麥卡遜 (MCK) 2016 Q1 法說會逐字稿

Welcome to the McKesson Corporation's 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. Please, go ahead.

Thank you, Solarie. Good afternoon. Welcome to the McKesson FY16 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'll open the call for your questions. We plan to end the call promptly after one hour at 6:00 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 Security 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 first-quarter FY16 results available on our website for a reconciliation of the non-GAAP performance measures to the GAAP financial results. Please also note that on today's call, we will refer to certain measures calculated on a constant currency basis. Additional information on constant currency FX is available in our SEC filings.

Thank you. Here is John Hammergren.

Thanks, Erin. Thanks everyone for joining us on our call. Today, we reported a solid start to FY16. For the first quarter, we achieved total company revenues of $47.5 billion, up 13% and adjusted earnings per diluted share of $3.14, up 30%, both on a constant currency basis over the prior year. During the first quarter, we completed the sale of our nurse triage business, a small business within the Technology Solutions segment and recorded a gain of $0.16 per diluted share in the quarter. Therefore, we are updating our full-year guidance and now expect adjusted earnings per diluted share of $12.36 to $12.86 for FY16.

Turning now to our business results for the quarter. Distribution Solutions revenues were $46.8 billion, up 13% on a constant currency basis. Distribution Solutions adjusted operating profit was $1.1 billion, up 17% on a constant currency basis. Our North American pharmaceutical distribution and services business, which includes US Pharmaceutical, McKesson Specialty Health and McKesson Canada continue to lead the way with revenue growth in the first quarter of 16% on a constant currency basis. Revenue in our US Pharmaceutical business exceeded our expectations in the first quarter, driven by strong growth from a few of our largest customers and brand pricing trends ahead of our expectations. However, generic pricing trends were well below the level of the prior year and below our expectations for the first quarter. We will continue to monitor pricing trends in the market and will provide updates as we communicate our quarterly results going forward.

We continue to grow our business with our US Pharmaceutical customers across the retail, institutional and independent channels. I would like to take a moment to highlight our vibrant community of independent pharmacy customers. Last month, we hosted our annual conference for retail independent customers, which brought together thousands of community pharmacy owners and pharmacists from across the country. Including our growing base of Health Mart pharmacy customers, now representing more than 4,000 stores across the US. Record attendance at this year's conference re-enforced a growing need for independent pharmacists to understand the dynamics shaping their industry and to evolve their business to meet these new demands.

This year's conference centered on our strategy to help customers attract more patients through greater access to preferred networks and highlighted McKesson's suite of services, which enabled pharmacies to operate more efficiently and capture new sources of revenue. We've hosted this conference now for almost 40 years. It continues to provide an exceptional platform for peer networking and continuing education while celebrating innovation, patient commitment and business growth of our exceptional independent pharmacist partners. In summary, I'm proud of the value we deliver for our US Pharmaceutical customers and the innovative services and solutions that set us apart. As some of you may have heard me say on occasion, it is our standard of operational excellence that earns us the privilege to serve our customers every day. It's our team's focus on our customers' success that allows us to grow our relationships and create value far beyond the core of Distribution Solutions.

Turning now to our McKesson Specialty Health, I am extremely pleased with the results for the first quarter, which represent a strong start to the fiscal year. Once again, we delivered impressive growth in our Specialty business, driven by performance in the US Oncology network and our broader oncology offerings and continued excellent growth in other multi-specialty categories. I believe we are very well positioned to continue to grow and innovate in this dynamic market. Our Canadian business had nice growth in the quarter with results that were in line with our expectations. At our Investor Day, last month, we highlighted the great achievements of our Canadian business. I'm now pleased to tell you that our team continues to grow not only in our core distribution business, but also expanding into our specialty and retail banner and our presence in the market. Retail -- excuse me, the recent addition of the Remedy RX banner in Canada adds to the scale we've built to support independent pharmacy. I'm proud to say that roughly 40% of all independent pharmacies in Canada operate under one of our banners. We leverage our innovative services, products and technology to drive better results for our business and our customers.

Turning now to our results for international pharmaceutical distribution and services, revenues for the first quarter were $5.8 billion, roughly flat year over year on a constant currency basis. Operating performance from Celesio was ahead of our expectations in the quarter. Earlier today, Celesio announced the acquisition of the pharmacy operations of Sainsbury's, a leading chain of supermarkets in the United Kingdom. Under the terms of the agreement, Celesio will acquire 277 in-store pharmacies and 4 hospital-based pharmacies, which will now be operated and branded as Lloyd's Pharmacy. The acquisition is expected to close in the fourth quarter of our FY16 and will broaden the already strong footprint of Lloyd's Pharmacy in the United Kingdom and add scale to the more than 12,000 owned or banner pharmacies across McKesson. In summary, we're off to a positive start to the year. I'm encouraged by the momentum in our international pharmaceutical distribution and services business.

Finally, our Medical Surgical business performed well in the quarter, with revenues at $1.4 billion, an increase of 4% over the prior year, including strong growth in our physician office business. Our McKesson surgical team continues to do an excellent job as we enter the homestretch of the integration activities driven by the PSS World Medical acquisition. We expect to complete our planned integration efforts by the end of FY16 on schedule and ahead of our original business case. While our Medical Surgical team is still in the midst of a tremendous amount of work, I'd like to recognize the outstanding progress they've made to date and their success in driving better value for our customers. In summary, I'm pleased with the performance of Distribution Solutions in the first quarter. We now expect Distribution Solutions revenue growth of high single-digits compared to the prior year. We now expect that full-year adjusted operating margin in Distribution Solutions will be up in the mid single-digits compared to the prior year.

Turning now to Technology Solutions. Revenues are down 4% for the first quarter to $736 million, driven primarily by anticipated revenue decline in our hospital software business and the sale of our nurse triage business. Adjusted operating margin in the segment was 22.7%, which includes a $51 million pretax gain associated with the sale of the nurse triage business. Excluding this gain, adjusted operating margin would have been 15.8%. Our first quarter results benefited from the steady growth profile of our financial and clinical data and services businesses, which include Relay Health and our physician revenue cycle business, along with positive results in our payer solutions business. We continued to make steady progress across Technology Solutions. I remain confident in our outlook for the full year, which includes an expectation for achieving adjusted operating margin in the high teens for the segment.

Now to wrap up my comments, McKesson's fiscal first-quarter results represent solid execution across both segments. We're updating our full-year outlook for FY16 to arrange a $12.36, to $12.86 to reflect the gain on the sale of our nurse triage business. For the first quarter, we generated cash flow from operations of $454 million. Our expectation to deliver cash flow from operations of approximately $3 billion for FY16 remains unchanged from our original guidance. Earlier today, the Board of Directors approved an increase to the quarterly dividend from $0.24 to $0.28 per share. We are extremely well positioned to execute our portfolio approach to capital deployment and deliver value for our shareholders through a mixture of internal capital investments, acquisitions, share repurchases and dividends.

With that, I'll turn the call over to James. We'll return to address your question when he finishes. James?

Thank you, John. Good afternoon, everyone. We are pleased with our first-quarter results, which represent a solid start to FY16. As John discussed earlier, we are raising our previous outlook and now expect adjusted earnings per diluted share of $12.36 to $12.86. This revised outlook is a result of the pretax gain of $51 million or $0.16 per diluted share from the sale of our nurse triage business, which is reflected in both our GAAP and adjusted earnings for the quarter. We do not expect that the elimination of the nurse triage business operating results will have a material impact on our expectations for FY16 adjusted operating profit.

Now let's move to our results for the quarter. My remarks today will focus on our first-quarter adjusted EPS of $3.14, 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 Schedules 2 and 3. Consolidated revenues increased 9% for the quarter to $47.5 billion. On a constant currency basis, revenues increased 13%, led by strong growth in our Distribution Solutions segment. Adjusted gross profit for the quarter increased 4% to $2.9 billion. On a constant currency basis, adjusted gross profit increased 9%, driven by the performance in both segments. Total adjusted operating expenses of $1.8 billion were down 5% for the quarter on a reported basis and up and 1% on a constant currency basis. In accordance with US GAAP, operating expenses are presented net of the $51 million pretax gain on the sale of our nurse triage business. Excluding this gain, total adjusted operating expenses were up 4% on a constant currency basis. Adjusted other income was $15 million for the quarter. Interest expense of $89 million decreased 7% on a reported basis and 4% on a constant currency basis.

Now moving to taxes, our adjusted tax rate for the quarter was 31.1%. As usual, I would expect this tax rate to fluctuate somewhat from quarter to quarter. For the full year, we continue to expect an adjusted tax rate of 31.5%. Adjusted income for the quarter was $737 million, with our adjusted earnings per diluted share of $3.14, up 27% on a reported basis and up 30% on a constant currency basis. The year-over-year currency headwind equated to $0.06 per share.

Wrapping up our consolidated results, our diluted weighted average shares were flat year over year at 235 million. While we continue to plan for upcoming significant debt maturities, today's announced acquisition and dividend increase are consistent with our portfolio approach to capital deployment, which for some years now has focused on a blend of internal investments, acquisitions, share repurchases and dividends.

Let's now review the segment results, which can be found on Schedule 3. Distribution Solutions segment revenues of $46.8 billion were up 10% on a reported basis and 13% in constant currency during the quarter. North America Pharmaceutical distribution and services revenues of $39.5 billion increased 16% on a constant currency basis, primarily reflecting market growth in our US Pharmaceutical, US Specialty and Canadian businesses. Our largest customers drove strong growth with a corresponding impact on our mix of business and margin profile. In addition, this quarter's revenue also benefited from the timing of certain branded drug price increases, which came earlier in the fiscal year than we had originally anticipated. For the full year, we now expect North America Pharmaceutical distributions and services revenues to increase by a low double-digit percentage versus the prior year. International pharmaceutical distribution and services revenues were $5.8 billion for the first quarter. On a constant currency basis, revenues were flat, relative to the prior year and in line with our expectations.

Overall, revenue growth driven by our businesses in the United Kingdom was mainly offset by an anticipated revenue decline from last year's loss of a Norwegian hospital contract. As a reminder, the results from Celesio's operations in Brazil are reported as part of discontinued operations on Schedule 1 of the tables accompanying our press release. Medical Surgical revenues were up 4% for the quarter, driven by market growth. Distribution Solutions adjusted gross profit increased 4% on a reported basis and 10% on a constant currency basis for the quarter. The increase in Distribution Solutions adjusted gross profit was driven by the strong revenue growth in our North American distribution business, the timing of certain brand drug price increases that occurred earlier in the fiscal year than we expected, the benefit from anti-trust supplement proceeds that was contemplated in our guidance and a better than expected performance from Celesio. Offsetting this growth, weaker than expected generic drug pricing trends in the quarter. The level, nature, and timing of generic pricing trends remained difficult to predict. We'll continue to monitor market activity. We will provide updates to you as we communicate our results each quarter.

Adjusted operating expense for the segment decreased 3% for the quarter on a reported basis. On a constant currency basis, segment operating expense increased 4% year over year. Segment adjusted operating profit of $1.1 billion increased 14% on a reported basis and 17% on a constant currency basis. The segment adjusted operating margin rates for the quarter was 242 basis points, an improvement of 8 basis points on a constant currency basis versus the prior year, driven by solid growth across the segment, including continued expansion of our generics business, favorable timing of certain branded drug price increases, the anticipated anti-trust settlements and better than expected results from Celesio. This year-over-year segment adjusted operating margin expansion was partially offset by weaker generic pricing trends and our business mix. As I mentioned earlier, we now expect full-year revenue growth from our North America pharmaceutical distribution and services business to increase by a low double-digit percentage versus the prior year, driven in part by higher than expected demand from our largest customers. Based on this growth and the resulting mix of revenue in our North American distribution business, we now expect segment adjusted operating margins to increase by mid single-digit basis points year over year.

Turning now to Technology Solutions, revenues were down 4% for the quarter, to $736 million. This decline was primarily driven by the anticipated revenue softness of the hospital software platform and the sale of our nurse triage business, partially offset by growth in our other technology businesses. As I discussed earlier, our consolidated first quarter jet and adjusted results reflect a pretax gain of $51 million from the sale of our nurse triage business. This gain was recorded as a reduction to Technology Solutions operating expenses for the first quarter. Adjusted operating expense in the segment decreased 27%. Segment adjusted operating profit increased 109%, primarily as a result of this gain. Excluding this gain, segment adjusted margin increased 534 basis points year over year. For the full year, excluding the gain recorded on the sale of our nurse triage business, we continue to expect to achieve an adjusted operating margin in the high teens.

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. For receivables, our days sales outstanding were relatively flat at 26 days. Our days sales in inventories decreased by 1 day to 30 days. Our days sales in payables increased by 3 days to 53 days. We generated $454 million in cash flow from operations for the quarter. 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 $5.6 billion with $1.9 billion held offshore. Internal capital spending was $120 million for the quarter.

Now I'll turn to our adjusted EPS outlook for the year. As I mentioned earlier, we are raising our FY16 guidance for adjusted earnings per diluted share from our original range of $12.20 to $12.70 to a new range of $12.36 to $12.86, to reflect the gain on the sale of our nurse triage business. This outlook assumes a full-year average exchange rate of $1.10 per Euro, which is unchanged from our prior guidance. In addition, we now expect $1.24 per share in amortization of acquisition related intangible assets and $0.30 of acquisition expenses and related adjustments. We also expect to exclude between $0.86 and $0.96 per share in LIFO related adjustments from our adjusted earnings. While we cannot predict the timing of pharmaceutical price increase activity, our current expectation is that the split of earnings between the first and second half of FY16 will be in line with our experience in FY15.

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

(Operator Instructions)

Ricky Goldwasser, Morgan Stanley.

A couple of questions here. So first of all, I see generic inflation is a big focuser for investors. So thank you for your comments on that. But could just help us understand, how should we think about generic inflation trend within the context of your guidance range?

Well, certainly as we've mentioned, we did see generic price increase activity below the levels of the last fiscal year and below our original expectations. Now, that said, obviously, our guide that we issued a few months back has a variety of variables that are key to it. We list those out for you.

So the width of the range allows us some flexibility to take into account variables of one driver that's up versus another driver down. So we're comfortable with the range that we've articulated this afternoon. That reflects the addition of the care management nurse triage gain. Of course, we'll keep everyone updated as we proceed through the fiscal year.

Okay. Then just as a follow-up, very strong top line growth for Distribution Solution, up 15% despite some impressive year-over-year comps you're anniversarying. So when you think about [affecting the environment and affecting the branding sensation] that you've seen in the quarter, do you expect similar trends for the remaining of the year? It seems just the growth is stronger than what you implied in the Analysts Day.

Well, I think we have had good success in growing our business across the board. I think the interesting part of the basic business that we have in our mix is that we have some customers that are growing, we think, more rapidly than the market. That growth is clearly seen in our business. That comes with it, better revenue growth, but it does put a little pressure on our mix as a result of the scale of those customers. We're certainly pleased with the performance in the quarter. We expect that revenue momentum to continue throughout the fiscal year.

One of the other drivers of the revenue strength in Q1 was the acceleration of some of the branded price increases that occurred in the first quarter that we were originally expecting to occur later in the year.

Steven Valiquette, UBS.

I think we all understand the comments about the generic inflation being difficult to predict. There's definitely no question about that. I'm just curious with your privilege of daily conversations with generic suppliers, with some 20/20 hindsight on that, do you have any thoughts or any opinions on what you think may have just led to that temporary slowdown of generic inflation in the June quarter? Or do you just attribute that to randomness and obviously some tough comps year over year that would soften the June quarter in particular? Thanks

Thanks for the question, Steve. I think the comps are clearly one of the challenges when you think about the strength of the price increases in the prior year. I think that it's -- although we have close working relationships in the generic manufacturers, they don't always share with us their plans related to price increases. Clearly, their view of product launches, their merger and acquisition activity, there's lots of things moving around in the market that may also be distracting them from some of the things that they need to do on a short-term basis or could have done on a short-term basis.

So I think our view is that we believe that generic pricing power will remain a part of the strategy generic companies will employ. That balance with the schedule of generic launches et cetera are part of the things that drive their P&Ls. I would say that following-on to what James said earlier, there are lots of variables in the way our quarters flow. One of the positive things in the quarter was the fact that our brand price inflation work was a little stronger than we'd seen on a compare basis.

So there are always puts and takes as you move along, I think the most important thing is that we continue to find ways to move the business. We're obviously also very pleased with the performance of our specialty business. Celesio had a very good quarter. So both specialty and Celesio performed above what we would have expected even though our generic business made a generic price -- a part of our business may have been a little bit behind.

Okay. All right, that's helpful. Thanks.

Eric Percher, Barclays.

So on the topic of growth of large customers, do you think that growth is coming at the expense of smaller customers? Or is it that the larger customers are getting a greater share of where we do see the outsized market grow?

Well, I think clearly the specialty business is more inclined to go through the larger customer, particularly the PBM channel. We obviously had seen some market shifts in the PBM's as well. I would imagine on the edge, our larger customers are taking some incremental share in the market. But I would say that at least the base of independence that McKesson is involved in closely and working with, we've seen good strength in that business, both in the growth of Health Mart stores but also in terms of their revenue growth.

So I think the most important thing for us to do is to continue to focus on bringing our scale and our capabilities to the smaller customers to help them continue to level the playing field relative to the larger customers. On the larger customer side, we have to find ways to add more value so that we are -- our margin impact isn't as negative as it can be when the mix changes.

Even absent the growth of the top line, operating expense seemed to come in quite a bit below where we expected on the distribution side, where you didn't add the impact. Could you speak to some of the activity? How it felt relative to your own expectation?

Well, we're very focused on, as you know, Eric, in being efficient and productive in our operations. I think we have over 3,000 or closer to 6,000 black belts if you include Celesio around the world. Those folks are designed to help us drive efficiency in our operations.

I also think it's important for us to maintain discipline around pricing. Albeit, the mixing is hard for us to control. Our pricing decisions are within our control. We have to stay disciplined on that. James, there might be some color you want to add on your expenses. I think our interest expense was down a little bit.

Yes, the operating expense line, we need to focus on going right across the Company, as John's referring to there. I think that in the technology solutions part of the business that we've already been able to build our margins quite nicely. So directionally, in line with what we were expecting. But we're certainly very pleased by the ongoing progress around our cost structure productivity.

Thank you.

Lisa Gill, JPMorgan.

John, when you called out North America and some of the things you talked, you did talk a little bit about specialty in your prepared remarks. Can you maybe just give us a little more detail as far as what you saw for revenue growth there in the quarter, especially versus your expectations?

Well, we expected our specialty business to grow above market levels. I think not only did it grow above market levels, it grew more than we had expected. I think our strength in particular in our community-based oncology businesses was very strong.

Clearly, US Oncology continues to perform very well. Albeit off of a slightly smaller base, our multi-specialty business is growing very rapidly as we create value differentiating capabilities in that market.

Okay, great. Then just on the follow-up side, for the small acquisition that was made for Sainsbury, can you give us any indication as to what the earnings or financial impact will potentially be from that acquisition?

Well, it's obviously a very important strategic move for us. It significantly expands the presence of Lloyd's Pharmacies in the UK. It's an endorsement of the strength of the Lloyd's brand and operating model. I think that's an important aspect to what this win signifies to our team and to the markets. James, you might want to comment on the timing and margin impact.

Yes, just based on our expected normal regulatory review process, we're expecting the transaction to close towards the end of February of this coming year. So I wouldn't expect it to have any material impact on FY16.

Okay, thank you.

Glen Santangelo, Credit Suisse.

James, I just want to follow-up on the gross margins a little bit. This was probably the -- the gross margins probably a little bitter lower than what we had thought, maybe the lowest gross margin we've seen in five or six quarters. I'm curious, can you maybe give us a little bit more color in terms of what impacted that gross margin? I don't know if that was tied into the generic inflation comments. Or if there is something related to the purchasing synergies from Celesio having kicked in or Rite Aid or Omnicare? Just give us a little bit better sense of what's going on there.

Really I would point to you two comments that we made during our prepared remarks. First of all, a very strong growth from our largest customers and therefore an impact on the mix and the margin -- the gross profit margin profile. So that's number one. Then secondarily, the lesser effect around generic price increases than we were originally expecting in our plan.

Okay. Maybe I'll just follow-up on that. John, for those who have been following the Company for a while, you made a call -- we always used to talk about branded price inflation every quarter. Then we went through a long period where we didn't talk about it. Now it feels like we're talking about it every quarter again. So has anything changed with respect to your relationship with the manufacturers and the IMA's that you've historically had in place? How do we think about branded price inflation as a driver relative to the size of, for example, what generic price inflation has done for the Company?

Well, thanks for the question. What's great about the business model McKesson has been employing for a long time is that it has a lot of levers that we can use to help drive our performance over time. As you point out, if you go way back to the early stages of my presence as a CEO, brand price inflation was the key driver that helped us drive our Company. Over time, that became less important as a factor but has always remained a factor.

So I think our comments today are more directional in nature related to our expectations. Brand price inflation came in higher than we had anticipated. As you point out, as we moved our model, we eliminated part of the variability or impact branded price inflation has on our business model.

Also if you recall, at one point in our evolution, generic price deflation was something we had to manage quarter to quarter. Now we've been in a period where we've actually experienced some inflation. So our comments there once again are directional in nature. It came in below where we had anticipated, but we believe both brand and generic price inflation will remain important tools for us as we look out this fiscal year and beyond.

Just perhaps to add one thing, recall that around a one-fifth of our relationships with the branded manufacturers are variable in nature. So the other 80% are a fixed fee for service type of structure.

Okay, thank you.

Robert Jones, Goldman Sachs.

Sorry to go back to this again, but it does seem like the biggest change relative to the update we got from you at your Analysts Day. So you're pointing out a mid single-digit margin expansion in the Distribution Solutions business. I'm just curious if there's any more detail you can give around how much of that lower margin expectation is just from revenue mix versus the less generic inflation that you have called out. I guess the bigger picture question, John, would just be given more specialties going and the growth there, is margin expansion as we think about this business going forward, is it something that we should think about in a more tempered manner?

Well, I think the point on margin in a good one. We clearly didn't anticipate our revenues to be growing as rapidly as they have. That has, as James mentioned, had a depressing effect on op margin. But if you actually look at operating profit growth, it's still very strong.

Our objective is to satisfy the needs of our customers. As you know, we have long-term contracts with many of them. So as they grow, the bigger ones will put some pressure on the mix. But the most important dimension here is I think our focus on making sure that we are driving efficiency in our operations as revenue grows. That was pointed out earlier from an expense perspective. We're disciplined in the way we approach the market.

The comment about specialty is an important one. That's a very high growth area. Each Company I think in the country probably defines specialty slightly differently. So it's difficult to talk to any one of us and get a perspective that's really industry-wide. From our point of view, there are some very profitable and positive mixed products in the specialty category. But there are also some products in the specialty category that are really expensive and carry a margin rate that's low but produce tremendous returns and profit drop in the P&L. So albeit, it may be dilutive to our margin expectations, they're certainly producing great returns.

I think that we have a responsibility to try to manage the Company with both a perspective on margin rate, as well as a dollar growth and clearly at the bottom line, the returns on our business. So we look at it in a portfolio way. If there's one message you can take away from me on the specialty business, it has been a priority for us now for many years, We came from a very weak position and we now are in a very strong position.

I'm very pleased with where we are in that market. As we define it, I think most of them were either number one or number two and growing very rapidly. So we are well positioned as we think out and look at the new product launches. Those launches, given the characteristics of some of them, could put some pressure on our margin rates, but clearly we think they'll be value-creating and we're in the right position to take advantage of the relationships we have with our customers in the markets that we serve.

That's all helpful. Then just a quick follow-up on the Celesio deal announced earlier today, any sense you could give us on how we should think about the transaction as far as adding to your ultimate synergy target? Then is the types of deals -- is this the types of deals we should expect you to be building upon the Celesio acquisition?

Clearly we're excited to have the business from a fundamental perspective beginning to stabilize and become more of a McKesson type of operation. We've always had a great view, a positive view of the resources and the people inside of Celesio, but as we talked about when we did the acquisition, there were some infrastructure and systems things we had to do and some strategy changes we had to make that would help us begin to get to a growth phase.

I think we're entering the early stage of that growth phase. The deployment of capital that we talked about as a possibility, you're beginning to see evidence of that. This type of acquisition fits right in with what we want to do. It's in a market that's extremely friendly to the utilization of generics and the incentives for both wholesalers and retailers to help their patients take generics. So when we have an opportunity to expand our channel of generics in an important market like the UK, it drives synergy across the entire Corporation through our global procurement operations that we've talked about.

So I think it -- not only is it helpful to Celesio as a standalone opportunity and to Lloyd's Pharmacy in particular, it's also helpful to McKesson overall to build on this12,000 storefront base of business that we have out of the some odd 60,000 or 70,000 stores that we service that buy in the case of the 12,000 that are owned or banners of ours that buy off of our portfolios. So it's important to recognize that pull-through buy power in the part of our strategy that this helps serve.

Got it. Thank you so much.

Ross Muken, Evercore ISI.

So maybe on the Tech Solutions business, obviously the reformation of that asset continues. It seems like the margin outlook for the year is good. Is it my math that's right, is this going to be a year where we actually see the growth? Not only that but maybe get back to some of the higher levels of EBIT we saw historically? Secondarily, when do you actually think we can see some of the transactional businesses come through to where we can actually see the division grow again?

I appreciate the question, Ross. We have been, as you know, working diligently for the last several years to reposition the business in the areas where we think we are strong or market leading, where the markets are actually growing and are favorable to McKesson. We have extremely strong franchises inside of our Technology Solutions business.

We've been struggling with our hospital IT business, where we've been reinvesting in the go-forward products and de-investing in the products that we've already announced that we plan to sunset. So it's difficult as an investor to see the positive momentum in the business through some of the drag that's present as a result of, as you described it, the reformation of the business as we position it for growth going forward. I think we are optimist that we continue to make the right decisions to get the momentum back in the business.

As to margin, I'll turn it over to James to talk a little bit of how you should think about it.

Yes. So as we track towards that high teens goal for FY16, I would say that right now we're looking at an increase in operating profit year over year. That's excluding the $51 million benefit from the gain around the nurse triage business. So we're on track for some operating profit growth this year.

Maybe, James, there's been some momentum in DC on a tax holiday or ability to repatriate some cash. I think you have roughly $2 billion or so offshore. How would that change your more medium-term capital allocation priorities? I know you've had some of the debt maturities and you have the Celesio put. One, is that something you've been thinking about? Two, would that free you up maybe to do a little more repurchase if it happened?

Well, we feel as though we have a very nice mix in terms of our cash balance between what's domestically and what's held offshore. We have spoken a few times about obviously yes, we have the upcoming debt maturities to take care of. So those are US dollar-denominated. But beyond, that our priorities for capital allocation are, first of all, internal investment and second, looking at value creating M&A opportunities.

Given the breadth, the international breadth of our business now, we feel as though we have a nice balance in terms of the flexibility of the offshore cash that we have available for deployment, as well as the domestic cash available for deployment. So I wouldn't say -- we'll see how the tax discussions in Washington DC play out. But we already like the balance of cash that we have available to us. So it feels as though we have the degrees of freedom that we need.

Thanks so much.

Garen Sarafian, Citi research.

A couple follow-up questions at this point. First, sorry to harp on this again, but regarding moderating generic inflation, could you characterize that a bit more? Was it across the board? In certain therapeutic classes? Vendor? Anything?

Well, I would just observe that we saw fewer manufacturers taking increases on fewer drugs. So both of those variables. We saw less activity than we had certainly seen last year during our first quarter and less than what we were assuming we would see when we put our plans together.

Okay. You mentioned Celesio performed better than expected. Maybe I missed it, but could you comment on what area of Celesio specifically exceeded your expectation thus far? Was it on the synergy front? Top line?

I'd say the revenue was really right on track on a constant currency basis with what we were expecting during the first year. We continued to see strong performance out of the United Kingdom businesses. We're seeing some modest improvements in the German environment, where obviously we have had something of a history of market discounting. Seeing a little improvement in that discounting environment in Germany; offsetting that, the French market is still looking like a challenging one. But net net, we're pleased with the progress that we made at Celesio in Q1. We feel as though we have more opportunities for the balance of the year.

All right, great. Thanks.

David Larson, Leerink.

Can you comment on the TEVA and Allergan transaction? Is that material or not with respect to generic inflation? Our checks indicate that as the generic industry consolidates, sometimes manufacturers raise price because they can. Just any thought here would be helpful. Thanks.

Well, we clearly have a very strong working relationship with both TEVA and Allergan. I think we see, as do you that the question of generic inflation has sometimes been driven by the ability for the price to actually benefit the generic manufacturers, or otherwise stick in the marketplace. So to the extent that the consolidation provides some of that opportunity, that would be a positive. I think that the market remains competitive. I think these consolidations will help eliminate cost. But I also think that McKesson's position in the market will continue to afford us an opportunity to work with these very large companies in a very positive way for both parties.

Great. Then just any general thoughts around PSCK9? How material that might be going forward? Maybe compare it to the hep C benefit?

I think it's difficult to tell. It's a little too early for us to comment on the characteristics of that product, albeit it is a positive. The continued innovation that comes out in these categories of products will be extremely important to us going forward. As I mentioned a few moments ago, our footprint in Specialty continues to grow. I think that as people launch with some of these more unique products, it'll help the patients, but it also will help McKesson.

Great, thanks a lot.

George Hill, Deutsche Bank.

First a quick one, are there any situations where generic drug prices inflate where you don't benefit?

Well, George, I think it's -- drug price inflation and the benefit is in the eye of the beholder. I think all of us in the supply chain have different characteristics with manufacturers and with customers that are highly variable in clearly the relationship both in terms of the way the business models work, but also the way the contractual relationships might work.

So I think it's probably better said that we try to optimize our value to the generic companies in a way where we benefit and they benefit. But at the same time, we have to stay extremely disciplined and diligent around making sure that our customers are also benefiting through our action in the supply chain. That's been our priority and will remain our priority.

Okay. That's helpful. Then maybe a quick follow-up on the Sainsbury transaction. It's interesting that this is the second deal like this that's occurred in a little over a month. As you see global tire consolidation, do you foresee global pharmacy consolidation? How do you feel like you're positioned in the face of -- if global retail pharmacy consolidation steps-up? Thanks.

I think that's a good question. Obviously we've seen tremendous consolidation across healthcare in the last 90 days alone.

There's been all kinds of activity. I think that the way we think about consolidation is clearly we want to be positioned with winners, but that doesn't necessarily mean that we have to be always positioned with only scaled players. In fact, we think our Health Mart customers, for example, are winners and are able to consolidate in their own space with other independent pharmacies because of the scale we bring to them and the value that we can deliver.

That's why I'm continuing to focus on the footprint of owned and banner pharmacies provide us the ability to help our customers who are perhaps not all owned by the same enterprise continue to benefit through their relationship at McKesson and may be able to stay as independent operators even though they may appear on the surface to be sub-scale in terms of store count.

They may improve their efficiencies through their partnership with us and clearly improve their margin structure through some of the value added services that we help them deliver into the marketplace on behalf of payers and consumers. So our focus is to help our customers be more successful across the board to the extent that people consolidate and they consolidate into our into our customers we win, or at least break even from a revenue perspective. Our objective is continue to be more and more efficient with these larger customers so that we can earn the privilege of continuing to serve them.

Okay, thank you.

Dave Francis, RBC Capital Markets.

John, let me take that answer and go a little bit further with it. To the extent that we are seeing consolidation among many players in the supply chain, including payers and obviously seen on the retail side, do you foresee the need strategically or otherwise to potentially further consolidate and own additional assets within the supply chain? Or are there inherent conflicts in that which would keep you from doing that? How do you best position the Company for -- to be most advantageously positioned going forward?

I think that's a very good question. In fact all of these questions are good questions.

I think that the industry is changing significantly. I think it's incumbent upon us, as it relates to our customers and our shareholders, to remain open to any strategy that we think is sustainable and can create value. Having said that, it's always been our position that we don't compete with our customers.

So the challenge in some of the conceived combinations would either have us competing with people that are on the partnered supply side of our business or perhaps on the partnered customer side of our business. That makes it difficult to conceive of some of those types of combinations. So I think that if we remain open to everything, we'll be very cautious before we ever cross the line of competing with our customers.

Great, thank you.

That does conclude our question-and-answer session at this time. I'll turn the call back over to our speakers for closing or additional remarks.

Great. Thank you, operator. Thanks to all of you on the call today for your time. McKesson is off to a good start to FY16. I'm excited about the opportunities that lie ahead. I want to recognize the outstanding performance of our employees and their contributions to driving better business health for our customers every day. I'll now hand the call over to Erin for her review of upcoming events in the financial community.

Thank you, John. On September 16, we will present at the Morgan Stanley Global Healthcare Conference in New York. On November 10, we will present at the Credit Suisse Healthcare Conference in Scottsdale, Arizona. We'll release second-quarter earnings results in late October. Thank you. Goodbye.

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