McKesson Corporation (MCK) Q1 2012 Earnings Report, Transcript and Summary

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. Ana Schrank, Vice President of Investor Relations. Please go ahead, ma'am.

Thank you, Lisa. Good afternoon, and welcome to the McKesson Fiscal 2012 First Quarter Earnings Call. With me today are John Hammergren, McKesson's Chairman and CEO; and Jeff Campbell, our CFO. John will first 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 1 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 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, acquisition-related expenses, amortization of acquisition-related intangible assets and certain litigation reserve adjustments. We believe these non-GAAP measures will provide useful information for investors. Please refer to our press release announcing first quarter fiscal 2012 results available on our website for a reconciliation of the non-GAAP performance measures to the GAAP financial results. Thanks, and here is John Hammergren.

Thanks, Ana and thanks, everyone for joining us on our call. Today, we reported a strong start to fiscal 2012, with total company revenues of $30 billion and adjusted earnings per diluted share of $1.27. This performance was the result of solid contributions from both Technology Solutions and Distribution Solutions and was helped by our acquisition of US Oncology, which has given us one of the most comprehensive service offerings available to a large and fast growing segment in the healthcare industry, Specialty Distribution and Services. Our first quarter performance positions us well for the remainder of the fiscal year. Due to a reduction in our estimated full year tax rate, we have raised our annual guidance assumption and now expect adjusted earnings between $6.09 and $6.29 per diluted share. Before I turn the call over to Jeff for a detailed review of our financial results, I will provide some highlights from both segments of our business. Distribution Solutions started the year with solid revenue and gross profit growth, keeping in mind that in last year's first quarter, U.S. Pharmaceutical benefited from a $51 million antitrust settlement. The U.S. Pharmaceutical team did a great job controlling cost in the first quarter, which resulted in relatively flat expenses in this business. It's still very early in our fiscal year but we remain confident in our expectations. We anticipate generics will be a strong driver of our full year financial results, though as we've discussed, heavily weighted to the back half of the fiscal year due to the launch calendar. We also expect that our broad range of value-added services for branded manufacturers should continue to contribute to steady levels of compensation. We continue to build new service offerings that create demonstrated value for our large Retail National Accounts, as well as our independent customers. Recently, our U.S. Pharmaceutical business held its annual trade show for independent retail customers. Thousands of pharmacy owners gathered in our hometown of San Francisco to learn more about the latest industry developments. During the event, we shared our vision to further strengthen the role of independent pharmacists, who are vital members of America's evolving healthcare system. We unveiled a number of innovative and integrated solutions, including our mobile messaging solution and our physician outreach program, to help independents become more integrated with patients and providers in their communities. At the conference, we demonstrated how McKesson's technology and clinical solutions work hand-in-hand. By using technology to become more efficient, pharmacists can free up their time to focus on delivering valuable clinical services that help their patients lead healthier lives. We were also able to leverage our vision center, located here at corporate headquarters, to further showcase McKesson's full complement of solutions for the healthcare industry. Many of these solutions are integrated for members of our Health Mart franchise, which received recognition from Consumer Reports and J.D. Power and Associates for its outstanding customer service this year and was announced as the Chain of the Year by Drug Store News during the trade show. We also previewed our new store-branded line of over-the-counter products for Health Mart, which we'll launch this fall. Our Health Mart franchise has approximately 2,800 stores and is growing. We believe Health Mart is a critical part of our solution set because it offers our independent pharmacy customers an effective way to successfully compete against larger national players. Now let me turn to our Specialty business and in particular, US Oncology. We've made great progress integrating the legacy McKesson assets with our US Oncology business. We have a cross-functional team in place to manage the integration, and we are right on track with our plans. When you think about oncologists today, they are under tremendous pressure to deliver more cost-effective care while adhering to best practice protocols. We believe this is going to lead to the development of integrated care models, the transition of reimbursement risk to providers and an increased need to manage operating costs. Our broad solution set, which includes distribution services and integrated technology offering, best practices and managed care contracting, and a full suite of practice management solutions, helps enable the success of our oncology customers. With McKesson, an oncologist can elect to have a simple distribution or GPO relationship, a more comprehensive practice management relationship or choose something in between. Our offering is attractive because of the breadth of the alternatives available to our customers. Specialty has had good overall performance this quarter. While the team is very focused on the integration, they've continued to execute on the core business with good success on all dimensions, in particular with generics and a growing pipeline of prospective customers. Turning to our Medical-Surgical business. We are really pleased that revenues were up 7% for the first quarter, primarily due to strong growth in our physician office business, resulting from acquiring new customers and further penetration of our existing customer base. We remain focused on optimizing our sourcing of McKesson branded products to drive margin expansion. In our Canadian Distribution business, we performed as we expected in the first quarter, with flat revenues on a constant currency basis due to the impact of the government-imposed price restrictions on generic drugs. The team continues to work on mitigating the impact by focusing on generic compliance gains with customers and capitalizing on global sourcing of branded and generic pharmaceuticals. In summary, I'm pleased with the 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 well positioned to benefit from a period of significant generic product introductions. We have also enhanced our overall value proposition with the US Oncology acquisition, which gives us a strong position in the fastest-growing sector of the market, specialty distribution. And our Medical-Surgical business is growing and generating solid financial results. We're off to a solid start and we're confident that the rest of the year will show strong growth. Turning now to Technology Solutions. I'm pleased with our performance across the segment and in particular, with the steady progress in our McKesson provider technology business, which drove improvement in our revenues and operating margins. As we said during our fiscal year-end call, our near-term priority is our customers' success. And right now, we are laser-like focused on getting our provider customers installed and eligible for the government's Meaningful Use incentives. In the first quarter, our operating results were strong, aided by all of the changes we've made in this business. In addition, our results came in a little better than expected, mainly from hitting certain implementation milestones and the timing of payments from customers. While we are encouraged by these achievements, we have not changed our full year view of Technology Solutions. In addition to the progress in provider technologies, 2 of our other businesses in this segment, our payer-facing health solutions business and our RelayHealth Connectivity business showed steady results year-over-year in the June quarter. We recently completed our acquisition of Portico, which will be integrated into our payer business. Portico adds integrated provider management including value-based reimbursement solutions to the McKesson portfolio. These solution capabilities will help automate network management, provider enrollment, contracting and pricing. Health reform is bringing payment and delivery model changes, such as accountable care and bundled payments. In this environment, payers and providers must deepen their clinical and financial alignment to ensure optimal outcomes at the right cost. Our strong Health Solutions portfolio includes products to help guide decision-making, the delivery of care and the final transaction processing. Combined with Portico systems, our broad offering will help payers and care providers create new products that use value reimbursement to align payers and providers on achieving the right outcomes. The combination will also help us drive significant administrative cost reductions by enabling clients to optimize and manage their networks efficiently and enable new complex reimbursement models. The acquisition of Portico, along with our acquisition of System C, a U.K-based company that offers a suite of patient administrative systems and clinical solutions, fits nicely with our overall strategy in Technology Solutions. We have a comprehensive set of products and services to help providers reduce costs while maintaining quality, safety and efficiency through automation and connectivity. In summary, we're off to a good start in fiscal 2012. In addition to solid operating performance, our strong balance sheet and steady cash flow provide us with opportunities to deploy capital and in the first quarter, we executed a $650 million accelerated share repurchase program. Overall, I believe we're well positioned for continued success. And 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. McKesson delivered strong financial results this quarter, laying a solid foundation for the remainder of the fiscal year. My comments today will focus on our $1.27 adjusted earnings per share, which as you recall from our discussion in May excludes 3 things: acquisition-related expenses, amortization of acquisition-related intangibles and litigation reserve adjustments, of which there are none this quarter. The numbers I'll review in my discussion can be found on Schedules 2 and 3 included in today's press release. I'll begin with our consolidated results for the quarter, which can be found on Schedule 2. Total revenues were $30 billion for the quarter, up 9% from the prior year. Excluding the impact of the US Oncology acquisition that we completed last December, total revenues increased 6% for the quarter. We are pleased to that both our Distribution Solutions and Technology Solutions segments contributed nicely to this growth. Adjusted gross profit for the quarter increased 8% versus last year. As a reminder, the prior year benefited from a positive $51 million antitrust settlement, which flowed through the gross profit line. Excluding both the impact of US Oncology this year and the prior-year antitrust settlement, overall adjusted gross profit would have increased 6% for the quarter versus last year. Total adjusted operating expenses were up 10% to $984 million for the quarter. US Oncology represented half of this total increase, in line with our original expectations. Now before I move on, I want to take a minute to clarify in a little bit more detail how US Oncology has been incorporated into the McKesson financial statements, particularly as it relates to cost of sales and operating expenses classification. Prior to the acquisition by McKesson, US Oncology recognized certain expenses on the cost of sales line in its income statement that are now reported in our McKesson results as operating expenses. These expenses generally run $20 million to $25 million a quarter and primarily relate to employee compensation and benefit costs, reclassified as operating expenses. So if you think about this for the first quarter, total US Oncology adjusted operating expenses were approximately $44 million, with roughly $20 million to $25 million of these expenses being previously classified as cost of sales in the US Oncology income statements. Next, other income was relatively unchanged from the prior year. Interest expense increased by $21 million to $64 million this quarter, primarily due to the debt we put in place as a result of the US Oncology acquisition. Our full year assumption of $260 million of interest expense in fiscal 2012 remains unchanged. Moving down the P&L to taxes. As you saw in our press release today, we have lowered our full year estimate of the tax run rate from 33% to 32%, as our estimate of the full-year sources of our earnings has changed. I would remind you that our tax rate is very sensitive to relatively small changes in our sources of income. So while 32% is our best estimate as of this quarter, the rate could vary from time to time. Adjusted net income in the quarter was $323 million, up 3% from the prior year. And moving now to share count. While this past year, we completed our largest acquisition in over a decade, the $2.1 billion US Oncology acquisition, we've also done over $2.7 billion of share repurchases over the past 5 quarters. This resulted in our diluted weighted average shares outstanding coming in at 254 million for the quarter, down 7% from the prior year. With respect to full year share count, as discussed at our Investor Day in June, we continue to expect our full year diluted weighted average shares outstanding to come in at our original guidance of 253 million shares. Our first quarter adjusted earnings per diluted share was $1.27, an increase of 9% compared to last year's adjusted EPS of $1.16. Now for those of you who follow us closely, I will be the first to admit that this year-over-year growth performance is more than up modestly versus last year's first quarter baseline of $1.03, which is what we directionally guided to back in May on our earnings call and again, at our Investor Day in June. Since then, there were 2 key drivers that led to this better-than-expected strong financial performance. First, and most significantly, as you know, the end of the quarter is very important to us in Technology Solutions depending on what implementation milestones we hit and the timing of customer payments. The good news is that we made stronger-than-expected progress in the last few weeks of the quarter in both of these areas, and both of these items drive revenue recognition, as reflected in our results. Second, our estimate of our sources of income evolved a bit as we closed our books, resulting in a favorable reduction of our full year tax run rate, as I mentioned earlier. This had some impact, of course, in the June quarter. Let's now move on to our segment results, which can be found on Schedule 3. Distribution Solutions, overall revenue increased 9% versus the prior year, with US Oncology contributing 3% to this year-over-year growth. Looking at the components, direct revenues were up 11% for the quarter. If you exclude the impact of US Oncology, our first quarter direct revenues grew a solid 7%, primarily driven by market growth and our mix of business. Warehouse revenues increased 3% from a year ago, benefiting from revenues associated with a new customer. Canadian revenues on a constant currency basis were flat for the quarter, in line with our original expectations, as John said. Including a favorable currency impact, revenues increased 7% versus the prior year. Government-imposed price reductions on generics in certain provinces will continue to impact the revenue growth in our Canadian business throughout this fiscal year. Medical-Surgical revenues were up a strong 7% for the quarter to $731 million, driven by increased volume from new and existing customers. Adjusted gross profit for this segment increased 6% for the quarter to $1.1 billion. If you exclude the impact of the US Oncology acquisition this year and the prior year antitrust settlement, Distribution Solutions adjusted gross profit would be up roughly 3%. Distribution Solutions adjusted operating expense was up 12% to $622 million for the quarter, and excluding US Oncology, operating expense increased just 4% versus last year. Adjusted operating margin rate for the quarter was 176 basis points, which is flat year-over-year when you exclude prior year antitrust settlement. Given the quarterly variability in this segment, we always focus, as you know, on full year margins. In this context, for full-year fiscal 2012, we continue to expect adjusted operating margin improvement in the high single-digit basis points. In summary, we're pleased with the solid first quarter performance in Distribution Solutions. Turning now to Technology Solutions. Total revenues were up 6% to $802 million for the quarter, aided by some of the timing issues John and I have now both discussed. For the full year, we continue to expect Technology Solutions revenue growth to increase modestly from last year's 2% growth. Adjusted gross profit in the segment grew 16% versus the prior year to $383 million. Contributing to this result is the revenue recognition timing we have discussed, much of which drops almost straight through to the bottom line. Technology Solutions had total gross R&D spending for the quarter of $105 million, flat with the prior year. Of this amount, we capitalized 10% compared to 14% a year ago. Our Technology Solutions adjusted operating profit was up 49% versus a year ago to $119 million. Adjusted operating margin in the segment was up to 14.84% for the quarter compared to 10.54% in the prior year. We are pleased with this margin expansion, although it was partly driven by the revenue recognition timing we've discussed. For the full year, we continue to expect our adjusted operating margin to be in the low end of our long-term Technology Solutions adjusted operating margin goal range of mid-teens. Leaving our segment performance and turning now to the balance sheet and working capital metrics. Our receivables were $9.4 billion, up from the prior year balance of $7.8 billion and our days sales outstanding increased by 2 days to 25 days. Inventories increased just 1% to $9.5 billion, while our payables increased 9% to $14.5 billion. So our days sales and inventory of 30 days is down 3 days from a year ago, while our days sales and payables was flat at 46 days. These working capital metrics resulted in us generating $326 million in operating cash flow for the quarter. This is in line with our expectations. And for the full year, we continue to expect to generate approximately $2 billion in cash flow from operations. We ended the quarter with a cash balance of $3.1 billion, down from our year-end balance of $3.6 billion. This obviously leaves us well positioned to create shareholder value through the use of our portfolio approach to capital deployment, as demonstrated in the first quarter when we completed a $650 million accelerated share repurchase, closed the System C acquisition and increased our dividend. Capitalized spending was $109 million for the quarter and we continue to expect full year capitalized spending between $450 million to $500 million. Now I'll turn to our outlook. As John mentioned earlier, due to the change in our estimated full year tax rate, we are raising our guidance on adjusted earnings from $5.99 to $6.19 to a new range of $6.09 to $6.29. As we have discussed, we have now closed both the System C and Portico acquisitions since the beginning of the fiscal year, which drives the modest change in our guidance assumptions of $0.47 for amortization of acquisition-related intangible assets and $0.07 for acquisition-related expenses. In summary, we continue to feel McKesson is on track to have another good year. Thanks and with that, I'll turn the call over to the operator for your questions. [Operator Instructions]. Operator?

[Operator Instructions] Our first question today comes from Ross Muken, Deutsche Bank.

So when you think about the USO asset, now that you've owned it for some time, and you look at sort of the relative performance and the synergy capture that you've enjoyed, where have you been most pleasantly surprised or in general surprised with sort of the asset? And in terms of looking at other potential uses and other disease areas or other places you could take some of the service model offerings that, that asset brings, what else have you sort of discovered you could potentially do with it over time to kind of create value at a higher margin?

Well, thanks for the question, Ross. This is John. I think that we are very pleased that we made the acquisition, and it's certainly progressing as we had planned. I think that the areas of focus or highlight I would say are that our employees, on both sides of the fence, have done a great job of getting together, both culturally as well as from a business operations perspective. US Oncology folks fit right in with the McKesson teams, and we're doing a good job of executing and organizing, so that we can continue to show success in this segment and drive value for our customers, most important. I think that the other areas of highlight would be that the customers, whether they're existing McKesson customers or US Oncology customers, sort of got the transaction right out of the gate. And whether they were a customer where we had a large management relationship or whether it was just a distribution customer, people seem to understand the synergies that we bring to both parties and are attracted to a model where they have the ability to, over time, continue to build out a value proposition with us that will improve the operating efficiencies of the practice, as well as improve the quality of clinical care provided. So in a myriad of dimensions, I think people get it and they're excited about it. And we are, as I mentioned in my prepared remarks, seeing increased interest from a customer funnel perspective and exploring opportunities, either to migrate up, as the existing customer would from a basic distribution relationship, up the value chain or actually being attracted as a new net customer into our network. As it relates to other practice opportunities, clearly US Oncology over more than a decade has been building out a skill set that has been refined, both from a business model perspective and also from a financial and clinical perspective that will be applicable, we believe, to other clinical care areas or perhaps international opportunities. But I have to say right now, we're really focused on executing against the opportunity that's in front of us in oncology here in the United States and we plan to continue to do that, but we do think there are applications in other areas.

And maybe quickly just on the technology business, the margin has been sort of hovering here around the high 14s, low 15s on an adjusted basis for a couple of quarters. So I dare say we're sort of at a place of stability. I mean it feels like -- Pat's got a pretty good handle on sort of the trajectory of the business. What's sort of the next big steps there in terms of kind of driving incremental EBIT and growth?

Well, I think we have made significant progress in the business. We made lots of changes last year, and we have done a lot of investment in the product to make sure the product is world-class. And we'll be ready for the Meaningful Use kinds of evaluations that will be necessary with our customers. I would say that our focus though right now is to make sure that our customers are migrating to our most recent platforms that will be required for Meaningful Use and our focus really is on implementation. Beyond that, you noticed in this quarter, we are continuing to build out our other business offerings. We acquired a company into our payer business called Portico, which we think will position us very well for the way healthcare is reforming in front of us, so that the payers and providers can connect together in a more complete way and deliver value that has a better transparency around cost and quality and more accountability for that care that's shared between the payers and the providers. And so we're excited about that. And clearly, we're continuing to make progress in the U.K., and this acquisition of System C will allow us to build out our offering there. So albeit, the big hospital systems business that we have in the U.S. is an important part of our focus. And implementation is the highlight there. We are continuing to strategically position the business for continued growth.

Up next, we'll take Robert Willoughby, Bank of America Merrill Lynch.

Just one question. John or Jeff, I guess you got still a substantial bundle of cash overseas. Assuming something favorable at some point in our lifetime happens in D.C. here, what would the plans be for any cash you'd repatriate in?

Well, I think we've done a very good job of optimizing the performance of our company in a way that takes advantage of the best practice around the area of cash management. And we believe that the offshore cash is a significant source of value and properly deployed. Our shareholders will realize that value. It's requiring us to be a bit patient, both in terms of evaluating what might happen politically and with our tax code. But we also believe there are opportunities, as Systems C showed in a small way, that we can deploy the cash also to acquisitions, which can create value. So we have a keen awareness that we're getting very low returns on that offshore cash, but we're also a little reluctant I think to bring it back and take the tax effect that would be required to bring it back into the U.S. at this point.

Up next, we'll hear from Glen Santangelo, Credit Suisse. Glen Santangelo - Crédit Suisse AG: Jeff, I just wanted to follow-up on some of the comments you were giving us on the Distribution Solutions segment. You gave us a lot of detail, excluding US Oncology and kind of backing out the litigation settlement from last year, and I'm trying to do the math. Could you just help me figure out where exactly the gross margins were this year versus last year in the op margins if I were to back out US Oncology in the game last year?

Right. It's a good question, Glen. And I guess to simplify, when you do that backing out, you'll see that the gross profit growth, if you take US Oncology out of this year and the $51 million good guy antitrust settlement out of last year, you'll see the gross margin is down a little bit year-over-year. And there's always some variability in 2 things, of course, in our Distribution segment that drive big dollars. One is the timing of how and when we get paid by our branded manufacturing partners and the part of the impact you see in this year's June quarter is the fact that the March quarter was a particularly robust quarter. I won't go into the arcana of how all these agreements work, but that has some effect on the following quarter. We think we're right on track though, as we look at the full year. Similarly, on the generic side, as John talked about, we have, this fiscal year, a more back-end loaded generic launch calendar. And so while we were pleased with the performance of our generic businesses, both in our traditional U.S. pharma business and in our specialty business in the June quarter, on a year-over-year basis, you didn't see the kind of growth from a full year perspective we continue to expect. So that's why, while the gross margin is down a little bit year-over-year when you look at the 2 June quarters, we continue to be comfortable with our full-year assumption that the operating margin expansion in that segment should be in the high single-digit basis points. Glen Santangelo - Crédit Suisse AG: Okay. That's fair. Was the operating profit margins down a little bit as well? Or did they expand a little bit?

Well, they're about flat. We didn't do the full math for you, Glen, of pulling the USON profits up. Glen Santangelo - Crédit Suisse AG: Okay, that's fine. I was just trying to get a sense for what happened in the base business. But that's helpful.

Our next question today will come from Larry Marsh, Barclays Capital.

I wanted to clarify, if I could, the variation in the quarter. Going back to your "up modestly" comments, Jeff. You'd mentioned that technology timing and payments and the tax rate, but it seems like if you add those together that's maybe a $20 million, $25 million delta, and I'm getting more like $50 million to $60 million. So I just want to make sure, is there any other good guy in the quarter versus your expectation to help us understand the quarter and why we should pull that out for the rest of the year? And then just on the tax rate, I know it's hard to predict over a longer period of time, but just for purposes of modeling, is it fair to say like anything else that 32% is a fair kind of go-forward rate over a longer period of time? Or do we think of that as a one-year phenomenon?

Well, couple of good questions there, Larry. In terms of surprise versus what we believed at the time, say mid-June, when we did Investor Day. I suppose first off, the size of the gap depends a little bit on what your baseline is and what you think up modestly was. I'll tell you for us, the surprise was probably a little smaller in dollars than what you suggested, but the Technology Solutions implementation, timelines and the customer payments that we hit that was a very material move because as I explained, that's revenue that when it comes, pretty much goes straight through to the bottom line. So a small amount of revenue really moves the profits. The tax rate has been a couple of pennies. And you're correct. I mean versus what we thought in mid-June, there's another couple of pennies where across the board, our other distribution and technology businesses all did a little better than we expected. Frankly, if that's all that had happened, it wouldn't be drawing our attention or your attention. It's really because of the very unexpected tax change and the very large variance in MTS that you got to the results you saw, which was probably -- in our world probably more $40 million or thereabouts better than we have been expecting. In terms of go-forward tax rate, it's always a little tough to make long-term commentaries on tax rates because -- particularly in today's political environment, who knows where the tax code is going. But what you should see over the next few years, if all else were to remain equal, is some of the lower tax sources of income that we have in our businesses we think will grow a little bit faster than our overall business. So if that were to happen and if the tax code were to change, I am hopeful that you will see that 30% inch down a little bit over time -- 32% excuse me.

Right. And so it just sounds like then, the first quarter good guy on timing of implementation, as you think about it, it really should kind of be pulled out in consequent quarters on technology?

Yes, exactly. For now, we are not changing our full-year view of technology. Because most of what happened we had in the plan. We just didn't think it would happened in the June quarter.

Our next question comes from Lisa Gill, JPMorgan. Lisa Gill - JP Morgan Chase & Co: Jeff, just to follow-up on that though, the other $40 million that was better than what you expected when we saw you in June, is there any reason why that would come out of future quarters?

Well, so if you think about the 3 sources, Lisa, the biggest source of course is just the revenue recognition in MTS and that's the piece that we really did have in the plan for the year. We just didn't think it would come in June. Now the tax rate, which helped us a little bit, we gave you an increase in our guidance because, sure, that impacts the whole year and that's why we pulled the year up by the $0.10 although it rounds to more like $0.02 in the June quarter. Lisa Gill - JP Morgan Chase & Co: Right. Okay. I guess -- and then just my second question would just be from a strategic standpoint, when we think about healthcare IT, maybe John if you can talk about this. Are you where you want to be in that business? How do you feel about the U.S. market? You're obviously meeting the milestones so that you can start to recognize that revenue, but maybe just talk about it strategically for a minute as you look out over the next couple of years.

Well, clearly, we think that technology is going to continue to be a source of opportunity as this market gets more and more automated, and the clinical side of the business is where the focus is today, primarily driven by the government's insistence that people get these systems installed and used in an appropriate way. Beyond that, there will continue to be demand for buildouts of clinical opportunities for adjacent products and other kinds of solutions and services that kind of bolt into the core clinical systems. And if you think about McKesson's customers, many of our customers from a financial perspective are running on terrific systems that we installed 20 or 25 years ago that those financial systems eventually will have to be upgraded and changed in a way that will allow them to deal with the complexity associated with the way payments are going to be delivered going forward. And one of the acquisitions we made in the quarter called Portico, for the payer side, is positioning the payer software business for that complexity. The continued development of a product called Horizon Enterprise Revenue Management would be the provider side of that improved infrastructure and architecture to manage the financial side of the house. So I think that albeit we're in a big buying cycle now on the clinical side or implementation cycle for McKesson, we do think that we will transition into a focus on the financial side as we look into that 2-year horizon. Lisa Gill - JP Morgan Chase & Co: And, John, just as a follow-up, I mean in the past you've talked about the fact that acquisitions are quite expensive in the market. Are you starting to see prices come down at all? Are you seeing that things are more reasonable? If we're looking at your balance sheet, you clearly have a lot of cash, and healthcare IT is a big opportunity over the next couple of years. Should we be thinking that there'll be more acquisition opportunities in that area?

Well, I think there will be winners and losers that are going to shake out in this environment. And the winners I believe will be the larger IT companies that have the footprints to be the anchor tenant, so to speak, with our clients. And I'd say that's true whether it's a payer client or a provider client, whether that provider is a hospital or a physician office. And that anchor position should allow for additional pull-through opportunities and products where smaller companies or companies perhaps on the margin can't get access to the customer. So I do think there'll be more acquisition opportunities as those valuations come down as a result of the complexity of getting into the business. And sometimes, we'll pay up a little bit for acquisitions when they're small-scale like System C and Portico, where on their own from a simple DCF perspective, would probably not be worth what we paid but when you put it into our enterprise with our pull-through opportunities, those customers will allow us to have a payback on that investment for our shareholders. But speaking broadly, we're not seeing valuations drop much for the big public companies yet, and that may take some time.

Our next question today comes from Ricky Goldwasser, Morgan Stanley.

Just a question around guidance, with this stronger-than-expected performance in the first quarter, will the year be more evenly weighted between the first half and second half? Or should we still think about first half at kind of like around 40% of earnings and then second half 60%?

Well, Ricky, I guess 2 comments. I don't think the pull-forward of some items that we saw pretty evenly spread through the rest of the year and our plan changes our view of the year. Of course we haven't really said anything about 40% at the first half. The only comment we've made beyond the first quarter, which certainly still holds true is we would expect the March quarter to once again be unusually strong.

Okay. I mean I'm saying 40/60 just because when I look back historically, I mean, I think last year it was around 42/58 before. So and if this is unusually -- if the back end is unusually strong because of the generic pipeline. Because like, we're making the assumption that the first half is going to be abnormally below that. And I know that you don't give quarterly guidance, but maybe you can help me then by thinking about the drivers in next coming quarter? Well what do you think about the key drivers of the business, whether it's the benefit that you get from the pharmaceutical manufacturers that make those products. How should we think about those in this upcoming quarter?

Well, Ricky as you know, the reason we don't give quarterly guidance is because you have significant quarter-to-quarter variability in the timing of when we get paid by our branded manufacturers, which we don't control. We're often a little surprised by generic launches, which we don't control. And we just demonstrated in the June quarter that in our technology business, rev rec can vary a little bit from quarter-to-quarter. So I guess I really just have to go back to -- we've given you the commentary on the fourth quarter. You've got one quarter of actual results and you've got full-year guidance that we just updated. But beyond that, boy, it's just -- I think for us to try to get more specific, would almost imply that there we know more about the timing of certain things than we in fact do.

Next we'll go to Helene Wolk, Sanford Bernstein. Helene Wolk - Sanford C. Bernstein & Co., Inc.: I have a question about the IT margin expectations for the balance of the fiscal year. I guess I heard that you're expecting to get to the low end of mid-teens and yet, I'm also hearing, I think, that you pulled forward what's probably high margin business in terms of the service revenue. So what am I missing in terms of what changes in mix or otherwise that helps me get to that margin outlook for the balance of the year?

Well, I think the way to think about it, Helene, at the low end of mid-teens, we'd say somewhere around 14, which is about where we were this quarter. So first thing to remember is there's significant seasonality in this business just because you have to end the sales year some time, so the March quarter tends to always be this, like quite a stretch, the strongest quarter and the highest margin. Second point I make is what we pulled forward was revenue that, in our plan for the year in our original guidance, we had later on in the year. Regardless of whether it fell later in the year or in the June quarter as it did, it was very high margin revenue. So it really doesn't change our view for the full year. So while we're pleased to get some things done with our customers more quickly than we had anticipated, we're only 90 days into the year, and it's just too early to change our view of the full year, which remains as it was.

Robert Jones of Goldman Sachs has the next question.

Yes, you guys hit on most of the big ones but I guess just a couple of specific follow-ups. It sounded like there was some strong performance in medical this quarter. We've heard some mixed commentary on utilization, this quarter across healthcare. I was just curious to what you guys are seeing from your medical business as far as utilization.

Well, I think we probably share some of that same view that utilization and physician office visits are down slightly or certainly softer than historical. I think that we had a view going into the year that we were going to grow slightly faster than the market as a result of the strength of our value proposition for the physician practices that we focus on, and I think that, that has probably shown itself in the first quarter. So I do think we're making some progress attracting new customers to our portfolio of solutions, and we're optimistic about this business and it continues to perform well for us.

Great. And I guess just quickly, if there is an update on the VA contract and any expectations around timing?

Yes, there is really no new update. We've submitted, as others have, I would imagine, a reply to the requests for proposals and I would imagine that's being evaluated and considered now. And we would expect, I believe, to hear late this year or early next year at December, January type of timeframe as to what the outcome of those -- government evaluation of those proposals will be. But there really is nothing new other than that.

Our next question comes from John Ransom, Raymond James. John Ransom - Raymond James & Associates, Inc.: Just a couple of questions on US Oncology, can you help us, with -- just the EPS effect of that acquisition this quarter? And was it better or worse than you expected?

It's pretty much tracking, John, right in line with what we expected. And the way to think about it is we gave GAAP guidance that it would be accretive, excluding the one-time costs of $0.07 to $0.08, and then the intangible amortization related to it is about $0.20. So on an adjusted EPS basis for the year, it'll be in the $0.25 to $0.30 range and we're tracking right to that. John Ransom - Raymond James & Associates, Inc.: Great. And secondly, do you have an update on the ASP plus 6%, maybe going to ASP plus 4%? And how should we think about that if that were to occur?

John, when we did the acquisition, we knew there was going to continue to be a focus and question and concern around the issue of reimbursement and we continue to focus on that as a company as well. And clearly, it's our desire to avoid any additional adjustments to the way our physician customers are reimbursed. Having said all of that, we did factor reimbursement pressure into our models when we acquired US Oncology. And in some ways, that pressure increases the interest customers might have in looking at other opportunities to improve profitability and efficiency in their practices. So I think this clearly is a concern. We don't want our physician customers to experience a reduction in reimbursement around the medication dispensing attributes of the profitability that they enjoy today but there are a lot of other ways to drive improved financial performance for these customers in addition to the markup on the product that we continue to focus on to hopefully provide. As I said, offsets that we would believe will exist as this pressure continues over time. We don't have any near-term reason to believe that any changes in ASP is likely to occur but we certainly hear the same debates that are going on in Washington, everybody else does and we're not naïve about the risk.

Up next, we'll take a question from Eric Caldwell, Baird. Eric Coldwell - Robert W. Baird & Co. Incorporated: Just some clarifications on Technology Solutions. Was the implementation milestone and payment timing, were those separate events, i.e. were they separated between MPT and maybe payer solutions where you got some disease management payments, something like that? If you could give some color there. And then John, I think you've mentioned that Provider Technologies showed improvement in revenue and profitability in your prepared remarks, and I'm curious whether that would also be the case had you not seen the accelerated timing event? Just some more clarification on the underlying performance net of the obvious benefits of the implementation timing.

So Eric, a couple of good questions there. So all of the revenue recognition surprises that I was talking about, both the implementation milestones that we hit, as well as the customer payments that we received, that was 100% within the MPT or hospital facing business. Across a range of product lines within that business and a range of customers, but all within MPT. The other point I might make, just to maybe clarify something I said earlier, is when you think about what surprised us versus our own perhaps expectations for the quarter, probably the total surprise to us was maybe in the $40 million range. The biggest piece of that is then, the MPT surprise I just talked about, plus you have tax and maybe a little bit across the rest of the company. In terms of how, absent the acceleration we would have done in the MTS segment, you still would have seen that business up nicely from the prior year. You just wouldn't have seen 49% operating profit growth, which is in fact what we reported. Eric Coldwell - Robert W. Baird & Co. Incorporated: That's very helpful. And I just -- if I can clarify, you said MTS would have been up regardless of the timing. Would Provider Technologies specifically have been up?

Well, we don't break out the specific results of MPT.

Steve Halper, Stifel, Nicolaus is up next. Steven Halper - Stifel, Nicolaus & Co., Inc.: What was the reason for the increase in the DSO by 2 days?

Well, 2 things. Day of week can actually matter to us, Steve, of course because we have rather -- some rather larger customers and whether they're due to pay us on Wednesday versus Friday and when the month ends, that can vary it. But there also have been a few cases over the past year where we've made an economic decision that it's in our interest, looking at all of the aspects of a customer contract, to use our balance sheet and occasionally extend a little longer payment term. So it's a mixture of those 2 things over the past year. Steven Halper - Stifel, Nicolaus & Co., Inc.: Okay. And then going back to the revenue recognition, I hate to beat a dead horse here on Technology Solutions. I understand the software implementations, but can you just explain the customer payment comment and how it hits revenue?

Yes, that's fine. The simple answer, Steve, is that there are certain categories of customers -- particularly in a time when there are a lot of struggling hospitals in the country financially -- so there are certain customers where we don't recognize any revenue until we get the cash in the door because we perceive sufficient payment risk that it would not be conservative in terms of accounting treatment for us to recognize the revenue and then hope we get paid. So we think that's conservative and a good accounting treatment. What it does mean is when you have some good work being done by our teams and some, frankly, customers who are happy with what we're doing for them and are paying us more quickly than we thought, boy, you get revenue that just drops straight through to the bottom line. Steven Halper - Stifel, Nicolaus & Co., Inc.: And lastly, can you tell us which businesses you would have an arrangement with that -- like that?

Well, I'm obviously -- we would never comment, Steve, on specific customers. But if... Steven Halper - Stifel, Nicolaus & Co., Inc.: No, no, no not specific customer names, but what type of...

Yes. These are all within the hospital facing technology business, which we would generally refer to as MPT.

Our next question comes from Tom Gallucci with Lazard Capital.

Just 2 quick ones. On the IT side, I think in the past, we've talked about maybe seeing some increased costs as you're trying to sort of do right by the customer and get things implemented. Since certain things have gone faster, should we expect a little lower cost as you get through the year even though that revenue has pulled forward? I understand that part. But should the cost basis be a little lower later?

Well, not really. Tom, as John pointed out, we're very committed to continuing the progress you saw in this quarter's results on implementations. And so while we're pleased with what happened this quarter, there are no plans to back off the level of resource we currently have planned for the year.

Having said that though, Tom, I do need to point out that we did make some changes last year from a cost structure perspective that we'll be rolling in on a full-year basis this year. So I think -- and that was not really in terms of R&D or implementation resources, but we did some consolidation in our overhead and our selling infrastructure last year, and we are getting the benefit of some of that as you look into the first quarter as we think about the full year. So there are some structural cost changes that have happened but it's not because we're reducing the resources we have in place to deal with these customer implementations.

Sure. And then maybe just one other on the traditional sort of drug distribution side. I thought it was interesting, ABC this morning had pointed to certain geographies that were growing disproportionately quick, I guess, relative to some others. Do you have any areas or regions that you would point to that are growing a lot faster than the average?

I have to admit I haven't really looked at it on a regional basis. I can't comment. I would imagine, though, there probably is some strength in certain states and in certain areas of the marketplace that haven't been affected by unemployment as much as others. I mean so that would -- I didn't listen to the comments but if you were to ask me, my guess would be we see some of that variability but it's more related to the condition of the market from an employment perspective than it is anything else.

Next up, we'll hear from George Hill, Citi.

I will start off with one on the IT side as well. John and Jeff, there's a lot of -- seems to be a lot of private assets out there available for sale now, you had mentioned the evaluation of the public companies. I guess as you look across the Technology Solutions segments, can you talk about which segments of that business are more attractive and less attractive and where might be -- attracts candidates to apply some more capital?

Well it's difficult for us to talk specifically in a forum like this as to what our strategy is in terms of capital deployment. I would say, however, that we don't limit our views in terms of synergistic acquisitions to a particular segment and we're fortunate that we're in almost every segment. So whether it's a payer asset or a hospital or a physician or a connectivity type of an asset or a retail pharmacy asset, we have the ability to at least evaluate whether or not there's a strategic fit and evaluate whether the financials of the proposed acquisition provide the kind of returns that we expect on behalf of our shareholders. And so I don't think we limit our views at all. But I would say that there's a couple of quick gates we can go through to quickly dismiss an opportunity as being realistic based on the expectations of the seller, in the case of a private transaction or the public market valuations, if you think about public company transactions. We do the same thing on the distribution side. We have the ability to really look across the globe at distribution assets, and we look at the same kinds of metrics.

Okay. And then maybe just a quick follow-up, some of the trade group information out there on the hospital [ph] side would show that you guys had a tough year in 2010 with respect to share retention. I guess do you feel like the customer base now has stabilized given that you guys have hit some of these milestones? Or do you feel like there could still be some further weakness?

Yes. we certainly -- we don't like to lose customers anywhere. And sometimes we're faced with a situation where our past performance as opposed to our current performance is a lagging issue that we have to deal with. I think that we feel really good about the quality of our current product line, the amount of money we invested in the last 2 years in our products, make those products I think competitive if not superior to many products that our competitors have in the marketplace. And I'm certainly hopeful that the market share changes that happened last year are a trailing indicator of our customers' views of us as opposed to a current indicator because we believe strongly that customers that are installing our current products are very pleased with the performance of those products largely. And we would expect that this year, our market share positions would remain solid, if not, perhaps begin to rebound slightly, particularly in the smaller marketplace where our Paragon product line is very well suited as a replacement alternative to incumbent products in a market where we have smaller share and significant opportunities to grow with a world-class product. So I think you almost have to define our technology business by product and think about our success on a product-by-product basis and that's what we try to do.

Our final question today will come from A.J. Rice, Susquehanna.

Just looking at the strength in the direct distribution and services year-to-year, I mean if you look at some of the macro-commentary, IMS would have said script trend actually moderated somewhat in the June quarter versus the March quarter. I was wondering in your 10-Q, you highlight volume growth and pricing as drivers both new customer and existing customer. Can you just maybe flesh out a little bit there of what you're seeing in terms of where the volume strength is across the board and what are you seeing on pricing?

Well, I think the pricing that we're referring to is product inflation to a large extent relative to the manufacturing behavior, and we think that environment in the first quarter was strong and that's why we referred to it in our documents. I do think that we have variability on occasion in our revenue number, driven by the performance of some of our large customers and their buying behavior. And just like on the receivables side, we can have variability on the sales side if somebody decides to place an order on the last day of the quarter or that's the way thing falls, we can pick up some additional revenue. And on occasion, we will pick up a new customer. We picked up a customer last year that flowed through this business as well, so I don't think it's time for us to think about revenue above what we've already indicated for the year and this quarter just happens to be a little bit stronger than we would have expected for the full year. And we don't have a different view on the full year, A. J.

Okay. And maybe just at the Investor Day, you guys were highlighting that you'd spent a lot of time realigning the sales force at US Oncology and sort of had positioned them to go out and heavily try to build on that CSA base of the 3,000 oncologists, as well as I think you identified JVs with acute care hospitals. Are we still sort of early stages there? Is there anything you can point to in the last few months that's sort of interesting to talk about?

Well, I think when I talked about my satisfaction with the US Oncology activity, I think one of the things that it points to is that we can do this integration and reorganization and not lose our sales momentum. As we do feel strongly about the fact that we have a value proposition that's resonating very well with our customers and potential customers. So I think we remain optimistic there. And I was involved in a couple of -- we were involved in a couple of activities with acute care hospitals, where US Oncology might have been a competitor or a potential competitor, and we've now combined our forces to create a solution set that fits well in an acute care community-based setting. So we've found a way I think to continue to change our value proposition so it can meet a myriad of needs and that's our focus. So thank you for that question. I want to thank you all for your time and attention today, and clearly, it's a good start to our year. We're excited about the opportunities ahead, and I'll now turn the call over to Ana for a review of our upcoming activities for the financial community.

Thank you, John. To preview our upcoming events, on September 8, we will present at the Stifel, Nicolaus Health Care Conference in Boston. On September 14, we will present at the Morgan Stanley Conference in New York. On November 10, we will present at the Credit Suisse Health Care Conference in Phoenix. And on November 16, we will present at the Lazard Capital Markets Healthcare Conference in New York. We will release second quarter earnings results in late October. We look forward to seeing you at one of these upcoming events. Thanks, and goodbye.

Ladies and gentlemen, that does conclude today's conference. Thank you all for your participation.