麥卡遜 (MCK) 2016 Q3 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 of Investor Relations.

Thank you, Melissa. Good afternoon, and welcome to the McKesson FY16 third 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 brief business update, and will then introduce James, who will review the financial results for the quarter. After James' comments, we will open the call for your questions.

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 the amortization of acquisition-related intangible assets, acquisition expenses and related adjustments, and LIFO-related adjustments. We also refer to certain non-GAAP measures calculated on a constant-currency basis. We believe these non-GAAP measures will provide useful information for our investors.

Please refer to our press release announcing third-quarter FY16 results available on our website for a reconciliation of non-GAAP performance measures to the GAAP financial results. Additional information on constant-currency effects is available in our SEC reports.

Thank you, and here is John Hammergren.

Thanks, Erin, and thanks everyone for joining us on our call. As we've had an opportunity to speak with many of our investors since we last provided an update just a few weeks ago on January 11, I'll keep my remarks fairly brief this afternoon. In a moment I'll turn the call over to James, and he will walk you through our results for the third quarter. But before I do, I have three key messages I want to leave you with today.

First, there have been no changes to the FY16 outlook and preliminary FY17 outlook, which we provided on January 11. We continue to expect adjusted earnings per diluted share of $12.60 to $12.90 for FY16.

Second, our third-quarter results were right in line with our revised expectations. I'm proud of the excellent progress we have made in expanding our global pharmaceutical sourcing scale, delivering operating margin improvements in our technology solution segment, and successfully executing on the Celesio acquisition synergies.

Third, I have great confidence in our future. As we enter the final months of FY16 and look to the future, I'm as confident as ever in our industry, and the unique role we play in making the business of health care more efficient. I'm confident in McKesson. Our focus on innovation and our customer-first mindset has propelled us to be leaders in the markets we serve. Most important, I'm confident in the extraordinary team we have at McKesson. We're truly the best in the business.

Our businesses are very well positioned, both domestically and internationally, and we have a tremendously strong balance sheet, which we will continue to deploy effectively and strategically to deliver long-term value for our shareholders.

Year to date, we've repurchased approximately $850 million of our common stock, repaid nearly $1 billion of long-term debt, and made internal capital investments of $417 million, and paid $179 million in dividends. We ended the third quarter with approximately $3.4 billion in cash, and our expectation to deliver cash flow from operations of approximately $3 billion for FY16 remains unchanged from our original guidance.

With that, I'll turn the call over to James to review our third-quarter results, and we'll return to address your questions when he finishes. James?

Thank you, John, and good afternoon, everyone. As John discussed earlier, we've provided our updated view on FY16 earnings on January 11, and we continue to expect adjusted earnings per diluted share of $12.60 to $12.90. Our results this quarter are consistent with our revised expectations.

I will now review our third-quarter consolidated financial results. As a reminder, Schedule 3 of the accompanying tables to our press release includes supplemental constant-currency information to outline both the dollar and percentage impact of currency movements on our reported results. During the third quarter and the first nine months of our FY16, our reported adjusted earnings per diluted share included currency head winds of approximately $0.03 and $0.11, respectively. Therefore during my prepared remarks I will reference both the reported and constant-currency figures.

Now let's move to our results for the third quarter. My remarks today will focus on our third-quarter adjusted EPS from continuing operations of $3.18, 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 3% for the quarter to $47.9 billion. Revenues were negatively impacted by $1.1 billion, as a result of foreign currency rate movements. On a constant-currency basis, revenues were $49 billion, an increase of 5%, led by growth in our Distribution Solutions segment. Adjusted gross profit for the quarter decreased by 3% to $2.9 billion.

On a constant-currency basis, adjusted gross profit was flat to the prior year, driven by the performance of Distribution Solutions, primarily reflecting the impact of a weaker year-over-year profit contribution from generic pricing trends, offset by growth across our other domestic and international businesses, and continued progress on procurement synergies related to our acquisition of Celesio.

Total adjusted operating expenses of $1.8 billion were down 5% for the quarter on a reported basis, and down 1% on a constant-currency basis, driven by diligent cost management in both segments, and the sale of our nurse triage and ZEE Medical businesses earlier in the fiscal year. Adjusted other income was $14 million for Q4. Interest expense of $87 million decreased 6% on a reported basis, and 5% in constant currency.

Now moving to taxes. This quarter's adjusted tax rate of 25.5% was driven by both a favorable mix of income, and certain favorable discrete tax items, which totaled approximately $0.07, primarily reflecting recent legislative changes in both the US and Europe during the third quarter. For the full year, we continue to expect our adjusted tax rate to be approximately 29.5%. Adjusted income for the quarter was $739 million, with our adjusted earnings per diluted share at $3.18, up 9% on a reported basis, and up 10% in constant currency.

Wrapping up our consolidated results for the third quarter, diluted weighted average shares decreased 2% year over year to $232 million. During the third quarter, we completed a share repurchase of common stock totaling $350 million. Fiscal year to date, we have repurchased approximately $850 million in common stock. Overall, we expect to continue our portfolio approach to capital deployment, which reflects a mixture of internal capital investments, acquisitions, share repurchases, and dividends. We continue to expect our weighted average diluted shares outstanding will be $233 million for the full fiscal year.

Now let's turn to the segment results, which can be found on Schedules 3a and 3b. Distribution Solutions segment revenues of $47.2 billion were up 3% on a reported basis. Revenues were negatively impacted by $1.1 billion, as a result of foreign currency rate movements. Constant-currency revenues were $48.3 billion for the third quarter, reflecting growth of 6%.

North America pharmaceutical distribution and services revenues were $39.6 billion in the third quarter, up 6% on a reported basis, and 7% on a constant-currency basis. Third-quarter revenues primarily reflect market growth in our US pharmaceutical, specialty, and Canadian businesses, offset primarily by the expiration of a customer contract at the start of the third quarter. International pharmaceutical distribution services revenues were $6 billion for the third quarter. International revenues were impacted by approximately $700 million in unfavorable currency-rate movements, primarily attributable to a weaker euro relative to the US dollar when compared to the prior year.

Adjusting for this currency impact, revenues were approximately $6.7 billion in the third quarter, down 1% on a constant-currency basis, primarily reflecting the loss of a hospital contract in Norway during FY15, partially offset by continued growth in our UK business.

Medical-Surgical revenues were flat year over year, primarily driven by market growth in our primary care business, offset by the sale of the ZEE Medical business in the second quarter. Distribution Solutions' adjusted gross profit of $2.5 billion decreased 3% on a reported basis, and increased 1% on a constant-currency basis, to $2.6 billion.

Overall, the third-quarter adjusted gross profit reflected our mix of business, including a growing proportion of specialty pharmaceuticals, a weaker profit contribution from generic pricing trends when compared to the prior year, and continued progress on driving Celesio-related procurement synergies. Adjusted operating expense for the segment decreased 5% for the quarter on a reported basis. On a constant currency basis segment operating expense was flat year over year primarily driven by expense Management and the sale of the ZEE Medical business during the second quarter. Segment adjusted operating profit of $1.1 billion was flat on a reported basis, and grew 2% on a constant-currency basis.

The segment adjusted operating margin rate for the quarter was 224 basis points, a decline of 8 basis points year over year. On a constant-currency basis, the segment margin declined 9 basis points, primarily driven by the adjusted gross profit result. Generic pricing trends are anticipated to be weaker during the second half of our fiscal year, as we outlined on January 11. Therefore, we now expect the Distribution Solutions segment adjusted operating margin to be relatively flat to the prior year.

Turning now to Technology Solutions, revenues were down 8% for the quarter to $694 million. This decline was primarily driven by the sale of our nurse triage business in the first quarter, and the anticipated revenue softness of the Horizon Clinical Software platform, partially offset by growth in our other technology businesses.

During the quarter, adjusted operating expenses in the segment decreased 7% on a reported basis, and 6% on a constant-currency basis, driven by our ongoing expense management efforts, and the sale of the nurse triage business. Third-quarter adjusted operating profit for the segment increased 7% to $133 million, and the adjusted operating margin rate was approximately 19%, representing an increase of 274 basis points versus the prior year.

On a constant-currency basis, adjusted operating profit increased 2%, representing an adjusted operating margin increase of 180 basis points versus the prior year. This increase was driven by strong performance in our payer solutions, relay connectivity, and medical imaging businesses. For the full year, we now expect the adjusted operating margin for the segment to be in the low 20% range.

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 the given quarter. For receivables, days sales outstanding were relatively flat at 26 days. Our days sales in inventories increased by 2 days to 33 days. Our days sales in payables increased by 3 days to 54 days.

We generated $566 million in cash flow from operations during the first nine months of FY16. 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 $3.4 billion, with $2.4 billion held offshore. For the nine months ending December 31, we had $417 million of internal capital spending, repurchased approximately $850 million in common stock, repaid approximately $1 billion in long-term debt, and paid $179 million in dividends.

Now I'll turn to our adjusted EPS outlook for the year. As I mentioned earlier, we continue to expect FY16 adjusted earnings per diluted share of $12.60 to $12.90. Our 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 $1.27 per share in amortization of acquisition-related intangible assets, and $0.31 of acquisition expenses and related adjustments. We also expect between $0.72 and $0.82 per share in LIFO-related adjustments.

In summary, McKesson delivered results consistent with our revised expectations for the quarter. Looking ahead to FY17, we expect to leverage the core operational strength and scale of our leading global businesses and our longstanding portfolio approach to capital deployment to create value for our shareholders, customers, and business partners.

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. Melissa?

Thank you.

(Operator Instructions)

Our first question comes from Ricky Goldwasser with Morgan Stanley.

Yes. Hi, good afternoon. First question is on the distribution segment operating margin. When we look at growth for the North America business on a normalized basis it's about up 7% year over year, at the lowest level we've seen since FY14. Should we think about this as new market growth for this segment? Is HCV the key factor there that contributed to that mid-teen growth in last 18 months that we should normalized, and will do so going forward?

Well, the first part of our question I would expect that will, as our normal course, give you more of a steer for FY17 margins when we do our update in early May. As it relates to what has been impacting the margin thus far is obviously we've spoken extensively about the impact through generic price increases, and that's really been the driver of that margin result for the DS function. Could you repeat the second part of the question?

The question was really not about the margin. It was more about the top-line for Distribution Solution for North America. It's up 7% in the last 18 months. We've seen this growth in low to mid and even high teens. The question's really, the two parts were forward looking, is 7% the new growth rate, and then when you look at what's driving that slow-down, is it that you've seen abnormal growth from HCV?

Ricky, this is John. We have a very large customer that's in the mail business that had some significant year-over-year progress in terms of customer wins that you saw us benefit from, from a revenue perspective, that helped push us into the double digits, in addition to the launches of some of these specialty drugs. The combination of those two events were probably the things that propelled us from a revenue perspective.

The 7%, from my perspective at least now, is more consistent with what we think the market underlying growth rates are probably running at today. Obviously there are some minor changes in what we might see from a mix perspective. I think to James' point, it's probably a little premature for us to talk about FY17 revenue forecasts. But I think we're probably going to grow like we are today, in line with the market. It's just a question of any customer changes that might happen during the year, either customers of ours that are winning or losing business, or when on occasion sometimes we lose a piece of business, like we did with a large mail-order customer just recently.

Then just one follow-up on the gross profit margins. Actually, third quarter gross profit came in a little bit better than we've expected. It seems you're still seeing benefit from buy-side margins. When we think about the new guidance that you provided a few weeks ago, should we think about this quarter, the third quarter, as the last quarter we should think about modeling as seeing a benefit on the buy side from generic inflation; and from this point on, we should think about a slow-down or model it at the 0% level that you've highlighted a few weeks ago?

Well, I would emphasize our view around generic price inflation was nominal, so not zero. But certainly modest, certainly significantly down from when we came into this fiscal year with much higher expectations.

There's really no change in what we said to you on January 11. Things are coming through as we had expected.

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

Great, thanks for the questions. On the administrative cost structure review you guys shared earlier this month, looking back over the last few years and trying to adjust for acquisitions like PSS and Celesio, it looks to us that SG&A has grown somewhere in the 10% range per year. As we think about the cost structure review and some of the client attrition you've experienced over the last year, how should we think about the right level of annual SG&A growth? Any progress you guys have made -- I know it's early, but any progress you've made in that review. Details behind it, would be helpful for us.

Well, it is early in our work, obviously. This is something that we did embed within the preliminary guide we offered a couple of weeks ago for FY17, but we're going through the detailed work now. We do think that there's opportunity. I've noted before that opportunity would likely drive a one-time charge in Q4 of the current quarter. We'll be able to perhaps provide an update in May. Certainly we feel as though there is some opportunity.

Robert, I think it's probably fair to say that looking at our SG&A without all of the acquisition noise that comes in and goes out, and certainly currency fluctuation, are really -- if you look at our internal numbers and our calculations our SG&A is normally growing in the low single-digit range. We typically don't average a 10% increase in SG&A. That would be way outside the boundaries.

If you look on base core expense trajectory, it's nowhere near that. I think you might see some abnormalities occasionally because of M&A and how that flows through, as well as some of this currency stuff. I think over time you should expect our SG&A to grow more of that single-digit rate once we get past some of this work we're doing today on administrative costs.

Got it. I guess a lot of focus on the pharma business, maybe just on medical. It looked like it was essentially flat revenue growth there, both sequentially and year over year. I think originally you guys were talking about mid-single-digit type growth for this year. What's changed relative to your original expectations? Then any thoughts about the trajectory of the medical business growth from here forward would be helpful?

With Medical-Surgical revenues we updated our guide a quarter or so ago to be low to mid-single-digit revenue growth. That was driven by our sale of ZEE Medical. We've talked also about the strength of the primary care business within Medical-Surgical. There's some challenges on the extended care side, but overall we're very pleased with the continued development of the business.

I think you have to net it for Z. That's probably the thing most people miss when they look at those numbers, because we don't adjust those out. They are in our adjusted numbers, they year-on-year reflection.

Got it, and nothing changed on the end-market side then?

No, not really. We're seeing a little bit of weakness in flu, but that's not going to be something you're going to see dampen our overall revenue to any significant extent. It really is the sale of Z.

Perfect. Thanks so much.

Thank you. We'll next go to Steven Valiquette with UBS.

Thanks, good afternoon. For me, just a quick question on the expected anti-trust litigation settlement gain for FY17 that you alluded to a few weeks ago. That extra $70 million year over year adds an extra $0.20 or $0.25 in FY17 if we assume a normal tax rate, which is fine. Any chance you can walk through the drivers or dynamics of what's going on there, to better understand why those gains were greater in FY17? Thanks.

It's really these things come through in unforecastable and sometimes lumpy fashions. Really, it's just a single settlement that's quite large by comparison to others that we've received, and certainly by comparison to other years. I think that's really it.

The case is quite far along, which is why we felt it was sensible to make an assumption that we would enjoy that $140 million benefit in FY17.

Okay. The other real quick one is in the $0.85 that you've talked about for the hit in FY17 from a combination of a generic pricing, and the customer transitions, obviously we're still getting a lot of calls on that. Is there any chance you're willing to maybe give just a bit more color just size-wise on magnitude of one of those buckets versus the other within that $0.85 at this stage, or are you still going to perhaps hold off on that until later?

Well, I'd just say that the majority of that $0.85 is being driven by generic price increase changes.

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

We'll next go to George Hill with Deutsche Bank.

Hi, good afternoon guys, and thanks for taking the question. John, shifting gears a little bit, given the recent pull-back in the market, assets would seem to be more attractively valued right now. Can you talk a little about whether or not the Company feels pressured to put capital to work? Around the capital deployment strategy, maybe talk about the appetite for increasing the Company's leverage ratio, and the appetite for deals that might add another leg to the stool, or something that might be more transformational as it relates to the business?

Thanks for the question. Clearly, we try not to feel pressure on any dimension, because it may cause you to do something that doesn't make sense. Having said that, as our balance sheet has become healthier and we paid off some of the debt and made the commitments that we said we would make relative to de-levering after Celesio, we're very aware of the fact that we now have expanded opportunity to deploy our balance sheet in a portfolio way, and we plan to continue to do so.

I would say the fluctuation in valuations does make some opportunities more attractive than others, and clearly even some of the private companies that might have dreamed of IPOs, et cetera, may be more available to a conversation with us than they might have been otherwise.

As it relates to putting leverage back on a Company, I think the fact that we were able to lever up and then de-lever again gives us credibility with making our commitments a reality. I think the issue of another leg on the stool or a transformational deal, clearly we look at any deal that makes sense to us financially and strategically. I don't think we push anything away from the table.

But having said that, synergies are usually more possible on deals that -- and more line of sight on deals that are in one of the segments that we're currently participating in. I would tell you that our bias is to go into businesses we currently understand and operate, as opposed to something that's far afield where the synergies are based on some expectation that the markets are going to be more attractive or they're going to grow faster. Usually we can't add a lot to those values if we don't have synergies to bring into the transaction.

Okay, that's helpful. Maybe just a quick follow-up again, we'll hit the generics topic again. You guys have pretty modest expectations for generic drug price inflation in FY17, but a lot of the drivers that drove the generic drug price inflation haven't changed much. Can you talk about -- can you give us any color on what you're seeing in the channel on what's driving the diminished rate of change and inflation? I'm looking for more anecdotal information that helps us see what's going on in the market there? Thank you.

Well, you may recall that when we talked about generic inflation in the past, we've talked about the fact that it is driven by a small number of molecules from a small number of manufacturers that have inflated to a very high degree. I'd say our current experience is that some of those outlier increases have diminished significantly. But overall, if you think about the portfolio over time, it has been in more of a deflationary mode.

When we talk about inflation, we're really talking about the net effect of inflation on our business driven by those molecules, not the overall portfolio inflating or deflating, because that typically deflates. We think that it's -- we're in a period now where we are going to have modest inflation. That's what we have been experiencing. That's what we talked about on July -- excuse me, January 11. That's what we anticipate for the rest of this fiscal year and into next fiscal year, is modest generic inflation.

Okay, thank you.

We'll next go to Lisa Gill with JPMorgan.

Thanks very much, good afternoon. John, a few weeks ago we talked about the incremental opportunity to add incremental generic procurement deals. I think you talked about the fact that you've done some Safeway, Ahold, and some others. But can you maybe just remind us of what you see as incremental opportunities that are still available to you within your own book of business out in the market place?

Well, clearly we have made significant progress in helping our customers secure generics more effectively, and use our distribution channel to bring them to their stores in a more cost-effective way as well. I think we have seen progress. You mentioned Ahold and Albertson's-Safeway. Many of our independent customers have continued to join us in the generic procurement side, and have become more and more reliant on McKesson's ability to help them reduce their cost and improve their performance.

Our Health Mart stores are now above 4,500 stores. That program has been extremely successful in driving generics. Our proprietary generics programs are still growing in healthy double-digit ranges. Overall, I think we continue to make progress.

Some of our largest customers still procure some or all their generics on their own, through their own distribution network, and do their own sourcing activities. We continue to have conversations with those customers about the value of using McKesson's combined power with theirs to do an even better job. Those conversations obviously are important to us as we think about the relationship with these customers. It would be premature for me to talk about specifically which customers we think might provide the most opportunity, but I don't think -- the table isn't run yet relative to opportunity for us.

Is there a way to quantify that number or maybe use an analogy, if you want to use baseball and innings, as far as how penetrated you are in your current book, just so we can think about as we move into 2017 and 2018 and beyond, what the potential incremental opportunities are as it pertains to these type of generic procurement relationships?

I would say the opportunity is not insignificant. Many of you have talked to us about specific customers that you know are continuing to procure a large majority of their generics on their own. I think it's not an immaterial impact in front of us, if we're able to persuade these customers with the data we have that our procurement activity would be beneficial to them. I'm hesitant to describe it in innings. Clearly in customer count, we've got a lot of customers using us today; but in customer value based on the size of their generic spend, there's significant opportunity left for us.

Then my follow-up, which is the Bull Sainsbury, as well as UDT, now in a second review process. Was that your initial expectation? How should we think about the timeline of closing those two acquisitions?

Our initial expectation was that the regulatory process would be extended and follow a pattern that we've seen before in these countries. I think we remain extremely optimistic that when these transactions are examined through their process that we will stand a very good chance of accomplishing the acquisitions in largely the form that we had expected when we announced them.

In answer to your earlier question, also, Lisa relative to procurement, I might also point out that the opportunities for us extend beyond just the US. Many times customers look -- or you look at customers that you know of in the US that are buying on their own but there are also customers buying on their own in other important markets for us, where we and they are able to dispense a generic that we sourc3ed together and we remain optimistic that our global activity and our procurement programs will continue to grow.

That's helpful, thank you.

We'll take our next question from David Larsen with Leerink.

Hi. Can you please talk about the competitive environment? When you go to market and bid for new pieces of business, how is the pricing environment? Now that we've got a couple of large JVs that are in the market with like Red Oak and [Weebad]. Can you talk about what the pricing environment looks like? Has there been a significant shift in 2015, 2016 relative to previous years, or not? Thanks.

Well, it's difficult to ever comment on pricing, because it's in the lens of where we are currently doing business, or where we're competing for business. I would say that overall the business remains competitive but stable. I don't see a lot of customer changes that would drive one to believe that there's something going on materially different from a pricing perspective out in the market place.

I can speak for McKesson's strategy, and that is that we continue to focus heavily on our selling efforts within our existing customer base, trying to find ways to add more value to those relationships. Through that value-added, create a relationship that has more stability, but it also provides better profit for our customers and better profit for McKesson as we evolve these partnerships. I think our principal focus is in the area of expanding our footprint with existing customers, and helping them perform better.

Okay, thanks a lot. Appreciate it.

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

Hi, good afternoon, guys. Maybe just quickly, we saw some headlines in the last week or so on some core rulings in Germany. Can you just remind us where we are with the Celesio stub, and the process left there to determine whether or not you will get to openly acquire the remaining portion, and how we should think about the purchase price?

First of all, we own around 76% of Celesio. For the other 24 points or so of the ownership, they have a put to us where we do not have a call on those shares outstanding. As to the news these past few days related to a suit that Magnetar had brought that we had previously seen dismissed at the local court level, if you will, back in December of 2014, that decision was appealed by Magnetar. It did get overturned just a few days ago. We're planning to appeal that decision. I would expect that process to play out over a year or more.

Given the issues specific to this case, I think it is unlikely that McKesson will be required to pay what some have been extrapolating as a potential liability. The case at hand related quite narrowly to a few shares that had been put to us. The court decision related to around EUR260,000 total. We see in extrapolations from that figure up into the EUR370-million range. I would not expect, given the specifics of the case and the process around German law, that we would be looking at that sort of payment.

I might also point out that this obviously, has no effect on the operating control we've already established with Celesio, and really no effect on our financial statements, other than this potential cash liability. But we've consolidated the earnings. We operate the Company, and to James' point, these outstanding shares remain outstanding, and can be put to us when they decide they want to put them to us.

Just quickly on the Rite Aid front, can you just help us think through how you have to game plan for an outcome there? Obviously, you're not going to be able to share with us what the discussions go like. I'm just trying to think practically in terms of, as you have to have that decision tree of what the various options are, how quickly, if the business ultimately transitions this year, next year, whenever, how quickly you can adjust your cost structure, or how flexible it is; and what are the sort of things we should look for to best understand how that will impact the parts of the P&L?

First off, I would remind folks that on -- in early January I made a comment about this business we believe will be retained by McKesson in its current form through late in our FY17 numbers. With the guidance we've given you for FY17, that range includes that we would -- or assumes we would continue to enjoy the Rite Aid business in relative, the same relative form through the end of that period. Obviously, we could be off plus or minus depending on what your view is of the process by which Walgreens will complete the transaction and how that may actually take shape.

I would say that we're reluctant to ever comment on what a customer might do when the decision is in their hands. I would say, however, that you've seen certain customers of ours value the incumbent relationship, and continue to enjoy a relationship with McKesson going forward like you do at Target and Omnicare, where the relationship changed from a mix perspective, but we were able to retain at least a portion of the business. I would not take that speculation and apply it necessarily to Walgreens, but I'd just point that out as certainly an alternative that has some possibility. Other than that, not much else I can say on it, Ross.

Thank you, John.

We'll take the next question from Garen Sarafian with Citi Research.

Good afternoon, John and James. James, the first question to you. Could you first repeat what the Technology Solutions adjusted constant-currency margins were for this quarter, which I think favorably benefited margins. But even if so, it's been quite strong year to date that you're now guiding to the 20% margin level for the year. Is there anything unique for us to assume these trends wouldn't continue into next year?

Well, I have been pleased with the operating margin trends in Technology Solutions in recent quarters. I think it very much reflects the work that the team there has been doing to re-orient our focus to specific businesses around our payer solutions, around our transactional-type offerings, and also our imaging business, as well as our revenue cycle management businesses. We've really shifted the focus to those areas where we think we have nice growth opportunities and we have solid margins.

That has flowed through in combination with good cost control to allow us to record much stronger margins, with the comment that we think for the full year we'll be in the low 20%s. About one point of that margin benefit, of course, remember comes from the sale of our care management business a couple of quarters or so ago. That's really the story on the technology margins. Overall, in constant currency, the margin number itself is 20.5%.

20.5%, okay, great. Maybe going back to the other question that was just asked regarding Rite Aid. Previously you guys have shied away from acquiring into the retail pharmacy space, as there could be some conflicts, at least in the US that's not present in Europe. With the potential acquisition of Rite Aid, where there is a possibility of a material amount of stores being sold, are you willing to reconsider that view, or would there still be too much of an impact with your remaining retail clients to consider that?

I don't think we would be interested in buying the stores. To the extent stores are divested, we would not be interested in buying them. That's not the business we're in, in the US.

Great. Thank you very much.

(Operator Instructions)

We'll take a question from Eric Coldwell with Baird.

Thanks. My primary McKesson ones have been covered at this point, but I am curious after many years of waiting we finally got the AMP final rule, 658 pages of glory. I'm curious if you and your teams have had a chance to go through at all, and if there's anything that stands out to you as you think about your business over the next year once that, I guess it goes into effect actually starting FY17 for you. But curious what your thoughts might be, if you have any at this point?

Well, I read the whole thing several times and highlighted the areas of most interest to me.

Of course.

Obviously, it's still very early to understand all of the implications and to understand the ability of the states to implement this rule. I think that it's likely to be pretty limited in the states that have already largely moved to a managed Medicaid program in recent years. This really is a state Medicaid fee-for-service kind of an application. I guess our initial assessment is that we expect it to have a fairly limited impact in the supply chain as we see it today.

That's good enough of an answer. Thank you so much.

Thank you. We'll next go to Eric Percher with Barclays.

John, I'd like to go back to the first question where you were asked to opine on 7% as perhaps a go-forward number. When we look at 7% in this quarter, and the decline relative to the prior quarters, you mentioned a couple items. But it's fair to think over the next several quarters we've got a contract movement, we have the sale of assets. FX may become an easier comp going forward. Is it fair to say that's not reflective of long-term industry growth, or how do you think about long-term industry growth today?

Well, I'm reluctant to make an industry call. You guys are, and others, are well positioned to do that. Clearly, part of what you have to look at is the amount of generic launches that come out, what kind of price inflation you're going to get on the branded launches, what kind of specialty drugs might hit and when. There's lots of complexity.

I guess what I was attempting to describe was that the relative higher rate that we had in advance of this quarter was driven by some specific customer wins that happened to flow through our P&L. That lapping effect of that success by that customer is the comparative that we're chatting about. That make sense to you, Eric?

Yes. As we've gone a couple weeks into the year, as you look at brand inflation trends, have you seen the political discussion translate into any material change in those trends?

No, we really haven't seen any change of any significance in the branded side. I'd say that the results are in line with our expectations.

Thank you.

We'll take a question from Charles Rhyee with Cowen.

Yes, thanks. John, just going back to your expectations on inflation, and not only just generic, but also maybe on branded. How do you guys thinking about in terms of this being an election year, and to the extent that you are seeing sort of a moderating environment? Any thoughts on as to how much you think may be an election cycle as impacting that? Thanks.

Well, also it's difficult to speculate on what the drivers are when we are not the ones making the decision on the generic or the branded side relative to inflation. I would say that political discourse that's taking place, and the Congressional inquiries relative to pricing practices, I think are obviously, going to have people at least pausing perhaps to consider whether now is the right time to take a price increase.

There obviously are other circumstances related to pricing associated with a supply disruption availability, new product launches. There's all kinds of things that probably play into the calculus there. I would say that I think the political discussion certainly clearly, and the media discussion probably has some impact; but to speculate on how much would be difficult.

That's fair. Then just maybe one quick follow-up on that. You mentioned earlier in a response that you clearly are looking at there's nothing really -- you're just saying there's a few items that really drove some of the inflation that you saw historically. You're not really seeing that right now. Is there anything structural to the market as you look forward in the next couple years where something like that couldn't happen again? Or do you think there's been some changes in the market where it's probably less likely we'll see what we saw maybe the last few years? Thanks.

Well, I believe that performance of branded pharmaceutical companies is probably easier to forecast given that it has been less volatile in the last decade than perhaps the generic industry, where we've seen more volatility. That volatility certainly is partially driven by supply and disruption. I would say that if you could forecast what supply disruptions might occur in the future, then you might have the ability to at least have some inclination as to what happens with branded price, or generic price inflation. But I'm really reluctant to speculate on how things may play out.

We clearly have given you guidance for the rest of this fiscal year on that dimension of inflation, both branded and generic. We've given you our thoughts relative to FY17 guidance on those two dimensions. I think we stand by our current speculation on that; but those views are amongst other views we have to take every year on what might happen throughout the year. We just want to be transparent with you about what we're thinking. I think that's probably the most I can say about it.

Great, thanks a lot.

You're welcome. I understand we don't have any additional questions in the queue. I know we hit a lot of these subjects in early January, and I appreciate all of the attention you've paid to these matters and others, and for your time on the call today.

As we enter the final few months of our fiscal year, and I look to the future, I'm excited about the opportunities I see for us to continue our lead from an innovation perspective, and how we can help our customers meet the many challenges that they face. The fundamental strength of McKesson has long been our ability to constantly adapt and grow during times of change, and by staying focused on our customers, and true to our core values.

I'll hand the call over to Erin for her to review upcoming events for the financial community. Erin?

Thank you, John. On February 10 we will present at the Leerink Partners Global Health Care Conference in New York. We will release our fourth-quarter earnings results in May. Thank you, and have a good evening.

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