麥卡遜 (MCK) 2012 Q1 法說會逐字稿

Good afternoon, and welcome to the McKesson Corporation quarterly earnings call. All participants are in a listen-only mode.

(Operator Instructions)

Today's call is being recorded, and if you have any objection, you may disconnect at this time. I would now like to introduce Ms. Ana Schrank, Vice President of Investor Relations. Please go ahead, ma'am.

Thank you, Lisa. Good afternoon, and welcome to the McKesson fiscal 2012 first quarter earnings call. With me today are John Hammergren, McKesson's Chairman and CEO, and Jeff Campbell, our CFO. John will first provide a business update, and we'll then introduce Jeff, who will review the financial results for the quarter. After Jeff's comments, we will open the call for your questions. We plan to end the call promptly after one hour, at 6.00 Eastern Time.

Before we begin, I remind listeners that during the course of this call, we will make forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve risks and uncertainties regarding the operations and future results of McKesson. In addition to the Company's periodic current and annual reports, filed with the Securities and Exchange Commission, please refer to the text of our press release for a discussion of the risks associated with such forward-looking statements.

Finally, please note that on today's call, we will refer to certain non-GAAP financial measures in which we exclude from our GAAP financial results, acquisition-related expenses, amortization of acquisition-related intangible assets, and certain litigation reserve adjustments. We believe these non-GAAP measures will provide useful information for investors. Please refer to our press release announcing first quarter fiscal 2012 results, available on our website, for a reconciliation of the non-GAAP performance measures to the GAAP financial results. Thanks, and here is John Hammergren.

Thanks, Ana, and thanks, everyone, for joining us on our call. Today we reported a strong start to fiscal 2012, with total Company revenues of $30 billion and adjusted earnings per diluted share of $1.27. This performance is a result of solid contributions from both Technology Solutions and Distribution Solutions, and was helped by our acquisition of US Oncology, which has given us one of the most comprehensive service offerings available to a large and fast growing segment in the healthcare industry, Specialty Distribution and Services.

Our first quarter performance positions us well, for the remainder of the fiscal year. Due to our reduction in our estimated full-year tax rate, we have raised our annual guidance assumptions, and now expect adjusted earnings between $6.09 and $6.29 per diluted share. Before I turn the call over to Jeff for a detailed review of our financial results, I will provide some highlights from both segments of our business.

Distribution Solutions started the year with solid revenue and gross profit growth, keeping in mind that in last year's first quarter, US Pharmaceutical benefited from a $51 million antitrust settlement. The US Pharmaceutical team did a great job, controlling costs in the quarter, which resulted in relatively flat expenses in this business. It is still very early in our fiscal year, but we remain confident in our expectations.

We anticipate generics will be a strong driver of our full-year financial results, though as we have discussed, heavily weighted to the back half of the fiscal year due to the launch calendar. We also expect that our broad range of value-added services for branded manufacturers should continue to contribute to steady levels of compensation. We continue to build new services offerings, that create demonstrated value for our large retail national accounts, as well as our independent customers.

Recently, our US pharmaceutical business held its annual trade show for independent retail customers. Thousands of pharmacy owners gathered in our hometown of San Francisco, to learn more about the latest industry developments. During the event, we shared our vision to further strengthen the role of independent pharmacists, who are vital members of America's evolving healthcare system.

We unveiled a number of innovative and integrated solutions, including our mobile messaging solution and our physician outreach program, to help independents become more integrated with patients and providers in their communities. At the conference, we demonstrated how McKesson's technology and clinical solutions work hand-in-hand. By using technology to become more efficient, pharmacists can free up their time to focus on delivering valuable clinical services, that help their patients lead healthier lives.

We were also able to leverage our vision center, located here at corporate headquarters to further showcase McKesson's full complement of solutions for the healthcare industry. Many of these solutions are integrated for members of our Health Mart franchise, which received recognition from Consumer Reports and J.D. Power and Associates, for it's outstanding customer service this year. It was announced as the Chain of the Year by Drugstore News during the trade show. We also previewed our new store banded line of over-the-counter products for Health Mart, which will launch this fall. Our Health Mart franchise is approximately 2,800 stores, and is growing. We believe Health Mart is a critical part of our solution set, because it offers our independent pharmacy customers an effective way to successfully compete against larger, national players.

Now let me turn to our Specialty business, and in particular, US Oncology. We have made great progress integrating the legacy McKesson assets with our US Oncology business. We have a cross-functional team in place to manage the integration, and we are right on track with our plans. When you think about oncologists today, they are under tremendous pressure to deliver more cost effective care, while adhering to best practice protocols. We believe this is going to lead to the development of integrated care models, the transition of reimbursement risks to providers, and an increased need to manage operating costs.

Our broad solution set, which includes Distribution Services and integrated technology offering, best practices and managed care contracting, and a full suite of practice management solutions, helps enable the success of our oncology customers. With McKesson, an oncologist can elect to have a simple distribution and GPO relationship, a more comprehensive practice management relationship, or choose something in between. Our offering is attractive, because of the breadth of the alternatives available to our customers. Specialty has had good overall performance this quarter. While the team is very focused on the integration, they have continued to execute on the core business with good success on all dimensions, in particular with generics, and a growing pipeline of prospective customers.

Turning to our Medical-Surgical business, we are really pleased that revenues were up 7% for the first quarter, primarily due to strong growth in our physician office business, resulting from acquiring new customers, and further penetration of our existing customer base. We remain focused on optimizing our sourcing of McKesson branded products to drive margin expansion.

In our Canadian Distribution business, we performed as we expected in the first quarter, with flat revenues on a constant currency basis, due to the impact of the government-imposed price restrictions on generic drugs. The team continues to work on mitigating the impact, by focusing on generic compliance gains with customers, and capitalizing on global sourcing of branded and generic pharmaceuticals.

In summary, I'm pleased with the performance of our Distribution Solutions segment. The scale and efficiency across our Distribution businesses, allows us to serve our customers with a high degree of satisfaction. With our successful proprietary generics program, we are well-positioned to benefit from a period of significant generic product introductions. We have also enhanced our overall value proposition with the US Oncology acquisition, which gives us a strong position in the fastest growing sector of the market, Specialty Distribution. And our Medical-Surgical business is growing and generating solid financial results. We are off to a solid start, and we are confident that the rest of the year will show strong growth.

Turning now to Technology Solutions, I am pleased with our performance across the segment, and in particular with the steady progress in our McKesson provider Technology business, which drove improvement in our revenues and operating margins. As we said during our fiscal year-end call, our near-term priority is our customer's success. And right now, we are laser-like focused on getting our provider customers installed, and eligible for the government's meaningful use incentives.

In the first quarter, our operating results were strong, aided by all the changes we have made in this business. In addition, our results came in a little better than expected, mainly from hitting certain implementation milestones, and the timing of payments from customers. While we are encouraged by these achievements, we have not changed our full-year view of Technology Solutions. In addition to the progress in provider technologies, two of our other businesses in this segment, our payer-facing Health Solutions business, and our RelayHealth connectivity business, showed steady results year-over-year in the June quarter.

We recently completed our acquisition of Portico, which will be integrated into our payer business. Portico adds integrated provider management, including value-based reimbursement solutions to the McKesson portfolio. These solution capabilities will help automate network management, provider enrollment, contracting and pricing. Health reform is bringing payment and delivery model changes, such as accountable care and bundled payments. In this environment, payers and providers must deepen their clinical and financial alignment, to ensure optimal outcomes at the right cost.

Our strong Health Solutions portfolio includes products to help guide decision-making, the delivery of care, and the final transaction processes. Combined with Portico systems, our broad offering will help payers and care providers create new products that use value reimbursement to align payers and providers on achieving the right outcomes. The combination will also help us drive significant administrative cost reductions, by enabling clients to optimize and manage their networks efficiently, and enable new, complex reimbursement models.

The acquisition of Portico, along with our acquisition of System C, a UK-based company that offers a suite of patient administrative systems and clinical solutions, fits nicely with our overall strategy in Technology Solutions. We have a comprehensive set of products and services to help providers reduce costs, while maintaining quality, safety, and efficiency, through automation and connectivity.

In summary, we are off to a good start in fiscal 2012. In addition to solid operating performance, our strong balance sheet and steady cash flow provide us with opportunities to deploy capital. And in the first quarter, we executed a $650 million accelerated share repurchase program. Overall, I believe we are well-positioned for continued success. And with that, I'll turn the call over to Jeff, and we'll return to address your questions, when he finishes. Jeff?

Well, thanks John, and good afternoon, everyone. McKesson delivered strong financial results this quarter, laying a solid foundation for the remainder of the fiscal year. My comments today will focus on our $1.27 adjusted earnings per share, which as you recall from our discussion in May, excludes three things, acquisition-related expenses, amortization of acquisition-related intangibles, and litigation reserve adjustments of which there are none this quarter.

The numbers I'll review in my discussion can be found on schedules two and three, included in today's press release. I'll begin with our consolidated results for the quarter, which can be found on schedule two. Total revenues were $30 billion for the quarter, up 9% from the prior year. Excluding the impact of the US Oncology acquisition that we completed last December, total revenues increased 6% for the quarter. We are pleased that both our Distribution Solutions and Technology Solutions segments contributed nicely to this growth.

Adjusted gross profit for the quarter increased 8%, versus last year. As a reminder, the prior year benefited from a positive $51 million antitrust settlement, which flowed through the gross profit line. Excluding both the impact of US Oncology this year and the prior year antitrust settlement, overall adjusted gross profit would have increased 6% for the quarter, versus last year. Total adjusted operating expenses were up 10%, to $984 million for the quarter. US Oncology represented half of this total increase, in line with our original expectations.

And before I move on, I want to take a minute to clarify in a little bit more detail, how US Oncology has been incorporated into the McKesson financial statements, particularly as it relates to cost of sales and operating expenses classification. Prior to the acquisition by McKesson, US Oncology recognized certain expenses on the cost of sales line in its income statement, that are now reported in our McKesson results as operating expenses.

These expenses generally run $20 million to $25 million a quarter, and primarily relate to employee compensation and benefit costs, reclassified as operating expenses. So if you think about this for the first quarter, total US Oncology adjusted operating expenses were approximately $44 million, with roughly $20 million to $25 million of these expenses being previously classified as cost of sales in the US Oncology income statements.

Next, other income was relatively unchanged, from the prior year. Interest expense increased by $21 million to $64 million this quarter, primarily due to the debt we put in place, as a result of the US Oncology acquisition. Our full-year assumption of $260 million of interest expense in fiscal 2012 remains unchanged.

Moving down the P&L to taxes, as you saw on our press release today, we have lowered our full-year estimate of the tax run rate, from 33% to 32%, as our estimate of the full-year sources of our earnings has changed. I would remind you that our tax rate is very sensitive, to relatively small changes in our sources of income. So while 32% is our best estimate as of this quarter, the rate could vary from time to time. Adjusted net income in the quarter was $323 million, up 3% from the prior year.

And moving now to share count. While this past year, we completed our largest acquisition in over a decade, the $2.1 billion US Oncology acquisition, we have also done over $2.7 billion of share repurchases over the past five quarters. This resulted in our diluted weighted average shares outstanding, coming in at 254 million for the quarter, down 7% from the prior year. With respect to full-year share count, as discussed at our Investor Day in June, we continue to expect our full-year diluted weighted average shares outstanding to come in at our original guidance of 253 million shares. Our first quarter adjusted earnings per diluted share was $1.27, an increase of 9% compared to last year's adjusted EPS of $1.16.

Now for those of you who follow us closely, I will be the first to admit that this year-over-year growth performance is more than up modestly, versus last year's first quarter baseline of $1.03, which is what we directionally guided to back in May on our earnings call, and again at our Investor Day in June. Since then, there were two key drivers that led to this better than expected, strong financial performance.

First, and most significantly, as you know the end of the quarter is very important to us in Technology Solutions, depending on what implementation milestones we hit, and the timing of customer payments. The good news is, that we made stronger than expected progress in the last few weeks of the quarter, in both of these areas. And both of these items, drive revenue recognition as reflected in our results. Second, our estimate of our sources of income evolved a bit as we closed our books, resulting in a favorable reduction of our full-year tax run rate, as I mentioned earlier. This had some impact, of course, in the June quarter.

Let's now move on to our segment results, which can be found on schedule three. Distribution Solutions overall revenue increased 9% versus the prior year, with US Oncology contributing 3% to this year-over-year growth. Looking at the components, direct revenues were up 11% for the quarter. If you exclude the impact of US Oncology, our first quarter direct revenues grew a solid 7%, primarily driven by market growth and our mix of business. Warehouse revenues increased 3% from a year ago, benefiting from revenues associated with a new customer.

Canadian revenues, on a constant currency basis were flat for the quarter, in line with our original expectations as John said. Including a favorable currency impact, revenues increased 7% versus the prior year. Government-imposed price reductions on generics in certain provinces will continue to impact the revenue growth in our Canadian business throughout this fiscal year. Medical-Surgical revenues were up a strong 7% for the quarter to $731 million, driven by increased volume from new and existing customers. Adjusted gross profit for the segment increased 6% for the quarter to $1.1 billion.

If you exclude the impact of the US Oncology acquisition this year and the prior year antitrust settlement, Distribution Solutions adjusted gross profit would be up roughly 3%. Distribution Solutions adjusted operating expense was up 12%, $622 million for the quarter. Excluding US Oncology, operating expense increased just 4% versus last year.

Adjusted operating margin rate for the quarter was 176 basis points, which is flat year-over-year when you exclude the prior year antitrust settlement. Given the quarterly variability in this segment, we always focus, as you know, on full-year margins. In this context, for full-year fiscal 2012, we continue to expect adjusted operating margin improvement in the high single digit basis points. In summary, we are pleased with the solid first quarter performance in Distribution Solutions.

Turning now to Technology Solutions, total revenues were up 6%, to $802 million for the quarter, aided by some of the timing issues John and I have now both discussed. For the full-year, we continue to expect Technology Solutions revenue growth to increase modestly from last year's 2% growth. Adjusted gross profit in the segment grew 16% versus the prior year, to $383 million. Contributing to this result, is the revenue recognition timing we have discussed, much of which drops almost straight through to the bottom line.

Technology Solutions had total gross R&D spending for the quarter of $105 million, flat for the prior year. Of this amount, we capitalized 10%, compared to 14% a year ago. Our Technology Solutions adjusted operating profit was up 49% versus a year ago to $119 million. Adjusted operating margin in the segment was up to 14.84% for the quarter, compared to 10.54% in the prior year. We are pleased with this margin expansion, although it was partly driven by the revenue recognition timing we have discussed. For the full-year, we continue to expect our adjusted operating margin to be in the low end of our long-term Technology Solutions adjusted operating margin goal range of mid-teens.

Leaving our segment performance, and turning now to the balance sheet and working capital metrics. Our receivables were $9.4 billion, up from the prior year balance of $7.8 billion. And our day sales outstanding increased by 2 days to 25 days. Inventories increased just 1%, to $9.5 billion, while our payables increased 9% to $14.5 billion. So our day sales inventory of 30 days, is down 3 days from a year ago, while our day sales and payables was flat to 46 days. These working capital metrics resulted in us generating $326 million in operating cash flow for the quarter. This is in line with our expectations. And for the full-year, we continue to expect to generate approximately $2 billion in cash flow from operations.

We ended the quarter with a cash balance of $3.1 billion, down from our year-end balance of $3.6 billion. This obviously leaves us well-positioned to create shareholder value through the use of our portfolio approach to capital deployment, as demonstrated in the first quarter, when we completed a $650 million accelerated share repurchase, closed the System C acquisition, and increased our dividend. Capitalized spending was $109 million for the quarter, and we continue to expect full-year capitalized spending between $450 million to $500 million.

And now I'll turn to our outlook. As John mentioned earlier, due to the change in our estimated full-year tax rate, we are raising our guidance on adjusted earnings from $5.99 to $6.19, to a new range of $6.09 to $6.29. As we have discussed, we have now closed both the System C and Portico acquisitions, since the beginning of the fiscal year, which drives the modest change in our guidance assumptions of $0.47 for amortization of acquisition-related intangible assets, and $0.07 for acquisition-related expenses. In summary, we continue to feel McKesson is on track to have another good year.

Thanks, and with that, I'll turn the call over to the operator for your questions. In the interest of time, I would ask, that you limit your questions to just one per person, to allow others an opportunity to participate. Operator?

(Operator instructions).

Our first question today comes from Ross Muken, Deutsche Bank.

Good afternoon, and congrats on a great quarter.

Thank you, Ross.

So when you think about the USO asset, now that you have owned it for some time, and you look at sort of the relative performance and synergy capture that you have enjoyed, where have you been most pleasantly surprised or in general, surprised with sort of the asset? And in terms of looking at other potential uses, and in other disease areas or other place you could take some of the service model offerings that, that asset brings, what else have you sort of discovered, you could potentially do with it over time to create value at a higher margin?

Well, thanks for the question, Ross, this is John. I think that we are very pleased that we made the acquisition, and it is certainly progressing as we had planned. I think the areas of focus, or highlight I would say, are that our employees on both sides of the fence, have done a great job of getting together, both culturally, as well as from a business operations perspective. The US Oncology folks fit right in with the McKesson teams, and we are doing a good job of executing and organizing, so that we continue to show success in this segment and drive value for our customers are most important.

I think that the other areas of highlight would be that the customers, whether they are existing McKesson customers or US Oncology customers, sort of got the transaction right out of the gate. Whether they were our customer when we had a large management relationship, or whether it was just a distribution customer, people seemed to understand the synergies that we bring to both parties. And are attracted to a model where they have the ability to over time, continue to build out a value proposition with us, that will improve the operating efficiencies of the practice, as well as improve the quality of clinical care provided.

So in a myriad of dimensions, I think people get it, and they are excited about it. And we are, as I mentioned in my prepared remarks, seeing an increased interest from a customer funnel perspective, in exploring opportunities either to migrate up as an existing customer would from a basic distribution relationship, up the value chain, or actually being attracted as a new net customer into our network.

As it relates to other practice opportunities, clearly, the US Oncology over more than a decade has been building out a skill set that has been refined, both from a business model perspective, and also from a financial and clinical perspective that will be applicable, we believe, to other clinical care areas. Or perhaps international opportunities. But I have to say right now, we are really focused on executing against the opportunities in front of us in oncology here in the United States, and we plan to continue to do that. But we do think there are applications in other areas.

And maybe quickly just on the technology business. The margin's sort of been hovering here around the high 14%s, low 15%s, on an adjusted basis for a couple of quarters. So I dare say, we are sort of at a place of stability. It feels like Pat's got a pretty good handle on sort of the trajectory of the business. What's sort of the next big steps there, in terms of kind of driving incremental EBIT and growth?

Well, I think we have made significant progress in the business. We made lots of changes last year, and we have done a lot of investment in the product, to make sure the product is world-class, and will be ready for the meaningful use in kinds of evaluations that will be necessary with our customers. I would say that our focus though, right now, is to make sure our customers are migrating to our most recent platforms, that will be required for meaningful use, and our focus really is on implementation. Beyond that, you noticed in this quarter, we are continuing build out our other business offerings.

We acquired a company in our payer business called Portico, which we think will position us very well for the way healthcare is reforming in front of us, so that the payers and providers can connect together more complete way, and deliver value that has better transparency around cost and quality, and more accountability for that care that's shared between the payers and the providers. And so we are excited about that. And clearly, we'll continue to make progress in the UK, and this acquisition, System C will allow us to build out our offering there. So albeit, the big hospital systems business that we have in the US, is an important part of our focus, and implementation is the highlight there, we are continuing strategically position the business for continued growth.

Great. Thank you.

You are welcome.

Up next, we'll take Robert Willoughby, Bank of America Merrill Lynch.

Just one question. John or Jeff, obviously, you've got still have a substantial bundle of cash overseas. Assuming something favorable at some point in our lifetime happens in DC here, what would be the plans be for any cash you would repatriate in?

Well, I think we have done a very good job of optimizing the performance of our Company, in a way that takes advantage of the best practice around the area of cash management. And we believe that the offshore cash is a significant source of value, and properly deployed, our shareholders will realize that value. It is requiring us to be a bit patient, both in terms of evaluating what might happen politically, and with our tax code. But we also believe there are opportunities as System C showed, in a small way, that we can deploy the cash also through acquisitions which can create value. So we have a keen awareness, that we are getting very low returns on that offshore cash. But we are also a little reluctant, I think to bring it back, and take the tax effect that would be required to bring it back into the US at this point.

Thank you.

You're welcome.

Up next, we'll hear from Glen Santangelo, Credit Suisse.

Yes. Thanks. Jeff, I just wanted to follow-up on some of the comments you were giving us on the Distribution Solution segments. You gave us a lot of detail, excluding US Oncology, and kind of backing out the litigation settlement from last year. And I'm trying to do the math. Could you justify help me figure out where exactly the gross margins were this year versus last year, and the Op margins if I were to back out US Oncology and the gain last year?

Right, and that is a good question, Glen. And to simplify, when you do that backing out, you'll see that the gross profit growth, if you take US Oncology out of this year and the $51 million good guy antitrust settlement out of last year, you'll see the gross margin is down a little bit year over year.

Yes.

There is always some variability in 2 things, of course, in our distribution segment that drive big dollars. One is the timing of how and when we get paid by our branded manufacturing partners.

Yes.

And the part of the impact you see in this year's June quarter, is the fact that the March quarter was a particularly robust quarter. I won't go into the arcania of how all these agreements work, but that has some effect on the following quarter. We think we are right on track though, as we look at the full-year. Similarly, on the generics side, as John talked about, we have this fiscal year, a more back end-loaded generic launch calendar.

And so, while we were pleased with the performance of our generic businesses both in our traditional US pharma business and in our Specialty business in the June quarter, on a year over year basis, you didn't see the kind of growth that from a full-year perspective, we continue to expect. So that's why, while the gross margin is down a little bit year over year, when you look at the two June quarters, we continue to be comfortable with our full-year assumption that the operating margin expansion in that segment should be in the high single digit basis points.

Okay, that's fair. Was the operating profit margins down a little bit as well? Or did they expand a little bit?

Well, they are about flat.

Okay.

We didn't do the full math for you, Glenn, of pulling the USO and the profits out.

Okay. That's fine. I was just trying to get a sense, for what happened in the base business. But that's helpful. Thanks a lot Jeff.

Our next question today will come from Larry Marsh, Barclays Capital.

Thanks, and good afternoon, everyone. Just wanted to clarify, if I could, the variation in the quarter. And I went back to your, up modestly, comments, Jeff. You mentioned the technology timing and payments and the tax rate. But it seem like if you add those together, that's maybe a $20 million to $25 million delta, and I'm getting more like $50 million to $60 million. So I just want to make sure, is there any other good guy in the quarter versus your expectations, to help us understand the quarter, and why we should pull that out for the rest of the year? And then just on the tax rate, I know it is hard to predict over a longer period of time. But just for purposes of modeling, is it fair to say, like anything else, that 32% is a fair, kind of go-forward rate over a longer period of time, or do we think of that as a one-year phenomenon?

Well, a couple good questions there, Larry. In terms of surprise versus what we believed at the time, it was mid-June when we did Investor Day. I suppose, first off, the size of the gap depends on a little bit on what your baseline is, and what you think, up modestly, was. I'll tell you, for us the surprise was probably a little smaller in dollars, than what you suggested. But the Technology Solutions implementation time lines and the customer payments that we hit, that was a very material move, that as I explained. That is revenue when it comes, pretty much goes straight through to the bottom line.

Right.

So a small amount of revenue really moves the profits. The tax rate has been $0.02, and you are correct. Versus what we thought in mid June, there is another $0.02 where, across the board, our other Distribution and Technology businesses, all did a little better than we expected. Frankly, if that's all that had happened, it wouldn't be drawing our attention or your attention, just really because of the very unexpected tax change, and the very large variance in MTS, that you got to the results you saw, which was probably, in our world, probably more $40 million or thereabouts better than we had been expecting.

In terms of go-forward tax rate, it is always a little tough to make long-term commentary on tax rates, because particularly in today's political environment, who knows where the tax code is going? But what you should see over the next year is if all else were to remain equal, is some of the lower tax sources of income that we have in our businesses, we think will grow a little bit faster than our overall business. So if that were to happen, and if the tax code were to change, I'm hopeful that you will see that 30% inch down a little bit over time, 32%, excuse me.

Right. And so, just it sounds like then the first quarter good guy on timing of implementation, as you think about it, really should be kind of pulled out, in consequent quarters on Technology?

Yes. Exactly. For now, we are not changing our full-year view of Technology, because most of what happened, we had in the plan, we didn't think it would happen in the June quarter.

Got it. Okay, great, thanks.

Our next question comes from Lisa Gill, JPMorgan.

Thanks very much. Jeff, just to follow-up on that though, the other $40 million that was better than what you expected when we saw you in June, is there any reason why that would come out of future quarters?

Well, so if you think about those 3 sources, Lisa, the biggest source, of course, is just the revenue recognition in MTS. And that's the piece, that we really did have in the plan for the year. We just didn't think it would come in June. Now the tax rate which, helped us a little bit, we gave you an increase in our guidance because sure, that impacts the whole year and that is why we pulled the year up by the $0.10, although it rounds to more like $0.02 in the June quarter.

Right. Okay. I guess, and then just, my second question would just be, from a strategic standpoint, when we think about healthcare IT, maybe John, if you can talk about this. Are you where you want to be in that business? How do you feel about the US market? You are obviously meeting the milestones, so that you can start to recognize that revenue. But maybe just talk about it strategically for a minute, as you look out over the next couple of years?

Clearly, we think that Technology is going to continue to be a source of opportunity, as this market gets more and more automated. And the clinical side of the business is where the focus is today, primarily driven by the government's insistence that people get these systems installed, and used in an appropriate way. Beyond that, there will continue to be demand for build outs of clinical opportunities for adjacent products and other kinds of solutions and services that kind of bolt into the core clinical systems.

And if you think about McKesson's customers, many of our customers from a financial prospective are running on terrific systems that we installed 20 or 25 years ago, that those financial systems eventually will have to be upgraded, and changed in a way that will allow them to deal with the complexities, associated with the way payments are going to be delivered, going forward. And one of the acquisitions we made in the quarter, called Portico, the payer side is positioning is the payer software business for that complexity.

The continued development of a product called Horizon Enterprise Revenue Management would be the provider side of that improved infrastructure and architecture to manage the financial side of the house. So I think that, albeit, we are in a big buying cycle now on the clinical side or implementation cycle for McKesson, we do think we will transition into a focus on the financial side, as we look into that 2 year horizon--.

And --John, just as a follow-up. In the past, you have talked about the past, that acquisitions are quite expensive in the market. Are you starting to see prices come down at all? Are you seeing that things are more reasonable? We are looking at your balance sheet, clearly have a lot of cash, and healthcare IT is a big opportunity over the next couple of years. Should we be thinking that there will be more acquisition opportunities in that area?

Well, I think there will be winners and losers that are going to shake out in this environment. And the winners, I believe, will be the larger IT companies that have the footprints to be the anchor tenant, so to speak, with our clients. And I would say that is true whether it is a payer client or a provider client, whether that provider is a hospital or a physician office. And that anchor position should allow for additional pull through opportunities of products, where smaller companies or companies perhaps on the margin, can't get access to the customers.

So I do think there will be more acquisition opportunities, as those evaluations come down as a result of the complexity of getting into the business. And sometimes we'll pay up a little bit for acquisitions when they are small scale, like System C, and Portico were on their own, from a simple DSF perspective, would probably not be worth what we paid, but we put into our enterprise with our pull-through opportunities, those customers will allow us to have a pay back on that investment for our shareholders. But speaking broadly, we are not seeing valuations drop much for the big public companies yet, and that may take some time.

Okay, thanks.

Yes.

Our next question today comes from Ricky Goldwasser, Morgan Stanley.

Yes. Hi, good afternoon, and congratulations. Just a question around guidance. With the stronger than expected performance in the first quarter, will the year be more evenly weighted between the first half and second half? Or still we -- or should we still think about the first half, as kind of around 40% of earnings, and then second half, 60%?

Well, Ricky, that is two comments. I don't think the pull forward of some items that we saw pretty evenly spread through the rest of the year in our plan, changes our view of the year. Of course, we haven't really said anything, about 40% in the first half. The only comment we have made beyond the first quarter, which certainly still holds true, is we would expect the March quarter to, once again, be unusually strong.

Okay. I'm saying 40/60, just because when I look back historically, I think last year was around 42/58, before so if this is unusually -- if the back then is unusually strong because of the generic pipeline, we are making the assumption that the first half is going to be up normally, below that. And I know that you don't give quarterly guidance, but maybe you can help me then, by thinking about the drivers in the next coming quarter? When we think about the key drivers of the business, whether it is the benefit that you get from the pharmaceutical manufacturers, that makes their own products, how should we think about those in this upcoming quarter?

Well, Ricky, as you know, the reason we don't give quarterly guidance is because you have significant quarter-to-quarter variability in the timing of when we get paid by our branded manufacturers, which we don't control. We are often a little surprised by generic launches, which we don't control. And we just demonstrated in the June quarter, that in our Technology business, [rev rack] can vary a little bit from quarter-to-quarter.

So I really have to go back to, we have given you the commentary on the fourth quarter. You've got 1 quarter of actual results, and you've got a full-year guidance that we just updated. But beyond that, boy, it's just, I think for us to try to get more specific, would almost imply that we know more about the timing of certain things, than we in fact do.

Okay. Thank you.

Next we'll go to Helene Wolk, Sanford Bernstein.

Thank you. I have a question about the IT margin expectations for the balance of the fiscal year. I guess I heard that you're expecting to get to the low end of mid-teens. And yet, I'm also hearing I think, that you pulled forward what is probably high margin business, in terms of the service revenue? So that what am I missing, in terms of what changes in mix or otherwise, that helps me get to that margin outlook for the balance of the year?

Well, I think the way to think about it, Helene, at the low end of mid-teens, would say somewhere around 14, which is about where we were the first quarter. So the first thing to remember, there is significant seasonality in this business, just because you have to end the sales year some time. So the March quarter tends to always be, by quite a stretch, the strongest quarter and the highest margin. The second point I would make, is the, what we pulled forward was revenue that in our plan for the year in our original guidance, we had later on in the year.

Regardless of whether it fell later in the year or in the June quarter as it did, it was very high margin revenue. So it really doesn't change our view for the full-year. So while we are pleased to get some things done with our customers more quickly than we had anticipated, we are only 90 days into the year. And it is just too early to change our view of the full-year, which remains as it was.

Great. Thank you.

Robert Jones of Goldman Sachs has the next question.

Thanks, yes. You guys hit on most of the big ones. But I guess just a couple of specific follow ups. It sounded like there was some strong performance in medical this quarter. We have heard some mixed commentary on utilization this quarter across healthcare. I was just curious, as to what you guys are seeing from your business, from your medical business, as far as utilization?

Well, I think that we probably share some of that same view, that utilization and physician office visits are down slightly, or certainly softer than historical. I think that we had a view, going into the year, that we were going to grow slightly faster than the market, as a result of the strength of our value proposition for the physician practices that we focus on. I think that, that has probably shown itself in the first quarter. So I do think we are make something progress, attracting new customers, through our portfolio solutions, and we are optimistic about this business. And it continues to perform well for us.

Great. And I guess, just quickly, if there is any, an update on the VA contract, and any expectations around timing? Thanks.

Yes, there is really no new update. We have submitted, as others have, I would imagine a reply to the Request For Proposals. And I would imagine that is being evaluated and considered now. And we would expect, I believe, to hear late this year or early next year, that December January type of time frame, as to what the outcome of those government evaluations of those proposals will be. But there really is nothing new, other than that. Next question, please.

Our next question comes from John Ransom, Raymond James.

Hi. Just a couple of questions on US Oncology. Can you help us with this -- the EPS effect of that acquisition this quarter? And was it better or worse than you expected?

It is pretty much tracking, John, right in line with what we expected. And the way to think about it is, we gave GAAP guidance that it would be accretive, excluding the one-time cost of $0.07 to $0.08. And the intangible amortization related to it, is about $0.20. So on an adjusted EPS basis for the year, it will be in the $0.25 to $0.30 range, and we are tracking right to that.

Great. And secondly, do you have an update on the ASP plus 6, maybe going to ASP plus 4, and how should we think about that if that were to occur?

John, when we did the acquisition, we knew there was going to continue to be a focus and question and concern around the issue of reimbursement. And we continue to focus on that as a Company as well. And clearly, it is our desire to avoid any additional adjustments to the way our physician customers are reimbursed. Having said all of that, we did factor reimbursement pressure into our models, when we acquired US Oncology.

In some ways, that pressure increases the interests customers might have in looking at other opportunities to improve profitability and efficiency in their practices. So I think this, clearly, is a concern. We don't want our physician customers to experience reduction reimbursement around the medication dispensing attributes of the profitability that they enjoy today. But there are a lot of other ways to drive improved financial performance for these customers, in addition to the mark-up on the product that we continue to focus on, to hopefully provide. As I said, offsets that we believe, will exist, as this pressure continues over time. We don't have any near term reason to believe any changes in ASP, is likely to occur, but we certainly hear the same debates that are going on in Washington that everybody else does, and we are not naive about the risk.

Okay, thank you.

Yes.

Up next, we'll take a question from Eric Coldwell, Robert Baird.

Thanks. Good evening. Just a some clarifications on Technology Solutions, was the implementation milestone and payment timings, were those separate events, i.e., were they separated between MPT and maybe payer solutions, where you got some disease management payments, something like that, if you could give some color there? And then John, I think you mentioned that provider technology showed improvement in revenue and profitability in your prepared remarks. And I'm curious if whether that would also be the case, had you not seen the accelerated timing event? Just some more clarification on the underlying performance, net of the obvious benefits of the implementation timing. Thanks.

So Eric, a couple of good questions there. So all of the revenue recognition surprises that I was talking about, both the implementation milestones that we had, as well as the customers payments that we received, that was a 100% within the MPT or the hospital-facing business, across a range of product lines within that business, and a range of customers, but all within MPT.

The other point I might make, just to maybe clarify something I said earlier, is when you think about what surprised us versus our own perhaps expectations for the quarter, probably the total surprise to us was maybe in the $40 million range. The biggest piece of that is then, the MPT surprise I just talked about, plus you have tax, and maybe a little bit across the rest of the Company.

In terms of how, absent the acceleration, we would have done in the MTS segment, you still would have seen that business up nicely from the prior year. You just wouldn't have seen 49% operating profit growth, which is in fact, what we reported.

That is very helpful. And if I just can clarify, you said MTS, would have been up, regardless of the timing. Would provider technologies, specifically have been up?

Well, we don't break out the specific results of MPT, Eric.

Thank you.

Steve Halper, of Stifel Nicolaus is up next.

What was the reason for increase in DSO by 2 days?

Well, 2 things. Day of week can actually matter to us, Steve, of course, because we have rather some rather large customers, and whether they are due to pay on us Wednesday, versus Friday, and when the month ends, that can vary it. But there have been also a few cases over the past year where we have made an economic decision, that it is in our interest, looking at all the aspects of a customer contract, to use our balance sheet, and occasionally extend a little longer payment terms. So it is a mixture of those 2 things over the past year.

Okay. And then going back to the revenue recognition, I hate to beat the dead horse here on Technology Solutions, I understand the software implementations, but can you just explain the customer payment comment, relative to how it hits revenue?

Yes, that is fine. The simple answer, Steve, is that there are certain categories of customers, particularly in a time when there are a lot of struggling hospitals in the country, financially. So there are certain customers where we don't recognize any revenue until we get the cash in the door, because we perceive sufficient payment risk, that it would not be conservative in terms of accounting treatment for us to recognize the revenue, and then hope we get paid. So we think that is conservative, and a good accounting treatment. What it does mean, is when you have some good work being done by our teams, and some, frankly, customers who are happy for what we are doing for them, and are paying us more quickly than we thought, boy, you get revenue that just drops straight through the bottom line.

And lastly, can you tell us what businesses you would have an arrangement with like that?

Well, I'm obviously not going to -- we would never comment, Steve, on specific customers.

No, no, no, not specific customer names.

Oh, I'm sorry.

What type of business line?

Yes, these are all within the hospital-facing technology business, which we would generally refer to as MPT.

Okay. Thank you.

Our next question comes from Tom Gallucci with Lazard Capital.

Hello, can you hear me?

Very clearly.

Okay, sorry about that. Just two quick ones. On the IT side, I think in the past we've talked about maybe seeing increased costs, as you are trying to sort of do right by the customer, and get things implemented. Since certain things have gone faster, should we expect a little lower costs as you get through the year? Even though that revenue is pulled forward, I understand that part, but should the cost basis be a little lower, later?

Well, not really, Tom, as John pointed out, we are very committed to continuing the progress you saw in this quarter's results on implementations. And so, while we are pleased with what happened this quarter, there are no plans to back off the level of resource we currently have planned for the year.

Okay. Fair enough. And then, just got a -- (Multiple speakers)>

But Tom, I do need to point out that we did make some changes last year from a cost structure perspective, that will be rolling in on a full-year basis this year. So I think -- and that was not really -- in terms of R&D or implementation resources, but we did some consolidation in our overhead and in our selling infrastructure last year. And we are getting the benefit of some of that as you look into the first quarter, as we think about the full-year. So there are some structural cost changes that have happened, but it is not because we are reducing the resources we have in place to deal with these customer implementations.

Sure. And then maybe just one other on the traditional sort of drug distribution side. I thought it was interesting that ABC this morning, had pointed to certain geographies that were growing disproportionately quick, I guess, relative to some others. Do you have any areas or regions that would point to, that are growing a lot faster than the average?

I have to admit, I haven't really looked at it on a regional basis. I can't comment. I would imagine though, there probably is some strength in certain states and certain areas of the marketplace that haven't been affected by unemployment as much as others. I didn't listen to the comments, but if you were to ask me, my guess would be, we see some of that variability, but it's more related to the condition of the market, from an unemployment perspective than it is anything else.

Okay. Thanks a lot.

Next up, we'll hear from George Hill, Citi.

Hi, thanks for taking the question. I will start off with one on the IT side as well. John and Jeff, there seem to be a lot of private assets out there available for sale now. Now you had mentioned the evaluations of the public companies. I guess as you look across Technology Solutions segments, can you talk about which segments of that business are more attractive and less attractive, and where might be attractive candidates, to apply some more capital?

It is difficult to for us to talk specifically in a forum like this, as to what our strategy, is in terms of capital deployment. I would say, however, that we don't limit our views in terms of synergistic acquisitions to a particular segment, and we are fortunate, that we are in almost every segment. So whether it is a payer asset or a hospital or a physician or a connectivity type of asset or retail pharmacy asset, we have the ability to at least evaluate whether or not there is a strategic fit.

And evaluate whether the financials of the proposed acquisition provide the kind of returns we expect on behalf of our shareholders. And so I don't think we limit our views at all. But I would say, that there is a couple quick gates we can go through to quickly dismiss an opportunity as being realistic, based on the expectations of a seller, in the case of a private transaction or the public market valuations, if you think about a public company transactions. We do the same thing on the distribution side. We have the ability to look across the globe at distribution assets, and we look at the same kinds of metrics.

Okay, and maybe then just a quick follow-up. Some of the trade group information out there on the hospital side, would show that you guys had a tough year in 2010 with respect to share retention. I guess do you feel like the customer base now has stabilized, given that you guys have hit some of these milestones? Or do you feel like there could still be some further weakness?

We, certainly, we don't like to lose customers anywhere. And sometimes, we were faced with a situation where our past performance as opposed to our current performance, is a lagging issue that we have to deal with. And I think that we feel really good about the quality of our current product line. The amount of money we invested in the last 2 years in our products, make those products, I think competitive, if not superior to many products our competitors have in the marketplace. And I'm certainly hopeful that the market share changes that happened last year, are a trailing indicator of our customer's views of us, as opposed to a current indicator, because we that believe strongly customers installing our current products are very pleased with the performance of those products largely. And we have expected this year our market share positions would remain solid, if not perhaps, begin to rebound slightly, particularly in the smaller marketplace, where our Paragon product line is very well-suited, as a replacement alternative to incumbent products in a market where we had smaller share, and significant opportunity to grow with a world class product. So I think you almost have to define our technology business by product, and think about our success on a product by product basis, and that is what we try to do.

Thanks. Appreciate the color.

You're welcome. We have time for one more question, operator.

Thank you. Our final question today will come from A.J. Rice, Susquehanna.

Thanks, hello, everybody. Just looking at the strength in the direct distribution and services, year-to-year. If you look at some of the macro commentary, IMS, would have said script trend actually moderated some what in the June quarter versus the March quarter. I was wondering, in your 10-Q, you highlight volume growth in pricing as drivers, both new customer and existing customer. Can you just maybe flesh out a little bit there, of what you are seeing, in terms of where the volume strength is across the board? And what are you seeing on pricing?

Well, I think the pricing that we are referring to is product inflation to a large extent, relative to the manufacturing behavior.

Right.

And we think that environment in the first quarter was strong, and that is why we refer to it in our documents. I do think that we have variability on occasion in our revenue number, driven by the performance of some of our large customers, and their buying behavior. And just like on the receivables side. And we can have variability on the sales side, if somebody decides to place an order on the last day of the quarter, or that is the way the thing falls, we can pick up some additional revenue. And on occasion, we will pick up a new customer. We picked up a customer last year that flowed through this business as well. So I wouldn't -- I don't think it's time for us to think about revenue above what we have already indicated for the year, and this quarter just happens to be a little bit stronger than we would have expected for the full-year. And we don't have a different view on the full year, A.J.

Okay. And maybe just at the Investor Day, you guys were highlighting that you had spent a lot of time realigning the sales force at US Oncology, and sort of had positioned them to go out -- and heavily to try to build on the CSA base of the 3,000 oncologists, as well as I think you identified JVs with acute care hospitals. Are we still sort of early stages there? Is there anything you can point to in the last few months, that is sort of interesting to talk about?

Well, I think when I talked about my satisfaction with the US Oncology activity, I think one of the things that it points to is, that we can do this integration, and reorganization, and not lose our sales momentum. And we do feel strongly about the fact, that we have a value proposition that is resonating very well with our customers and potential customers.

So I think we remain optimistic there. And I was involved in a couple, we were involved in a couple of activities with acute care hospitals, where US Oncology might have been a competitor or potential competitor, we have now combined our forces to create a solution set that fits well in an acute care community based setting.

We have found a way I think to change our value proposition so it can meet a myriad of needs, and that is our focus. So thank you for that question. I want to thank you all for your time and attention today, and it clearly, is a good start to our year. We are excited about the opportunities ahead, and I'll now turn the call over to Ana for a review of our upcoming activities for the financial community.

Thank you John. To preview upcoming events, on September 8, we will present at the Stifel Nicolaus Healthcare conference in Boston. On September 14, we will present at the Morgan Stanley conference in New York. On November 10, we will present at the Credit Suisse Healthcare Conference in Phoenix. And on November 16, we will present at the Lazard Capital Markets Healthcare conference in New York. We will release second quarter earnings results in late October. We look forward to seeing you at one of these upcoming events. Thanks, and goodbye.

Ladies and gentlemen, that does conclude today's conference. Thank you all for your participation.