McKesson Corporation (MCK) Q1 2009 Earnings Report, Transcript and Summary

Good afternoon and welcome to McKesson Corporation Fiscal 2009 First Quarter Conference Call. All participants are in a listen-only mode. [Operator Instructions]. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Ms. Ana Schrank, Vice President Investor Relations.

Thank you, Angie. Good afternoon and welcome to the McKesson fiscal 2009 first quarter conference call for the financial community. With me today with John Hammergren, McKesson's Chairman and CEO; and Jeff Campbell, our CFO. John will provide a business update and will then introduce Jeff, who will review the financial results for the quarter. After Jeff's comments, we will open the call for your questions. We plan to end the call promptly after one hour at 6:00 Eastern time. Before we begin, I remind listeners that during the course of this call, we will make forward-looking statements within the meaning of the Federal Securities laws. These forward-looking statements involve risks and uncertainties regarding the operations and future results of McKesson. In addition to the Company's periodic current and annual reports filed with the Securities & Exchange Commission, please refer to the text of our press release for a discussion of the risks associated with such forward-looking statements. Thanks, and here is John Hammergren.

Thanks, Ana. And thanks to everyone for joining us on our call today. McKesson turned in solid results for the first quarter, continuing our positive momentum of the prior three years. Our results were driven by an excellent performance in the distribution solution segment where both revenues and operating profit were up strongly. As we discussed at our recent investor day The Technology Solutions business is subject to quarterly volatility but we are optimistic about our full-year forecast. We continue to use our balance sheet and our solid operating cash flow to further the creation of additional shareholder value. The overall result was steady growth in earnings per share and we are off to a solid start in fiscal 2009. Before I turn the call over to Jeff for a detailed review of our financial results, I will highlight the positive trends in our business and the progress that we are making to deliver sustained growth. Consolidated revenues for the first quarter were up 9% and earnings per diluted share were up 8% to $0.83. Our strong performance was driven by the Distribution Solutions segment, which still accounts for the largest part of earnings, and provides a great base for our Company. With the scale we've achieved and the efficiencies we offer in our customers, the Distribution Solutions segment will continue to provide McKesson with a platform for growth in the years to come. In the quarter, Distribution Solutions revenue growth was 9%, reflecting the strength and diversity of our customer base in both the United States and Canada. Distribution Solutions revenue grew as a result of solid growth and new business from existing customers, and the acquisition of OTN. Outstanding performance from U.S. Pharmaceutical continues to drive this segment with strong performance across the breath of our customer base. Our core direct revenues grew 16% for the quarter. While our revenues moved directionally like the pharma industry revenues our growth rate has typically been higher as we continue to have success in getting our customers to move more business through us as opposed to buying directly from manufacturers. We recently held our annual Pharmacy Strategies Conference for independent retail customers, where we outlined our vision for independent pharmacy as a health and wellness destination, not just a place to pick up prescriptions, and we unveiled a number of solutions that can help make this vision a reality. Today Pharmacists have an opportunity to elevate their role as healthcare providers in their communities. As trusted accessible healthcare professionals, independent Pharmacists are ideally suited to counsel their patient on medication therapy helping them manage conditions such as Diabetes, High Blood Pressure and Asthma. At the conference we demonstrated the McKesson Technology and Solutions work hand-in-hand. With technology providing gains in efficiency and profitability, pharmacists can spend more time delivering services that help their patients lead healthier lives. The conference served as a showcase for McKesson full compliment of solution for independent pharmacies. Many of these solutions are integrated for members of McKesson's Health Mart franchise, which grew 50% during fiscal 2008. Health Mart customers are extremely loyal to McKesson particularly with their generic compliance. Compared to the independent segment as a whole, our Health Mart stores have a 10% better utilization of OneStop our proprietary generics than the rest of the segment. We believe our OneStop generics program leads the industry in our recent performance supports that. In the first quarter sales growth for OneStop Generics was 20%, one again significantly above market growth. Because OneStop Generics is not a one size fits all program, we have participate across a wide range of customers including independence, regional chains, mail order firms, hospitals, including their group purchasing organizations, and long-term care pharmacy providers. We recently expanded our relationship with Safeway to include Generics except an additional 1000 stores in our OneStop program. This is terrific example of our steady progress penetrating our customer base with unique programs tailored for specific needs. We continue to benefit from our acquisition of OTN which gave us greater scale in the rapidly growing market for specialty pharmaceuticals and will accelerate growth until we lap the revenues from that acquisition. Bringing OTN into our family of distribution businesses provides us with a comprehensive value proposition for our customers and for our manufacturing partners. The integration of OTN is proceeding as planned and we should be complete by September. Beyond U.S. Pharmaceutical there was significant contribution to growth from other businesses within Distribution Solutions. In the first quarter growth in the Canadian Distribution business was outstanding due to new and expanded customer agreements. By focusing on long-term customer relationships and operational excellences, McKesson Canada has continued to be a leading distributor in Canada. We have strong market positions in our distribution businesses in the United States, Canada and Mexico, and through our joint venture in Nadrow [ph]. Each country operates a little differently, but we are able to make the strongest elements from each work together and exchange those best ideas across all three businesses. A good example of this is the recent acquisition we made in Canada. Of group farm ESAR, which is the marketing and purchasing arm for a network of close to 270 independently owned pharmacies located throughout Québec, Ontario and the Atlantic Provinces that operate under a banner called Proxim. In Canada banner is operated somewhat the same fashion as our Health Mart franchise and if they allow independent pharmacies to remain independently owned while achieving the scale and benefits of larger chain. McKesson Canada already owns several banners and the acquisition of Proxim banner fills out our offering. This acquisition demonstrates McKesson's commitment to the independent pharmacy business model, and our efforts to continue to expand our Canadian footprint. Lastly, in Distribution Solutions our medical surgical business continues to execute well. In the first quarter the business had solid revenue growth with particular strong results reported from our home care group, which has improved its market position with a suite of proprietary technology tools that enable McKesson's Horizon home health customers to place product orders to med-surg directly from their operating platforms. In summary, I'm very pleased with the strong performance of our distribution solutions segment. The scale and efficiency across our distribution businesses allows us to serve our customers with a high degree of satisfaction. With our successful proprietary generics program, we are set to benefit from the period of significant generic product introductions over the next few years. We've also enhanced our overall value proposition with the OTN acquisition, which gives us a strong position in the fastest growing sector of the market, specialty distribution. And in medical surgical solutions, our business is growing and we're executing very well these days. We have a terrific business and a stable industry, and I feel confident about our momentum for the remainder of the fiscal year. Turning now to technologies solutions. Our results in the first quarter don't reflect our full year expectations for the segment. Jeff will take you through more of the specifics on our first quarter, but let me remind you that there is quarterly volatility in the business that can impact the results on a short-term basis, but it doesn't change our long-term view of what we can accomplish. We are still very confident about our products and our strategy and we are optimistic about our full year results. Rights now, for example, Technology Solutions is hosting its Annual Executive Summit, it focuses on the role of technology in automating and connecting healthcare. The summit is for very senior hospital and health systems executives and even in this tough economy, we have a record number of first-time attendees. We include in the summit a series of meetings with our top customers to provide updates on the role of technology in overcoming current challenges in healthcare. We also provide industry education and the opportunity to network with peers to discuss common challenges such as patient safety, and uncompensated care. Our customer's commitment to this annual event demonstrates their continued interest in our solutions. As a result of our customer's interest when we look out into the future we see a robust pipeline. As Pam Pure told you at Investors Day this is a very big complex business and over the years we have succeeded because we have true expertise in healthcare and we have the broadest portfolio in the industry with unique solutions for hospitals, payers, physician offices, and pharmacies. To meet the needs of our broad customer base, we continue to focus on innovation and invest in new product development. For decades McKesson has been a leader in revenue cycle solutions. To maintain that leadership position, we recently announced the introduction of Horizon enterprise revenue management, Horizon ERM, a new solution focused on helping customers manage the very complex reimbursement collection and patient-management issues in healthcare. This new solution will run on Horizon architecture, and it is open, so that it integrates with both, McKesson and non-McKesson clinical solutions. Horizon ERM will better enable hospital financial managers to predict cash flow and net revenue by understanding the payment history of pairs and anticipated patient throughput. With this system, we're reinventing the way consumers interact with the health system and removing many of the administrative tasks currently performed after care is received to the front end of the care process. In last year's first quarter we announced the move of our health solutions business from the distribution segment into technology solutions to more closely align the development of new offerings that connect the needs of payers and providers for information and financial flows. This quarter I want to provide you with an update on some of the recent activities in health solutions, a business that provides commercial and government payers with software and services designed to optimize their operations and health outcomes for parents. Through McKesson health solutions we offer disease management programs and those three hour services to improve health status and health outcomes of patients with chronic conditions. We also provide business intelligence tools for measuring, reporting, and improving clinical and financial performance, including our InterCall criteria software for clinical decision support. In our payer business, all of our top 25 managed care organizations, and more than 90% of the Blue Cross Blue Shield plans depend on our solutions to manage their business. And in the disease management and triage business, our services are employed by more commercial and government agencies than by any other vendor. A great example of our ability to leverage expertise from our payer organization, and connectivity solutions from RelayHealth, and the power of our technology footprint in the ambulatory and health systems base [ph] was our announcement of community care advantage earlier this year. Drawing on our extensive experience in disease management for Medicaid patients and success with consumer-based technology solutions, we developed an offering to help meet the medical needs of the indigent, chronically ill, and newly discharged patients. The goal of this solution is to reduce the cost of serving high-cost populations by helping hospitals target non-reimbursed cost for readmissions, emergency department visits, and hospital occupancy. Community care advantage is a great example of our ability to use our scope and scale and combine our assets to help healthcare provider address their toughest challenges. On the disease management services side of the business we finished a successful first year in Illinois, with the largest and most complicated DM program in any state with 170 McKesson employees; nurses, physicians, and social workers on the ground, on the phone or in triage centers, helping the most costly Medicaid patients in Illinois. The result was that we decreased the in-patient admissions by managing those patients at home or in non-acute care studies. We are pleased with the successes of our software and services in health solutions and the synergies we have gained from moving this into our technology solutions segment. This type of broad-based success across our customer base of hospitals, payers, physician offices, and pharmacies, they keep us optimistic about the full year results for technology solutions. My last subject before I turn this call over to Jeff is the important topic of capital deployment. We continue to take a portfolio approach to capital deployment and in the first quarter we deployed $242 million in acquisitions, the largest of which was the McQueary Brothers for $190 million. In addition, we paid out our newly double dividend on July 1st. In summary, we entered fiscal 2000 with a strong performance and the long-term prospects of two businesses remain extremely promising. Our solid balance sheet and operating cash flow provide resources to further the creation of shareholder value. Based on the healthy fundamentals underlying our business, and our ability to execute on our objectives, and the estimated benefit of a tax reserve release, we are now raising our previous outlook and now expect that McKesson should earn between $4 and $4.15 per diluted share from continuing operations for the fiscal year ending March 31st, 2009. I look forward to reporting to you on our continued success throughout the year. With that I'll turn the call over to Jeff, and will return to address your questions when he finishes. Jeff?

Thanks, John and good afternoon everyone. As you've just heard, McKesson had another solid start to the fiscal year, driven by the performance of our distribution solutions business and the strength of our balance sheet. Let me begin by reviewing our financial results for the quarter, as always I'll first review our consolidated results, providing more color when I discuss each segment in more detail. Revenues for the quarter grew 9% to $26 .7 billion from $24.5 billion last year. Our overall revenue growth is, of course, driven by the growth in distribution solutions which was up 9% from last year, and represents 97% of our consolidated revenues. Gross profit for the quarter was up 8% to $1.3 billion. Distribution Solutions gross profit increased 14%, providing for nice margin expansion in the segment. Technology Solutions gross profit declined 6%, primarily due to our recognition in the prior year of $21 million of disease management deferred revenues, the expenses for which were incurred in prior quarters. Moving below the gross profit line, our total operating expenses were up 9% to $897 million for the quarter. Higher expenses in the quarter were primarily driven by growth in the business and several acquisitions, particularly OTN, as well as $9 million of additional FAS 123R expenses. Operating income for the quarter grew 4% to $371 million from $356 million a year ago. Moving below operating income, other income, of $21 million was 43% below last year, primarily due to lower interest rates on a lower cash balance. Given the current low interest rate environment, we are managing our cash very aggressively, and maintained a lower cash balances in the quarter. Interest expense of $34 million was relatively unchanged from the prior year. Moving to taxes, our effective tax-rate of 34.4% in the quarter was a bit higher than the 34% effective rate in the first quarter a year ago. You will recall that this year's guidance on our tax rate is for a 33% run-rate versus last year's 34%. This year's June quarter was above the 33% run-rate as it included $5 million tax expense for discrete items. Before I move on, I would like to take mat here to talk you through a discrete tax reserve adjustment that we expect to make in our September quarter. Let me remind you that in the past I have said that we do not include highly uncertain outcomes from settlements or other discrete tax items in our guidance. However, we are now confident that we will release a tax reserve in the September quarter of $65 million. Our outlook for the full year remains at a tax-rate of 33% before considering the impact of this expected reserve release. Net income in the quarter was $235 million, unchanged from the prior year, While earnings per share of $0.83 was up 8% from $0.77 a year ago. This EPS leverage was driven by the impact of the aggressive $1.7 billion of share repurchases we made in fiscal year 2008, which lowered our diluted shares outstanding by 7% year-over-year to $282 million -- 282 million shares. This quarter, our portfolio approach to capital deployment was more heavily weighted towards acquisitions. In the quarter, we deployed $242 million for acquisitions, million of which was for McQueary Brothers. We also repurchased a $130 million of stock which is little less than we've been doing in light of the acquisition spend this quarter. Its also worth noting that the cash proceeds we get from option exercises were down $119 million year-over-year this quarter. Let's now move on to distribution solutions. In this segment we achieved overall revenue growth of 9%, compared to the same quarter last year. U.S. Pharmaceutical direct distribution and services revenue grew 16%, about 6 points of which were due to the acquisition of OTN. That leaves 10% growth driven primarily by strong performance across our entire customer base, and some shift from our warehouse customers to direct-store-store delivery. This shift also contributed to our warehouse revenues declining 8%, but the primary driver of the warehouse decline was the loss of a contract by a large warehouse customer which we've talked about beginning with the March quarter. So we'll be done lapping this loss beginning with the March quarter of fiscal 2009. Canadian revenues increased 27% for the quarter. While a favorable currency impact of 10% and two additional sales days helped drive this increase, the largest factor was our continued success in securing new and expanded distribution agreements across our customer base. This is a great result. Medical surgical distribution revenues were up 6% for the quarter to $627 million growing roughly at market rates. Gross profit for the segment was up 14% to $934 million from $822 million a year ago, on 9% revenue growth, representing a nice improvement in gross margin of 15 basis points. The increase in gross profit for the quarter was due to the impact of our agreements with branded pharmaceutical manufacturers and an improved mix of higher margin products and services including sales of OneStop Generics. We also benefited from the lower mix of warehouse sales. These are terrific results, especially given that we had $14 million in positive anti-trust settlements in the prior year quarter. Our distribution solutions operating expenses were up 13% for the quarter, to $562 million, reflecting growth in our businesses, and the acquisitions of OTN and McQueary Brothers. Operating margin rate for the quarter was 148 basis points, compared to 143 basis points in the prior year. Truly impressive when taking in to account last year's favorable $14 billion in anti-trust settlements. In summary, and before I move to Technology Solutions, we are very pleased with the revenue growth and margin expansion of our businesses within Distribution Solutions. We are off to a great start for the fiscal year in this segment, and I am optimistic about the fiscal year outlook. Turning to February Technology Solutions, let me remind you as I did at investor day, that in this business we have contracts that are implementation-driven, and software sales, both of which can fluctuate from quarter-to-quarter. Last year, for example, we talked about our strong physician software sales, which were driven by regulatory deadlines that did not repeat this June quarter. Additionally, last year we recognized the $21 million of previously deferred revenue on a management contract that fell straight though bottom line, something that did not recur this year. With these factors in mind, our services revenues were up 6% in the quarter, excluding the $21 million from the prior year services revenues. This growth reflects progress across the board of customers we serve, and products we offer. Software and software systems revenue of $138 million in the quarter were unchanged from a year ago, primarily due to the strong sales of physician software in the prior year quarter. For the quarter Technology Solution had totaled gross R&D spending of $99 million an increase of 4% from the prior year. Of this amount, we only capitalized 14%, compared to 21% a year ago. We continue to innovate and spend on R&D to maintain our leadership position, and expect our capitalization rate to be between 15% and 20% this year. Technology Solutions operating expenses increased 5% in the quarter to $270 million. Higher expenses in this segment were driven by growth in the business, higher net R&D expense, and additional FAS 123R charges at $5 million over the prior year. Our operating profit in our technologies solutions segment this quarter was $66 million, down from $100 million a year ago. Operating margins in this segment were 8.87% for the quarter compared to 13.7% in the prior year. While the first quarter gets us off to a slow start, we still expect to make operating margin improvements in this segment on an annual basis. And to make progress towards our long-term goal of low to mid-teens operating margins. Leaving our segment performance and turning briefly now to the balance sheet. You may have noticed from our press release filed earlier this afternoon, that we utilized $325 million of our AR sales facility at the end of the quarter. As I mentioned before, given the size of our working capital, the fact that that we're churning through over $100 billion of receivables and payables a year, we have considerable daily fluctuations in our cash balance. As we have begun to manage our cash more aggressively in this low interest rate environment, we have begun to use your short-term liquidity facilities a bit for the first time in a few years. Given this more aggressive approach to managing cash, we felt it prudent to increase the committed balance available to us through our AR facility from $700 million to $1 billion. This AR facility, combined with our $1.3 billion revolving credit facility, gives us total liquidity support, $2.3 billion. Now to our working capital metrics. Adding back the $325 million sale of AR at quarter end, our receivables increased 11% to $7.5 billion, marginally higher than our sales growth. And our day sales outstanding would have been 22 days flat versus the prior year. Our inventories were $9.3 billion on June 30th, a 16% increase over last year. Our day sales and inventory of 33 was two days higher than a year ago. Once again, there are fluctuations in our daily working capital, depending on what's happening the day the quarter ends. But going forward, we do not expect this increase in our year-over-year days sales and inventory to sustain itself. Compared to a year ago, payables were up 13% to $12.4 billion, our day sales and payables increased one day from a year ago to 44, reflecting primarily the growth of our generics business which typically has longer payment terms. In the quarter, we used $11 million in operating cash flow, excluding the benefit of the $325 million receivables sales. This was driven strictly by timing of inventory purchases as reflected in our DSI, as well as a few other pure timing related issues. Going forward, we continue to expect to generate over $1.5 billion of operating cash in fiscal 2009. Capital spending was $40 million for the quarter, $5 million higher than the $35 million the year ago. Capitalized software expenditures were down to $38 million from $41 million a year ago. Our annual guidance for capital and software expenditures in the range of $350 million to $400 million remains unchanged. We ended the quarter with $1.2 billion of cash and cash equivalents, down from the $1.4 billion we held at year end. So overall, our first quarter results were solid and on track. Given the favorable tax reserve adjustment that I spoke about earlier, the solid first quarter results, and our confidence in the year, we are raising our guidance for EPS from continuing operations from $3.75 to $3.90, up to $4 to $4.15. On our May call we provided directional quarterly guidance, suggesting that our first quarter would be up slightly from the prior year. Our diluted EPS of $0.83 came in a little better than we expected, it was mainly due to timing. We continue to expect second quarter earnings to be flat to up slightly, and a stronger second half. Other than the above mentioned tax adjustments, there are no other changes to our fiscal year 2009 earnings per share guidance assumptions which we laid out for you back in May and affirmed in late June. We feel that McKesson is on track for another good year. Thanks, and with that I'll turn the call over to the operator for your questions. Operator? Question and Answer

Thank you. [Operator Instructions]. Our first question comes from Bret Jones from Leerink Swann, your line is open.

Bret?

Good afternoon. Thanks for taking the question. I was wondering if you could update us, and this is probably a question directed at Pam. I was wondering if you could update us on the Horizon enterprise management. I think there were nine contracts for 14 facilities. I was wondering where that stands now? And if any of these facilities are running at different clinical system?

Well, Brett, Pam is not here on the call, so I'll attempt to answer the question. Horizon enterprise resource management was just recently launched. Is that the question you are asking about that product?

Yes, but I believe you're still signing contracts even though it's going to launch in early next year, is that correct?

But we're signing contracts, but it isn't up and being implemented yet. It's a in the beta [ph] phase.

No, I know --.

What was the question, how many contracts did we sign and how many more are we going to sign?

No, no. The question was how many -- yeah, if you could give us an update on the number of contracts that had been signed, I believe it was stood at about nine contracts for 14 facilities, and now it's about a month, month and a half ago. And if any of these facilities that have signed contracts for this new financial system are running a different clinical system?

I can't answer the question about whether or not they are competitive D installs [ph]. Clearly, we believe the product is well suited for both existing McKesson customers upgrading to a more contemporary platform as well as competitive customers who might be running other systems to use this new product. And the idea behind it really is that it will integrate much more effectively with the new clinical systems that we've sold, and perhaps others have sold. So we're excited about the launch, we are making progress and signing new deals with our customers but, I really don't have the specifics to share with you today.

All right, fair enough. And then a question just on the gross margin within the technologies solutions business. I realize there was a disease management account that fell straight to the bottom-line for the year-over-year comp. But it was also significantly below the other three quarters of last year, and I was just wondering if there is anything else going on in that line?

No, Bret this is Jeff. The gross margin bounces up and down a little bit, but the $21 million is the biggest chunk. And then the other thing is, we did have a spike in physician office software sales last year, given the regulatory deadline, and that stuff is sort of almost pure margin. So as that spike last year was not replicated this year, that drove most of the rest of the decline in the gross margin.

And I think Bret, it is also important as we've talked about this business in this past as to look at our full year expectations on the business because we do see lumpiness in the business quarter-to-quarter depending on when contracts are signed, and more importantly when they are implemented, and how the revenue is recognized. We do things in a very conservative way here, and sometimes you'll get these artifacts of things flowing through that business in different ways quarter-to-quarter. But we're still very optimistic, as Jeff said that we'll make good progress towards our goal of low to mid-teens that kind of margins for that business for the full year.

I understand but relative to your other three quarters there is nothing different in the mix of the business, then that would explain why it was lower than the other three quarters last year?

Well, I don't think there's significant differences in the mix. You'll see that they were more hardware sales in the quarter that grew faster than the other segments and hardware sales have the worst margin of the three so that's possibly is part of the mix. But business is big and complex. It has got lots of different moving parts in it. And clearly, software is the most profitable, and software's are off a little bit compared to the others as you get a little bit of effect. But once again on a full-year basis we are feeling very good about that business in the pipeline and tunnels we see in front of us.

Great. Thank you very much.

Yep.

Thank you Robert Willoughby Banc of America, you may ask your question.

Wow. It looks like 242 million of deal spending year-to-date. Can you hazard a guess what you did on the Canadian acquisition plus the IT deals that have closed since the quarter, what that deal spend and the aggregate might be at this point?

I'm trying to make sure I understand your question, Bob. So if you look at the cash flow statement, you see the 240 million in…

Yeah

…Acquisition spend, I guess I'd also point out that there's other line, which has to do mostly with the pharma-soft deal that John talked about which actually technically closed July 1, but the cash was sitting in an escrow account, which is why it's down in the other category. McQueary we've been very public about the number that's a $190 million, and a couple of other technology deals which drove the remainder of the 242.

I thought there had been some close since the end of the quarter. Is that not the case? That the incremental spend above?

No, the only one that technically closed afterwards was the pharma-soft. But as I said…

Okay.

Its been in investing section in that other category.

And I'm having trouble getting to the share repurchase number. You mentioned 130 million on the cash flow statement, it does way 147, so I was -- what is the disconnect there?

You know, it has to do, I must admit you got me a little bit -- it has to do with the tax treatment as people exercise options, is what my team here is telling me. So tell you what, that one we were happy probably to take offline and give you a little more detail.

Okay. That's great. Thank you.

Thanks, Bob.

Thank you, David Veal of Morgan Stanley your line is open.

Yeah, I guess just one question sort of a outside the quarter, I wonder if you can give us an update on the AWP litigation, how are you thinking about that for the balance for the fiscal year are we getting closer to the settlement? Is there a time at which we take a reserve for that?

Well, we typically don't talk a lot about progress in litigation until there's something really to discuss, and we don't take reserves for litigation unless we have a known certain amount, and that would typically require an agreement between various parties. I can't speak to whether this will settle or it won't settle. I can say the only news in this case that release publish and official as the court as set a December 1st start date for the trial of the claims by the two certified classes in the Boston AWP litigation case. But I know you know that litigation is inherently unpredictable, and I guess all I can do is reiterate what we said from the very beginning of this case, and that is we believe it lacks merit and that our company has at it all times acted properly and legally. So we intend to continue to defend ourselves vigorously. And that's all there nothing new since the 10-K filing ither than that December 1st date.

Okay great thank you. Just a follow-up for Jeff. The renewal on the AR facility was that accomplished largely the same terms as the one before? Or were there any kind of changes there?

Well, so we upside from 700 to 1 billion as you would expect in today's bank environment-- this is an annual facilities we've been renewing it each year for quite sometime, and some of the terms certainly went up a little bit in pricing. Now, of course that has to be balanced against the fact that all I'm talking about when I say that are the fees associated with the facility, which is, of course, a very, very small part of the actual cost of using the facility. So while the fees have gone up not insignificantly because interest rates are down 300 basis points year-over-year, the actual costs when we draw are down quite significantly versus the prior year. But, you know, the banking markets, poor large corporations like ourselves is a little pricier than it has been in sometime.

That's great. Thank you very much.

Thank you. Tom Gallucci of Merrill Lynch, your line is open.

Good evening, two questions. One pharma growth was very strong versus our expectations, so wondering if you could just define a little bit on how you are driving such strong numbers especially relative to some of the market information that people see and I do you think you are taking any share? And the second question that we get a lot is how you think about Rite-Aid as far as credit being a bigger customer and sort of going through the time that it has been going through?

Well thanks, Tom for the questions. Clearly we are very pleased with our growth in the pharmaceutical distribution business. But as you have saw in our result we have been growing our direct business in particular nicely, the direct-store delivery business. We are really pleased that how we're positioned in that business, and as we said in our prepared comments, we do think we're taking share of our existing customers spend that goes outside of wholesaling, we also think that some of our customers are growing slightly faster than the marketplace and then just a step back a little bit, the overall market statistics that are published by IMS and others have typically been directionally correct, but not absolutely correct. So that we use them as sort of an annual guideline in terms of -- as we look out to our planning horizons, but as Jeff talked about at our investor day, wholesalers as a group have typically grown nicely faster than the IMS so that market numbers would have indicated for lots of various reasons. So we are pleased with our growth, we think our growth is going to remain very solid, and clearly we're getting great leverage on that growth by growing gross margins even faster than we growing revenues and it's the best result in the margin expansion in our business which is one of our top priorities. And on the Rite-Aid credit situation, Rite-Aid has been a long-term customer of ours, and a good customer of ours, they have been and remain current with us, and we have a very open and frequent dialogue with them, so there's really nothing new to discuss relative to the relationship with McKesson and we're pleased to have them as a customer, we continue to work closely with them.

Thank you. Glen Santangelo from Credit Suisse, your line is open.

Yeah, John, and Jeff, just a quick question on the drug distribution operating margin. Obviously you saw some nice expansion there year-over-year, and if you back out the anti-trust settlements in the prior year the margin expansion was even better, almost 20 basis points sort of by my calculations. What is driving that do you think? Is it some of the recently launched generics, or do you think John as you suggested it's maybe more of the growth in the OneStop Program?

Well, I think it's really a combination of many factors. I think the, you know, generics continue to be a very important part of our business. Frankly I'm not sure the big generic wave was in the first part of this year, it is really coming later in the year. So I can't point to any specific launch that help drive our number. But we continue to manage our expenses very carefully which helps give us margin lift. We try to manage our mix in the business effectively as you pointed out selling more generics in to our existing customers and taking generics that they would have otherwise purchased direct or around us, and we also are focused on making sure that we optimize our relationships with the branded manufacturers, and when they have price increases we do get some benefits on that side as well. And it's all balanced on making sure our sales force that doesn't give it away on the customer pricing side and they sell the total value of your relationship with the customer. So our field teams have done a great job of demonstrating the value on a regular basis for our customers. Things like Health Mart and others produce more value for our customers than we ever charge in fees, and that helps us avoid the -- sort of the price discussion which is a big part also in maintaining margin growth is to resist the temptation to respond the pressure by dropping pricing.

Hey, John, maybe just one follow-up, if I could. I mean, you talked about Safeway on this call. In the past couple of calls you mentioned some of your other customers that used to by direct that are now buying their generics through McKesson. Is there some sort of catalyst for this change all of a sudden, or were they finally, you know, waking up to your value proposition? Any sort of comments on kind of why we're seeing a change there, would be helpful.

Well, you have been following the company for a long time, Glen, and we started this process of generics heavily investing in programs for our customers four or five years ago, maybe even beyond that. And it started primarily as an independent program, but as the snowball has grown and our book of business has grown, it has allowed us to create more and more value for our customers, and more and more value for the manufacturers. And thereby I would suggest that our value proposition continues to improve. So, whereby several years ago, we may not have had a program that attacked a customer like Safeway us to, today those kinds of customers are very open to the dialogue, number one, because they are looking for sort of the value. And number 2, our program stands up very well against their internal comparatives of what they can do on their own. So, I think it's a combination of the scale of the program, and the sophistication of the program and our customer's willingness to think beyond the boundaries of which they've normally look to wholesaling. And I think not only we're selling more generics, but more software, we're selling more services. We're getting more deeply embedded with our customer base, which improves their performance and frankly improves ours simultaneously.

Okay. Thanks.

Thank you.

Larry Marsh from Lehman Brothers, your line is open.

Thanks, John, and Jeff. A bigger picture, John, really, on merger environment and the economy. Is consolidation of generic companies like we thought about this test be good or bad for you? And why specifically? And then along with that, I mean above and beyond any particular customer, what's the economy? Are you continuing to tick up your allowance for -- accounts in either business, you know, given the environment, and if not, why not?

Well, those are both good questions. I think mergers by our customers and by our suppliers has been a long-term trend. For as long as I have been in this industry, it certainly has existed. And we typically work very well with the consolidators on both the customer side as well as on the manufacturing side, and have close working relationships with them. We try to be aligned with winners, and to the extent that those winners produce additional efficiencies, the entire industry is better of, because waste is eliminated and there is an opportunity to turn that waste into margins for us in the industry. So, I think that -- you know, clearly the issue of making sure we have a fair price and a fair deal is important and to the extent that that we continue to use our buying strength and power, I think the natural thing in the industry will be continued looks for consolidations and efficiency. On the doubtful accounts side, we have no made any additional allowances for doubtful accounts of any significance. I think we see -- we see our customers' payables to us or our receivables very clearly. It's one of the strength. I think of McKesson's business model is very close management of our accounts receivable. And I think other than a couple of blips occasionally you might have that inflate and inventory number or a receivable number for primarily timing reasons. We really don't see a lot of bad debt reserve issues that we have to deal with.

Okay, great. And I guess the elaboration for Jeff. Just a little bit by the share count in the quarter of 282 million, I know we don't -- didn't have period-end numbers, you know, at the end of March, but I thought you would give -- below us -- I know you had suggested that you were looking for 281, I guess average for the full year. So you are a good bit ahead of that. You know, is that some of the impact of fewer share -- stock option overhang? Or is there something else there that would cause the big drop sequentially, and is 281 still the right number to use for the full year?

Well, I think, Larry, of your question -- 281 is still the number I would guide you to for the year. There's, of course, a number of factors going on here. We did repurchase shares at a little lower pace this quarter than we have been. On the other hand that was a little offset by the fact that we had fewer option excises than we've been running late. I would also remind you that the lower stock price, lowers -- a little bit just due to the way the math works on the account.

All right.

So, all of those things are contributing to what brought us to 282, but for now I would say our guidance still remains the 281 for the year.

So, I guess, the point is we could see some sequential expansion in that figure, or not much of a reduction even though you continue to buyback stock?

Well, as I give you that 281 estimate, of course, we're making assumptions about a lot of things, including…

Right.

…we're going to exercise options, what is going to happen to our stock price, and obviously we don't make predictions about our stock price. We have to do to some extend when I do forecast for accounting purposes, and we have a lot of faith in our forecast for the future, and in the performance of the company. So that's somewhat buried in the 281 assumption.

Okay. And then, finally, just the tax reserve, you are, I guess, pulling out in the September quarter, 65 million, could you elaborate a little bit about what that is, has been tied to? And is there other, sort of reserve opportunities that you have in your book in the next few years?

Well, as you know, Larry, under the new tax rules that went in to place last year, FIN 48, all companies have a little bit more disclosure that is forward-looking when it comes to tax reserves when they used to -- and in fact, as you recall, when you go back to the 10-K we published a couple months ago, we have the required disclosure that says speculatively in the next year, you could have reserve releases up to a larger number. And I believe our number -- I don't have a 10-K right in front of me here, you can look up at it, it is around $120 million. At the time we provided guidance back in May, someone asked me about that, and they said gee, Jeff, is any of that in your guidance? And the answer was no. Because that disclosure is highly speculative because it still depends on exactly what happens in the future. Clearly, as of today, we're very confident that this 65 million will be appropriately accounted for in the September quarter and taken in as net income. And that's why we're telling you about it, and that's why we're adjusting our guidance to reflect it, but we are not -- anything that is still covered by that earlier disclosure -- and I'm looking at the number here, it looks like it was 100 -- yeah, around 120 million. Anything else that is in there would still be pretty speculative. And these have to do at all kinds of issues, we have lots of different taxing authorities all over the globe, and we're constantly in discussions. So this just reflects a number of those items.

Okay, very good. Thanks.

Thank you.

Thank you. Charles Rhyee from Oppenheimer & Company, your line is open. Charles Rhyee - Oppenheimer & Company: Thanks for taking the question. I wanted to go back to the technologies division for a second, and I understand everything, the comments you've made up until now but, my thought here is, my question here is that with Per-Se it seems like we've anniversary the acquisition of Per-Se. And if I recall looking at their financials prior to being acquired, they are running EBIT margins in the mid-teens if I'm not mistaken. Can you give us a sense on how the integration is going? Are we still expensing integration costs related to that acquisition in the June quarter here? And if so, how long will that might continue before we might see some of that sort of show up in the numbers?

Yeah, I think that the Per-Se acquisition in particular has gone very well for us. And I would suggest that it is pretty well integrated at this point and the cost related to that integration are relatively minor. I might add though that we have -- we continue to make acquisitions in that segment and early on in the acquisition phase, even if some of the smaller minor acquisitions from a capital deployment perspective can provide some drag in an aggregate and it's not hard to get to $5 million to $10 million to $15 million wroth of earnings drag because of three or four acquisitions that are important to us in the long run, but have that effect in the short-term. So part of what we do every quarter is, we allocate our capital as we look for acquisitions that make sense for us, sometimes the timing of them pile up on each other and we have a little bit of that effect. So I think that your margin discussion around Per-Se is relatively accurate, and I think that it's been a positive influence on the margin structure of our business, and we are getting the value out of that acquisition that we had expected. On the flip side, we're investing heavily in our new enterprise resource management, our revenue cycle management businesses and we are investing heavily in acquisitions that are a bit of an offset to the synergies being produced by the Per-Se acquisition. That's really why we continue to focus on the full year expectations for that business. Charles Rhyee - Oppenheimer & Company: Okay, thanks. And then one more follow-up for Jeff. You know, if I look at the interest expense in the quarter, and the quarter-ending debt, obviously, now some of this moved to your AR Facility, should we think of still your interest expense -- nothing has really changed overall with overall interest expense expected for the year?

Correct. And the short-term borrowing that we do is very inexpensive because short-term rates are so low and so it's not going to really materially move the needle on that. Charles Rhyee - Oppenheimer & Company: Okay, great. Thanks.

Lisa Gill from JP Morgan, your line is open.

Hi, thanks and good afternoon. Jeff, when you talked about the gross profit for the drug distribution business, you talked about three components driving at manufacture agreements, generics and less warehouse business. Obviously, we understand the generics and the less warehouse business and I'm just trying to understand has anything changed on the relationship side with pharmaceutical manufacturers? And then, can you just remind us what we've seen thus far as far as price increases this quarter? And what your expectations are over the next couple of quarters for price increases?

Yeah, all good questions, Lisa. Our relationship with the manufacturers, I guess I'll start with the comment, they're probably stronger than they've ever been because the nature of our more transparent agreements, and our performance under them is just a great, much better basis for the relationship. When you look at the strong gross margin performance, you see in that segment, you're correct, all of those things help. When you look at the branded manufacturers, there is a couple of things going on, we're working very hard to continually demonstrate that we can provide more value to the manufacturers, and you see that being reflected in our renewals of the agreements, and that contributes to part of what you are seeing year-over-year. And then of course, we still have a small part or a minority of the agreement where we have some dependency upon price increases, particularly with regard to the timing of the compensation. And price increases in the June quarter were fairly robust. I'd remind you that our guidance for the year was based on an overall price increase assumption that price increases would be a little bit below the prior 12 months and moderate more towards the levels that we saw in our fiscal '06 and fiscal '07. Now, we're only what, 90 to 110 days into the year, so it's far too early for us to comment on what the whole year is going to look like. But clearly, we're off to a pretty solid start on the price increase side.

Okay, great. Thank you very much.

Yup.

Thank you. Ross Muken from Deutsche Bank, your line is open.

Oh, hi, it's Barbara Ryan. I actually had the same question about generic consolidation and its impact but, maybe since I'm on the line, you could tell us what your OneStop business was up in the quarter?

That was up about 20% Barbara in the quarter which we think is obviously stronger than the market growth rate. It continues to show that we're getting more and more of our customers spend due to the program.

Great. Thanks, John.

Yeah.

Ricky Goldwasser from UBS, your line is open.

Thank you. A number of questions. On the OneStop, what was the sequential increase in the OneStop business?

I don't know that we have that number in front of us, Ricky, but we can try to dig it out. What were the other questions?

The other question is in your guidance for the year, do you assume any energy cost is maintained at current level or are you looking for some sort of relief later on in the year?

I would think that -- that, you know, first of all energy cost in our business is a small amount of our total overall costs, and it is not one that is, that thus far has been from a change perspective has been very material to the corporation wall. In some of our businesses it's more important. We are doing anything we can do reduce our energy costs through lighting an HSBC kind of changes as well as transportation changes and we're also obviously trying where we can to pass along those costs to our customers, and that's an important part of our strategy. But overall, I'd say that our assumptions are that the energy costs will remain relatively where they are now. We don't have big assumptions about significant increases or significant decreases as we've set out our guidance for the year.

Okay, and then…

On this consecutive growth and we don't have the answer in front of is, if you can call Ana or something tomorrow that will be great.

Yeah, that will be helpful and then just on the pricing side, you know, Jeff, you talked about the fact that you into guidance you factored in some inflation in the year anything that earlier in your prepared comments you said you are not changing your pricing assumption for the September quarter. Is what kind of effect have you've seen to-date in the quarter? And obviously we're very early in the quarter. Do you still expect pricing to be lower in the September '08 compared to where it was same period last year?

Ricky! I don't think we gave quarterly pricing guidance. And the comment that Jeff made earlier was that the full-year assumptions for price increases was unchanged from the guidance we gave at the start of the fiscal year, so our view is has remained unchanged, and our view as you reiterated a moment ago is it will moderate somewhat from last fiscal year back to the '06, '07 kinds of levels. So a slight moderation and I think that's still as we see. But as he also said, it's early in the year to call any changes there. As to prices this quarter, once again it's too early to tell, but I think things are pretty much on the plans than we expect them to be, and we're making progress, and we've got three more quarters in this year and that's a lot of runway in front of us.

And the only directional comment, Ricky I did make about the September quarter was just to say that when you think about the EPS split over the rest of the year, we would expect the September quarter to be flat to up slightly and then much stronger EPS growth as we get into the latter two quarters.

That wasn't really related to –

That's -- yes, correct.

Okay. And lastly when we think about anything that was said [inaudible] there was a question earlier -- when we think, really, about your ability to further penetration your existing customer base such as Safeway, should we think about some like more holistic approach that including both branded and generic and kind of the overall proposition that you give them that, rather than just looking at separately as on the generic side?

When we sell a large customer like Safeway, and we did our most recent contract renewal with them, the generics were in addition to the overall contract. It wasn't as if they are contracted for in a compartmentalized way. It is an overall relation with the customers that we try to promulgate. And in fact we really don't sell generics to non-McKesson customers. If they are not in a big distribution relationship with us, our sales force and even our teleservice spenders are not marketing generics discretely as a value prop. It's part of an overall relationship, and that's how we continue to build the values. I think we're very focused on expanding those existing relationships and getting more and more of their spend.

So should we view it of basically bundling of brand in generics to help drive the generic penetration?

Well, bundling is a word that takes on many different meanings, I think what I -- I guess what I would like to suggest is that it's -- it's a discussion usually with existing customers or potentially new customers in an all encompassing way that says listen we want to be your single provider of products to your warehouse, to your stores, to generics, branded, software potentially, automation, those bigger relationships are how we can really impact a customer's performance, and that's why we focus on those bigger relationship. If they leave us isolated to just brand distribution and outside the loading dock, there's very little we can do to effect the storage performance. I have got time for one more question. I guess there's one more person out there.

Richard Close from Jefferies, your line is open.

Great thanks for squeezing me in, Jeff just really quick, talking about the directional on the earnings with the second quarter flat to up slightly, that's prior to the tax reserve.

Yes, I'm sorry. That's an excellent clarification, Richard.

Okay. Just wanted to make sure there, and then John, you mentioned the pharma strategy and the independents, the conference or meeting that you had. I was wondering if you could just give us a state of the current environment with independents, some of the feedback that you are hearing? In terms of -- based on the current economy and all of that, and the level of independence that Health Mart pharmacies that you have now.

Well, I actually -- maybe, it obviously is not a representative sample of the entire universe of independence. But our independence and particularly the Health Mart and value-add independence that attended our trade show, I think seem very optimistic about their prospects. I think they are excited about the idea of engaging in a broader healthcare discussion with the patient that's being paid for. So medication therapy management, that's not reimbursed and some other things that we're able to help these guys and gals step into, beyond just the dispensing of medication is a value proposition that they have been looking for and gets them out from behind the counter and engaging with the petition [ph]. I think the health of the customer base remains strong. Our customers in particular are looking to buy more stores and expand. Health Mart continues to grow. We're somewhere in the neighborhood of 2,000 stores at this point. And those Health Mart sotes are more profitable than their similar brother that are Health Mart. So we've improved their performance and improved our performance frankly at the same time. So it's a very symbiotic relationship. And I think one of the issues that the industry is going to have to grapple with in the next 10 years is the transition of some of these stores. So, one of the things we're really doing with our customers and I know our competitors are as well is trying to make sure these independence stay in the business, stay viable, sell their stores to other independents or to their friends and neighbors, or transition them to other family members that might be growing up and have a desire to be in the pharmacy business. So I think our ability to reach out to those store owners and help them with those transition that could take a decade or two is also going to continue to keep them a vibrant part of the pharmacy distribution channel. And we're happy to play that role. So, thank you for your questions today. It was great to have all of you joined us on the call. I also want to thank all of you that have been patiently waiting to answer -- to ask your questions. I hope we got to most of them. If we didn't then please call into Ana Schrank and we'll try to do the best we can. We remain very excited about our unique offering across healthcare and our ability to turn that value into great results for our customers and for our shareholders. And I will also -- I want to tell you that we're excited to see you guys with these meetings. And Ana, I think there's bunch of places we're going to be attending here in the next few months.

Yes, thank you, John. I have a preview of upcoming events of the financial community. On August 14th, we will attend the Oppenheimer Healthcare Revenue Cycle Management Conference in New York; on September 4th, we will present at the Thomas Weisel Healthcare Conference in Boston; on September 9th, we will present at the Morgan Stanley Global Healthcare Conference in New York; and on September 16th we'll present at the Bank of America in San Francisco. Our second quarter earnings release will be in late October. We look forward to seeing you at one of these upcoming events. Thanks and good bye.

Thank you. That does conclude today's conference. You may now disconnect from the audio portion and thank you for your participation.