麥卡遜 (MCK) 2015 Q1 法說會逐字稿

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

(Operator Instructions)

Today's call is being recorded. And now, your host for today's call is Erin Lampert, Senior Vice President of Investor Relations. Ms. Lampert, please go ahead ma'am.

Thank you, Rufus. Good morning and welcome to the McKesson FY15 first-quarter earnings call. I'm joined today by John Hammergren, McKesson's Chairman and CEO; and James Beer, McKesson's Executive Vice President and Chief Financial Officer. John will first provide a business update and will then introduce James who will review the financial results for the quarter. After James' comments, we will open the call for your questions; we plan to end the call promptly after one hour at 9:30 AM 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 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, on today's call we will refer to certain non-GAAP financial measures, in which we exclude from our GAAP financial results acquisition expenses and related adjustments; amortization of acquisition-related intangible assets; certain litigation reserve adjustments; and LIFO-related adjustments. We believe these non-GAAP measures will provide useful information for investors. Please refer to our press release announcing first-quarter FY15 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, Erin, and thanks everyone for joining us on our call. Today we reported a strong start to FY15, with total Company revenues of $44.1 billion and adjusted earnings per diluted share from continuing operations of $2.49. Based on the strength of our distribution solutions results in the first quarter and our confidence in the full year, we are raising our previous outlook and now expect adjusted earnings per diluted share at $10.50 to $10.90 for FY15.

Before I begin my comments on our business performance for the quarter, I want to provide a brief update on two items. First, I'm pleased with the outcome of the Celesio Annual General Meeting of Shareholders, which was held on July 15 in Stuttgart, Germany.

As part of the standard German legal process, at that meeting, shareholders voted to approve the domination agreement between McKesson and Celesio. The domination agreement must be registered with the German courts in order to become effective.

Before that registration can take place, minority shareholders may have certain challenges, which may be based on substance or technical grounds. Anticipate that at least one challenge will be filed.

Under German law, there is a limited period of time for such disputes to be heard. Based on our current assessment, we now expect that the domination agreement will be registered with the German courts, and therefore, McKesson will be allowed to exercise operating control over Celesio by the end of the current calendar year. This time line represents a modest delay from our previous expectation that we would achieve operating control late in the first half of FY15.

The second item I want to highlight is related to the sale of our international technology business. Approximately one year ago, we talked about a number of actions to better position the Company going forward, including our intention to sell our international technology business. This business consisted of two main divisions: clinical and financial solutions, and workforce solutions.

In July, we completed the sale of the clinical and financial systems portion of McKesson international technologies business from McKesson international technology business. The workforce solution division, which provides workforce and payroll solutions to the UK National Health Service, was not included as part of the sale. As a result, it was determined that this business would need to be reclassified from discontinued operations, where we reported the results in FY14 back into continuing operations for FY15.

As part of the reclassification of this business from discontinued operations to continuing operations, we recognized a pretax charge of $34 million, or $0.11 per diluted share, in our first-quarter adjusted earnings results. It is important to note that our sole contract in the UK-based workforce solutions business with the NHS expires in late calendar 2015. We do not intend to rebid this contact going forward, and therefore, will continue to operate the business only to the end of the existing contract.

Moving on to our business results for the quarter, distribution solutions had a strong start to the year, with revenue of $43.3 billion for the quarter, up 38%, and adjusted operating profit of $1 billion, up 44%, on both a reported and constant-currency basis.

North America distribution and services, which includes our US pharmaceutical business, McKesson Specialty Health, and McKesson Canada delivered strong results for the quarter aided by higher-than-expected revenue growth. Within North America, revenue growth in our US pharmaceutical business exceeded our expectations in the first quarter, driven primarily by strong demand for two recently launched drugs for the treatment of hepatitis C, as well as solid growth across our independent national retail and mail order customers. Based on this revenue strength in the first quarter, we now believe revenue growth in North America will be modestly ahead of our original expectations for the year.

Within our US pharmaceutical business, we also experienced solid growth across our portfolio of generic and brand pharmaceuticals, driven in part by the timing of certain generic and brand price increases, which came earlier in the fiscal year than we had originally planned. It is important to note, however, that our full-year expectations for both brand and generic inflation remain unchanged.

We continue to make solid progress in executing our new agreement with Rite Aid. And as you saw in a recent press release, I'm delighted with the extension of our long-standing distribution relationship with CVS Caremark through June of 2019. As you know, we have a tremendous track record of delivering comprehensive supply chain solutions to CVS, and we are proud to continue this valued relationship.

Last week, we hosted our annual conference for retail independent customers, which brought together thousands of community pharmacy owners and pharmacists from across the country. This year's conference helped attendees understand the transformation in the market, driven by an emphasis on patient -- positive patient outcomes, continued growth of preferred networks, and a focus on the pharmacy's ability to impact important quality and patient satisfaction ratings. Our conference attracts a significant number of our Health Mart customers, and we're extremely proud to have reached a milestone of more than 3,400 Health Mart pharmacy members.

In summary, I'm pleased with the performance of our US pharmaceutical business in the first quarter and a great start to this fiscal year.

Moving on to our specialty business, we had solid results in the first quarter with nice growth across the business. At our recent investor day, we highlighted the diversity of our specialty portfolio, where we are a leading service and technology provider across multiple specialty areas.

It is this diversity of our broad portfolio that sets us apart, in particular, our model through [S Oncology] provides comprehensive services across the spectrum of cancer care. I'm excited about the progress we continue to make in our specialty business, and believe we are well-positioned to continue to grow and innovate in this dynamic market.

And our Canadian business had a solid start to the year, with results that were in line with our expectations for the first quarter.

Turning now to our results for international pharmaceutical distribution and services. Revenues for the first quarter were $7.6 billion, an increase of 3% on the underlying results of Celesio on a constant-currency basis. As I mentioned in my opening remarks, we continue to move through the required steps to achieve operating control of the Company and now expect to achieve this milestone by the end of our current calendar year.

Turning to our medical surgical business, revenues were $1.4 billion for the first quarter, an increase of 2% over the prior year. We are off to a solid start to the year in our medical surgical business, and we continue to make good progress optimizing our distribution network and technology platforms related to the acquisition of PSS World Medical.

In summary, we're off to a strong start to the year in distribution solutions. We are extremely well positioned across all of our distribution businesses, and we are confident in our improved outlook for the rest of the fiscal year.

Technology solutions revenues were down 8% for the first quarter, driven primarily by anticipated revenue softness in our Horizon Clinical software platform, and the disposition of our product line, as we discussed on our last earnings call. Adjusted operating margins in the segment were 10.4%, which includes the $34 million pre-tax charge associated with the reclassification of a portion of our international technology business from discontinued operations to continuing operations. Excluding this charge, adjusted operating margins for the segment would've been 15%.

More broadly, we continued to make steady progress across our technology solutions businesses. Our first-quarter results benefited from the steady growth profile of our RelayHealth connectivity business, along with positive results in our physician services and medical imaging businesses.

I also want to highlight the recent success of the CommonWell Health Alliance. Over a year ago, McKesson collaborated with several other organizations to demonstrate our leadership in finding solutions to address the issue of data interoperability in our industry. These companies recognized early on that pervasive connectivity cannot be accomplished by any one vendor but must be implemented in the way that all vendors and systems can effectively participate.

The CommonWell Health Alliance began with five founding members, all with a common goal: to change the standards of interoperability for the nation. And today, the alliance has grown to include a total of 11 members.

Recently, the CommonWell members were able to demonstrate success through the launch of foundational services across four geographies within select pilot locations. The goal of the pilots was to validate the proof of concepts and understand from the providers the ways in which we can continue to bring added value.

We've been encouraged by the success of the pilots, and now, CommonWell members, including McKesson, are gearing up for expansion and commercialization of the program, with foundational services provided by RelayHealth, and a plan to continue to add members to the alliance. We are very pleased with the success to date and are looking forward, along with our partners, to the next growth phase for CommonWell.

In summary, we continue to make solid progress in our key strategic priorities for McKesson technology solutions, including helping our customers reduce cost, operate more efficiently, providing our customers with solutions to drive improved analytics, and supporting our customers' transformation to a world of value-based care.

Now to wrap up my comments for our fiscal first quarter. The strength of our operating performance is reflected in our strong financial results for the quarter, which I'll remind you, include the charge of $0.11 per diluted share as a result of the reclassification of a portion of our international technology business to continuing operations. This was not contemplated in our original plan. In light of the strong operating performance, we are pleased with our improved outlook for the full year, and as I noted at the beginning of my remarks, we are raising our guidance by a range of $0.10 to $10.50 to $10.90 for FY15.

In addition to the strength of our operating performance, we continue to have a strong balance sheet. For the first quarter, we generated cash flow from operations of $182 million, our expectation to deliver cash flow from operations of approximately $3 billion for FY15 remains unchanged from our original guidance. We are extremely well positioned to execute our portfolio approach to capital deployment to continue to deliver value for our shareholders.

With that, I'll turn the call over to James, and we will return to address your questions when he finishes. James?

Thank you, John, and good morning, everyone. We are very pleased with our first-quarter results, which represent a strong start to FY15. And as John discussed earlier, we are raising our previous outlook and now expect adjusted earnings per diluted share from continuing operations of $10.50 to $10.90.

Today, I will walk you through our first-quarter financial results and provide an update on our acquisition of Celesio. Before I move on, let me remind you that in this quarter, both GAAP and adjusted earnings reflect the reclassification of a portion of our international technology business, referred to as our workforce business, from discontinued operations back to continuing operations.

Related to the workforce business reclassification, we recorded a pretax charge of $34 million, or $0.11 per share, largely representing a one-time catch-up of depreciation and amortization on the underlying assets as we move the business from discontinued to continuing operations. It is also important to note that FY14 was recast to include the results of the workforce business. Schedule 9 provides a recast FY14 consolidated and technology segment revenues.

Revenues for the workforce business were $31 million during the first quarter of FY14 and $147 million for the full year. FY14, as we cast for the addition of the workforce business, includes $0.04 and $0.21 in contribution to adjusted earnings per diluted share for the first quarter and full year respectively, as outlined on schedules 7 and 8.

Now let's move to our results for the quarter. My remarks today will focus on our first-quarter adjusted EPS from continuing operations of $2.49, which excludes three items: amortization of acquisition-related intangibles, acquisition expenses and related adjustments, and LIFO-related adjustments.

Turning now to our consolidated results which can be found on schedule 2: consolidated revenues increased 37% for the quarter to $44.1 billion. On this 37% revenue growth, adjusted gross profit for the quarter increased 50% to $2.9 billion, driven by Celesio and the strong performance of our distribution solutions segment.

Total adjusted operating expenses of $1.9 billion were up 64% for the quarter, mainly driven by Celesio. Excluding the impact of Celesio, operating expenses increased 3% for the quarter. Other income was $21 million for the quarter. Interest expense increased 71% versus the prior year, to $101 million, driven by debt issued and assumed related to our acquisition of Celesio.

Now moving to taxes, our adjusted tax rate for the quarter was 31.2%. As usual, I would expect this tax rate to fluctuate somewhat from quarter to quarter. Adjusted income for the quarter was $585 million, with our adjusted earnings per diluted share from continuing operations at $2.49. Ramping up our consolidated results, diluted weighted average shares outstanding increased by 1% year over year to $235 million.

Let's now turn to the segment results, which can be found on schedule 3. Distribution solutions segment revenues increased for the quarter to $43.3 billion, up 38% on a reported and constant-currency basis. North America pharmaceutical distribution services revenues increased 14% to $34.3 billion, primarily reflecting market growth, including sales of two recently launched drugs for the treatment of hepatitis C, the delay of certain generic launches to later in the fiscal year, and growth in our Canadian and specialty businesses.

In addition, as John mentioned, this quarter we recorded solid growth across our portfolio of generic and branded pharmaceuticals, driven in part by the timing of certain generic and brand price increases, which came earlier in the fiscal year than we had originally planned. On a constant-currency basis, revenues increased 15%. Based on the growth we have seen, primarily from the sales of two hepatitis C drugs, we now expect that North America will be modestly ahead of our previous full-year expectations of mid single-digit revenue growth.

International pharmaceutical distribution and services revenues were $7.6 billion for the first quarter. On a constant-currency basis, revenues increased to 3% on the underlying revenues of Celesio. Medical surgical revenues were up 2% for the quarter, driven by market growth. Distribution solutions adjusted gross profit increased 68% for the quarter on 38% revenue growth, resulting in 106 basis points improvement in our adjusted gross profit margin.

In addition to the Celesio acquisition, our first-quarter gross profit and distribution solutions benefited from favorable performance in our pharmaceutical portfolio, including earlier-than-expected generic and brand price increases that occurred late in the quarter. Our full-year assumption for generic and brand price inflation remains unchanged.

Adjusted operating expense for this segment increased 90% for the quarter, driven by our acquisition of Celesio. Excluding Celesio, operating expenses for the segment increased 4% year over year. The segment's adjusted operation margin rate for the quarter was 232 basis points, an improvement of 9 basis points versus the prior year.

As I mentioned earlier, we now expect revenue growth for our North America pharmaceutical distribution and services business to be modestly ahead of expectations. Based on the anticipated mix of revenue in our North American business, we now expect operating margins to increase mid single-digits basis points year over year.

Turning now to technology solutions, revenues were down 8% for the quarter to $768 million. This decline was primarily driven by the anticipated revenue softness of the Horizon Clinical software platform and the planned elimination of a product line, offset by growth in our other technology businesses.

It is important to note that relative to FY14's recast revenues, the workforce business revenues are expected to be down year over year. And as a result, we now expect segment revenues for the full year to decline by low single digits year over year.

As I discussed earlier, first-quarter GAAP and adjusted results for technology solutions reflect a pretax charge of $34 million, or $0.11 per share; $32 million of these charges reduced segment adjusted gross profit, while a further $2 million increased the segment operating expenses this quarter.

Adjusted operating expenses in the segment decreased 4%, driven primarily by restructuring actions taken in the prior year. First-quarter adjusted operating profit for the segment was down 45% to $80 million, and the adjusted operating margin rate was 10.42%, representing a decrease of 692 basis points versus the prior year.

Excluding the impact of the workforce business charge, the adjusted operating margin rate was 15%. Based on the reclassification of the workforce business, we now expect the full-year adjusted operating margin for the segment to be at the mid-teens level.

Moving now to the balance sheet and working capital metrics, as you've heard me discuss before, each of our working capital metrics can be significantly impacted by timing, including which day of the week marks the close of a given quarter. In addition, this quarter's working capital metrics also includes Celesio.

For receivables, our day sales outstanding increased two days versus the prior year. Excluding Celesio, our days sales outstanding remained flat at 24 days.

Our days sales and inventories were flat year over year at 31 days. Our days sales in payables were flat year over year at 50 days. Excluding Celesio, our days sales and payables increased two days to 52 days.

We generated $182 million in cash flow from operations for the quarter. Overall for the full year, we continue to expect our cash flow from operations to be approximately $3 billion. We ended the quarter with a cash balance of $4.1 billion with $1.9 billion held offshore. Internal capital spending was $119 million for the quarter.

Now I'll turn to our adjusted EPS outlook for the year. As I mentioned earlier, we are raising our FY15 guidance for adjusted earnings from continuing operations per diluted share from our original range of $10.40 to $10.80 to a new range of $10.50 to $10.90.

In addition, we now expect $1.32 per share in amortization of acquisition-related intangible assets and $0.50 of acquisition expenses and related adjustments. We also expect to exclude between $0.95 and $1.05 per share in LIFO-related adjustments.

Before concluding my remarks, I would like to briefly review some important aspects of the next steps in our acquisitions of Celesio. As John mentioned earlier, we now expect to secure operating control by the end of the calendar year.

We continue to believe we can achieve the previously stated accretion range of $1.00 to $1.20 on an adjusted earnings basis during the 12-month period beginning February 2014. You will recall, however, that this range assumes 100% ownership; our current ownership stake in Celesio remains at 76%. By the fourth year following completion of the required steps to obtain operating control, we continue to expect to realize annual synergies between $275 million and $325 million.

In summary, McKesson delivered strong financial results during the first quarter, and we are well-positioned for the remainder of the fiscal year.

Thank you, and with that, I will turn the call over to the operator for your questions. In the interest of time, I ask that you limit yourself to just one question and a brief follow-up to allow others an opportunity to participate. Rufus?

Thank you, sir.

(Operator Instructions)

For our first question, we go to George Hill with Deutsche Bank.

Hey, good morning, guys, and thanks for taking the question. James, maybe I'll ask a couple of questions about the guidance for the back half of the year. Net of the IT charge, is it right to think about that you guys are actually taking the guidance up by $0.20, considering the $0.11 -- or let's call it $0.21 given the IT charge taken in the quarter?

Well certainly, obviously, we do include that IOG charge in our workforce business charge in our adjusted earnings. So absent that, yes, we are upping the formal guide by $0.10, but in the first quarter, yes you are right, we did absorb an $0.11 charge associated with that workforce business.

Okay, I wanted to make sure I understood that quickly, and then a quick follow-up either for James or John. Generic drug price inflation has obviously been very strong in helping the performance of the IT business. Can you talk about expectations for the back half of the year, given the strength that you saw the front half of the year?

We do think there was some pull-forward, George, of our generic price inflation models the full fiscal year, but we really don't -- we haven't changed our outlook, if you think about it on a full-year basis. So I think right now, it's early for our fiscal year, but we believe that the guidance we gave at the beginning of the year is still reasonable.

Okay. I will hop back into the queue. Thanks.

And for our next question we go to Lisa Gill with JPMorgan.

Thanks very much. Good morning. I was wondering if we could look at the overall drug distribution revenue, and John, I think you talked about the Hep C drug. But if you back out Hep C in the quarter, can you give us an idea of what you are seeing for underlying utilization and any early signs of ACA? We see Rite Aid just recorded this morning again strong results on the pharma side, so I'm just wondering what you are seeing in your model?

Well is difficult to account for what the Affordable Care Act effect is in our business. We came into the year believing there would be some modest effect from it, and maybe still believe that's the case. We really had strength across the entire segment of our ex revenues; Canada and specialty, in particular, came in very strong for us.

I think we are pleased with the momentum that we have, and as you mentioned, the Hep C drugs, we're also surprised to how quickly they've been taken up and the volumes that we've received there. So I think overall, we are pleased with the performance of the revenues in that business.

And then, John, as a follow-up, you mentioned the extension of your relationship with CVS. Are there been any changes of note to that new relationship that goes through 2019?

It's basically the same form that we've had with them in the past in terms of the service and the relationships, so we are pleased to have renewed it, and we think it continues to show the quality of the service and the relationships we have with our customers.

Okay, great. Congratulations on a great quarter.

Thank you.

And we go next to Ricky Goldwasser with Morgan Stanley.

Hi, good morning. A couple of questions here. First of all, I think I heard the comment on the operating margin now expected to grow at mid-single due to mix. Can you give us some more color on the underlying revenue mix and what you have seen that was different than your expectations?

Yes, the driver of my comments around the distribution solutions operating margin is really the impact of the Hep C drugs that we saw really having a very strong rollout in this last quarter, and that is what is driving the margin effect.

Okay, and then a quick follow-up on the Rite Aid generic contract. I know, I think you said that you expect to see the benefit flowing through in the September quarter, so is the still like -- is timing still consistent with your earlier expectations?

We're really pleased with the continued performance in our relationship with Rite Aid. I would say that our contract negotiations have progressed the way we had anticipated, and the conversation around September was probably more focused on our delivery of generics to their individual stores. So we are probably better than halfway through the of implementation of store delivery of generics directed by McKesson. And that will continue to evolve until we have 100% of that responsibility as we get through the fall time frame.

Okay, and in terms of contribution to your bottom line, should we see that in the following quarter?

Well I think our guidance anticipates the effect of Rite Aid's business flowing through McKesson, and so other than the dilutive effect that has been a bit of a surprise from Hep C, from a margin-rate perspective, the rest of the performance of the business is right in line with our expectations.

Thank you.

We go next to Glen Santangelo with Credit Suisse.

Thanks and good morning. John, I just want to talk you about the North American distribution business. The Company continues to pose very solid results in that segment, and if I hear you correctly, obviously specialty helped the revenue line. Maybe volumes also helped the revenue line. But if I filter that down to the operating profit line, we are still seeing very sizable beats.

I'm wondering if you could help us think through what might really be driving that better-than-expected result. Is it that the branded and generic price inflation being pulled forward? Is it the volumes? We're not really sure what the margins look like on the specialty drugs you were talking about, so any help in triangulating what's really driving that operating profit would be helpful.

I think it comes from many of the sources, as you just highlighted there. Clearly, the branded generic performance in the quarter was very strong. We are pleased with the revenue growth we have received, in particular, out of Canada and in specialty.

Even our standard RX business has been supported by robust growth really across the board. And the continued uptake of our generic portfolio, the strength of Northstar; our ability to continue to bring market share to our customer base; and the strength of OnStop, our generic program in our markets continues to remain very strong. So I really feel like the businesses in North American pharmaceuticals are performing very well.

Maybe if I follow up Celesio. Obviously, their out with operating results this morning. And looking through those results, it seems like some of the segments might've performed a little bit better, while some of the other segments continue to be -- face some challenges that I think you've talked about in the past. But maybe could you give us some high-level commentary about what you thought of the results? And is everything performing relative to where you would've expected?

Yes. I think so. Overall, we're basically in line with our expectations. As you noted, in their comments, they talked a little bit about where their strength is coming and where some of their weaknesses are. I think their commentary is generally in line with what we expected.

Okay. Thank you.

You're welcome.

For our next question, we go to Robert Jones with Goldman Sachs.

Things the question. Just want to go back to guidance, a couple moving pieces here relative to the previous communication. Am I correct to assume that there was some slight synergies assumed previously from the timing of operational control Celesio? And would that now not be included in the new guidance range, given the push out of the expectation on operational control?

And then on the international technology business, I understand that you are absorbing the $0.11 charge, but as we think about the balance of the year, are there corresponding earnings from that business that come back into the P&L?

Yes, so on the first of your questions, what we have spoken about in the past was that, we expected a modest amount of synergies from Celesio during FY15. So yes, at some level, the push out of operational control by a few months does have some impact on that, but again, they were modest expectations in the first place. I just want to emphasize that.

And in terms of the workforce business and the impacts later in the year, I would expect that would continue year over year, because again, we've recast history so we have all of that in that schedules to the press release. I would expect that, that would continue to create something of a headwind year over year for the balance of the FY15.

That's helpful. And then John, on the cash deployment I understand you got probably about 1.5 on holds for Celesio, and there's some debt redemptions over the next 18 months. But still a lot of cash, with over $4 billion on the balance sheet today, solid cash flow again. Anything you can give us on how we should think about that cash being returned to shareholders or any perspectives on the M&A landscape at this point?

Well as you point out, there are a couple of uses of the cash that we already have planned into our future, and one is the purchase of the remaining outstanding shares of Celesio. We still have 24% left to accumulate, which we believe will happen over time, as well as the debt repayment that we've committed to accomplish as we go forward.

But we want to remain investment-grade, as we've indicated, and that as a backdrop will probably cause us to continue to have a portfolio approach to our capital deployment. So that doesn't mean that we won't return to shareholders through dividends and share repurchase some of that cash, but what it does mean is that our priorities to make sure we maintain investment-grade and that we avail ourselves of opportunities from an M&A perspective that makes sense, which we've done on a regular basis.

Great. Thanks so much.

We go next to Stephen Valiquette with UBS.

Thanks, good morning. So a couple quick ones here. First, the 2% revenue growth in the medsurg distribution segment. Is that indicative of a normalized run rate that we should expect for the rest of the year?

Well I think we believe the medsurg business is growing in line with our original expectations, so we think mid-single digits is probably where we're going to be. It's a little softer in the quarter than we would forecast for the full year. And I think the softness is really in line with what we think the market performed at the first [segment] for us.

And I have to emphasize that we are really pleased with the continued progress in medsurg and integration perspective. We are really accomplishing our objectives there, and the team is doing a good job.

Okay. Then quickly, you guys had that previous commentary about the percent of earnings in the first half of 2015 being similar to FY11 through FY13. I know that was loose guidance or commentary previously, but is that still relevant with these 1Q results? Or does that go out the window with the strength of 1Q?

Well what I'd say is I'd stick to the annual guide that we have offered. Given the quarter-to-quarter volatility in our results, it's hard to give directional assistance to you just for a single quarter, and I think this quarter is a good example of that.

We saw some price increases both on the branded side and on the generic side move up into this quarter earlier than we had planned. And then also, we saw some of the brand to generic conversions that we were expecting push further back towards the end of FY15. So really align you to the overall annual guide.

Okay. Great. Thanks.

And for our next question, we go to Ross Muken with ISI Group.

Good morning, guys. So it's now been a pretty remarkable period for the Company. You obviously had the Celesio acquisition, the Rite Aid agreement. It shows the value you can provide some of your larger customers. How does that beget discussions with other customers you have in terms of the McKesson value proposition and how you could obviously, then prove that you could obviously, provide more value to the broader universe as well?

We think our early success with the implementation of the Rite Aid relationship, as well as our continued performance in these businesses, is an indication of our customers' reliance on our ability to work in partnership with them to deliver superior results. I think we continue to work with those customers that have now fully availed themselves of the offerings that we have to make sure that they understand the results we think we can obtain together.

To help them quantify not only the savings from sourcing with us, but also the savings associated with having us manage the logistics requirements associated with the purchase of product as well. There are still significant customers that are somewhat redundant with us related to those deliveries, that we think afford both of us opportunities.

Having said that, these are big, strategic decisions that have to be made, and it will take some time for some customers to reach the same conclusion that others have already reached. But I think our performance, as the first quarter shows, is an indication of customers' continued reliance on our ability to help them on many dimensions, including sourcing their products.

Great, that's helpful, John. And maybe on technology solutions, this has been a bumpy ride now for quite a while, and I know you've done a lot to scale-down some of the clinical pieces where you've struggled. But as you think about the investment in the space and you think about the footprint, what is -- at the Board level and at the management level, what is the debate on longer-term aspirations and goals for certain businesses?

Then how did you figure out what needed to go versus what needed to stay? And how did that affect how you are going to continue to look at the portfolio going forward?

Well if you set aside the surprise we had, so to speak, going into this quarter, which was the lack of our ability to exit the portion of the international operations business that we had related to the workforce, and to run that contract out as opposed to selling it. If you set that aside, and you actually look at the performance of the business, it is basically in line with our expectation.

What we've been focused on there is making sure that we have the appropriate operating margin for businesses of this type; that we're growing the earnings of the business in a way that is responsible and reflects the opportunity that we see in front of us; that the growth coming from the positive businesses in that segment are able to offset the drag associated with the businesses that are not growing, as we know that they won't in certain categories.

In particular, that Horizon Clinical business that we're in the process of winding our way out of. And I would say that the last [mission] that's important to us is that these businesses are significant cash produces for us, and I think the management team knows how to operate them.

The bumpiness on occasion is caused by things like IOG that we didn't fully expect to flow back into operations, and we'll work our way through that as well. And I think at the portfolio level, we have a responsibility to look at this business, as well as all of our businesses, not so much in the aggregate and the way that we report them, perhaps.

If you disaggregate them, there a lot of smaller businesses and product lines that make up these two large segments or three large segments now. And I think what we're focused on is how do we make sure that we have got the right portfolio of products and services in those segments to grow the business?

Thanks so much, John.

You're welcome.

And for our next question, we go to Greg Bolan with Sterne, Agee.

Hi. Thank you. I apologize if I missed this, but for the quarter, James, just thinking about the 14% North America pharmaceutical distribution business, what do you believe was the contribution from the Hep C launches for the quarter, in terms of contribution to growth rate?

Well you have seen Gilead announce their results. And I just say that directionally, our revenues coming out of [sibaldi], for example, would've been in line with the overall market share across the three big distributions in this country.

Okay. That's fair. And then lastly on the same topic, as it relates to the margin dilution, if you will, year on year from the launch of these Hep C drugs, any noticeable impact in terms of stunting margin expansion for the distribution solutions segment?

Well the guidance that I offered a little earlier, mathematically represents a very modest reduction in margins for distribution solutions. And obviously, those have been going up consistently in recent years, and at analyst day, you'll recall that we reset the long-term margin goal for distribution solutions up to between 250 and 300 basis points. So modest impact from these Hep C drugs in the short term.

Great. Thank you so much.

And for our next question we go to John Ransom with Raymond James.

Hi, good morning. Sorry to keep beating this horse, but one of your competitors mentioned that generic inflation was higher this year than they thought versus expectations of being lower. You talked about it just being more price pull-throughs earlier than expected. How do we square those two comments? Has inflation, in fact, been higher than you expected or is it really just timing.

Well I can't really comment on others -- other people's comments, but what I would say is that reflect on the fact that we all have different fiscal years, we all have different portfolios of generics, we have different proprietary programs in the generic world, we have different relationships with generic manufacturers.

And having said all of that, our point of view on generic price inflation for our fiscal year remains unchanged from the guidance we gave you at the beginning of our fiscal year. The only thing that we've really tried to clarify if this call was, that we believe some of that inflation was pulled forward in the first quarter, but our full year remains intact with our previous views.

I know that it's a complex discussion to have. It also makes it even more complex when we are trying to forecast the behavior of others in a channel where we don't have complete visibility.

As frustrating as it may be to use sometimes, we can't tell you what our goal for generic inflation will be 12 months out. Frankly, it is a little bit of a black box for us as well; we have to make educated and informed estimates as to what we think will happen.

Sometimes, those estimates are off, either from a timing perspective or from the magnitude perspective. And what we're saying here is that really we're seeing some timing differences, but the magnitude we think will remain relatively the same.

That magnitude that we talked about when we offered the guide for FY15 was high single-digit growth year over year.

Great. Thank you.

You're welcome, John.

With that, ladies and gentlemen, we have no further questions on our roster. Therefore, Mr. Hammergren, I will turn the conference back over to you, sir.

Thank you, Rufus, and thanks to all of you on the call and for providing some time today to listen to our results. I'm pleased with the strong first-quarter performance and certainly excited about the opportunities that lie ahead for us. I want to recognize the outstanding performance of all of our employees and their contributions to these great results.

I'll now hand the call off to Erin for her review for the financial community.

Thank you, John. As a preview of upcoming events for the financial community, on September 9, we will present at the Morgan Stanley Global Healthcare conference in New York. On September 30, we will present at the Leerink Partners Healthcare Services Roundtable in New York. On November 11, we will present at the Credit Suisse Healthcare Conference in Phoenix, Arizona.

We will release second-quarter earnings results in late October. Thank you and goodbye.

Ladies and gentlemen, thank you for joining today's conference. You may now disconnect. Have a good day.