麥卡遜 (MCK) 2015 Q4 法說會逐字稿

Good afternoon, and welcome to the McKesson Corporation quarterly earnings call.

(Operator Instructions)

Today's call is being recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Ms. Erin Lampert, Senior Vice President Investor Relations.

Thank you, Vickie. Good afternoon and welcome to the McKesson's FY15 fourth-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 then James will review the financial results for the quarter and the full year. After James' comments, we will open the call for your questions. We plan to end the call promptly after one hour at 6 PM 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 that on today's call we will refer to certain non-GAAP financial measures in which we exclude from our GAAP financial results amortization of acquisition-related intangible assets, acquisition expenses and related adjustments, certain claim and 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 fourth-quarter FY15 results available on our website for a reconciliation of the non-GAAP performance measures to the GAAP financial results.

Thanks. And here's John Hammergren.

Thanks, Erin. And thanks, everyone, for joining us on our call. Our fourth-quarter results wrap up another year of outstanding earnings growth led by strong performance in our Distribution Solutions segment. For the full year, revenues increased 30% to $179 billion, and adjusted earnings per share from continuing operations increased 29% over the prior year to $11.11.

FY15 was an exceptional year across McKesson as we deepened our relationships with our customers and manufacturing partners, while expanding our scale and global reach. There are many achievements to highlight but to name just a few, in FY15 we formally secured operating control of Celesio and created a global sourcing and procurement office in London. This office will lead our efforts as we partner with manufacturers to more efficiently and effectively provide pharmaceuticals across a wide variety of markets and geographies.

During the year we demonstrated the strong value we provide to our US pharmaceutical customers as we successfully operationalized our agreement with Rite Aid and entered into an expanded relationship with Omnicare for both the sourcing and distribution of brand and generic pharmaceuticals. Our medical-surgical business met or exceeded all of our year two integration priorities related to the PSS acquisition, driving significant efficiencies in our IT and distribution infrastructure, while maintaining the exceptional level of service our customers expect.

We drove market leading growth in our specialty business, expanding our position across oncology, rheumatology, and ophthalmology, and extending our track record of annual growth for new physicians joining the US oncology network. And we continue to work alongside a growing number of partners in the CommonWell Health Alliance where we are beginning to see real world progress in making the promise of data interoperability a reality.

In addition to these terrific accomplishments, we generated $3.1 billion in operating cash flow for the year, and continued our strong track record of creating value for our shareholders through our portfolio approach to capital deployment. I'm extremely proud of our accomplishments in FY15 and would like to take this opportunity to thank our employees for their leadership and constant focus on putting our customers' success at the forefront of everything we do.

Today we also provided FY16 guidance of $12.20 to $12.70 per diluted share, representing an expected increase of 12% to 16% in adjusted earnings per share on a constant currency basis. This plan reflects strong growth across our businesses on top of the exceptional results in FY15.

I'm excited about the outlook for our business and the momentum we have for FY16. We have a tremendous number of opportunities ahead of us and I'm confident in our team's ability to continue to deliver innovative solutions that help our customers drive better business health.

Turning for a moment to the broader industry environment, the key themes of an aging population are rising chronic diseases and the challenge of containing costs remain important in the evolution of our industry. Against this backdrop, it is encouraging to see great innovation taking place. Pharmacies continue to expand their value as convenient sites of care for patients by providing an ever increasing set of services to help consumers better manage their health.

In turn, consumers are more engaged in understanding the cost and quality of healthcare. With higher deductible plans becoming more prevalent and consumers playing a larger role in the selection of their health insurance through employers or exchanges, people are increasingly looking for transparency and data as they make more informed healthcare choices.

Policy makers have set meaningful direction to support a transition to value-based care in the United States. Recently Congress overwhelmingly passed HR2 which permanently replaces Medicare's sustainable growth rate system. The bill, which was signed by the President, provides needed reimbursement stability and predictability for providers in the near term while they transition to a more incentive-based payment system by the year 2019.

The bill also contains provisions for healthcare data interoperability, among other important provisions. I believe the passage of these measures and the bipartisan support for continued reforms, intended to improve the efficiency of healthcare delivery in our country, will continue to spur business innovation to solve healthcare's most critical challenges of cost, quality and access.

McKesson stands unique in the industry for our depth of our relationships and strength of our experience across healthcare. And this positions us well to help our customers navigate ongoing challenges and emerge as stronger, more effective businesses.

Moving now to our business results for the fourth quarter and the full year, Distribution Solutions had another excellent year led by outstanding performance in our US pharmaceutical distribution business. On a constant currency basis, full year FY15 Distribution Solutions revenue increased 33% and full-year adjusted operating profit increased 31% compared to the prior year.

Although adjusted operating margin in the segment declined modestly year over year, driven primarily by the impact of the mix of hepatitis C drugs, we remain confident in our ability to consistently expand operating margin over time. North America distribution and services, which includes our US pharmaceutical business, McKesson Specialty Health and McKesson Canada, delivered strong results for the year, with 17% revenue growth on a constant currency basis compared to the prior year.

The US pharmaceutical business delivered tremendous growth in FY15 driven by the strong expansion of our generics business including growth of approximately 40% in our one-stop proprietary generics program. We are proud to be a full-service generics sourcing and distribution partner to an increasing number of our customers. FY15 provided a visible platform for our US pharmaceutical team to demonstrate their ability to drive strong value through our in-house proprietary sourcing expertise, and to drive efficiencies throughout the supply chain, while strengthening the service levels our customers enjoy.

In FY15, we also continued to perform well for our branded pharmaceutical manufacturing partners and maintained steady levels of compensation in return. And Health Mart maintained its strong record of growth during FY15, ending the year with nearly 3,800 stores or approximately 15% growth over the prior year. In summary, the US pharmaceutical team had an excellent year and I believe this business remains extremely well positioned for continued success.

Our Canadian distribution business delivered solid results in FY15. In addition to maintaining our market-leading position in pharmaceutical distribution in Canada, we continue to grow our extensive network of banner independent pharmacies across Canada where we now serve approximately 1,900 participating stores.

The expansion of our private label generic pharmaceutical offering, under the Sivem brand, continues to exceed our expectations. And we're pleased with the exceptional growth and the expansion of our Canadian specialty business in FY15 which now includes more than 85 Inviva infusion clinics across Canada.

Turning now to our US specialty business, FY15 results were strong driven by growth across our portfolio of assets, including our oncology business, as well as other specialty categories such as rheumatology and ophthalmology. I'm also pleased to report we continue to grow the number of physicians who choose to join and further strengthen the US oncology network. For the fourth year in a row, Black Book Ranking placed McKesson's iKnowMed, as the number one oncology electronic health record in the market.

We continue to expand our services to both payers and manufacturers. We are working with payers using innovative payment models that tie quality to outcomes, and have secured multiple contracts for value based reimbursement in oncology care. And with manufacturers we continue to be a key partner through our clinical trial research network and our comprehensive manufacturer facing solutions, including commercial support, product distribution support, and patient services.

I want to acknowledge that there has been quite a lot of talk of late regarding biosimilars. We expect the biosimilar landscape to evolve over time and we believe this new category will play a growing role in the specialty market. The success of each biosimilar drug and drug class has many dependencies including the channel of delivery, the disease which the drug addresses, physicians' views on quality and efficacy, and the value delivered by various participants in the supply chain.

Our comprehensive service offerings and capabilities put McKesson in an excellent position to provide value in this exciting and evolving market. In summary, North American pharmaceutical distribution and services delivered outstanding results in FY15. For FY16 we expect high single-digit revenue growth compared to the prior year.

Turning now to our results for international pharmaceutical distribution and services, revenues were $26.4 billion for the full year, an increase of 5% on the underlying results of Celesio on a constant currency basis. I'm pleased with the progress we've made in the last five months since formally gaining operating control of Celesio.

Our London-based procurement organization is off to a solid start and we still expect to generate between $275 million and $325 million in synergies by the end of FY19. We are making important long-term investments to upgrade the information technology infrastructure across Celesio. And we continue to invest in refreshing our existing retail pharmacy footprint, creating a differentiated health focused experience in our pharmacies.

And we are encouraged to see signs of more stable performance in important markets like Germany. And as previously announced, we've launched a sale process for the Brazilian businesses, PanPharma and Oncoprod, which are now reported in discontinued operations.

For FY16, we expect that the international pharmaceutical distribution and services revenue will be roughly flat compared to the prior year on a constant currency basis. I'm pleased that our Celesio businesses are performing well and are well-positioned to execute on their operating plans and priorities.

Our medical-surgical business delivered solid results with 5% growth in revenues in FY15. We have now completed year two of our three-year PSS world medical integration plan. And I'm pleased to report the team continues to meet or exceed expectations on all fronts. The medical-surgical team made significant progress in the integration of the distribution center network, migrations of critical IT systems and harmonization of our product portfolios in FY15.

FY16 represents the third and final year of integration work and we expect to complete the consolidation of our distribution network and further integration of key IT systems across the business this year. I remain extremely impressed with our medical-surgical team and our ability to grow and expand the strong relationships we are privileged to have with our customers while keeping operational excellence at the center of everything that we do. For FY16, we expect medical-surgical revenue growth in the mid single digits compared to the prior year.

Overall I'm proud of our full-year operating performance in Distribution Solutions and believe we have strong momentum as we enter the new fiscal year. As we look ahead to FY16, we expect the that Distribution Solutions revenue growth will increase by mid single digits compared to the prior year. And we expect adjusted operating margin to expand by low double-digit basis points compared to the prior year.

Turning now to Technology Solutions, for the year Technology Solutions revenues were down 8% to $3.8 billion. Full-year adjusted operating profit was down 8% to $486 million. We remain encouraged by the strong results we see particularly in our RelayHealth pharmacy and connectivity businesses and our payer solutions business, and by the signs of stabilization and growth that we see in our medical imaging business.

At the same time, we continue to take steps to further refine our portfolio of businesses. Our FY15 results were impacted by the anticipated year-over-year decline in our hospital software business, the planned elimination of a product line, and the previously disclosed wind-down of our international technology business.

Looking forward to FY16, we expect Technology Solutions revenues will decline by mid single digits year over year as growth in our connectivity, payer solutions, medical imaging and provider revenue cycle businesses will be offset by an expected decline in our hospital software business and the pending sale of another business line. However, we expect adjusted operating margin in Technology Solutions will expand in FY16 to the low end of our long-term adjusted operating margin goal of high teens. In summary, we remain committed to helping our customers use information technology strategically to better enable business, better enable care, and better enable connectivity.

To wrap up my comments, I believe we have strong plans for our FY16 that reflects growth across our broad portfolio of businesses. And we expect that both of our segments will expand operating margin and will reach the initial part of the range for the long-term adjusted operating margin targets we outlined at our Investor Day last June. We have the financial strength and discipline to continue to invest in the growth we expect across our businesses.

And, finally, we are in businesses that continue to generate strong cash flow from operations. We expect that our cash flow from operations will be approximately $3 billion in FY16.

I'm confident in our team's ability to continue to deliver value to our customers and the strong financial returns for our shareholders. We expect FY16 adjusted earnings per diluted share of $12.20 to $12.70, representing 12% to 16% growth year over year on a constant currency basis.

With that, I'll turn the call over to James for a detailed review of our financial results. James?

Thank you, John, and good afternoon, everyone. As you just heard, we are very pleased by our results for the quarter and for the full year. Our results reflect strong growth in our adjusted earnings from continuing operations per diluted share, driven by the performance of our Distribution Solutions segment. In addition, our capital structure remained a source of financial strength as we generated strong operating cash flow and continued to leverage our portfolio approach to capital deployment.

Today, I will cover both the fourth-quarter and full-year results. I will also present guidance for FY16. As a reminder, we provide our guidance on an annual basis due to the seasonality and the quarter to quarter variability inherent in many of our businesses.

Before I begin, there are two aspects of our financial results for our fourth quarter and full year that I would like to bring to your attention. First, our current-year and prior-year financials were recast to exclude the results of Celesio's operations in Brazil. The results from our business in Brazil and other businesses held for sale are reported as part of discontinued operations on Schedule 1 of the tables accompanying our press release.

Brazil's operations drove a loss from discontinued operations per diluted share of approximately $0.10 for the quarter and the full year. As part of the decision to sell the Brazilian business, we also recorded a $235 million aftertax impairment charge to reduce the carrying value of this business to its estimated net fair value. This impairment charge generated a loss of $0.99 per diluted share from discontinued operations for the fourth quarter and full year.

Second, during the fourth quarter, the Euro traded at an average exchange rate of $1.12 per euro versus our prior expectation for a rate of $1.15 per euro. The recent strengthening of the US dollar generated an incremental negative foreign currency translation impact of approximately $0.03 to our adjusted EPS from continuing operations in the fourth quarter versus our prior expectation.

Now let's move to our results. My comments today will focus on our full-year FY15 adjusted diluted EPS from continuing operations of $11.11, which excludes four items -- the amortization of acquisition-related intangibles, acquisition expenses and related adjustments, certain claim and litigation reserve adjustments and LIFO-related adjustments.

Now, turning to our consolidated results, which can be found on Schedules 2A and 2B, consolidated revenues increased 19% for the quarter and 30% for the full year to $179 billion. Adjusted gross profit increased 11% for the quarter to $3 billion, driven principally by an additional month of contribution from Celesio, as we closed the acquisition in February 2014 of the same quarter last year.

For the full year, adjusted gross profit increased 36% to $11.8 billion, primarily driven by our acquisition of Celesio and market growth, including strong execution in our distribution businesses. Total adjusted operating expenses of $1.9 billion were up 9% for the quarter, driven mainly by the inclusion of an additional month of Celesio's operating expenses, given the timing of our acquisition, as previously mentioned.

For the full year, excluding the impact of Celesio, consolidated adjusted operating expenses increased 1%. Other income for the full year totaled $65 million. Full-year adjusted interest expense increased 47% versus the prior year to $374 million, primarily driven by debt issued and assumed related to our acquisition of Celesio. For FY16, we expect our year-over-year interest expense to be less than the prior year based on $1.5 billion of planned debt repayments.

Now moving to taxes, for the full year our adjusted tax rate was 30.6%, which reflects our mix of income and a number of discrete tax items. Our FY16 earnings outlook assumes an adjusted tax rate of approximately 31.5%, which is based on our expected mix of US versus international earnings. However, this rate may fluctuate from quarter to quarter.

For the full year, adjusted net income from continuing operations totaled $2.7 billion and our adjusted earnings per diluted share from continuing operations was $11.11. Overall, this year's adjusted earnings per share benefited significantly from our mix of business, specifically the favorable performance across our entire portfolio of generic pharmaceutical offerings and the contribution from our acquisition of Celesio.

Wrapping up our consolidated results, diluted weighted average shares outstanding increased by 1% year over year to 235 million. During the fourth quarter, we completed a $340 million share repurchase, which fully exhausted the previously granted Board authorization. In addition, our Board recently approved a new share repurchase authorization amount of up to $500 million. Our diluted weighted average shares outstanding assumption for FY16 is 236 million.

We expect to continue our historical portfolio approach to capital deployment while addressing upcoming significant debt maturities. Specific FY16 capital allocation priorities are as follows: planning for existing debt maturities and thereby maintaining our investment grade ratings, investing in our current businesses, and reviewing opportunities to pursue value creating M&A.

Let's now turn to the segment results which can be found on Schedules 3A and 3B. On a constant currency basis, Distribution Solutions total revenues increased 23% for the quarter and increased 33% for the full year. Revenue growth was driven primarily by our acquisition of Celesio and market growth in our North America pharmaceutical distribution and services business.

During FY16, we anticipate Distribution Solutions revenues will increase by a mid single digit percentage over the prior year, driven by expected market growth and our mix of business. North American distribution business revenues increased 18% on a reported basis and 19% on a constant currency basis for the quarter.

For the full year, revenues increased 17% on a constant currency basis, driven primarily by market growth and our mix of business including revenues from the sale of drugs used in the treatment of hepatitis C. For FY16, we expect our North American distribution business to deliver a high single-digit percentage revenue growth, compared to FY15.

For the fourth quarter, international pharmaceutical distribution and services revenue increased 30% on a reported basis and 51% on a constant currency basis to $5.9 billion, reflecting one additional month of revenues as we closed our acquisition of Celesio in February 2014. For the full year, the underlying revenues of Celesio increased by 5% on a constant currency basis. For FY16, we expect Celesio's constant currency revenues to be approximately flat to the prior fiscal year.

Moving now to the medical-surgical business, revenues were up 5% for the quarter and the full year, driven by market growth. We continue to execute against our three-year PSS integration plan and performed well against our synergy business case. During FY16, we expect to complete the final year of our integration plan while delivering mid single-digit percentage revenue growth year over year.

Distribution Solutions' adjusted gross profit increased 46% for the full year on a 31% increase in segment revenues, resulting in a 58 basis point improvement in our adjusted gross profit margin year over year. On a constant currency basis, segment adjusted gross profit increased 48%.

Adjusted operating expense for the segment increased 59% on a reported basis and 62% on a constant currency basis for the full year, driven primarily by our acquisition of Celesio and by the strong revenue growth within our North American distribution business. Excluding the impact of Celesio, our full year Distribution Solutions adjusted operating expense was up approximately 3% versus the prior year.

As we look ahead to FY16, we expect continued growth in segment-adjusted operating profit, driven by the contribution from our generic business, specifically from expanded one-stop sales, and the breadth and depth of our global sourcing efforts. In addition, we expect branded pricing trends to be consistent with the prior year and anticipate generic drug pricing trends slightly below those observed in FY15.

The segment's adjusted operating margin rate for the quarter was 243 basis points, a decline of 5 basis points over the prior year. This decline was primarily driven by a higher volume of branded drug sales, including the sale of hepatitis C drugs, and a lower than expected contribution from Celesio. Excluding the impact of the hepatitis C drugs, the segment adjusted operating margin was approximately 255 basis points for the quarter, up 7 basis points from the prior year.

Distribution Solutions' full-year adjusted operating profit increased 30% to $4.2 billion. And we ended the year with an adjusted operating profit margin of 238 basis points, a decline of 3 basis points over the prior year.

Again, this decline was driven by a higher mix of branded drug sales, in particular hepatitis C drugs. Excluding the impact of these hepatitis C drugs, segment-adjusted operating margin was approximately 247 basis points, an increase of 6 basis points over the prior year. For FY16, we expect Distribution Solutions adjusted operating margin to expand low double-digit basis points, compared to the prior year.

Turning now to Technology Solutions, revenues were down 10% for the quarter and down 8% for the full year to $3.1 billion. This full-year decline was primarily driven by the anticipated revenue softness of the hospital software platform, the planned elimination of a product line and the wind-down of our UK workforce business, partially offset by growth in our other technology businesses.

Looking ahead to FY16, we expect Technology Solutions revenues to decline by a mid single-digit percentage as year-over-year growth in our payer-facing and connectivity businesses will be offset by an anticipated revenue decline in our hospital software business and the pending sale of a business line. Adjusted operating expenses in the segment decreased 14% for the quarter and 9% for the full year, as a result of various cost management and restructuring initiatives.

For the full year, adjusted operating profit decreased 8% to $486 million, primarily due to a lower revenue base and the wind-down of our UK workforce business. Our full-year adjusted operating margin remained flat to the prior year at 15.8%. During FY16, we expect to achieve an adjusted operating margin in the high teens.

I'll now review our balance sheet metrics. As you've heard me discuss before, each of our working capital metrics can be significantly impacted by timing. In addition, our working capital metrics also include Celesio.

For receivables, our days sales outstanding decreased 3 days to 26 days. Our days sales in inventory decreased 2 days from the prior year to 31 days. And our days sales in payables was approximately flat versus the prior year at 54 days.

Our working capital management is illustrative of our continued focus on cash generation. During FY15, we reported $3.1 billion in cash flow from operations. We ended the year with a cash balance of $5.3 billion with $2.3 billion held offshore. Looking ahead, we expect cash flow from operations to be approximately $3 billion for FY16.

Internal capital spending totaled $545 million for the full year, which includes spending related to Celesio. For FY16, internal capital spending is projected to be between $600 million and $650 million, as we continue to develop our information technology infrastructure across McKesson and make incremental investments related to our retail pharmacy operations.

Now I would like to briefly review some important considerations regarding our acquisition of Celesio and the related synergy case. Our current FY16 adjusted EPS guidance contemplates making measured progress towards achieving transaction synergies of $275 million to $325 million by the end of FY19. And as a reminder, the vast majority of these synergies represent procurement related savings from our global sourcing efforts.

You might recall that subsequent to achieving operating control in December 2014, McKesson consolidates 100% of Celesio's net income, and, in exchange, we are obligated to pay an a annual guaranteed dividend of EUR0.83 euro per share to Celesio's noncontrolling shareholders. And today while we continue to consolidate 100% of Celesio's results from continuing operations, it is important to note that for FY16 we expect our ownership of Celesio to remain unchanged at 76%.

Our dividend obligation to Celesio's noncontrolling shareholders will be recorded in the line titled net income attributable to non-controlling interest on Schedule 1, and is expected to drive a FY16 expense of approximately $44 million or about $11 million per quarter, assuming our 76% ownership stake at an exchange rate of $1.10 per euro.

Now, before I conclude, I would point out that in today's earnings press release we detailed the key assumptions underlying our FY16 adjusted earnings from continuing operations per diluted share of $12.20 to $12.70. As always, our plan includes certain risks, but overall we see significant opportunities to create continued value for our shareholders, customers, and business partners in FY16. Our plan calls for outstanding growth on FY15 results that were exceptionally strong and represents adjusted EPS expansion of 12% to 16% on a constant currency basis.

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. Operator?

Thank you.

(Operator Instructions)

We'll take our first question from George Hill with Deutsche Bank.

Hey, good afternoon, guys, and thank you very much for taking the question. John or Jim, maybe just a little bit on Celesio. Celesio has put forward the plan to delist the shares. How should we think about how that accelerates whether or not investors in Europe are going to put the shares back to McKesson? Can you guys provide us any update on when we might expect to see the shares delisted?

George, I think the objective we have is to focus on down-listing now and it will probably lead or could lead to delisting in the end. But our focus now is to down-list. It provides certain efficiencies and streamlines some of our reporting requirements in Europe.

As to how the minority shareholders may behave as a result of this, it certainly would be speculation on my part. As you know, they have a price that's already been fixed through this process that they could put their shares to us. And clearly we'd have an obligation to buy them at those prices.

To the extent that this accelerates their interest in doing so, we'd have to have the wherewithal available to us to make that transaction possible. Other than that, I don't have much else to say about it.

Okay. Then maybe just a quick follow-up would be, you're a few more months now into your majority ownership of Celesio. Any surprises or anything new the Company's learned either to the positive or the negative side? Thanks.

That's a good question. I appreciate it. As you might have noticed in the quarter, we announced that we were going to put for sale our Brazilian assets. And I think that's an example of what McKesson typically does in these types of situations, is to look carefully at the portfolio of businesses that are represented, particularly in a large asset like Celesio, and begin to focus our efforts and our management team on those assets that we believe will deliver the best long-term value for our Company and for our shareholders. And as such, this portfolio modification or optimization was contemplated and then announced as a result.

We continue to be very encouraged by the progress we're making in the UK, in particular, and our retail strategies. Several of our other markets are performing well and we are continuing, I think, to make progress.

You may have noticed in the conversation I talked about the revenues being relatively flat. It's principally driven by two factors, and that is, in addition to the Brazilian operation going into discontinued ops, the Norway business lost a large hospital customer which affected our revenues in that market. And we also continue to have some challenges in the French market as reimbursement continues to be a pressure point there. But I would say that we see signs of Germany continuing to stabilize, and as I mentioned the UK business in particular is performing well.

Okay. I appreciate the color. Thank you.

We'll go next to Lisa Gill with JPMorgan.

Thanks very much. John, can you maybe just give us an update on the London procurement operation? What percentage of contracts have you signed, just to give us an indication as to how much more work you have to do on the procurement side.

Thanks for the question, Lisa. As you know, we were delayed in getting operational control of Celesio. It delayed our ability to really begin to execute against the procurement synergies that we believe exist for us as we create a global footprint and a single relationship with these manufacturers on a global basis. So, that work was delayed.

As I mentioned we launched the opening of that office in January. We're in the midst of our discussions with, as you might imagine, the very largest of our manufacturing partners, talking about how we can streamline the relationship between our companies and make sure that they win when we win. And those discussions are probably too early to describe relative to how far along we are or certainly percentages of completion.

I would say that we're getting a terrific response, however, and the manufacturers are eager to work with a company like McKesson where we can deliver such significant value. And I think it also helps if we can have a unified message globally with what we're trying to do. And clearly our footprint in the US, our strength with Rite Aid, our strength with OmniCare, our HealthMart capabilities, I mentioned the 1,900 banner pharmacies in Canada along with the several thousand pharmacies in Europe, both owned under the Lloyd's brand as well as franchised, give us a significant footprint that manufacturers are very interested in. So I'm excited about the early progress and we'll clearly keep you guys informed as we continue to make progress.

Staying on the generic theme, I was surprised to hear in FY16 you expect generics to be below 2015. Is that because of the timing of the way Nexium came in? Or am I missing something as I just look at what's expected to lose patent protection over the next 12 months?

That's a good question. I think we actually expect more dollar value of branded generic launches -- launches of branded drugs in FY16 than there were in 2015. So, you're right, there's more dollar value of product going generic.

I think as we look at our portfolio of generic estimates, we, frankly, see the character and characteristics of some of those generics being not quite as favorable for us as the launches that took place in FY15. An example would be a generic that might have many participants, and the value back to the supply chain as a result of that competitive activity wouldn't be as great. I would just say, there are some [nuantial] differences between our view of the portfolio of generics. It's not so much size based as it is characteristic of the launches.

Okay, great. That's helpful. Thanks, John.

We'll go next to Robert Jones with Goldman Sachs.

Thanks for the questions. You're obviously ending with the cash balance very strong, over $5 billion. It looks like the free cash flow you're calling for in FY16 about $2.4 billion. Based on your comments, both John and James, it sounds like maybe share repurchases for next year aren't quite as high a priority as M&A.

I'm curious if, A, there's anything specific leading to this maybe slightly reprioritization for next year. And then, John, more importantly, can you share maybe what, in your mind, are the priorities right now as you think about where you maybe want more exposure across healthcare?

Why don't I start with the answer and let James fill in some of the details. Clearly, based on our belief at this point and what we've described as our expectations for FY16, we will have a very strong balance sheet at the end of the year.

We've also talked about our priority related to maintaining investment grade. We did talk in the call about debt that's going to be extinguished this year as it comes due. And in an earlier conversation we talked about the rights of the minority shareholders of Celesio. So there are some uses of capital included in internal investment that James and I have described for FY16 that will consume some of this financial strength.

We've also talked over time about, in addition to the priority remaining investment grade, the priority of high value transactions and the ability for McKesson to execute on those transactions in a strategic way that produces very positive returns, above our cost of capital returns for our shareholders. And that remains a priority, as well.

And we did talk about the Board approving a $500 million repurchase, which is not insignificant as it relates to share buybacks. So I think you'll continue to see us unfold our strategy as the year goes on. And we're cognizant of the fact that our balance sheet remains a source of opportunity for us and we plan to use that opportunity judiciously on behalf of our shareholders.

I would just further emphasize that I think it's helpful to have some cash balance flexibility to allow us to take advantage of attractive M&A if it should come along during this period of delevering.

That's fair. Just a quick follow-up on some of the comments you made around follow-on biologics or biosimilars, John. I know you don't typically get into individual drug launches, but given this is the first of its kind, I was wondering if you could maybe share your thoughts around how you think about biosimilar Neupogen coming to the market and whether or not there's anything factored into the guidance around that launch -- or potential launch, I should say.

You hit on a very key comment there about potential launch. I think that as relates to our FY16 guidance and the uncertainty related to biosimilars and their uptake, we have really nothing included in our guidance related to biosimilars. I would say that I think the Company's well-positioned in the biosimilar space. As you know, we have a very active specialty business and we have a complete array of services that can be provided to biosimilar manufacturers, which we think will launch in a very similar way to branded manufacturers' launches in terms of the support for patients, the special handling requirements, the reimbursement requirements, the physician contact that needs to happen. We do that in a significant way today.

In addition, I might add, any of the biosimilars that will be focused on the oncology product market are particularly attractive to us because of our physician network. The US Oncology Network has a track record of helping branded companies come to market through our clinical trial work. And they also have the ability to create formularies when they're convinced that, from a clinical perspective, the product can be selected and defined for the patients in a way that delivers best-in-class quality and the lowest possible cost. So I think that unique asset in US Oncology will play a role here over years as biosimilars come to market in the oncology class.

Should be interesting to watch how it plays out. Thanks, John.

We'll go next to Dave Francis with RBC Capital Markets.

Good afternoon. Thanks for the questions, guys. John, I'm curious, I know your business is second derivative in nature, but with King Burwell weeks away from a decision at the Supreme Court, how would you view a negative Supreme Court ruling on ACA subsidies relative to your outlook on the core US pharmaceutical and med-surg business?

It's been difficult for us all along to quantify ACA's effect on the demand in our businesses. Albeit, we do believe there is a positive effect associated with people getting access to care in the fashion that ACA's provided.

I would say that in my conversation with people on the Hill and at the state level around the markets, I believe that the country's going to have to position itself to take care of folks that are not able to afford their own care, and to do so in a way that's effective and efficient for our businesses and for our country. So, I think the end result here, even if something were to come from this Supreme Court ruling that may put a question mark on the subsidy or support for these patients, I think that there'll be a quick reaction on the Hill to try to find another way to provide low-cost quality care to patients so they don't fall through the crack and end up in the emergency rooms in America.

And I would remind also to the listeners that know this well, that pharmaceutical use and the appropriate use of pharmaceuticals and primary care physicians is the best way to treat patients, as opposed to letting their situations falter and having them end up in an acute situation in one of our great American hospitals. And that, I think, needs to be avoided. I think it's early to call but I think that this, combined with the continued pressure from the demographic perspective, and all of the things that we see from a growth and opportunity perspective in our industry, keeps me very excited about the future for McKesson.

That's helpful. And a quick follow-up, flipping over to the IT side of the business. With the doc fix legislation and some of the focus there being on interoperability and what have you, what do you see as the status of CommonWell and opportunities relative to both CommonWell's continued move forward and revenue opportunities for RelayHealth, in particular, as it relates to the work that you guys are doing there? Thanks.

Thanks for the question. We are excited to be a participant in CommonWell. As you know, CommonWell is a not-for-profit gathering of roughly 70% or so of the systems provider volumes in the country for physician offices and hospitals. And that aggregation of technology companies who have decided to come together and create a method by which we can move information between our non-native systems -- or between each other's competitive systems, said another way -- is a landmark opportunity for this country to actually get interoperability and exchange data in a way that's never been done before.

This opportunity for McKesson translated into our ability to continue to support CommonWell's mission through the services that have been offered by RelayHealth. And Relay is one of probably many in the future providers of capabilities to CommonWell that will facilitate this movement of patient data and financial data that will soon be very helpful.

I'm quite excited about it. I'm, frankly, right now more excited about what it's going to do for healthcare in this country than I am necessarily for the revenues of Relay, which will follow over years. But I think the adoption curve is going to be steep and I think people are going to benefit from CommonWell's efforts.

Thank you.

We'll go next to Ricky Goldwasser with Morgan Stanley.

Hi, good afternoon and congrats on a great quarter and guidance. A couple follow-up questions. First on the Tech Solutions, John, obviously you expressed your excitement around CommonWell. But when you think about the Tech Solutions segment and performance over the last few years, when you think about the different parts of the business, does the segment still fit strategically with the rest of the McKesson portfolio?

I think the way we think about our technology business is the value that it delivers to our customers and our ability to make sure that we're delivering against those needs. As we think about the overall portfolio of McKesson's companies, you can see that we are always active in our management of that portfolio and that's frankly one of the reasons that the Technology Solutions segment, which is an aggregation of many different companies, revenue has been down as a result of that portfolio activity.

There are assets in there that are very directly correlated to other business unit strategies in our corporation. There could be things like our Relay pharmacy business, which is the connectivity provider for most of America's pharmacies. Or it could be our outsourcing business for physician offices, which is heavily correlated with our practice management activities where we are supporting the efforts of community oncology or community physician work.

And then there's other businesses that may not be as correlated to the strategy of the rest of our businesses. And in those cases the key for us is can we optimize the performance of those standalone companies, vis-a-vis their competitors.

So, I don't ever rule anything in or out on any of our businesses relative to our strategy. I think I look at it as an evolution and we need to continue to do so. And we need to make sure that we optimize the value and the performance of these businesses on behalf of our shareholders.

Okay. And one follow-up just related to questions that we're getting from investors. Obviously, there's a lot of chatter out there around potential M&A of some clients of yours. Some of them have longer-term contracts. Do these contracts typically have a change of control clause in them? If you could just clarify that.

I think the industry is going to continue to be filled with chatter and clatter related to strategic partnerships and mergers and acquisitions. There are certainly people in our healthcare industry that promulgate some of these discussions and rumors more than others. McKesson, as a policy really, we don't talk about our customer contracts and we certainly don't talk publicly about M&A or potential M&A.

We have very solid relationships with our customers. We've earned the right to have their business for years, and sometimes decades. As you know, we've currently earned the right in several cases of expanding our relationship with our customers to include all of the purchasing of their generics and their distribution of their business.

I might also note that we have a very broad base of customers. We clearly, to the extent that our relationship with one customer changes, hopefully we're at the same time expanding relationships with others.

All I can tell you is we stay close to our customers. And in many cases if a customer changes from an ownership perspective, McKesson stays with that customer even into the new entity from a service perspective. You might recall, Ricky, when CVS purchased Caremark, we were fortunate to have CVS continue the Caremark relationship with McKesson. There are many examples where you'll see M&A activity and McKesson maintains a relationship.

Okay. Thank you.

We'll go next to Steven Valiquette with UBS.

Thanks. Good afternoon. For me, just a quick question on the FY16 guidance. While EPS at the midpoint is just a touch below the Street consensus, it seems to me it may just be due primarily to slightly higher tax rate year over year, and also that flat share count despite the new $500 million buyback authorization. My sense is investors probably are not going to be too concerned about this. But for me, big picture, just curious if there's still potential for the combined Company tax rate to still come down over the next few years, despite the fact that it may be up a little bit in FY16. Thanks.

The tax rate guidance that we've offered for FY16 reflects the expected mix of profits between our international businesses, which tend to be taxed at a lower rate, versus our domestic businesses. And recall, of course, those domestic businesses have been growing very nicely in recent years, and so that's a factor in the thought behind the 31.5% tax rate guide for FY16. We're not looking to try to project out beyond FY16 at this point in time.

Okay. All right. Fair enough. Thanks.

We'll go next to Glen Santangelo with Credit Suisse.

Thanks and good evening. I also want to follow up with one quick question on the guidance. It seems like one of the components of your guidance you talk about maybe lower pricing on the generic side in FY16 versus FY15. It's nice to have a conference call that's not dominated about generic price inflation. But, John, I'm curious, could you give us your perspective in terms of what you're seeing there? And are you actually seeing any changes in the market or do you just believe it's prudent to assume some level of normalization? Thanks.

Glen, I think you hit the same word I was going to use and that was prudent. I think we've seen a very robust cycle of generic inflation, at least as we view it, and clearly we expect it to continue. We expect it to moderate slightly as we give our guidance for next year. To the extent that our prudent guidance proves to be incorrectly low, then at some point we'll over-achieve our expectations. And to the extent that we project it to be too high in our crystal ball, then we'll be disappointed with what happens with our generics. But I think overall we remain very optimistic about our portfolio and how we manage it. And I think we do a pretty good job of forecasting where the business is going to be.

Okay. Thank you.

We'll go next to Eric Coldwell with Robert W. Baird.

Hey, thanks very much. At first I was just hoping that perhaps you could size the US specialty business and growth rate but, really, my question is around specialty pharmacy. To be fair, you have a specialty pharmacy operations ex-US. You interact with patients in US Oncology. You own pharmacies. You have pharmacy franchises globally. I'm not sure why specialty pharmacy would truly be a, quote, foreign business to you -- no pun intended on that -- or why you might not actually be interested in moving more in that direction. And I'll leave it at that. Thanks so much.

Thanks for the question. We are in the specialty pharmacy business in various aspects of our strategy. And certainly if you think about it globally, particularly where we own pharmacies, we have a specialty pharmacy activity. You pointed out oncology as one example. I think we've always been sensitive to supporting our customers and their activities and we are reluctant to compete with our customers in a real significant way.

To the extent that specialty pharmacy can support our overall strategy and not be in conflict with what our customers expect from us, then we'll continue to pursue it. And in certain areas it makes a lot of sense for us to be there. In other areas it makes sense for us to support other people's specialty pharmacy businesses.

Is there any chance I could get you to put some figures around the size of specialty overall in the US? In the growth rate you did mention you were growing above market.

No chance.

What do you think the market's growing?

Slower than we are.

Fair enough. Have a good night. Thanks.

We'll go next to Ross Muken with Evercore ISI.

Good afternoon. Sticking on the international parts of the business, you've owned the asset now for some time. You guys have done a tremendous job historically of rolling up various industries. And obviously you have plenty of fire power to do deals.

What have you learned about the various geographies so far where you play and where you don't play? And what is your view of Brazil? How did that impact your view in emerging versus more developed markets to move into with that asset? And then how would you characterize valuations in some of those geographies versus what we see in the US? So, a broad reaching question on the M&A outlook in some of those newer markets.

Ross, I think that's a very interesting question and I think it has a very complex answer that I'll try to deal with. I think the way we think about Europe is the way I think about McKesson 16 years ago when I landed in this seat -- how can we optimize the performance of the businesses we have and focus on those businesses, and then how do we branch from those businesses to adjacencies that we know how to operate in markets where we can compete.

And I think the situation with Brazil, it was not obvious that we could create a market-leading strategy there, particularly given the vertical nature of some of the retailers in that market and nuances associated with the business models down there; and clearly whether we're scaled properly, et cetera, that I think the conclusion was reached that we should have our focus on Europe and in those markets where we currently have a strong beachhead. In many of those markets we're number one or number two already from a distribution or retailing perspective.

And in many of those markets, the hospital business is still direct, the specialty business is nascent. There aren't a lot of services that are similar to what we provide here in the US, both to manufacturers and to the end customers. So, I think we do see an opportunity, both through organic growth as well as M&A, in several of those markets, and that'll be part of our focus as we think about the strength of our balance sheet.

That's perfect. It's 6:00 so I'll end there.

Thanks. I know there are a few other folks that are still on the line hoping to ask questions. So if you want to go a little bit further I'm happy to do that.

We'll go next to David Larsen with Leerink.

Hey, guys, congratulations on a great quarter. Can you just highlight again what the growth rate was in the one-stop generics program? I thought I heard a very high number. And maybe some descriptions around what drove that would be very helpful. Thanks.

Yes, the one-stop program has been and continues to be very successful for us. And this last year the number I quoted was a 40% growth rate year over year, which was quite significant. Now, obviously a portion of that was our success with Rite Aid. But the business still grew very significantly even outside of the Rite Aid business.

Okay. Great, thanks a lot.

We'll go next to Garen Sarafian with Citigroup.

Thanks for taking the questions. I want to ask on Health Mart. The growth of 15% seems much stronger than the market. So, what portion of this is due to market growth, as you define it, and where is the remainder of the growth coming from? Is it more taking share or small chains that used to do some of these activities in-house that are now going to the HealthMart franchise? If you could just elaborate there a little bit.

Just to be clear, the growth rate was in store count, not in revenue of those stores. Those stores, I'm sure some of them did come from competitors, but I would imagine there's a portion of them that just came from great customers that had been doing business with us for a while and realized that HealthMart added a bigger opportunity for us and for them. And that expansion of our footprint with them and the services we provide gave us a better position with those customers.

So, it expands our footprint of HealthMart across the country. And our objective with our customers is hopefully to earn the privilege to be HealthMart for all of them. Obviously, with the exception of the large chains which are creating their own brands.

Got it. And then the follow-up is just a bigger picture question of ongoing M&A among pharmaceutical manufacturers and what we read about in the press. To ask the question a little bit differently, though, at what point do you begin to get concerned of too much consolidation in the pharmaceutical space?

I'm not concerned yet, and I would say that the manufacturer relationships we have are very significant. Clearly, to the extent that we can create value by delivering channel or volume to them, they're interested in working closely with us, and that's our objective. I certainly don't see on the horizon a situation where manufacturers no longer need McKesson as part of their solution.

Great. Thanks a lot.

(Operator Instructions)

We'll go next to Eric Percher with Barclays.

Thanks for sneaking me in there. Simple one would be the London organization that you've created, is that independent from the international distribution business, meaning it doesn't roll up, none of the profits would roll up within the Celesio business?

Eric, I guess the best way to describe it, it's a separate operation that is organized in London and it reports directly to Paul Julian, and its job is to focus on a global relationship with large global manufacturers. As to the financial effect of those businesses, of this activity, you probably would find it in many different parts of our corporation, including maybe even maybe medical supplies as we source globally for medical supplies in private label. So, it will end up in various P&Ls as success is reached there.

Perfect. Thank you.

At this time we have no further questions. I return the call back over to our speakers for any additional or closing remarks.

I certainly want to thank everybody for their time today and for being on the call. I know we ran a little bit over but it was our year end and we spent a little time chatting, so I wanted to make sure that we spent some time making sure we have all of your questions answered.

We think we have a very strong operating plan for FY16 and certainly exciting growth opportunities across McKesson. I'm certainly proud of our track record of delivering value to our customers and strong financial returns to our shareholders and to each of you. And I'm certainly proud of our terrific McKesson team which continues to deliver year in and year out.

So with that I'll turn it over to Erin for some upcoming events for the financial community.

Thank you, John. I have a preview of some upcoming events. We will participate at the Bank of America-Merrill Lynch Healthcare Conference in Las Vegas tomorrow, May 13, and the Goldman Sachs Global Healthcare Conference in Rancho Palos Verdes on June 9. We look forward to seeing you at one of these upcoming events. Thank you and good-bye.

Thank you for joining today's conference call. You may now disconnect. Have a good day.