McKesson Corporation (MCK) Q4 2013 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the McKesson Corporation fourth quarter earnings call. [Operator Instructions] As a reminder, today's call is being recorded. And if you have any objections, you may disconnect at this time. I would now like to introduce Ms. Erin Lampert. Please go ahead, ma'am.

Thank you, Lisa. Good afternoon, and welcome to the McKesson Fiscal 2013 Fourth 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 one hour at 6:00 p.m. Eastern Time. Before we begin, I remind listeners that during the course of this call, we will make forward-looking statements within the meaning of federal securities laws. These forward-looking statements involve risks and uncertainties regarding the operations and future results of McKesson. In addition to the company's periodic, current and annual reports filed with the Securities and Exchange Commission, please refer to the text of our press release for a discussion of the risks associated with such forward-looking statements. Finally, please note that on today's call, we will refer to certain non-GAAP financial measures, in which we exclude from our GAAP financial results acquisition-related expenses and related adjustments, amortization of acquisition-related intangible assets and certain litigation reserve adjustments. We believe these non-GAAP measures will provide useful information for our investors. Please refer to our press release announcing fourth quarter fiscal 2013 results, available on our website, for a reconciliation of non-GAAP performance measures to the GAAP financial results. Thanks, and here is John Hammergren.

Thanks, Erin, and thanks, everyone, for joining us on our call today. Today, we reported results for the fourth quarter and full year that reflects strong operating performance across all businesses in our Distribution Solutions segment. We generated $2.5 billion in operating cash flow for the year, capping off another great year of cash flow performance. In addition to completing our acquisition of PSS World Medical in the fourth quarter, we repurchased shares valued at $800 million, bringing our total share repurchases for the year to just over $1.2 billion. As we discussed in our third quarter earnings conference call, we have anticipated the challenge of the low level of new generic launches in our industry and its affect on McKesson in fiscal 2014. As a result, during the fourth quarter, we took a number of strategic and operational actions to position the company for fiscal 2014 and beyond. Today, we also provided fiscal 2014 guidance of $7.90 to $8.20 per diluted share from continuing operations, reflecting solid growth across our broad portfolio of businesses, aided by the continued strength of our balance sheet. Given the challenges we anticipated as we head into fiscal 2014, I believe we have a plan that balances investment for the future and delivering solid financial returns for our shareholders. To summarize our fourth quarter and full year fiscal 2013 results, I'm pleased by the strong performance in Distribution Solutions, with all businesses performing ahead of their operating plan for the year. I'm also proud of the strong cash flow and balance sheet, which continue to provide us continued opportunities to create value for our shareholders through our portfolio approach to capital deployment. While the actions we took in the fourth quarter lowered our financial results, I believe we, as a management team, have a responsibility to regularly evaluate our strategy and ensure we position the company for long-term success. Let me step back for a moment and provide some context for the strategic and operational actions we took in the fourth quarter. I would remind you that, on the January earnings call, we talked about a number of actions we plan to take to position the company for the challenges we face in 2014 and beyond. I'll put these actions into 3 broad categories: First, in our Distribution Solutions segment, we completed a strategic evaluation of our minority investment in Nadro, a privately held pharmaceutical distributor in Mexico, where we have a 49% equity interest, and we made the decision to exit our minority investment in this business. Second, we realigned the structure in our Technology Solutions segment during the fourth quarter, to focus in the areas where we have a leading position, improve our efficiency and enhance our ability to continue to innovate on behalf of our customers. As one part of the broader realignment of Technology Solutions, today we announced our intention to exit our International Technology and Hospital Automation businesses. While both of these business have made important contributions to McKesson over the years, they no longer fit with our evolving focus. Finally, we have taken a number of smaller actions across our business to help us meet this short-term challenge, while ensuring our company remains well positioned for the long-term. These actions drove various severance and facility exit charges across both segments and within our corporate group. Through many years of change in our company and in our industry, McKesson has remain committed to our customers' success. We understand clearly that our own performance and growth must be constant, focused and determined if we are to continue to distinguish ourselves for our customers. Now turning to the broader industry environment. Health care topics remain in the national spotlight. Federal and state governments continue to struggle with near-term budget challenges and the longer-term imperative of implementing meaningful health reforms. Reimbursement changes continue to have an impact across the health care industry, with the impact to medical oncology reimbursement drawing recent widespread attention. McKesson is very engaged in advocating on behalf of our oncology physician partners and customers to reinforce the value of community oncology practices across the country. We continue to believe our U.S. oncology model is particularly well positioned to succeed in an environment seeking the highest quality care and the best outcomes at the lowest cost. The pharmaceutical supply chain continues to evolve with new partnerships and new ideas for addressing global markets. While all health care markets are ultimately local, McKesson has been working globally for many years. Our sourcing expertise and the strength of our relationships with manufacturers across the globe have allowed us to drive efficiencies for our pharmaceutical and Medical-Surgical customers. Those customers have, in turn, rewarded McKesson with their continued trust and their partnership as we grow and expand with them. Our customers have urgent needs to improve their processes, reduce their costs and meet increasing regulatory demands. They are looking for a strong partner who can help drive solutions across all of these dimensions. At McKesson, it is the strength and breadth of our products and services, our ability to leverage our significant scale and our broad technology capability that continues to differentiate us with our customers. Now moving on to some of the business results for our fourth quarter and full year. Strong execution in all of our businesses in Distribution Solutions drove full year operating results for the company. Once again, U.S. pharmaceutical delivered outstanding results for the year. In fiscal 2013, we experienced the largest number of brand-to-generic conversions our industry has ever seen, and I'm proud of the performance of our U.S. pharmaceutical business during this unprecedented year. During fiscal 2013, we expanded our total generic pharmaceutical business through continued penetration of our customer base, demonstrating the significant value we deliver through our generics programs. And I'm pleased with the growth and progress in our private label generics business. Due to the size and sophistication of our Global Sourcing capabilities, we also successfully launched our private label generics into the Canadian market in fiscal 2013. A significant accomplishment for the U.S. pharmaceutical team in the fiscal year was the opening of our new state-of-the-art regional distribution center, which continues our long track record of investment in creating the most efficient and effective operating infrastructure in the industry. During the year, we were very pleased to renew a considerable portion of our business in U.S. pharmaceutical. I believe the value we demonstrate year-in and year-out is one of the core reasons we are privileged to have long-standing relationships with our customers. We also continued to perform well for our branded pharmaceutical manufacturing partners and maintained steady levels of compensation and return. In summary, I'm proud of the accomplishments of our U.S. pharmaceutical businesses in fiscal 2013. I believe this business remains extremely well positioned for continued success. Turning to our other businesses in Distribution Solutions. Our Medical-Surgical business delivered strong results, with 15% growth in revenues in fiscal 2013. Solid organic growth and growth from new customers, along with the completion of our acquisition of PSS in February of this year, all contributed to this terrific result. I'm very pleased to welcome Gary Corless and his talented team from PSS to McKesson. While we are still in the early phase of the integration with PSS, I'm very encouraged by the conversations I've had with the integration team, leaders in our business and our sales force and our customers. As with any acquisition of this size and scale, there will be synergies we anticipate in the relatively early stages and other synergies that will take longer to capture. We've assembled a great team to lead this effort, and all of them are passionate about what we can do on behalf of our customers going forward. Our Canadian Distribution business had a solid year and continues to grow its contribution to the overall operating performance of the Distribution Solutions segment. Through consistent execution and innovation, our team in Canada has continued to find ways to grow their operating results. Our business has grown not only as a result of our customers' growth, but also through winning new customers who are looking for a strong partner with a long track record of performance. Our business in Canada continues to perform very well, and I believe we are well positioned to continue our track record of growth in fiscal 2014. Finally, our Specialty business delivered solid financial results by making steady progress in the areas of patient care, growth in the number of physicians who are part of the U.S. oncology network and advances in technology deployed to physicians to assist them in providing better care to their patients. The impact of the sequester on medical oncology reimbursement, which took effect on April 1, has received particular attention over the past month. Now more than ever, both independent oncologists practicing in the community setting and oncologists practicing as part of hospital-affiliated groups need a strong partner who can help them improve their efficiency. With our expertise in managing the business and information technology needs of the oncology care process in the community and hospital settings, the value proposition of U.S. oncology is stronger than ever. Through our U.S. oncology model, which encompasses a full suite of integrated cancer care, including medical oncology, radiation oncology and surgery centers, our team at McKesson specialty health has a deep understanding of the dynamics of community oncology practices. We continue to innovate for our customers, leverage the scale and sourcing expertise of McKesson and provide a compelling value proposition that allows us to grow our business with existing customers and win new customers. This business is performing well, and we expect it will continue this coming fiscal year. Overall, I'm is extremely pleased with our full year operating performance in Distribution Solutions. As we look ahead to fiscal 2014, in particular, we expect that revenue in Distribution Solutions will rebound significantly for the year as brand-to-generic conversions slow, our existing customers continue to grow and we have a full year result of the acquisition of PSS. Turning now to Technology Solutions. For the year, Technology Solutions revenues were up 3% to $3.4 billion. Full year adjusted operating profit was down 16% to $371 million. Fourth quarter results include the impact of an impairment charge and the costs associated with the realignment of our business in Technology Solutions, which I'll come back to in just a moment. The results of Technology Solutions were below our expectations. We are making a number of changes in the segment to focus in the areas where we have a leading position, and invest in the opportunities where we can innovate for our customers. So let me walk through a few of those to get our focus in the most -- majority part of our effort. Since Pat Blake assumed the leadership for our Technology Solutions segment in 2009, we've been focused on a strategy to improve the performance of our core technology businesses and invest in new growth opportunities. We've made progress toward our goals over the past several years, and the changes we announced today are the next step toward positioning our Technology Solutions segment for the future. We've expanded our capabilities in our RelayHealth and McKesson Health Solutions businesses. In addition to the strength in both of these businesses, we have positioned McKesson to lead in the emerging areas of population health, analytics, value-based reimbursement and connectivity, all areas critical to our customers as they look to the future. Beyond the newly expanded RelayHealth and McKesson Health Solutions, the remaining assets in Technology Solutions have been organized around 3 business areas: our leading medical imaging software franchise, our newly combined ambulatory services and software business, and our electronic health record and revenue cycle solutions. I believe the steps we have taken to further focus our efforts in Technology Solutions leverages the strengths in our portfolio, and allows us to optimize our R&D investments in support of our critically emerging requirements our customers will face over the next several years. Looking forward to fiscal 2014, we expect Technology Solutions revenue growth will accelerate from the level of growth seen in 2013, driven primarily by the acquisitions completed in fiscal 2013, and we expect operating margins at Technology Solutions will rebound strongly in fiscal 2014. In summary, we remain committed to helping our customers use information technology strategically, to enable better business, better care and better connectivity. Before I end, I will spend a few moments talking about capital deployment. We are in a business that continues to generate strong cash flow from operations. We expect that our cash flow from operations will be approximately $2 billion in fiscal 2014. Over time, we've used our portfolio approach to capital deployment for acquisitions, share repurchases, dividends and internal investments, creating significant value for our shareholders. And we expect to continue our portfolio approach as we head into fiscal 2014. To wrap up my comments, I believe we have a solid plan as we enter fiscal 2014 that reflects growth across our broad portfolio of businesses, aided by the continued strength of our balance sheet. I'm confident in our team's ability to continue to deliver value to our customers and strong financial returns for our shareholders. We expect fiscal 2014 adjusted earnings per diluted share from continuing operations of $7.90 to $8.20. With that, I'll turn the call over to Jeff for a detailed review of our financial results. Jeff?

Well, thanks, John, and good afternoon, everyone. As you just heard, this was another quarter of strong operating performance in Distribution Solutions, capping off a great year of operating performance in this segment. We also had another great year of cash flow and deployed a record amount of capital in the fourth quarter, which contributed significantly to the positive outlook we have for fiscal 2014. Looking forward, we believe that the strategic and operational actions we took in the March quarter better position us for both FY '14 and for the years beyond. In my remarks today, I'll cover both the fourth quarter and full year results. As you know, we provide our guidance on an annual basis, due to both the seasonality and the quarter-to-quarter variability that is inherent in many of our businesses. In this context, an annual look at our financial results can provide more meaningful insight into some of the key trends. So I'll focus more today on the annual numbers than the quarterly ones, and I will also comment on what the trends we see in the annual numbers for FY '13 might mean for fiscal 2014. My comments today will also focus on our full year FY '13 adjusted EPS of $6.33, which as you recall, excludes 3 types of well-defined items: amortization of acquisition-related intangibles, acquisition expenses and related adjustments, and certain litigation reserve adjustments. So it is important to note that this full year adjusted EPS of $6.33 includes the impact of the strategic business realignment actions that we took in the March quarter, which are partly a response to the challenges John and I discussed on our January earnings call. These actions collectively resulted in $0.76 of impairment charges and $0.11 of severance and facility exit charges, all of which were recorded in the fourth quarter. So let me start by sorting through these charges. To simplify, our fourth quarter charges, all of which flowed through both our GAAP and adjusted earnings, are made up of 3 items. First, we recorded $191 million noncash pretax impairment charge, or roughly $0.58 of EPS, in our Distribution Solutions segment in the fourth quarter related to our decision to sell our minority investment in Nadro. We called this $191 million noncash pretax impairment charge out in our press tables, immediately below the Other Income line. Second, as part of our recent business structure realignment in Technology Solutions, we recorded $46 million of noncash pretax impairment charges or roughly $0.18 of EPS in the Technology Solutions segment, $36 million of which flowed through the operating expense line. Third, as part of our broader company-wide efforts to offset the headwind of significantly lower generic launches in fiscal 2014, we recorded severance and facility exit charges of $35 million or $0.11 of EPS, spread fairly evenly across both operating segments in the fourth quarter. So with these charges behind us, let's now turn to our consolidated results, which can be found on Schedules 2A and 2B. Consolidated revenues were relatively flat for the full year and down 3% for the quarter. The story behind our revenue performance has been the same all year, as our revenue growth was slowed by the record number of brand-to-generic conversions that occurred in fiscal 2013. Notably, as we look forward to the fiscal 2014, we expect a significant pivot here because of the steep decline in brand-to-generic conversions in FY '14. Through the combination of this sizable slowdown in generic launches and our recent acquisitions, we expect to see significant revenue growth return in fiscal 2014 in both segments. Now as you've heard me say many times before, while generic drugs have a deflationary impact on our top line growth, they certainly are a good thing financially for our company. You see this in our full year adjusted gross profit growth of 6%, as our economics are better on generic drugs. Total adjusted operating expenses for the full year were up 8% to $4.4 billion. Our full year adjusted operating expenses were higher, primarily driven by 3 factors: recent acquisitions contributed $136 million of additional adjusted operating expense; the RAMQ charge, recorded in the third quarter in our Canadian business, added another $40 million; and the fourth quarter noncash Technology Solutions impairment charge added $36 million. When you exclude these 3 items, our full year adjusted operating expenses were up roughly 3% versus the prior year. This is probably the best reflection of what we would expect for our total company adjusted operating expense in fiscal 2014, before adding in the significant additional adjusted operating expenses from our recent acquisitions. Other income for the full year was $35 million. As a reminder, this line is primarily driven by our interest income and also includes the pluses and minuses on various other investments. Generally, we don't expect material changes in this line from year to year. Full year adjusted interest expense decreased $22 million versus the prior year, to $229 million, driven primarily by the repayment of $400 million in long-term debt back in February 2012. Looking ahead, we did raise $1.8 billion of new debt in the last half of fiscal 2013, and we enter fiscal 2014 with our gross debt-to-capital ratio at 40.8%, placing us at the top end of our current target leverage range. In a commentary on the current low interest rate environment, however, we expect our year-over-year interest expense in fiscal 2014 to be fairly flat despite the increase in our debt. Moving down the P&L to taxes. We ended the year with an adjusted tax rate of 31.3%, which is slightly higher than the adjusted tax rate guidance we provided on our Q3 earnings call of 30.5%. The higher rate was driven by a number of discrete items and a slightly less favorable mix of income. Looking forward, our fiscal 2014 outlook assumes an adjusted tax rate of approximately 31%, although it may fluctuate from quarter-to-quarter. Adjusted net income for the full year was $1.5 billion, and our adjusted earnings per diluted share was $6.33. As a reminder, this full year adjusted EPS of $6.33 includes the $0.76 of impairment charges and $0.11 of severance and facility exit charges taken in the fourth quarter. To wrap up our consolidated results, this year's earnings per share number was aided by the cumulative impact of our share repurchases, which lowered our full year diluted weighted average shares outstanding by 5% year-over-year, to 239 million, in line with our original guidance. Going forward, mainly driven by the magnitude of the share repurchases we did in the fourth quarter of FY '13, our diluted weighted average shares outstanding assumption for fiscal 2014 is 231 million. Let's now turn to the segment results, which can be found on Schedules 3A and 3B. Distribution Solutions total revenues were flat for the full year and down 4% for the quarter. Looking at the components, direct distribution and services revenues increased 2% for the full year and 1% for the quarter. Full year and fourth quarter direct revenues increased primarily due to market growth, which was offset by the record number of brand-to-generic conversions in FY '13. As John mentioned earlier, for fiscal 2014, we anticipate direct revenue growth will rebound significantly, driven by the slowing of brand-to-generic conversions and aided by above market growth that we expect from a handful of our largest existing customers. Warehouse revenues declined 9% for the full year and 26% for the quarter. As we discussed over the past several quarters, warehouse revenues are particularly impacted by brand-to-generic conversions. In addition, relative to our original expectations, in FY '13, we saw a shift of existing customer business from warehouse to Direct Store Delivery, which actually is a very good thing for our bottom line, as we have higher margins in the direct revenues. Canadian revenues on a constant currency basis decreased 2% for the full year and 5% for the quarter. As a reminder, the prior year benefited from having 5 extra sales days in fiscal 2012. In the fourth quarter, in addition to the impact we have seen all year from the ongoing generic price reduction challenges in Canada, we were going through a transition with one of our largest Canadian customers. Looking forward to fiscal 2014, we'll complete the customer transition while also benefiting from some recent new customer wins. As a result, we expect to return to significant revenue growth in this business in FY '14, as our team continues to do a great job overcoming the challenging generics regulatory environment. Medical-Surgical revenues were up 15% for the full year and up 37% for the quarter. When you exclude the impact of the PSS acquisition, our fourth quarter revenues increased approximately 10% versus the prior year and our full year revenues increased a healthy 8%, driven by market growth and new customers. We are very pleased with all of these revenue growth numbers, and they provide a strong foundation for fiscal 2014 as we set about the hard work of integrating these 2 great businesses. I would say that our expected view of the PSS first full year operating performance remains unchanged from the initial comments we made on our Q2 earnings call. Distribution Solutions adjusted gross profit increased 8% for the full year on flat revenues, resulting in a nice improvement in our adjusted gross profit margin. Adjusted operating expense for this segment increased 10% for the full year, driven by the business acquisitions we've made over the past year and the $40 million RAMQ pretax charge in our Canadian business. When you factor out these 2 items, our full year Distribution Solutions adjusted operating expense was up approximately 4% versus the prior year. As reported on Schedule 3B, Distribution Solutions full year adjusted operating profit declined 2% to $2.5 billion, and we ended the year with an adjusted operating margin rate of 207 basis points. I do want to remind you that this full year adjusted operating margin rate, 207 basis points, includes the fourth quarter $191 million noncash pretax impairment charge for Nadro. Looking forward, in fiscal year 2014, we would expect mid-single-digit basis point growth off this FY '13 adjusted operating margin of 207 basis points. Turning now to Technology Solutions. Revenues were up 3% for the full year to $3.4 billion. As noted on Schedule 3B, our full year adjusted operating profit was down 16% to $371 million, and our full year adjusted operating margin rate was 10.91%. Adjusted operating expenses in the segment increased 9% for the full year. And here again, you see the impact of the acquisitions we have made over the past year, as the acquisitions accounted for approximately 3 points of this growth. In addition, $36 million of the fourth quarter asset impairment charges related to the business realignment were recorded in the operating expense line. Technology Solutions gross R&D spending for the year was $492 million, up 9% compared to $451 million in the prior year. Of these amounts, our capitalization rate remained unchanged at 8%. For fiscal 2014, we expect revenue growth in Technology Solutions to be similar to what we experienced in FY '13, before adding in for FY '14 the impact of the various acquisitions we have done. And we expect to be within the low end of our long-term adjusted operating margin goal range of mid-teens. Moving now to the balance sheet and working capital metrics. Let me remind you that our financial statements include PSS' entire balance sheet of March 31, 2013, but only 5 weeks of sales for the quarter. As a result, it's more relevant to discuss our working capital metrics, excluding PSS. For receivables, our days sales outstanding, excluding PSS, increased by 1 day versus the prior year to 25 days. Our days sales in inventory of 32 days was up 2 days from a year ago, and our days sales in payables increased to 50 days from 49 days last year, all when you exclude PSS. These working capital metrics, along with our continued focus on cash generation, resulted in cash flow from operations of $2.5 billion. Echoing John's earlier comments, this is at the high end of our original guidance range and is an outstanding result. Our capital structure remains a source of financial strength and earnings growth, and we enter fiscal 2014 with continued financial flexibility. Looking ahead, we expect cash flow from operations to be approximately $2 billion for fiscal 2014. Internal capital spending was $406 million for the year, slightly below our original expectations. You will see our fiscal 2014 guidance assumes an internal capital spending range between $400 million and $450 million. Before I conclude, let me provide a few last bits of context for our fiscal 2014 adjusted earnings guidance range of $7.90 to $8.20 per diluted share. In today's press release, we called out the key guidance assumptions underlying our fiscal 2014 plan, so I won't comment further on most of these assumptions. I would note that one of these key assumptions has always listed the various items not contemplated in the guidance we issued today, such as the impact of any litigation reserve adjustments or the impact of any potential new acquisitions. For FY '14, we are adding LIFO to this list, as the slowdown in brand-to-generic conversions last year could result in LIFO adjustments in FY '14. Last, I would point out one other item that will impact our fiscal 2014 GAAP and adjusted earnings results. As discussed in today's press release and throughout this earnings call, we have announced our intention to exit our International Technology and Hospital Automation businesses. Beginning with the first quarter of fiscal 2014, the results of these businesses will be reported as discontinued operations. So in summary, I've tried, as we've gone through our results, to help you understand how our FY '13 performance supports our fiscal 2014 planned guidance. As always with any plan, there are risks, but we enter fiscal 2014 pleased with the plan we have for the coming year and optimistic about our prospects. Thanks. And with that, I'll turn the call over to the operator for your questions. [Operator Instructions] Operator?

[Operator Instructions] Our first question comes from Glen Santangelo with Credit Suisse. Glen J. Santangelo - Crédit Suisse AG, Research Division: Just 2 quick ones, if I could. John, in your sort of prepared remarks, you talked about the health care IT business, and I think you suggested that revs would be up based on some recent acquisitions. But I think you also suggested that the margins would rebound strongly in that business. And I was wondering if you could elaborate a little bit on what's driving that improved profitability in that segment.

Thanks, Glen, for the question. I think certainly the first thing is we won't have some of the onetime events that are flowing through our adjusted earnings. We talked about some of the changes we did at the end of the year here that caused that to happen. We also don't expect some of the issues we had in the businesses that we plan to put it into discontinued operations, obviously it won't be in part of our adjusted earnings going forward. And probably third and most important, I think we're regaining some of our momentum in these businesses and hope that we will experience a nice margin lift, because of positive mix change and because of just a more focused and performance-oriented process into this year's plan. Glen J. Santangelo - Crédit Suisse AG, Research Division: Okay. Maybe if I can just ask one follow-up on the distribution segment and, Jeff, I want to make sure I kind of heard you correctly. We're looking for improved revenue growth in drug distribution due to the factors you kind of talked about. And I thought you said maybe for the operating profit assumption, we'd be up mid- to high-single digit basis points off of an adjusted number in the base year because of the impairment. Did I hear that correctly?

Well, let me be very clear. So if you look at FY '13, Glen, you see a 207 basis point margin rate in Distribution Solutions for the year, and that does include the Nadro impairment. As we look at FY '14, we'd expect a mid-single-digit basis point improvement off that 207. And I think what's important to realize here are 2 things. Number one, that, as we've been talking about for a very long time, you have a really unprecedented 1 year drop, in our fiscal year, in the number of brand-to-generic conversions, and that is a significant impact on our margin rate. Sort of related is you have tremendous growth returning on the revenue line, particularly around brand and particularly where we expect even a little above-market growth from some of our largest existing customers, where the business is mostly brand. So you have really factored into that margin rate assumption for FY '14, both the brand-to-generic conversion downside and the fact that you're going to have a big revenue number that obviously has a dampening effect on the margins.

We'll take our next question from Ricky Goldwasser with Morgan Stanley.

We've been hearing a lot about creating global scale recently, and you just exited Mexico, obviously, one particular market. But do you think that you need to go global to further improve your sourcing?

I think that we generally don't comment on our market expansion plans, and we have and will continue to consider many strategic options, both within and outside the United States. And as in the past, we'll pursue those options and find the ones that drive the most value for our shareholders. I think we have significant scale today. And clearly, our sourcing programs are quite significant. And we think we have very good relationships. And we have been working globally for many years to drive efficiencies and source private-label products for our pharmaceutical and Medical-Surgical supply customers. So in the end, we think we have very significant scale today and terrific sourcing capabilities and expertise that we refined over decades, actually. And I believe we're doing a great job for our customers and we'll remain very well positioned. But does not mean that we're not going to continue to evolve and innovate for the future. And the partnership you refer to, that was recently announced, is an important industry move, but it's not going to change our strategy. And at the same time, however, our management philosophy is that, in order to keep our leadership position, we have to constantly evolve and be open to new approaches and ideas.

Ricky, I'd also, just on the specific question of Mexico, remind you that this is a minority investment for us, where we had no management control or position. And it's probably not so much a commentary on the market as it is just on the fact that the governance didn't work for us.

And I would say, in follow up to that, the governance in Canada has worked for us in our ability to leverage our skills, across both the U.S. and Canada it's proven to be quite effective. So I think had we, perhaps, had a different position in Mexico, we would have had a different result.

Okay. And then just to clarify on the margin question, so when we back up the charges and the benefit, we get to operating profit margin of around 3.07% in Distribution segment for the quarter, so very nice expansion. So I just wanted to make sure that we're thinking about that number correctly. And then as we think about fiscal year '14 guidance, I think the reported number was 2.07%. Once we back off that, we get back of the envelope to around 2.20%, 2.22%. Should we use that number as we model fiscal year '14?

Well, to be clear on fiscal year '14, Ricky, what we're saying is, off the 207 number for FY '13, we would expect mid-single-digit basis point growth, because of the very significant dampening impact of a rebound in revenue growth and the drop-off in brand-to-generic conversions.

Okay. And that's includes already the positive margin contribution from PSS?

Correct.

We'll take our next question from Lisa Gill with JPMorgan. Lisa C. Gill - JP Morgan Chase & Co, Research Division: John, I just wanted to follow up on some of your thoughts on the overall distribution market right now. I mean, clearly, there's been a number of changes in contracts over the last several months. You've renewed your contract with CVS. But can you maybe just give us some of your thoughts around the overall competitive and pricing environment today?

Sure, Lisa. I see a market that is competitive today, just as it has always been, I guess. And while there has been some attention recently to some of these big customer switches in the industry, I think we've been very pleased to have renewed a large portion of McKesson's U.S. pharmaceutical business headed into this fiscal '14. And those renewals are actually more of our base than we typically would experience in a typical year. So we're quite pleased that we have continued to renew those partnerships. And I think it's really based on our broad capabilities and our track record for driving substantial financial efficiencies for our customers. It is terrific service levels, and I mentioned the fact that we're opening up our renewed or replacement RDC, which is going to be, I think, a continued big hit for our customers. And I think our customers have continued to choose us because we provide the best value proposition on a myriad of dimensions. And so I'm quite pleased with it and I think we're quite optimistic as it relates to, at least, our position with our customers going into the next fiscal year. Lisa C. Gill - JP Morgan Chase & Co, Research Division: And then just as my follow up, I know you made comments earlier around the value proposition you offer around oncology. Maybe, Jeff, can you talk about any kind of earnings impact that you'll have for any headwinds on the oncology distributions side -- I'm sorry on the oncology reimbursement side, whether it's a shift from ASP plus 6, were other cuts due to sequestration?

Well, Lisa, clearly, the cuts for oncologists as part -- that happened as part of the sequestration, are a serious issue for our physician customers. When you step back, when you think about the overall scale of McKesson and the size or specialty business relative to the whole company and our role, I would say that it's not a material item for McKesson, even within the guidance range that we've given you. I think we'd also make -- I'd go back to some of the points John made in his comments, which is we also believe that the overall model we've developed in our specialty business is particularly attractive to physicians and practices at times when reimbursement is really putting a lot of pressure on the practices. Lisa C. Gill - JP Morgan Chase & Co, Research Division: And just so I understand, are you seeing a pickup in the number of physicians that are now coming under that model for U.S. oncology, because of the tough brand reimbursement environment?

I think it's too early to suggest that the sequester, which only began to take effect April 1, had any impact on our quarter. I would say, Lisa, though, that if you think about what we've been doing over time, is evolving the strategy so that we can compete in a way that our customers look at us differently, perhaps, than others in the marketplace. And they come to us as a place that can help them improve their operating performance in ways that simple price discounts on distribution can't provide. And so the partnership we've created with U.S. oncology physicians is quite significant. And we have seen a nice increase in the number of physicians who have joined the U.S. oncology network during last fiscal year. So our comments are really pre-sequester comments related to physician adoption of our model. Clearly, we think the pressure is a 2-edged sword. It clearly is a negative impact as it relates to the current economics of physicians that are outside of the benefit that we can provide in a more holistic way and, to some extent, a drag on those inside of our network. But we work very well with our doctors to help offset those negatives to the extent that we can. And clearly, doctors that are not in the network are attracted to a place where they can find an expanded partnership that can help them deal with some of those challenges. So much like what we found with Health Mart and independent pharmacies, sometimes the pressure that's exerted causes people to open their minds to a different model that will expand their ability to operate more profitably.

Our next question comes from Steven Valiquette with UBS.

So you obviously have a lot to sort through here in a short amount of time. But I guess when we talk about these collective exit, realignment and restructuring charges in the fiscal fourth quarter of '13, is there any color just on how material the EPS savings are expected to be in the new fiscal '14 EPS guidance? So would that range of $7.90 to $8.20 have been completely different if you didn't take these actions, or it would have been around the same range? Just trying to get more color on the EPS.

That's a fair question, Steven. The short answer is no, it wouldn't have materially changed. Our Nadro -- remember, Nadro is just an investment. So the equity earnings on that have been de minimis in recent years. And the combination of our International Technology business and our automation business was also de minimis when you look at FY '13. For FY '14, now it depends a little bit on how the transactional process goes here, but we'll report all that in the discontinued ops line. The bottom line is that this $7.90 to $8.20 EPS from continuing operations is not significantly impacted by any of those 3.

Okay. And then quickly, not to make you put on your political prediction hat, but I know there is a bill in the House that calls for the removal of the oncology drug sequester cuts. I guess the way you see it now, do you think there is maybe a reasonable chance that these cuts could be reversed? Or is it more in the category of not holding your breath? Or do you just not want to comment on probabilities on that?

Well, while the beginning of the political spectrum is difficult to comment on, and I certainly don't want to put myself in the shoes of the policymakers, I do think that oncologists have been perhaps more uniquely impacted in a negative way than the general health care industry through the sequester. And so we're very sympathetic and supportive of the moves to help our physicians get outside of this, what we think is an unfair and perhaps more heavily impacting their business model than others in the sector. Having said all of that, I think our financial forecasts for this year, going forward, are not going to be materially impacted one way or the other relative to the sequester. And so we feel comfortable that, as a corporation, we can work through these challenges. Clearly, at the physician level, depending on their mix of business, that's Medicare, Medicaid kind of oriented, the larger the impact. And we're working on those physician customers to try to find efficiencies to offset those hits.

Our next question comes from Tom Gallucci with Lazard Capital Markets.

I guess sort of 2 housekeeping questions, if I could. First, fiscal '13 cash flow was very strong, as you mentioned, Jeff, down, I guess, a bit year-over-year based on your expectations for fiscal '14. Generic profitability is a difficult comp. Can you talk about any other key moving parts that we should be thinking about there on the cash side?

No, the drop, Tom, in the guidance for '14 versus '13 is just the classic day of week that the relative years happen to end on. And given the magnitude of our revenues and receivables and payables, when you get a Monday or a Friday, is a huge difference. And that's really the main driver of the decline.

Okay. So '13 was maybe exaggerated a little bit up by timing and '14 exaggerated down, so the differential in reality isn't all that extreme.

I think that's an excellent way to look at it.

Okay. And then I think you also mentioned in the text of the release on fiscal '14 outlook, you're expecting branded and generic price trends to sort of be similar in '14 as '13. Can you tell us what you saw in those 2 areas?

Well, yes, although I'll give you the caveat that every company and every consultant measures inflation differently. On the branded side for our internal purposes, we measure inflation looking at our particular product mix and doing a dollar-volume weighted calculation of the average price increase. And that is influenced not just by the average size of the price increase, but by how many you have, and some products take more than one in a year. When you do all that calculation, our index was in the 10% to 11% range last year, and we expect that same kind of range next year. The generics side is even trickier to talk about a number, because we model every new launch individually. For mature products, we calculate a dollar volume weighted average of how the overall price trends are going. As you know, if you go back 4 or 5 years, that indices used to often go down quite significantly, 10% or 15% a year. In recent years, it's been flat to up a little bit to down a little bit, and that's the same kind of trend we would anticipate for next year.

Our next question comes from Robert Willoughby with Bank of America Merrill Lynch.

Jeff, on the last call, you did reference $46 million in deferred Technology revenues. I assume nothing was recognized in the fourth quarter. And did the divestitures impact that number at all?

Well, to be clear, you're correct that, on the particular sales that we deferred in the December quarter, none of that was recognized in the March quarter. To be clear, we have lots of other ongoing business in that International Technology business, where the revenue continues to be recognized, and we have a great contract with the NHS, and we have lots of legacy clinical business, and all of that continues to just be recognized as is. But of the deferral piece, you are quite correct, that none of it was recognized in the March quarter. If look at FY '14, that entire business will now be reported down in discontinued operations, along with our Hospital Automation business and the revenues and profits of those business, as well as the costs and gains associated with their sales, will ultimately all flow through that line.

Robert, we do not expect any of those revenues to be recognized in this quarter as well. So there was no change in our plan there.

Okay. And John, I heard a strong yes and a strong no on the international expansion. Can you -- kind of what's the disconnect? We're getting pitched these wonderful synergies of international collaboration. The rest of the industry seems to say wait and see, and you seem very much on the fence as well. Is there a stronger statement you could make one way or the other on that?

Well, it's been our practice really not to talk about our strategy until it's ready to be revealed. I guess the point is that we think we have significant scale today. We don't think that our success is dependent on some type of a joint purchasing program or some type of an acquisition. Having said all of that, we also think that we can be successful on an ongoing basis by keeping our minds open and evolving our strategy and being aware of what our markets are doing. So at this point, I wouldn't count on us doing anything, and I wouldn't count us out on doing anything. I think the focus has to be on remaining agile in our approach. And I think you can -- if you look at our history as a company, we have -- we sometimes missed an opportunity and sometimes we missed a problem, and we'd like to keep that track record going. So we're going to continue to think about what we need to do, if anything, in addition to just outright execution everyday against a strategy we've had in place. We've been doing this private label generics thing for almost a decade now, from the beginning of the thought process to the execution we have today, and now we're bringing it to Canada. These are not easy things to do, and it takes a long time to do them right. And we're certainly not going to mess up our reputation or our customers' confidence in us by going halfhearted at something. And usually, like we did in that private label, we don't talk about it until it's successful.

Our next question comes from Robert Jones with Goldman Sachs.

Just a couple on PSS. Jeff, I understand that you're saying that your operating performance expectations for PSS are unchanged. But if I go back, I think the original guidance, EPS guidance, that it's based off of a much higher interest rate than what you ended up securing. Would you mind sharing with us just what the actual new EPS contribution range is? Or is it as simple as just applying what the final rate was in order to get what you're thinking about EPS contribution from PSS in '14?

Well, the short answer is really what you just said at the end there. But just to level set for everyone, back in the original earnings call, we said, just to help people work through the math, that if you were to 100% debt-finance PSS at a 4% interest rate, we'd expect the resultant accretion to be $0.15 to $0.25. If you look at the last 6 months, we've done a couple of financing, raised about $1.8 billion, at an average interest rate of about 2.1%, not 4%. So if you were to plug 2.1% into that calculation instead of 4%, it would add about another $0.05 to the accretion. It's always a little bit tricky to say, "Well, does that debt all serve to finance PSS or did part of it fund the $800 million of share repurchase we did in the March quarter, cash funded [ph] ?" But I'm just trying to help people understand, however you want to model the capital structure, our view of the earnings power of PSS remains unchanged.

Got it. And then, I guess, just a broader question on the medical market share in ambulatory. We saw some significant growth from one of your U.S. competitors in the ambulatory space reported earlier today. I'm just wondering if you would comment on your positioning there, maybe how the transition has been going early days and specifically any comments around sales force engagement since the deal had been announced?

Well, you can see in our prepared remarks, we had tremendous revenue growth, both pre-integration of the PSS number, and once you put it in, obviously, it grew even more nicely. But both PSS and McKesson, independently, grew very nice in the quarter. And you know that our footprint is quite significant in the physician or ambulatory space. That includes surgery centers. It includes independent physicians. It includes physicians that are owned by hospitals. It includes home health care. It includes long-term care. And so we do believe we have the strongest footprint in the industry in all of those settings of care. And we're really pleased that we've been able to evolve our product offering, our strategy, our technology in a way that enhances our go-to-market strategy. And so I think what you're at least seeing from us, and perhaps others are following, is a more holistic approach to the market and to the challenges our customers face. And as you also know, although we are quite significant now in the nonhospital or non-acute care settings, we have significant opportunity to grow because the market is highly fragmented. And our ability to attract new customers based on our value prop, we think will continue. As to the integration of the team at PSS, I think everybody remains engaged and enthusiastic. I mentioned Gary Corless on my phone call, and I also want to put a shout out to Stanton McComb. The 2 leaders of that business have come together with their teams and are doing a great job of putting the integration plans together. Our going-in assumption was that we would not lose a sales rep and, certainly, not eliminate one on purpose. And I can tell you that we've had almost 100% retention -- not quite, but almost 100% retention of our field selling forces. And we're working out the territory overlaps and the customers, and we feel quite confident we'll retain our people and we'll retain our customers. We're excited about that. Now clearly over time, there'll be some difficult decisions to make on synergies and taking cost out of our networks. But we have such a large opportunity here, we think that any employee negatively impacted should have an opportunity to explore other opportunities inside of McKesson. So we're off to a good early start. The businesses are performing well, and our customers are reacting very favorably.

Our next question comes from Eric Coldwell with Robert W. Baird. Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division: My main questions are taken care of, so I'll just ask a quick one. I heard on the call several times about a fee pivot in revenue, a significant rebound, et cetera. The Street was modeling fiscal 2013 a little higher, so the growth rate is not exactly comparable, but the Street was looking for about 2.6% revenue growth in fiscal '14. My sense is that fee pivots and significant rebounds are more than 3% growth. So I'm hoping you can just give us a little more sense on what you are really signaling here.

Yes, the short answer to your question, significant pivot, significant growth is well beyond 2.6%. We're always a little cautious, Eric, to give an overly precise number, because our revenue growth will be dominated by just pharmaceutical distribution. And it will be, in particular, dominated by the couple of large customers and exactly what their purchasing patterns are around brand. And of course, the impact on our bottom line of all that is far less than the impact on the revenue growth. All that said, our view probably of the markets' growth itself is probably a little more robust than I think some other pundits out there. Our view of our own customers growth, particularly a couple of large customers, is that when we look at their pipelines, we expect a few of our larger customers to grow above the market. And then you do have the added impact of just the math of adding in PSS. So in our Distribution Solutions segment, which drives the revenue growth for the whole company, we would expect to be much higher than the 2.6% you just cited. Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division: That's fair. And if I could just one add-on, is the growth related to one of the better new drug approval years from the last 15 at the FDA, or is it that you're seeing market volumes and just customer mix, as you mentioned, being stronger?

Well, clearly, we're optimistic about new drug approvals, but I think that much of our view on revenue growth is being driven just by the growth our customers are going to receive this year and the lack of a dilutive effect of significant generic launches, which were pulling back our revenue in previous years. And clearly, just like Jeff said, there's a -- I think we have a more positive view on overall revenue growth for the industry than perhaps some others might have, because of this generic pullback.

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

Jeff, can you just comment on the sequential decline in direct and bulk revenue, please?

Well, let me take those backwards. If you look at bulk revenue, remember, that's less than a handful of our large customers, for whom we do a warehouse service as part of a much broader relationship. Some of the good news about the sequential decline is it's driven by some of those large customers putting more of their business through our direct model, which is actually much better for us. So that's really the story on warehouse. On direct, it's really just a function of the way the brand-to-generic conversions have rolled out through the year and, of course, it's the reversal of that trend, beginning next quarter and then really happening to a much greater extent as you get into the second, third and fourth quarters of FY '14, that causes such a pivot in the revenue growth rates.

Okay, and then just one more. You mentioned a potential, I think, LIFO charge for fiscal '14. That is included, I think, in your adjusted EPS. That's new from previous year's guidance. Any color around the size of that?

Well, it's not in our guidance, but it would be included in our adjusted result. We won't adjust it out, if that's the question you're asking.

It is so hard, David, to forecast this because it's a mathematical calculation we do once a year, which is driven by a methodology developed over 30 years ago, when the company first started doing LIFO accounting. And once you start it, you can never adjust it. And it is just very hard to predict. What we do know, however, is that the significant change in FY '14, in terms of the number of brand-to-generic conversions, will cause that calculation, potentially, to be significantly different than it has been. That's why we're calling it out, just so people understand that we have not included that in our guidance.

And our last question comes from George Hill with Citi.

Jeff, a little bit of an accounting question for you. Am I thinking about the IT segment right, where the Better Health 2020 investment spend, the bulk of that should be behind us as we go into fiscal 2014 and is that contributing to the margin improvements?

Actually our investment -- if you listened to Jeff's comments, our R&D investment actually goes up in fiscal '14, so I think that we are -- versus '13, and I think you'll see that we are continuing to invest against that strategy. So we are not de-investing in the business yet, plus you know we have -- we'll have full year effect of some acquisitions we did in the prior year as well. So I think over time, we're hoping to get the return on investment from increased revenues and an improved mix in the business as opposed to reducing our investment in the business. Well, I want to thank all of you and thank the operator for our help today and for paying attention to the call. We do have a solid plan for fiscal 2014, combining our expectations for expanded revenue growth in both of our segments and continued capital deployment. I'm proud of our track record of delivering value to our customers and strong financial returns to our shareholders. And I want to acknowledge all of our employees here at McKesson for their passion and commitment to our goal of bringing better health to our customers and the patients they serve. With that, I'll turn it over to Erin for a view of the upcoming events for the financial community.

Thank you, John. I have a preview of upcoming events. We will participate in the Bank of America Merrill Lynch Health Care Conference in Las Vegas on May 15 and The Goldman Sachs Health Care Conference in Ranchos Palos Verdes on June 11. We will release first quarter earnings results in late July. We look forward to seeing you at one of these upcoming events. Thank you, and goodbye.

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