegaveyouoriginalguidanceatthestartofthefiscalyear,wewereexpectingtobearoundthelowendofthehighteens.Now,theprimarydeltathereisthecaremanagementgainthatwerecordedinthefirstquarter.Now,peelingbackfromthat,wecontinuetobepleasedwiththegrowthwe'reseeinginourpayerproviderbusinessesandtherelayconnectivitybusinesses.ButofcoursethegrowththereishavingtobeoffsetbyourdecisiontoexittheHorizonHospitalsoftwarebusiness.Sothatwillhaveanimpactontechnologysolutions.
JohnHammergren (Chairman,President&ChiefExecutiveOfficer):
Buttoreinforce...
GarenSaraf ian (Analyst-CitiInvestmentResearch):
(inaudible)
JohnHammergren (Chairman,President&ChiefExecutiveOfficer):
Butobviouslytoreinforcewhatyou'resaying,we'repleasedwiththemargintrajectoryofthatbusinessandwe'repleasedwiththeprogresswe'vemadeintakingasmuchcostoutaswecanaswetakethatHorizonbusinessdownoverthenextcoupleofyears.
Operator :
We'llgonexttoEricColdwellatBaird.
CompanyName:McKessonCorpCompanyTicker:MCKSector:ServicesIndustry:Wholesale
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EricColdwell(Analyst-RobertW.Baird&Co.,Inc.):
Hey.Thanksverymuch.John,IthinkIgenerallyagreewithyourviewsonbrandedinflationandclearlybrandinflationisnotasimportantasitwasmorethanadecadeagoundertheoldindustrystructure.ButIwouldloveitifyoucouldgiveusalittlemoredetailonsortofthecurrentstateofcontracts,maybethepercentofsalesthatarenotunderfeeforservicerelationships.Andthenunderfeeforservice,suspendingdisbelief,ifbrandedpriceinflationdidpareback,whatwouldhappenwiththemodel?Howwouldyouadjust?Whatkindofimpactmightwesee?AndI'llleaveitatthat.Thankssomuch.
JohnHammergren (Chairman,President&ChiefExecutiveOfficer):
Well,thanksforthequestion.Clearlyasyoumentioned,ifyougobackinhistory,therehavebeenlotsofdifferentmodelsthatMcKessonhasusedtocreaterelationshipswithmanufacturersthatarebeneficialtothemandbeneficialtoourselvesandcertainlyonwardtoourcustomers.Andovertimewehavecreatedrelationshipswiththemanufacturersthathavebeenlessdependentonpriceinflation,providingmorevisibilitytothemanufacturersonoursupplychainandworkinginpartnershipwiththemtogivethemthedataandthethingsthattheymightfindusefultothemintheirownproductionactivitiesandtheirgo-to-marketstrategies.Andinreturn,they'vegoneandpaidusforthatworkinthesefeeforserviceordistributionrelationshipscontractsthatthey'vehavesigned.
Thathasfranklytakensomeofthetopofftheopportunityonpriceinflationandtakensomeofthebottomoffonpriceinflationrisk,sothebandofperformanceisprobablycertainlyalittlemoreforecastable.Andwe'vealsotalkedinthepastthatroughly80%plusorminusofourbusinessareinstructuredarrangementsthatarefeeforservicetypeofdialogueorcertainlymoreconstructedanddocumentedthantherestofthebalance.SothatalsohashelpedreducesomeofthevolatilityyoumightfindinthisparticularleverofprofitabilityinsideofourP&L.
EricColdwell(Analyst-RobertW.Baird&Co.,Inc.):
Withtheyoutalkaboutthe80%,andIthinkthatisaprettyconsistentmessage.Isthe20%isacertainpercentageofthatyourSpecialtybusiness,orareyoutalkingcoretraditionalbrandatretailwhenyougivethe80%figure?
JohnHammergren (Chairman,President&ChiefExecutiveOfficer):
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
CompanyName:McKessonCorpCompanyTicker:MCKSector:ServicesIndustry:Wholesale
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begintoreformatourrelationshipwithourcustomersandoursupplierpartnersandwe'dfindwaystocontinuetogrowourbusiness.AndsoIthinkthatthatlevelofconfidenceiswhatyoushouldbegettingfromustoday.
EricColdwell(Analyst-RobertW.Baird&Co.,Inc.):
Okay.Thanksverymuch
JohnHammergren (Chairman,President&ChiefExecutiveOfficer):
Yes.
Operator :
We'llgoinnexttoGeorgeHillatDeutscheBank.
GeorgeHill(Analyst-DeutscheBankSecurities):
Hey,goodmorningguys,andthanksfortakingthequestion.John,appreciateallthecommentsaroundkindoftheRiteAidannouncement.Iguess,butthecompanyseemsalittlebitsnake-bitbyindustryM&Alately.IguesseitherJohnorJames,canyouguysquantifytheriskaroundtheRiteAidrelationship?AndJohn,Iwouldaskasyouthinkaboutindustryconsolidationstrategically,doyoufeellikethecompanyneedstobemoreaggressivethanithasbeenhistoricallyanddoesitchangetheriskprofileatallforhowyouthinkaboutacquisitions?
JohnHammergren (Chairman,President&ChiefExecutiveOfficer):
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.
JamesBeer (ChiefFinancialOfficer&ExecutiveVicePresident):
CompanyName:McKessonCorpCompanyTicker:MCKSector:ServicesIndustry:Wholesale
EventDescription:Q22016EarningsCallMarketCapasofEventDate:42.22BPriceasofEventDate:186.25
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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
JohnHammergren (Chairman,President&ChiefExecutiveOfficer):
Thanksforthequestion.Clearlyourjobistofindwaystogrowourbusinessandtodoitintelligentlyandtodoitinarisk-boundedwayandtodeploycapitalintelligently.SoIthinkournumberonepriorityistodeploycapitalinplaceswherewehaveabaseandanexpertiseandwhereit'snotacompletelynewlegofthestool,butit'ssomethingthat'sadditivetowhatwe'recurrentlydoing.So,Ithinkweevaluateeverythingandclearly,everyhealthcareoralmosthealthcaredistributionopportunitythatcomesonthemarketcomesthroughMcKessonandmanyofthemwepassonbecauseit'snotstraightupouralleyorwebelievethatthepriceistoohigh.Butotherwise,we'regoingtostayprettyfocused.
JamesBeer (ChiefFinancialOfficer&ExecutiveVicePresident):
Yes,andI'djustaddintermsofthebreadthofourbusinesses,whetherit'sCanada,Europe,Specialty,Medical-Surgical,TechnologySolutions,andthereareavarietyofbusinessesthatwehavewheretherewillbeopportunitiesthataredownthemiddleofthefairway
JohnHammergren (Chairman,President&ChiefExecutiveOfficer):
Exactly.We'vejustbeentoldthereareafewmorequestionspendingsowe'regoingtorunthiscalljustalittlebitlaterforthoseofyouthathavetimetodothat.Sowe'llgoontothenextquestion.
Operator :
Andwe'llmovetoCharlesRhyeeatCowen.
CharlesRhyee (Analyst-Cowen&Co.):
Thanksfortakingthequestionhere.John,James,JohnIthinkinyourremarksyoutalkedaboutbiosimilarswithNeupogenbeingthefirstlaunch.Justcuriouswhatyou'veseenintermsoftheuptakeinthatproductandhowthatmightbeshapingyourviewsonbiosimilarsinthefuture.
JohnHammergren (Chairman,President&ChiefExecutiveOfficer):
Well,thankyouforthequestion.Clearlybiosimilarsaregoingtobeanimportantaspectofourbusinessportfoliogoingforwardandwewillcontinueto,Ithink,seebenefitofthesebiosimilarlaunchesoverthecomingyears.Astothespecificlaunchthatwe'verecentlyseen,itfranklyhasnotgottenatonoftractionyet,atleastnotinourbusiness,andit'sbehavingmuchmorelikeabrandedproductthanitisatypicalquicktosubstitutegeneric.Atsomepointthesebiosimilarsprobablywillbemoresubstitutablebecausetheirclinicaleffectivenessandefficacywillhavebeenproveninsomefashion.Andthat'swherewe'llhavemoreopportunitiestomakefastertransfersoftheproduct.Andwethinkwe'reverywellpositioned,particularlywhentheproductarerightdownthealleyofcommunityoncologyandwecanuseourU.S.oncologynetworktohelpvalidatetheefficacyoftheproductandthenmovemarketshareveryquickly,eitherkeepthemarketsharewiththeoriginatorormoveittothebiosimilartotheextentthatthey're
CompanyName:McKessonCorpCompanyTicker:MCKSector:ServicesIndustry:Wholesale
EventDescription:Q22016EarningsCallMarketCapasofEventDate:42.22BPriceasofEventDate:186.25
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replaceable.Sowewilllookforopportunitiesgoingforward.
CharlesRhyee (Analyst-Cowen&Co.):
IfIcouldjustfollowuptherethough,rightnowthenwouldyousaythemarginprofilealsolooksmorelikeabrandthanageneric?Andthenintermsofsubstitutabilitythough,itseemslikeinthebiosimilarpathwaythatitdoesn'thavethesametypeofA-Bsubstitutabilitythattraditionalgenericsdo.Doyouthinkthatregulationshavetochangetoallowthatfordistributorstoreallybenefitfromthatabilitytomoveshare?Thanks.
JohnHammergren (Chairman,President&ChiefExecutiveOfficer):
Well,itisbehavingmorelikeabrand,andevennotonlyintermsofthewayit'sbeingtakentomarketanditspricingstructure,butalsointhewaythatthephysiciansareviewingit.Ithinktheywanttohaveadiscussionabouttheproductitselfasopposedtoacceptinganautomaticsubstitutionbyapharmacyorbyawholesaler.Idobelievethough,overtime,thatsubstitutabilityquestionwillbecomelessandlessaquestionandtotheextentthatwecanhelppeoplecreateevidencethatsupportstheA-Binterchangeabilityortherapeuticsubstitution,thenwecertainlywillpursuethat.Inthemeantimethough,welookatthatasalong-termpriority,andIwouldn'tconsideranyoftheupandcomingpendingthingsinthenextsixmonthstoayearasbeingblockbusterbigsuccessesforus,atleastrightoutofthegate
CharlesRhyee (Analyst-Cowen&Co.):
Great.Thankyou.
JohnHammergren (Chairman,President&ChiefExecutiveOfficer):
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?
JamesBeer (ChiefFinancialOfficer&ExecutiveVicePresident):
Well,we'recertainlypleasedwiththefinancialflexibilitythatwehave.AndI'llstartoffbyjustreallyremindingyouoftheportfolioapproachthatwehavetocapitalallocation.Andwithinthatportfolio,internalcapitalexpendituresandM&Aarethefirstandsecondpriorities.Socertainlywanttobeclearaboutthat.Butgiventhedegreeofflexibilitythatwehave,obviouslywe'realsogoingtolookregularlyatwhatwethinkisarealisticM&Apipelineintheshort,mediumterm.Contrastthatagainstourcashbalanceandourcomingprojectedfreecashflowandmakeanassessmentastowhetherthere'sexcesscashavailableforsharerepurchases.Andyou'veseenustakethatactionintermsofbuybacksnowbothinthislastQ2andinthefourthquarterofthelastfiscalyear.
CompanyName:McKessonCorpCompanyTicker:MCKSector:ServicesIndustry:Wholesale
EventDescription:Q22016EarningsCallMarketCapasofEventDate:42.22BPriceasofEventDate:186.25
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Sowe'repleasedthattheboardauthorizedthenew$2billionauthorizationforsharerepurchases.Soitfeelsasthoughwehavetheliquidityandtherightportfolioapproach,therightflexibility,tocontinuetodeploycapitaleffectivelyonyourbehalf.
EricPercher (Analyst-BarclaysCapital):
Andthechangein,ortheelementthathasimpactedguidancewasthe$500millionbeingdoneearlierintheyear.There'snochange?The$2billionissuedisnotimpliedtobeusedinyourcurrentguidance?AndIguessitalsobegsthequestionwhenyoulooktoEurope,arethere$10billiondeals,oraremostofthese$2billion,$3billion,ormuchsmaller?
JamesBeer (ChiefFinancialOfficer&ExecutiveVicePresident):
Well,intermsoftheweightedaveragesharesoutstanding,thefull-yearnumberthatImentionedwas234million.Embeddedwithinthatisthe$500millionbuyback.Thereisnothingassumedaboutprogressagainstthenew$2billionauthorization.Intermsofthetransactionsizesavailabletous,Iwouldn'twanttoreallycommentonanythingspecifictoM&A.You'veseentherecentdealsizeswithUDGandSainsbury's.Butthere'sawiderangeofopportunitiesacrosstheverybroadsetofbusinessesthatweoperate.
EricPercher (Analyst-BarclaysCapital):
Thankyou.
Operator :
We'llgonexttoDaveFrancisatRBCCapitalMarkets.
DaveFrancis (Analyst-RBCCapitalMarkets):
Hi.Thanks,andcongratulationsonasolidquarter.Justarealquickone,John.Biggerpicture,Iappreciatethecommentaryonwhatyou'reseeingfrompricingtrendperspectiveacrossboththebrandandgenericbaskets.Canyoutalkalittlebitaboutwhatyou'reseeingvolume-wiseintermsofanymeaningfulchangeinthemarketplaceupordowndomestically?Isthereanythinggoingoninthebroadeconomythat'simpactingvolumetrendsasyou'reseeingthemintheU.S.business?Thanks.
JohnHammergren (Chairman,President&ChiefExecutiveOfficer):
Thanksforthequestion,Dave.Ithinkweseethingsprettymuchinlinewithwhatwehadexpectedfortheyearonavolumebasis.Andclearlyyoucanseethatthenumbersthatarebeingpostedbythevarioussourcesastoprescriptionvolumes.Ithinkwedon'tseeanymajorchanges.Thereareperhapssomechangesthatyoumightseeinthephysicianofficeperspective,butIwouldsaythatthebiggestchangeortrendthatwecontinuetoseeisthatsomeofourlargercustomersaregrowingmorerapidlythantherest.Andinparticular,ourlargestmailcustomerhashadprettynicegrowth.Andsothatputsalittlepressureonourmarginstructure,particularlyontheSpecialtyproductsthatgothroughthatparticularcustomer.Butotherwise,everything'sprettymuchinlinewithwhatwe'danticipated.
DaveFrancis (Analyst-RBCCapitalMarkets):
Verygood.Thankyou.
JohnHammergren (Chairman,President&ChiefExecutiveOfficer):
Yes.
CompanyName:McKessonCorpCompanyTicker:MCKSector:ServicesIndustry:Wholesale
EventDescription:Q22016EarningsCallMarketCapasofEventDate:42.22BPriceasofEventDate:186.25
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Operator :
AndournextquestioncomesfromDavidLarsenatLeerink.
DavidLarsen (Analyst-LeerinkPartners):
Hey,guys.Canyoutalkaboutthegenericinflationcomp?Like,whendoyouexpectthattostarttoease?Soinflationrateswereobviouslyveryhighincalendar2014.They'vepulledinoverthepastcoupleofquarters.Sonextyear,andjustanygeneralthoughts.Wouldyouexpectthecompforgenericinflationtoeaseabit?
JamesBeer (ChiefFinancialOfficer&ExecutiveVicePresident):
Well,genericinflationisnotforecastableandwecertainlydon'thaveanyinsightfromwhatthemanufacturersareplanningtodointheirbusinesses.We'veupdatedourassumptionforthebackhalfofthisfiscalyear.Andofcoursewereallywanttotakeastepbackandemphasizehowgenericpriceinflationisjustoneofanumberofvariablesthatdriveagainthisbroadsetofbusinesses.SoIwouldurgenottohaveanoverfocus,ifyouwill.It'sanimportantissue,asJohnwasmentioningearlier.Weincludedinourinitialannualguide,andweupdateyouastheyeargoesalong.ButIreallythinkwewanttokeepthisinperspectiveintermsofthebroadnumberofdriversofourbusinesses.
DavidLarsen (Analyst-LeerinkPartners):
Okay.Great.AndthenjustanyquickthoughtsonTarget?HaveyouhadanydiscussionswithCVSaroundTargetandthataccount?
JohnHammergren (Chairman,President&ChiefExecutiveOfficer):
Well,unlessyou'veheardsomethingdifferent,we'venotheardoftheTargettransactionclosing,andIwouldimagineourconversationswithCVSwouldbemoreworthwhilepostthatprocessthantoday.SoI'mnotreallypreparedtocommentorspeculateonitotherthantosaywe'recontinuetoservicetheTargetbusinesswithallofourfocusandwewanttomakesurethosestoresareingreatshapeprethetransitiontoCVSownership.
DavidLarsen (Analyst-LeerinkPartners):
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.
JohnHammergren (Chairman,President&ChiefExecutiveOfficer):
Well,justtomakesurethatI'mclear,thatourCVSrelationshipiswithboththemailaswellasmanyof
CompanyName:McKessonCorpCompanyTicker:MCKSector:ServicesIndustry:Wholesale
EventDescription:Q22016EarningsCallMarketCapasofEventDate:42.22BPriceasofEventDate:186.25
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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.
JohnHammergren (Chairman,President&ChiefExecutiveOfficer):
No,that'sokay.IjustsaidIwanttomakesureeverybodyelselisteningwasclearonit,Ross.Ithinkwehavetimeforonemorequestion.
Operator :
Andwe'lltakethatfromJohnRansomatRaymondJames.
JohnHammergren (Chairman,President&ChiefExecutiveOfficer):
John?
Operator :
Mr.Ransomyourlineisopen.Pleasegoahead.
JohnRansom(Analyst-RaymondJames&Associates):
Hi.Sorry.Tryingtomulti-taskhereanddoingitverypoorly.I'msorryifthishasbeenasked,buttheRiteAidcontractexpiresin2019.Isthereachangeofcontroloutontheotherside?Ordoyouexpectthattoremaininplacethrough2019?
JohnHammergren (Chairman,President&ChiefExecutiveOfficer):
Well,wedon'ttalkspecificallyaboutthetermsofouragreementsotherthanwhatwesayatthebeginningofthem.AndIthinkthatthecommentImadeinanswertothequestionearlierisweplantocontinuetoservetheirbusinesswithallofoureffortandmakesurethatthey'reverysuccessfulastheycontinuethroughthistransactionprocess.
JohnRansom(Analyst-RaymondJames&Associates):
Okay.That'sallIhad.Thankyou.
JohnHammergren (Chairman,President&ChiefExecutiveOfficer):
Allright.You'rewelcome.
CompanyName:McKessonCorpCompanyTicker:MCKSector:ServicesIndustry:Wholesale
EventDescription:Q22016EarningsCallMarketCapasofEventDate:42.22BPriceasofEventDate:186.25
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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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