麥卡遜 (MCK) 2001 Q4 法說會逐字稿

Good morning and thank you all for holding. Welcome to the McKessonHBOC fourth quarter earnings call. I would like to remind all parties that their lines have been placed on a listen-only mode until the question/answer segment of today's conference. This conference is also been recorded at the request of McKessonHBOC. And now, I would like to turn the call over to your moderator today Mr. Larry Kurtz, Vice President of Corporate Communication and Investor Relations. Thank you. Mr. Kurtz you may began.

Thank you, operator. Let me add my welcome to the McKessonHBOC Incorporated fiscal 2001 Q4 conference call for the financial community. During the course of this call, we may make forwarding looking comments. Please see our press release and SEC filings for full discussion of the risk factors associated with those comments. As is our practice, this call is open to both the public and the press through our webcast and is being taped for replay on our website and call-in number. With me today are John H. Hammergren, President and CEO of McKessonHBOC; William R. Graber, CFO; Paul C. Julian, President Supply Management Business; and Graham O. King, President Information Technology Business. The format of the call will be introductory comments by John, followed by financial review by William, and then some brief comments from Paul and Graham, after which we will open the call to your questions. I hope that you all received our press release and the attached tables. We also have available income statements by quarter for the 2000 and 2001 fiscal years that reflect the reclassification of iMcKesson into the supply management and information technology segments. The tables attached to the release include the quarterly and fiscal results for the iMcKesson unit as both a separate segment and reclassified. However, the discussion today, unless otherwise noted, will treat iMcKesson as a separate segment since that's the way you have been accustomed to seeing the numbers this year. When we get to the Q&A, we ask that you limit yourself to one question and a followup. If you have more questions, please return to the queue. If we don't get your question on the call, please call me later. However, because we know we have a lot to cover, we are extending our usual one-hour call by an extra fifteen minutes. We plan to end this call at about 12Eastern Time. Thank you all. Here is John Hammergren.

Thanks, Larry, and thank you for joining us today. I am pleased to report that McKessonHBOC had very strong performances in both our Supply Management and Information Technology businesses in the fourth quarter. At the beginning of the fiscal year to execute the supply management strategy put in place over the past several years, we promoted Paul Julian to head this business and created a focused organization and we rebuilt much of the management team, aligned goals, and incentives. Paul and his team did an outstanding job. When we started the fiscal year, we had a goal of achieving strong double-digit operating margin improvement with revenue growth in line with the market. For the quarter, the supply management Ioperating margin expanded 61 basis points and we had very solid top line growth of 17%. For the full year, the operating margin expanded 27 basis points and revenues were up 13%, roughly in line with the market. In the Information Technology segment we achieved our goal of stabilizing this business and with the first revenue increase year over year in more than seven quarters and a 37% increase in bookings, this business is coming back. Graham will go into more detail about some of the key metrics for this business but as you will hear, we are making great strides in almost every area of our business scorecard. We have assembled the best management team in the business and we are investing heavily in product development to ensure we retain our market leadership position. In the fourth quarter, Information Technology segment revenues were up 18% over the third quarter and 7% over the fourth quarter a year ago lead by year over year growth across the board in software, service, and hardware revenues. Backlog was up 16% compared to a year ago driven by improved execution and increased demand for our software solutions and related services. During the quarter, we integrated the iMcKesson's Provider Solutions group back into this business where it will play an important role enhancing our clinical strategy as we expand our investment in this area. As a result, our earnings per diluted share before special items with 31 cents, up 41% compared to fourth quarter a year ago. Looking ahead to apply FYO2 the fundamentals driving our business internally and externally remain very positive. The pharmaceutical market continues to grow rapidly in the 13% range and we are the only distributor that is not involved in a merger or restructuring which should create additional market opportunities for us. We expect that that the pricing of branded pharmaceuticals will remain strong which should provide continued investment/buying opportunities for the corporation. The number of generics entering the market combined with the emphasis on these products to control drug cost creates an additional utilization with benefits to both our customers and McKessonHBOC. We have a powerful proprietary generics program and we expect great value to be created for the company in this part of our business. The fundamentals are also positive for information technology. Our customers continue to be under pressure to reduce costs and improve quality, in particular to reduce medical errors. The public is demanding better quality and lower cost care. With proven return on investment for our software products, increased use of new information technology solutions gives providers a clear path to solving their challenges. We have the largest installed base of the customers and continue to bring to market product innovations such as Horizon WP that leverage their existing investments. Therefore, entering this fiscal year we have confidence in the strength of our markets, the position of our businesses, and the quality of our management teams. In Supply Management, we expect revenue growth in the mid teens, in line with the market adjusted for our mix of business. We continue to make progress achieving efficiencies in the operations and asset management areas of this business, which we will drive continued improvement in the financial performance of this business. As reclassified to include some the iMcKesson business in our supply management results, the operating margin was up 14 basis points this year. We expect significant improvement again in fiscal 2002 although this year's performance will be a challenge to match. We expect information technology revenues to increase at least 10% and the expansion of its profit margin driven by the continued growth of software revenues, improved operating deficiencies, and net cost removed from the iMcKesson business and infrastructure. As I mentioned, we are focused on building the company for a long-term shareholder value not only this year but into the future. To position the company for sustained growth, we are expanding our investments in necessary customer and business infrastructure and for product initiatives to develop solutions for supply chain, medication management, and clinical information needs. These investments will be partially offset by the elimination of approximately $20 million in goodwill amortization associated with the iMcKesson businesses in fiscal 2001. We believe that a properly scaled information technology business should achieve 10% to 15% operating margins. Last year, including the iMcKesson operations, our information technology segment was breakeven. Our goal for fiscal 2002 is to return the operating margin in the information technology segment to its level of last year prior to our segment reclassification for fiscal 2002. William will go into more detail about the charges recorded in the quarter across the company. A portion of the charge relates to iMcKesson restructuring, which eliminated overlapping development in functional areas and applied resources to focus on more near term clinical opportunities in our core information technology base of hospital and health systems customers. The charge in the information technology business should not distract from the continued progress of this business under its current leadership since it relates to contracts written prior to July 1999 for a relatively small group of customers and products. As Graham will discuss with you shortly, we have now have a strong portfolio of new products and services which will continue to build momentum in this important business. A small portion of the charge came from the focusing of our strategy for the pharmaceutical services business. This charge covered primarily severance and other costs for the shut down of unprofitable businesses and related overhead expenses that were reported in our supply management segment. In summary, the company is at the center of the healthcare agenda in pharmaceuticals and information technology. We are focusing on executing on these opportunities and strategically positioning the company through ongoing investments to improve operating performance and deliver sustainable growth overtime. Now, let me turn the call to our Chief Financial Officer, William Graber.

John. Before I take you to our financial results including the special charges, I would like to make sure that everyone understands the makeup of our press tables. Schedules 1-2 and 2-2 show segment results on the old basis with iMcKesson shown as a separate segment. Schedules 1-3 and 2-3 show the impact of reclassifying the iMcKesson businesses into the appropriate segments; supply management and information technology or corporate. All of my comments will refer to the financial results that include iMcKesson as a separate segment as we have presented in previous quarters. As John said, our fourth quarter results were very strong. Earnings per share before special charges were 31 cents compared to 22 cents during last year's fourth quarter, also before special charges. Special charges of 93 cents per share when combined with our normalized operations yielded a loss of 62 cents per share for the quarter. For the year, we recorded diluted earnings per share of 99 cents before special charges and a loss of 17 cents after special charges. Let me go through the specifics of the special charges first and then I will talk about our more normalized fourth quarter results. The $359 million in special charges carried only a 26% tax benefit since almost one-third of the charge was nondeductible goodwill. The charges were primarily centered around the iMcKesson business and the Information Technology business with the largest set of charges occurring in the former iMcKesson segment, totaling $184 million. One hundred and sixteen million of this consisted of goodwill and intangibles from two acquisitions. The amortization of these items was amounting to just over five million per quarter. Twenty nine million of the iMcKesson charges were for severance and contractual obligations for individuals that wouldn't be required after the restructure. Twenty three million of the charge was for write-downs of iMcKesson investments that are permanently impaired and required an adjustment to fair value. The remaining $16 million of charges included in the iMcKesson segment were for other exit costs including costs for termination of certain contracts. The next largest charge in the quarter was in Information Technology and totaled $161 million. This charge covers estimated cost for customer contract disputes associated with pre July 1999 ITB contracts for software and services. You will recall that we recorded charges for contract disputes in this business in the last fiscal year. Those charges were based on the best information available to us at that time. Since that time, we have developed new products and in recent months I have discussed them with a number of affected customers, which represent a subset of our installed base. Many of these customers are satisfied with the majority of their products but they feel that some of their expectations have not been met. Based on those discussions, we have revised our assessment of the cost required to settle these issues. Based on current information, we believe that these estimates will cover our future exposure. We expect the resolution process to be substantially completed over the next 18 to 24 months. Special charges in the supply management segment totaled six million and relates primarily to a restructuring of our business within the pharmaceutical services business. Finally, the seven million of special charges at corporate relates primarily to a fair value adjustment to corporate venture investments. We estimate that about $235 million of the special charges are non-cash charges. So, about a $125 million of the special charges are cash charges and these would be offset in part by the cash-tax benefits. Lets now move on to our more normalized operating results. First, Supply Management, revenues of almost $8.1 billion or 17% ahead of last year's $6.9 billion. If sales to customer warehouses are included, revenues are up 23% from last year. Operating profit of $222 million is up more than 50% from a year ago and demonstrates the significant progress across a number of business processes. Paul will speak more about this in a few minutes. Our operating margin percentage of 275 basis points was up 61 basis points from last year and allowed us to show a 27 basis point gain for the year. Obviously, we have made significant strides during the past twelve months and continue to look for additional improvement. In our Information Technology segment, revenues of $236 million were seven percent above last year's fourth quarter and 18% above third quarter levels. Software revenues were up 12% for the quarter and although down five percent for the year, we have deferred at March 31st more than $45 million in software revenues in the future quarters due to the previously announced change that we have implemented in contract methodology. One-time software bookings of $36 million in the quarter were up 12% for the quarter and are up 37% for the year. Operating profit of $12 million was up 17% from a year ago. The backlog grew to a level of just under $1.6 billion, up $60 million during the quarter and represents a 16% increase from backlog levels of a year ago. All categories of the backlog, with the exception of hardware, showed increases over the last year. The iMcKesson segment is been reported for the final time. Revenues of $74 million were up 11% for the quarter. The operating loss of $32 million reflects significant reserve strengthing in the former iMcKesson businesses during the fourth quarter. Corporate cost and interest expense are essentially at last years level but I should add that we are reporting a three million dollar loss in the quarter and five million for the year for our share in the equity loss of the Health Mexus venture. Fiscal 2002 corporate cost will be impacted by the infrastructure investments, continuing Health Mexus investment, and higher benefit costs. Looking at the balance sheet, cash and marketables of $446 million are up $93 million from last quarter although down from last year's $606 million. Capital expenditures of $159 million are up modestly from last year's spending levels of $145 million. Receivables are up from a year ago due to the revenue increase and include no receivable sales at the end of this year's fourth quarter or at the end of last year's fourth quarter. Inventories of $5.1 billion are up more than 20% from a year ago and reflect the fourth quarter volume increase and a more aggressive forward buying program offset by a commensurate increase in payables. The balance sheet remains in great shape. Net debt to net capital is 18% below last quarter's rate of 20% but above last year's ending rate of 15% but I would remind also that we had a significant tax payment this year on the gain on sale of the Water Products business, a transaction that occurred in the prior year. If that tax payment had occurred in the year of the transaction, we would have lowered our net debt to net capital rate by more than three full points this year. Operating cash flow generation of $353 million represented a significant improvement over last year even after adjusting for last year's $400 million reduction in the AR sales program and this year is also impacted by the above-mentioned tax payment. All in all great progress on the fundamentals including working capital management and we are well positioned as we begin our next fiscal year. The iMcKesson businesses have been integrated back into our two core segments and they are also positioned to add more value going forward. Before I turn this over to Paul to discuss some of the highlights of the Supply Management business, I would like to reaffirm the points that you heard from John about fiscal year 2002 expectations. We expect revenue growth for Supply Management in the mid teens range, in line with our customer base. We expect Information Technology revenue growth to be at least ten percent. We expect continued margin expansion in Supply Management, although it will be challenging to match the improvement of fiscal 2001. Margins in Information Technology, including the iMcKesson businesses that are now included, should increase as we continue to expand software sales and benefit from the iMcKesson cost rationalization partially offset by reinvestment in infrastructure and new product initiatives. Given all those factors, we expect strong financial results during our next fiscal year but first half results will be impacted by typical earning seasonality in our pharmaceutical distribution business as well as the continued to wind down of our iMcKesson expense structure that isn't covered by the special charge. With that, let me turn the call over to Paul C. Julian, President of our Supply Management Business.

Thanks, Bill. I am pleased to be here to further review with you a strong performance by McKessonHBOC Supply Management Business in fiscal 2001. When John put me in charge of this business at the start of the year, we believed we had the opportunity to significantly improve the operating margin of the pharmaceutical distribution business by focusing on a few key leverage points. As a first step, we reorganized the management structure to create a team that was accountable and had lined incentives to achieve strong financial results. Our team immediately focused on the areas where we believe we could affect major near term improvements to operations and our profit while still positioning the business to continued margin expansion and solid growth in the future. Here's what we did. We focused on more effective investment activities and placed more financial discipline in the process and we were very successful with both strategies. We focused on improving our back office operations supporting the pharmaceutical business. All the metrics improved significantly this year. We focused on increased penetration for generics, which we achieved by taking advantage of the number of pharmacy outlets buying our generic products. There are now more than 7,000 customers purchasing our select generics and a total of 20,000 that are purchasing generics through some McKessonHBOC proprietary program. This not only produced financial benefits in fiscal 2001 but also positioned us well for the influx of branded pharmaceuticals scheduled to come off patent the next several years and the increasing emphasis on these drugs to control costs. We also introduced our Supply Management Online Ordering Technology, which consolidates the many web-based technologies we have been providing to our customers into a single offering. I am pleased with the increase in volume we are seeing moving through this site and we continued our focus on efficiencies in our DC Network which we achieved by implementing a series of improvements from our six sigma effort. Implementation of closed loop distribution which further automates inventory tracking in our system and the net closure of two more DCs. With annual revenue growth of 13%, we are getting great leverage on our fixed cost structure. We achieved our growth in pharmaceutical distribution through growth in our customer base, especially the hospital segment. We positioned the business for strong revenue growth next year also with the recent addition of high quality business such as OTN, Caremark and Randall which more than makes up for the loss of PCS business following its sales to Advanced Paradigm in both growth and operating profit. Let me expand a bit on the OTN business. We have had a small but rapidly growing oncology distribution business, Medpath, but this new agreement significantly expands the size and scope of our oncology product distribution. OTN had been managing the inventory itself and using Livingston, a division of UPS for logistics. We signed a five-year agreement to take over responsibility for both the purchasing and warehousing of product inventory and the logistics of delivery to OTNs customers. Both OTN and McKessonHBOC believe that this will help better serve the OTN customer base of community oncologists by streamlining the supply chain process. Like the Randalls' volume, it is another example where we have expanded our revenues without taking share from a competitor through our unique business model. Our Canadian business, Medis, had very strong growth with revenues up 31% in fourth quarter and 19% for the full fiscal year. We continue to be very well positioned in this market and are exploring ways to bring more of our value added offerings such as hospital and retail pharmacy automation through our Canadian customer base. This year we sold our first ROBOT Rx system to a Canadian hospital customer. Our automation business continues to expand its install base of robots, AcuDose cabinets, AcuScan bedside scanning technology and Supply Scan technology for tracking medical, surgical product movement in the hospital. We doubled the number of AcuDose cabinets installed. We have a dozen sites using the AcuScan product and have Supply Scan installed at more than 70% of HCA hospitals where they believe it has been an important contributor to their increased operating efficiency. These technologies are a key differentiator and play an important role in selling into the institutional segment such as innovation numbers. As John said earlier, the market fundamentals for our supply management business are quite positive and I believe we will continue to gain leverage in our operations, which will improve both performance for the customers and the financial results of our business. I recognize that expectations are high to continued strong results from Supply Management. They were high this year and we delivered and I am confident that our people can deliver again in fiscal 2002. I look forward to answering your questions but now I would like to turn the call over to Graham King, President of Information Technology business.

Thank you, Paul. Let me start by reiterating what John and Bill said about the Information Technology business. We have made great progress over the past year in virtually every area of our business. Today, the Information Technology business is in vastly improved shape. Our management team is in place and outstanding. Customer and employee satisfaction are dramatically improved. Sales are up. Overall revenue and operating income are higher. With better quality, we have increased our backlog. By all measures we are doing well. Let me turn now to the specifics of our progress. Over the past year every ITB employee has been focused on four core goals; customer satisfaction, employee satisfaction, accountability, and performance. The results have been very positive. Customer satisfaction is the highest it has been in two years and by all accounts improving. Employee satisfaction is higher than the industry average in 13 of 14 critical areas and attrition is down by 25% over the prior year. Our support and development metrics have improved dramatically. We have achieved significant reductions in support backlog in aging since this time last year. Overall, support backlog is down 55% and cases greater than 90 days are down by 88%. We are also making outstanding progress on the development side of the business. In the past six months we have introduced several major products. Horizon WP Position Portal, Horizon WP Passport, Horizon WP Care Record, Horizon WP Care Alerts, and our Pathways Surgical Manager Solution. All of these products have met initial availability and quality metrics and have been quite positively received. We have also stabilized Paragon and reintroduced it to the market. In summary, we have made excellent progress in stabilizing older products and introducing new ones and you can expect to see some additional and very significant clinical announcements this summer. Now let me turn to our financial performance. In the third quarter we turned around a seven-quarter decline in revenue and in the fourth quarter we posted nearly an 18% sequential increase with gains in every area, software, services, and hardware. Our backlog grew by 16% compared to where we ended last year and it is now close to $1.6 billion. We don't provide funnel data but it has growing significantly and together with our backlog, indicates strong future revenue streams, which is an excellent subway to our next topic, our future prospects. The fundamentals in our market are positive and improving and we are the best-positioned company in the health care pharmatics technology industry with a strong line of offerings to the largest and a growing base of installed customers. Demand for our products and services is increasing due to the needs to improve patient care reduce labor and supply costs and deal with a shortage of skilled personnel. We have seen this reflected in both our product and service segments. As you might expect, given the needs of our customers, clinical solutions are in an area of very strong growth. Over the past year, we have increased sale by more than a 150% lead by our flight ship clinical solutions, Pathways Care Manager. We signed contracts representing more then 40 new facilities in fiscal 2001 and 73 facilities are in the process of implementing one or more Pathways Care Manager modules.

Many of these are add-ons, indicating customer satisfaction with the value of the solution, which is more widely used then any other point of care clinical system in the industry. Building on the success of Pathways Care Manager, last September we launched Horizon WP, our web-powered family of products and services. This was the first major new product line launched in several years. We started in a clinical area with the Horizon WP Position Portal. It has been extremely well accepted. More than 250 physicians at Memorial Health in Savannah, Georgia, have access to the portal and a recent survey shows they are thrilled with it. Eighty-nine percent say the system is easy to use. Eighty-three percent say it saves them time and 91% say they are making decisions with more information than in the past. We have also successfully deployed the Horizon WP Care Record products at several types including one of largest health system customers. At this customer, we converted 500,000 patient records, 853,000 encounters, and 33 million results for a multi-facility, longitudinal clinical repository. With the launch of Horizon WP Care Record, we now have a common clinical platform making our solutions more cost effective, easier to implement, and maintain. Word has started to filter out that we are preparing for a series of clinical announcements in June. These announcements will build on our current success and strengthen the current Pathways Care Management System to provide the most advanced and robust clinical system in the market place. One component of the announcement will deal with a new strategic relationship with Vanderbuilt University. But there is a lot more coming, stay tuned.

We think you will be impressed with the offering and our time to market plan. Before I leave my discussion of our clinical solutions, I would be remised on not commenting on the great success we are enjoying with our new pharmacy systems Pathways Med Manager. We acquired this number one ranked solution in October 2000 and it is a key component of our medical management solution, a solution that will help improve the patient's safety by reducing medication errors. We signed seventeen Pathways Med Manager contracts, covering 43 units in the past six months versus a plan that called for 42 units over twelve months so the product is off to a great start and the pipeline is full. We continue to roll out and lead the market for financial and administrative solutions including decisions support and contract management. Customers value these key solutions and they play a significant role in our revenue management strategy delivering very strong ROI. An example of this is our Pathways Contracts Management Product, which pays for itself very quickly. We have twelve customers who have each saved at least $1 million annually using this solution. One significant example, Wellmont Health Systems has saved $13 million just since January 1999. In closing, our results demonstrate that ITB back in a growth mode and with the largest install base and most comprehensive portfolios of products and services we're better positioned then any one in this industry to capitalize on the growing market momentum. As the market continues to develop, we believe our strengths will translate into more than our share of sales. That is why I too, am confident that we will see solid revenue growth in the coming fiscal year. And while we are still investing heavily in new products that will be important to growth at O2 and O3, we will make continued progress improving our operating margins and profit. Thanks. Here is John to summarize.

Thank you, Graham, and also Bill and Paul. Before I turn the call over to the operator for questions, let me say again how pleased I am with the significant progress the company has made this past fiscal year. We met our goals for growth and margin improvement in both supply management and information technology. In particular, we had very impressive performance in the supply management business and achieved our objectives of improved execution, enhanced profitability and efficient use of capital. Our balance sheet is in great shape and our focus on improved working capital management is paying off. We have excellent fundamentals in the company, a more focused business strategy, certainly a much stronger management team dedicated to meeting key objectives. Therefore, I am confident that we will continue to see progress in a fiscal 2002. Now, we would be happy with any question that you may have. Operator? Thank you, sir. At this time, if any participants do have any questions please press star, 1 on your touchtone phone. Questions will be taken in the order in which they are received. Also at this time, due to the number of participants on today's conference call, please limit your questions to one at a time. If you do have any more questions you may re-queue up after your questions is finished. Thank you. If you would like to ask questions please press star, 1. Glen Santangelo, you may ask your question and please state your organization.

Glen Santangelo with Salomon Smith Barney, Inc. Just have a couple of quick questions for Graham. Graham, if you could just discuss maybe the magnitude that Horizon WP might have had in the current quarter. I mean were the sales meaningful and if you can give us a sense for how many customers live you maybe have up and using the system and then as a followup if you could just comment on the margins in the ITB segment which, you know, deteriorated from the December quarter. If you could give us a sense for, you know, was that investment spending or what the might have been. Thanks.

Thank you.

Thank you. Horizon WP sales continue to go well. We converted 16 of the presales orders to contracts in the fourth quarter of the year. We expect to see that continue to grow. With regards to the margins, that was both an investment continuing to invest, and strengthening of our reserves that caused that downtick in the margin.

You talk about shelving your reserves, you said as well. There was significant reserve strengthening. What was that all about?

No, Glen, let me take that. Every quarter in all of our businesses, we review our reserves situations and when appropriate we will strengthen those reserves. In the fourth quarter of this year, in all of our segments we did strengthen the reserves. iMcKesson obviously showed up probably a little more than others simply because they were already in a loss position, but we did infact strengthen reserves in both the ITB segment as well as Supply Management.

Okay, thanks for the comment guys. Thank you. Marie Rossi, you may ask your question and please state your organization.

Yeah, it's actually Mike Fitzgibbons in for Marie with Morgan Stanley. Last quarter you guys had reported $335 million in assets in the iMcKesson segment and it looks like there were about a $170 million in asset impairments and charges. Of what's remaining, can you could talk a little bit about where it is going and how much of that will be affected by continued charges in the next few quarters?

Mike, when we take the special charges in the fourth quarter, they are based on everything that we had available to us in the fourth quarter. You know, sitting here today you know, if we expected special charges in the first and second quarter we probably would have recorded those already so we don't anticipate special charges going forward based on the information that we have available right now and as far as the asset base, part of that asset base, the old access health medical management base will be moved in the Supply Management Segment and a very small piece of that, of the asset base, would be in Provider Solutions and that would go into the Information Technology segments.

Okay just to clarify, in your press release there's a line that says that expenses associated with iMcKesson will continue in the first and second quarters of fiscal 2002.

this is the businesses associated with iMcKesson. You know, we took a special charge in the fourth quarter based on the severance and other charges that could be taken in the fourth quarter. There will continue to be some wind down expenses in the first and second quarters before we finally get the expense levels in those businesses down to the appropriate level.

And, Mike, this is John. I guess I want to reaffirm something that Bill just said. We have not "abandoned the iMcKesson businesses." What we have done is narrowed our focus and our strategy, impaired those assets which are impaired, Abitan and Medivation, that is what the write-off of the goodwill is, and there will be certain related cost like the ASP model they were following marketing this product to stand alone physicians out of the in the small doc offices in America that will need to wind our way out over the first couple of quarters and those expenses will be in our business until we are able to shut down those operations appropriately for some of those customers that are up and running in those businesses. But the goal over the long term is to migrate a lot of that technology into some of our solutions that we were building out of ITB and to use the power of the IDN relationship with physicians that are interactive of that IDN, to continue to empower a physician order entry and clinical results orders and viewing, etc., from physician sites outside of Acute Care hospital settings connected to the Acute Care system. So, I guess the point is is that there are ongoing assets at iMcKesson including over $300 million in revenue that we are going to sustain with ongoing investment. It just not going to be at the same level as it was as a standalone "company" the way we have established it before.

Okay, thanks very much. David Risinger you may ask your question and please state your organization.

Yes, calling from Merrill Lynch. Congratulations on the distribution upside this quarter. I just wanted to ask a little bit about the ITB area. If my numbers are correct, the deferred revenue on the balance sheet went down about $27 million from December, I think, which is at $405 million down sequentially to about $378 to $379 million. Would you comment on that and how that impacted the revenue line?

this is Bill. The deferred revenue in ITB actually, you know, sort of trends down after the December quarter. We bill all of the maintenance at one time in the third fiscal quarter and then as that becomes revenue it comes out of the deferred revenue line over the next four quarter and then it is reestablished again the next year.

It shouldn't been seen as a negative trend. It is just a natural seasonality the way we build that business.

Okay, that is great. Thank you very much. Steve Halper you may ask your question and please state your organization.

Thomas Weisel Partners. Could you talk about some of the things that you are doing between ITB on the Supply Management side in order to gain some synergies especially at the hospital level and, you know, what are the prospects, you know, in terms of that whole closed loop, you know, Supply Management focus?

Sure, you know I think clearly there are terrific synergies in both the Medication Use Process as well as the Supply Chain Management solutions that we have talked about. We mentioned a little about of the strength and the continued investment in both of the initiatives and the focus that our customers have for us to bring them solutions to detect those challenges. We are making significant progress on the medication side, in particular combining automation distribution services and the system implementations that Graham mentioned in his discussion. With the addition of our new pharmacy system having a completely integrated information solution that allows our physicians to make the product selection up front with appropriate data and then carry that product selection all the way through accurate dispensing to the point of care is a critical component of what people are looking for from a medication safety prospective. It allows us to streamline the supply chain by having this visibility from the point the script is written all the way through dispensing to improve the product flow in the system and make sure that is world class. Paul also mentioned in his comment, the conversation regarding Supply Scan, which is an information solution that integrates the demand at the patient care areas on the floor for our customers. It starts a replenishment cycle the moment that they begin to use the product on the patient so I guess the best way to describe is that when a nurse pulls an item out of the supply cabinet or the storage area or the cart that is on the floor and begins to use that on a patient not only do we immediately record that product pole into our patient billing systems and our Trend Star Decision Support System around the whole product usage prospective, we also begin the replenishment cycle right then and there. So the issue of cycle counting and the constant rework that has to go on in inventory is eliminated because it is all automated so it significantly reduces errors. It gives the customer better decision support data from which to draw product line performance and profitability information, and it reduces the amount of inventory necessary on hand to make that happen. So, those are two very significant examples of what we are making this happen and I mentioned also that we had implemented at the beginning of this year a Corporate Solutions Group which are a small group of highly seasoned, talented sales executives that are focusing on partnerships with our largest IDN customers and we significant results from that organization this year as well.

Thanks. Steve Sauvas you may ask your question and please state your organization.

Sure, it's with Goldman Sachs and Chris McFadden is here with me. I guess the first ITB site, Graham you have mentioned a little bit about Horizon WP and progress there. Can you give us a flavor for the pricing model on that and the revenue recognition policies on that product line?

Sure Horizon WP, first of all, speaks to a family of products, Steve, and I think your question goes directly to the Position Portal, which is the one that we have been discussing the most because it is prominent in our clinical strategy. There is a base price for a 100 doctors or less and that's around $500,000. Above that it is based upon a user-pricing model. The revenue is recognized at the time, over the time of the implementation of the system, which is generally three to six months.

Okay, and then on a distribution, Chris.

Yeah. As a followup, if I might, and congratulations, too, on the strong distribution results, as you think about your full year 2001 results can you kind of give us a sense of which contributed most meaningfully, you would think about the contribution from your investing and buying activities. Of course, the improvement in Carlton and also discipline on the contracting side relative to your sell side margins and how would you look for that mix to affect your fiscal 2002 results looking forward from today?

Well, Chris, let me start with the answer. This is John and I will turn it over to Paul in a second. You know, we did talk earlier on at the beginning of the year about our financial discipline and the fact that we were focused much more on balanced revenue growth and margin expansion. So, you can expect that theme to carry forward as we continue to grow this business. It is more important for us to get leverage in our operations and show improved use of capital and appropriate returns on that capital and continued progress in that margin expansion than it is for us to try to blow the lights out of revenue. Paul and his team have done a great job, really focused on all areas, and, Paul, why don't you talk a little bit about what we have done.

Yeah, hi, Chris. You know, the three areas that we focused on this year I think laid a great foundation for the next year and next several years to come potentially and that is is really a focus on our back office operations in Carlton that I've already eluded to. Our generics program, is, you know, we have 7,000 plus customers today on Select Generics Program and 20,000 overall in our Generic Proprietary Program and that number continues to grow and as we move customers up the value chain on some of our first Proprietary Generic Programs, we tend to do better and our customer does better and then I think the reorganization that took place earlier this year with respect to our investment buying area and that having now being reported up to who is the CFO of Supply Management is producing the desired results. I would actually see continuing a balanced approach towards our operating profit and margins for the coming year.

Paul or Bill, would you disclose what your average inventory was for the period versus the period end as is disclosed in the release or just kind of give us a sense of how those two numbers might have looked?

The average inventory, I mean, there was nothing special that was done at the end of the quarter from an inventory standpoint other than what we would normally do in forward buying. So, you know, I guess I'll go out on a limb and say the average for the quarter was probably about where it was at the year end.

Great. Thank you very much. Larry Marsh, you may ask your question and please state your organization.

Yes, Larry Marsh at Lehman Brothers. Let me see if I can summarize and issue a question here. It sounds like for the year just ended, I guess over 95% of your revenues and I guess if you allocate iMcKesson proportionally, it sounds like all your profits came from your distribution business and I think you have done a nice job of suggesting that you could see some revenue growth acceleration for this upcoming fiscal year and, Paul, thanks for sharing some of the specific new customer relationships. Do we think that business as kind of already being in hand to achieve those kind of top line goals, John and Paul, or might we continue to see expanded contractual relationships and then I'll follow up briefly after that.

You know, Larry, as I mentioned, we expect to really grow in line with our market adjusting for our mix of customers and we have had discussions with folks before about the fact that our large base of the independent customers is growing slightly slower than typical chain customer. The opportunity to create value for the corporation in those independent customers and also create value for them is greater because we bring the assets of the corporation to them as Paul mentioned in Select Generic Buying and a lot of other programs that help them position themselves for future success. So, I guess the message is we are going to continue to grow intelligently at the revenue line. We don't expect us to move much around more than what the market is doing because a lot of our customers are pretty stable. Our contracts are stable. We don't expect a lot of big changes in our business next year from a contracting perspective and so we are ready to continue to look for operating efficiencies in our back offices and as Paul mentioned bringing more value added opportunities to our customers like generics where we can improve our margins on that piece of business and provide them a savings at the same time.

Great. In the followup, I guess, John, you were saying that you anticipate increasing your investment in infrastructure product initiatives. You said that is going to be partially offset by the goodwill amortization cost savings for the next fiscal year. You identified how much your goodwill amortization cost savings would be. Is there any way to more broadly quantify which kind of investment you anticipate making, how should we think of that commentary?

Yeah, I think our focus is to make investments that are prudent and reasonable given the scale of our business and the momentum of our business and as we set into the year we have specific plans to continue to increase the amount of development expense that we are putting against product initiatives. So, things are Horizon and other strategies that are critical to the company's future are properly invested in for the future and we think it is a great opportunity now for us to make those investments, make them intelligently and retain our leadership position in the market place. As it relates to the infrastructure, that is really related to the continued grow out of SAP and several of our businesses and we are going to be installing SAP in our information technology business. Frankly, the Systems and Processes in our information business from an internal architectural perspective aren't where they need to be and we are going to be making those investments and in the near term probably won't have a direct payback but as they are implemented and installed over time will have a very direct and specific impact on our ability to track our business and to improve our operating performance. So although I am not going to necessarily quantify the level of expense investment, I would say that is going to be intelligently applied and in addition, as I mentioned the investment in certain of the iMcKesson solutions is going to continue as well perhaps not at the level that was once there and certainly not with the corporate overhead and infrastructure that was being build as a separate stand-alone entity. So, I think the best way to think about it is we are going to do it prudently.

Just excluding iMcKesson would you anticipate those investments to be pretty smooth throughout the year or more front-end loaded.

I think that it will be more smooth throughout the year, however, the iMcKesson wind down expenses, as Bill mentioned, are going to be primarily related in the first two quarters of the year and in some of these in infrastructure investments where you might be putting a system in and taking people out, people coming out come out later in the process and system goes in earlier. So we do expect our performance to improve more in the last half of the year than certainly in the first two quarters because of the seasonality in our pharmaceutical business, in some respects because of the seasonality in our IT business in how people drive towards that year-end but also because of these investment issues that will be a bit of attraction from earnings in the early periods of the year.

Okay. Thanks a lot. PAUL JULIAN AND JOHN Your welcome. David Buck you may ask your question and please state your organization.

Yes, it is Buckingham Research Group. First question is for Graham. Can you just quantify the timing of the $45 million of one time sell through revenues and what time frame you would expect those to flow into revenue, if you could give some some sense of that and also can you give some sense of what the operating, put a band on what type of operating margin expansion you expect for ITB for overall 2002.

Sure. With regard to the recognition of the forward portion of the software through POC, that will be in the 12 to 18 month time frame. And the second question was regarding to margins in fiscal 2002 where John has said earlier in his statements that our objectives are to get the combined iMcKesson and ITB back to what the ITB profit margins were in fiscal 2001.

Okay. Thank you. Thank you. Once again, at this time I would like to remind all participants to only ask one question. If you do have more questions, you may enter the queue again. Lisa Gill, you may ask your question and please state your organization.

Lisa Gill, J. P. Morgan. I was wondering if I could ask Paul Julian a little about the Med Search business. It looks like sequentially it was down by about $6 million from the last quarter. Wondering if you could just talk about the customer trends, what you are seeing, if you saw any bad debt write-off with your long term care customers.

The Med Search business is very strategic for the company and today we have a lean position in two of the segments. They are really long term care and primary care. I think we have a lot of opportunity actually going forward in the medical business next year as we continue to rationalize our DC network. So, I am very optimistic about the medical business looking ahead.

Paul how many DCs do you anticipate taking out of the network?

You know, I don't really know that right off the top of my head but we have a lot of opportunity there to rationalize the DC network within that business.

And what do you see from the long-term care side. Are you seeing additional bad debt write-off? Are you seeing the customers improve?

Yeah, we haven't seen any of recent that I can recall and we do think the customers are improving and there has been more money put into that channel by the government as I am sure you are aware.

this is Bill. You will recall that we had a write-off in the third quarter in that area but none in the fourth quarter.

thank you. Thank you, John Souter, you may ask your question and please state your organization.

S.G. Cowen. John, with respect to the shareholder lawsuit, I think the full expectations of the Judge will come back and allow us to continue but he said that he would have had his comments back at least two or three weeks ago. Can you talk about any thoughts on why there is such a delay?

John, the Judge as far as we know, never indicated when he was going to give his comments back and as far as we can tell, he's going to give them back to us when he decides to give them back to us. As it relates to your discussion about allowing the case to move forward I think that would be purely speculation. Until the Judge makes a ruling we are not sure what he's going to do. Ray Falci, you may ask your question and please state your organization.

Hi, this is Ray Falci with Bear Stearns. I would like to focus a minute on the iMcKesson businesses that are being folded back into ITB. Maybe, Graham, you can comment on down at the sales level what you are doing with resources there? What the early indications have been from the customer base in terms of being able to offer integrated products suites now and what if anything is changed from where you have been say 90 days ago in those two businesses.

Sure. Two products are being rolled back in, Practice Point Connect, which is the old Metivation business and Practice Point Clinical which is the old Abaton business. The Practice Point Clinical Suite of solutions is being rolled in and integrated with our Horizon WP Care Record which is our clinical repository and that will be offered through the IDN network. It is our ambulatory solution and it will be offered by the ITB general and clinical sales organizations. It's too early to speak of any great success but clearly there is initial interest in the customer base as we knew there would be because they do want a patient record that is available to them any point across the continuum of care and that is exactly what we will be able to provide them. The Connect Product, Practice Point Connect, which is the Metivation product will be integrated into our Horizon WP Consumer Portal and it is way too early to speak to response there because we will be taking that product into a handful of alpha and beta customers this year to prove the concept and to learn how to deal with consumers and patients on an online environment.

Okay, great. Thanks. Norman Fidel, you may ask your question and please state your organization. Mr. Fidel you may wish to check your mute button. Andy Speller, you may ask your question and please state your organization.

A.G. Edwards. Guys, I want to ask you about the guidance you have given with ITB. Just appreciate it, guys. Just wondering what's changed within the organization or the industry that give you guys the, I guess, comfort level to give guidance. You have been somewhat quiet on that front for a good period now. I was just hoping to get a little more color on the reasons on the guidance you have given.

Well, I think it probably is twofold. One is we feel very comfortable now that we have a stable customer base and that we have largely recovered a lot of the ill will that was out there before. As Graham mentioned we had two years of declining metrics in those areas and now they are much more stable and improving. So that's one point, is that we have a stable customer base that becomes the field under which we sell our products. The second point really is one of the change to POC contracting which required POC accounting which put a bunch of the revenue into the backlog as opposed to booking it under the P&L. It was a phenomenon we couldn't really speculate about going into this year. We had no idea how these contracts would be written and finalized and we had no evidence as how the revenue would flow forward out of them. So, I think we have better visibility now that we do have revenue in the backlog and as I mentioned earlier those backlogs come in over 12 to 18 months. We have got a strong funnel, as Graham mentioned. We didn't even have a funnel coming into this year in terms of a former process that we believed in and now we have one. We have got a great pipeline of new products. We talked about the new products that have already been released and put into the market place. We have a much more experienced sales organization, which also gives us a better visibility and makes us feel better about our prospects. We take all of that together, the fact that we have got backlog revenue and it comes forward and it gives us forecastability, so to speak, and on the margin side we certainly know, at least on the amortization, how much we are going to take out of the cost structure of the iMcKesson businesses that are rolled into that combined number. I think it is improved visibility and improved comfort.

Okay, if I could ask a followup on Supply Management. In the last quarter you commented on some softness on the top line, some of your largest chain customers. Did that go away this quarter with the revenue growth accelerating the way it did?

I think that my comment about the chain customers was really that we have larger mix of independents as a piece of this so our business is different than the "market" because our mix is a little bit different than some of our competitors. That is a piece of it and the second thing is that I think our retail customers are continuing to form in line with previous performance but if you note, we also had this Y2K effect in the quarter. So if you level our third fiscal quarter and our fourth fiscal quarter and look at our year, we grew at 13% which is, I guess, that's roughly in line with what we think our mixed adjusted market grew. So I think that the low third quarter washing against the high fourth quarter shows that we are on track and perhaps people got overly concerned about our third quarter revenue number.

Really, you think the third quarter revenue, shortfall we'll call it, was more of a Y2K issue from a year ago?

I think it's a piece of that but it is also just, you know, I can't speak to that. You look at right age numbers you can see that they are improving so we do have our chain customers with improving results which pulls through our volume as well. I guess what I am trying to say is that it is a direct reflection on the health of our customers and our ability to continue to grow with the market.

Okay. Thanks a lot. Craig Baskin, you may ask your question and please state your organization.

Hi! Its Craig Baskin at Loomis Sales. I wanted to ask two questions. Firstly, I was wondering if you could quantify the magnitude of pharmaceutical price increases this year versus last year and, secondly, looking at your outstanding operating margin for your Supply Management Business, what are your thoughts about sequential growth in that margin level? Thank you.

This is Paul. The pharmaceutical price increases were about in line with what our expectations were year over year and as we said in our earlier comment, we anticipate that we will continue to expand our operating margin this coming year in the pharmaceutical business.

Now, let me make sure if don't follow the pharmaceutical distribution business, sequential expansion is virtually impossible if you go up fourth to first fiscal quarters so you should go back and look at how margin goes for the industry. You can't get sequential expansion off the fourth quarter.

Thank you. Karen Corn, you may ask your question and please state your organization.

Putnam Investments. I had a question on the pharmaceutical distribution side. We have seen this last year and it's expected to continue next year, a big increase in pharmaceutical retail counters, whether it is in drug stores or discounters or mass merchants and I was wondering how that trend, if any, impacted the business and if you can give us a flavor for what kind of increase you see when a company is stocking up a new store versus your normal flow of business for, you know, just replenishment?

I don't know that I fully understood your question but if we get same store growth on people that are organically growing is different than obviously adding new stores. Are you asking whether we saw a lot of new store additions in our mix of customers last year?

Yeah. That's exactly right and when you do see new stores open up if you did see any, how did that impact the numbers. I'm asking because many of us see growth in the distribution business different from the same store comps that the underlying companies will report. You know you have right aid and independents who are reporting comps lower than the growth that you saw this quarter and I am wondering if part of this is explained for some new counter openings which might have a disproportionate impact on the revenue.

Oh yeah. Absolutely. I mean that, you know, we have Walmart or you have Safeway or you have Target and those kinds of folks that are opening up new, as you said, store counters. That certainly is incremental as they build inventory for those openings and those launches and you will see that trend affect our overall results. So if you go back a couple of years when we were growing much faster than the market place, our customer base was expanding rapidly in terms of new store additions. So that phenomenon does affect us significantly and probably affects us more in the month or the quarter they open the store because they have that stock issue that they have to load in as they get ready for the grand opening.

Thank you. Robert Willoughby, you may ask your question and please state your organization.

Thank you, First Boston. Can you comment on the trends in DSO by business line and may be throw out a cap ex goal for next year.

Bob, let me take the cap ex first. Next year's cap ex we anticipate, you know, something in the range of this year maybe up to as high as $175 million but something in the $150 million to $175 million range. From a DSO standpoint, our pharmaceutical business year over year maintained very good receivable days in the 20 day kind of range and the other businesses that we have in the portfolio actually did better and our overall days for the company went down about two days year over year.

Excellent. Thank you. Sandy Draper, you may ask your question and please state your organization.

Good afternoon, two questions. One a how keep, I guess for Larry. Larry, it sounded like, you said you had full schedules bi-quarter and bi-year with iMcKesson rolled in. Was that in the press release? I just saw...

Sandy, no, it wasn't in the release. You will get it separately via e-mail today.

Okay. Okay. Great. Thank you very much and a followup is for Graham. Graham, obviously we saw great revenue growth in ITB. As you moved over to percentage of completion and some subscription, you know, it caught me by surprise that you could show 18% sequential revenue growth. Can you talk a little bit more about that and then, you know, because this one is so strong would you expect to see a little bit of a dip off in the first quarter and then a rebuild as we go throughout 2002.

Let me answer the second one, the last question first because it's the easiest one to get to. Our business is seasonal and you find throughout the industry the first half is down compared to second half of the year and that's true throughout the industry. With regards to the growth, not only was the fourth quarter up again, the backlog was up 16% year to year. I think is just reflecting the points that John made earlier. We spent the first year and a half stabilizing the business. Last year we held manpower flatter, slightly down in the division, but at the same time we increased our investments by over 15% in R&D, so while we were stabilizing the business we have been investing. We have got some new products out there. There are more to come. We stabilized the old products. There was a delay in demand because of the Y2K build up but with new products, stabilized products, and a more effective sales organization, John called it. We are seeing increased funnel, increased backlog and you have started to see the results of that in the fourth quarter.

Okay, it seems to me that you are being fairly conservative with the 10% growth target. Obviously what you saw in this quarter, you know, you are not going to maybe keep that sequential number but that seems like a pretty conservative number relative to what you are doing on a backlog in bookings basis in this quarter results.

Remember also that we rolled some iMcKesson revenue into that business, the Transaction Solution Hub as well as the Providers Solutions Business which is the Physician Office, the old psybeta, psycare so those businesses were not growing or are not growing as rapidly on the revenue line as well and they were really, we are not trying to push the revenue line hard in this business quarter to quarter. What we are focussed on is building a solid customer path for long-term investment with us and making sure that is properly run.

Okay, great, thank you very much.

This will be our last question. Thank you, Dan Johnson, you may ask your question and please state your organization.

Thanks a lot Partners. Could you please just touch on your Novation pickup this quarter and how that helps the quarter's performance, and nice job. Thanks.

This is Paul. The Novation Business did come in in the fourth quarter and it obviously had some uplift to the quarter and we are actually continuing to do well with Novation in the market place going forward so...

Can you give us a sense as to what your total win was through the last round at Novation?

Probably a net of around $500 million.

Thanks a lot

Great. Thank you for your time and attention this morning. We did allow the call to run over slightly because we thought we had a lot to talk about. Once again, I couldn't be more pleased with the results of the business and the great teams that we are building under Paul, Graham and Margaret in the Medical Management Business. We really do feel very positive about what we have accomplished and really look forward to balanced, appropriate growth as we go forward. Let me turn the call back over to Larry Kurtz for some additional message points and once again, thanks for your attention and your interest in McKessonHBOC.

As John said that is the time we allocated including the extra fifteen minutes so thanks everyone and thank you operator. Our next presentation to the financial community will be the week of June 11th at the Goldman Sachs Healthcare conference in The release of our financial results for the first quarter of fiscal 2002, is tentatively scheduled for Tuesday, July 24th. For those of you calling in to honor me with follow-up questions maybe we didn't get to on this call or have other questions, we will be getting back to you in about an hour or so. We follow this call with a regular employee call and we participate on that so if you'll be patient. Starting in about an hour we will be getting to your questions, too. Thanks and goodbye.