McKesson Corporation (MCK) Q1 2015 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the McKesson Corporation Quarterly Earnings Conference Call. [Operator Instructions] Today's call is being recorded. And now, your host for today's call, Ms. Erin Lampert, Senior Vice President of Investor Relations. Ms. Lampert, please go ahead, ma'am.

Thank you, Rufus. Good morning, and welcome to the McKesson Fiscal 2015 First Quarter Earnings Call. I'm joined today by John Hammergren, McKesson's Chairman and CEO; and James Beer, McKesson's Executive Vice President and Chief Financial Officer. John will first provide a business update and will then introduce James, who will review the financial results for the quarter. After James' comments, we will open the call for your questions. We plan to end the call promptly after 1 hour at 9:30 a.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 on today's call, we will refer to certain non-GAAP financial measures in which we exclude from our GAAP financial results acquisition expenses and related adjustments, amortization of acquisition-related intangible assets, certain litigation reserve adjustments and LIFO-related adjustments. We believe these non-GAAP measures will provide useful information for investors. Please refer to our press release announcing first quarter fiscal 2015 results available on our website for a reconciliation of the non-GAAP performance measures to the GAAP financial results. Thanks. And here's John Hammergren.

Thanks, Erin, and thanks, everyone, for joining us on our call. Today we reported a strong start to fiscal 2015 with total company revenues of $44.1 billion with adjusted earnings per diluted share from continuing operations of $2.49. Based on the strength of our Distribution Solutions results in the first quarter and our confidence in the full year, we are raising our previous outlook and now expect adjusted earnings per diluted share of $10.50 to $10.90 for fiscal 2015. Before I begin my comments on our business performance for the quarter, I want to provide a brief update on 2 items. First, I'm pleased with the outcome of the Celesio Annual General Meeting of Shareholders, which was held on July 15 in Stuttgart, Germany. As part of the standard German legal process, at that meeting, shareholders voted to approve the domination agreement between McKesson and Celesio. The domination agreement must be registered with the German courts in order to become effective. Before that registration can take place, minority shareholders may assert challenges, which may be based on substance or technical grounds. Anticipate that at least 1 challenge will be filed. Under German law, there is a limited period of time for such disputes to be heard. Based on our current assessment, we now expect that the domination agreement will be registered with the German courts and therefore, McKesson will be allowed to exercise operating control over Celesio at the end of the current calendar year. This time line represents a modest delay from our previous expectation that we would achieve operating control late in the first half of fiscal 2015. The second item I want to highlight is related to the sale of our International Technology business. Approximately 1 year ago, we talked about a number of actions to better position the company going forward, including our intention to sell our International Technology business. This business consisted of 2 main divisions: clinical and financial solutions, and workforce solutions. In July, we completed the sale of the clinical and financial systems portion of McKesson International Technology's business -- our McKesson International Technology business. The workforce solution division, which provides workforce and payroll solutions to the U.K. National Health Service, was not included as part of the sale. As a result, it was determined that this business would need to be reclassified from discontinued operations, where we reported the results in fiscal 2014, back into continuing operations for fiscal 2015. As part of the reclassification of this business, from discontinued operations to continuing operations, we recognized a pretax charge of $34 million or $0.11 per diluted share in our first quarter adjusted earnings results. It's important to note that our sole contract in the U.K.-based workforce solutions business with the NHS expires in late calendar 2015. We do not intend to rebid this contract going forward. And therefore, we'll continue to operate the business only to the end of the existing contract. Moving on to our business results for the quarter. Distribution Solutions had a strong start to the year with revenue of $43.3 billion in the quarter, up 38%, adjusted operating profit of $1 billion, up 44%, and both are reported on constant currency basis. North America distribution and services, which includes our U.S. Pharmaceutical business, McKesson Specialty Health and McKesson Canada, delivered strong results for the quarter aided by higher-than-expected revenue growth. Within North America, revenue growth in our U.S. Pharmaceutical business exceeded our expectations in the first quarter, driven primarily by strong demand for 2 recently launched drugs for the treatment of Hepatitis C, as well as solid growth across our independent national retail and mail order customers. Based on this revenue strength in the first quarter, we are now -- we now believe revenue growth in North America will be modestly ahead of our original expectations for the year. Within our U.S. Pharmaceutical business, we also experienced solid growth across our portfolio of generic and brand pharmaceuticals, driven in part by the timing of certain generic and brand price increases, which came earlier in the fiscal year than we had originally planned. It is important to note, however, our full year expectations for both brand and generic inflation remained unchanged. We continue to make solid progress in executing our new agreement with Rite Aid. And as you saw in our recent press release, I am delighted with the extension of our long-standing distribution relationship with CVS Caremark through June of 2019. As you know, we have a tremendous track record of delivering comprehensive supply chain solutions to CVS. We are proud to continue this valued relationship. Last week, we hosted our annual conference for retail independent customers, which brought together thousands of community pharmacy owners and pharmacists from across the country. This year's conference helped attendees understand the transformation in the market driven by an emphasis on patient -- positive patient outcomes, continued growth of preferred networks and a focus on the pharmacy's ability to impact important quality and patient satisfaction ratings. Our conference attracts a significant number of our Health Mart customers and we are extremely proud to have reached a milestone of more than 3,400 Health Mart pharmacy members. In summary, I'm pleased with the performance of our U.S. Pharmaceutical business in the first quarter and the great start to this fiscal year. Moving now to our specialty business. We had solid results in the first quarter with nice growth across the business. At our recent Investor Day, we highlighted the diversity of our specialty portfolio, where we are a leading service and technology provider across multiple specialty areas. It is this diversity of our broad portfolio that sets us apart. In particular, our model through U.S. Oncology provides comprehensive services across the spectrum of the cancer care. We're excited about the progress we continue to make in our specialty business and believe we are well positioned to continue to grow and innovate in this dynamic market. And our Canadian business had a solid start to the year with results that were in line with our expectations for the first quarter. Turning now to our results for international pharmaceutical distribution and services. Revenues for the first quarter were $7.6 billion, an increase of 3% on the underlying results of Celesio on a constant currency basis. As I mentioned in my opening remarks, we continue to move through the required steps to achieve operating control of the company. We now expect to achieve this milestone by the end of our current calendar year. Turning to our Medical-Surgical business. Revenues were $1.4 billion for the first quarter, an increase of 2% over the prior year. We're off to a solid start to the year in our Medical-Surgical business and we continue to make good progress optimizing our distribution network and technology platforms related to the acquisition of PSS World Medical. In summary, we are off to a strong start to the year in Distribution Solutions. We are extremely well positioned across all of our distribution businesses and we are confident in our improved outlook for the rest of the fiscal year. Technology Solutions revenues were down 8% for the first quarter, driven primarily by anticipated revenue softness in our Horizon Clinical software platform and the disposition of our product line as we discussed on our last earnings call. Adjusted operating margins in this segment were 10.4%, which includes the $34 million pretax charge associated with the reclassification of a portion of our International Technology business from discontinued operations to continuing operations. Excluding this charge, adjusted operating margins for this segment would have been 15%. More broadly, we continued to made steady progress across our Technology Solutions businesses. Our first quarter results benefited from the steady growth profile of our RelayHealth Connectivity business, along with positive results in our physician services and medical imaging businesses. I also want to highlight the recent success of the CommonWell Health Alliance. Over a year ago, McKesson collaborated with several other organizations to demonstrate our leadership in finding solutions to address the issue of data interoperability in our industry. These companies recognized early on that pervasive connectivity cannot be accomplished by any one vendor. It must be implemented in a way that all vendors and systems can effectively participate. The CommonWell Health Alliance began with 5 founding members, all with a common goal, to change the standards of interoperability for the nation. And today, the alliance has grown to include a total of 11 members. Recently, the CommonWell members were able to demonstrate success through the launch of foundational services across 4 geographies, and in select pilot locations. The goal of the pilots was to validate the proof of concept and understand from the providers the ways in which we can continue to bring added value. We have been encouraged by the success of the pilots. And now CommonWell members, including McKesson, are gearing up for expansion and commercialization of the program with the foundational services provided by RelayHealth and a plan to continue to add members to the alliance. We are very pleased with the success to date and are looking forward, along with our partners, to the next growth phase for CommonWell. In summary, we continue to make solid progress in our key strategic priorities for McKesson Technology Solutions, including helping our customers reduce cost, operate more efficiently, providing our customers with solutions to drive improved analytics and supporting our customers' transformation to a world of value-based care. Now to wrap up my comments for our fiscal first quarter. The strength of our operating performance is reflected in our strong financial results for the quarter, which, I'll remind you, include the charge of $0.11 per diluted share as a result of the reclassification of a portion of our International Technology business to continuing operations. This was not contemplated in our original plan. In light of the strong operating performance, we are pleased with our improved outlook for the full year. And as I noted at the beginning of my remarks, we are raising our guidance by a range of $0.10, to $10.50 to $10.90 for fiscal 2015. In addition to the strength of our operating performance, we continue to have a strong balance sheet. In the first quarter, we generated cash flow from operations of $182 million. And our expectation to deliver cash flow from operations of approximately $3 billion for fiscal 2015 remains unchanged from our original guidance. We are extremely well positioned to execute our portfolio approach to capital deployment to continue to deliver value for our shareholders. With that, I'll turn the call over to James. And we'll return to address your questions when he finishes. James?

Thank you, John, and good morning, everyone. We are very pleased with our first quarter results, which represent a strong start to fiscal 2015. And as John discussed earlier, we are raising our previous outlook and now expect adjusted earnings per diluted share from continuing operations of $10.50 to $10.90. Today, I will walk you through our first quarter financial results and provide an update on our acquisition of Celesio. Before I move on, let me remind you that in this quarter, both GAAP and adjusted earnings reflect the reclassification of a portion of our International Technology business, referred to as our workforce business, from discontinued operations back to continuing operations. Releases to the workforce business reclassification, we recorded a pretax charge of $34 million or $0.11 per share, largely representing a onetime catch-up of depreciation and amortization on the underlying assets as we move the business from discontinued to continuing operations. It is also important to note that fiscal '14 was recast to include the results of the workforce business. Schedule 9 provides a recast fiscal '14 consolidated and technology segment revenues. Revenues for the workforce business were $31 million during the first quarter of fiscal '14 and $147 million for the full year. Fiscal '14, as recast for the addition of the workforce business, includes $0.04 and $0.21 in contribution to adjusted earnings per diluted share for the first quarter and full year, respectively, as outlined on Schedules 7 and 8. Now let's move to our results for the quarter. My remarks today will focus on our first quarter adjusted EPS from continuing operations of $2.49, which excludes 3 items: amortization of acquisition-related intangibles; acquisition expenses and related adjustments; and LIFO-related adjustments. Turning now to our consolidated results, which can be found on Schedule 2. Consolidated revenues increased 37% for the quarter to $44.1 billion. On this 37% revenue growth, adjusted gross profit for the quarter increased 50% to $2.9 billion, driven by Celesio and the strong performance of our Distribution Solutions segment. Total adjusted operating expenses of $1.9 billion were up 64% for the quarter, mainly driven by Celesio. Excluding the impact of Celesio, operating expenses increased 3% for the quarter. Other income was $21 million for the quarter. Interest expense increased 71% versus the prior year to $101 million, driven by debt issued and assumed related to our acquisition of Celesio. Now moving to taxes. Our adjusted tax rate for the quarter was 31.2%. As usual, I would expect this tax rate to fluctuate somewhat from quarter-to-quarter. Adjusted income for the quarter was $585 million, with our adjusted earnings per diluted share from continuing operations at $2.49. Wrapping up our consolidated results, diluted weighted average shares outstanding increased by 1% year-over-year to 235 million. Let's now turn to the segment results, which can be found on Schedule 3. Distribution Solutions segment revenues increased for the quarter to $43.3 billion, up 38% on a reported and constant currency basis. North America pharmaceutical distribution and services revenues increased 14% to $34.3 billion, primarily reflecting market growth, including sales of 2 recently launched drugs for the treatment of Hepatitis C, the delay of certain generic launches to later in the fiscal year and growth in our Canadian and specialty businesses. In addition, as John mentioned, in this quarter, we recorded solid growth across our portfolio of generic and branded pharmaceuticals, driven in part by the timing of certain generic and brand price increases, which came earlier in the fiscal year than we had originally planned. On a constant currency basis, revenues increased 15%. Based on the growth we have seen, primarily from the sales of 2 hepatitis C drugs, we now expect that North America will be modestly ahead of our previous full year expectations of mid-single-digit revenue growth. International pharmaceutical distribution and services revenues were $7.6 billion for the first quarter. On a constant currency basis, revenues increased 3% on the underlying revenues of Celesio. Medical-Surgical revenues were up 2% for the quarter, driven by market growth. Distribution Solutions adjusted gross profit increased 68% for the quarter on 38% revenue growth, resulting in 106 basis points improvement in our adjusted gross profit margin. In addition to the Celesio acquisition, our first quarter gross profit in Distribution Solutions benefited from favorable performance in our pharmaceutical portfolio, including earlier-than-expected generic and brand price increases that occurred late in the quarter. Our full year assumption for generic and brand price inflation remains unchanged. Adjusted operating expense for the segment increased 90% for the quarter, driven by our acquisition of Celesio. Excluding Celesio, operating expenses for the segment increased 4% year-over-year. The segment adjusted operating margin rate for the quarter was 232 basis points, an improvement of 9 basis points versus the prior year. As I mentioned earlier, we now expect revenue growth for our North America pharmaceutical distribution and services business to be modestly ahead of expectations. Based on the anticipated mix of revenue in our North American business, we now expect operating margins to increase mid-single-digit basis points year-over-year. Turning now to Technology Solutions. Revenues were down 8% for the quarter to $768 million. This decline was primarily driven by the anticipated revenue softness of the Horizon Clinical software platform and the planned elimination of a product line, offset by growth in our other technology businesses. It is important to note that relative to fiscal '14's recast revenues, the workforce business revenues are expected to be down year-over-year. And as a result, we now expect segment revenues for the full year to decline by low single-digits year-over-year. As I discussed earlier, first quarter GAAP and adjusted results for Technology Solutions reflect a pretax charge of $34 million or $0.11 per share. $32 million of these charges reduced segment adjusted gross profit, while a further $2 million increased the segment's operating expenses this quarter. Adjusted operating expenses in the segment decreased 4%, driven primarily by restructuring actions taken in the prior year. First quarter adjusted operating profit for the segment was down 45% to $80 million, and the adjusted operating margin rate was 10.42%, representing a decrease of 692 basis points versus the prior year. Excluding the impact of the workforce business charge, the adjusted operating margin rate was 15%. Based on the reclassification of the workforce business, we now expect the full year adjusted operating margin for the segment to be at the mid-teens level. Moving now to the balance sheet and working capital metrics. As you've heard me discuss before, each of our working capital metrics can be significantly impacted by timing, including which day of the week marks the close of a given quarter. In addition, this quarter's working capital metrics also include Celesio. For receivables, our days sales outstanding increased 2 days versus the prior year. Excluding Celesio, our days sales outstanding remained flat at 24 days. Our days sales in inventories were flat year-over-year at 31 days. Our days sales in payables were flat year-over-year at 50 days. Excluding Celesio, our days sales in payables increased 2 days to 52 days. We generated $182 million in cash flow from operations for the quarter. Overall, for the full year, we continue to expect our cash flow from operations to be approximately $3 billion. We ended the quarter with a cash balance of $4.1 billion with $1.9 billion held offshore. Internal capital spending was $119 million for the quarter. Now I'll turn to our adjusted EPS outlook for the year. As I mentioned earlier, we are raising our fiscal 2015 guidance for adjusted earnings from continuing operations per diluted share from our original range of $10.40 to $10.80 to a new range of $10.50 to $10.90. In addition, we now expect $1.32 per share in amortization of acquisition-related intangible assets and $0.50 of acquisition expenses and related adjustments. We also expect to exclude between $0.95 and $1.05 per share in LIFO-related adjustments. Before concluding my remarks, I would like to briefly review some important aspects of the next steps in our acquisition of Celesio. As John mentioned earlier, we now expect to secure operating control by the end of the calendar year. We continue to believe we can achieve the previously stated accretion range of $1 to $1.20 on an adjusted earnings basis during the 12-month period beginning February 2014. You will recall, however, that this range assumes 100% ownership. Our current ownership stake in Celesio remains at 76%. By the fourth year following completion of the required steps to obtain operating control, we continue to expect to realize annual synergies between $275 million and $325 million. In summary, McKesson delivered strong financial results during the first quarter and we are well positioned for the remainder of the fiscal year. Thank you. And with that, I will turn the call over to the operator for your questions. [Operator Instructions] Rufus?

[Operator Instructions] And for our first question, we go to George Hill with Deutsche Bank.

I guess, James, maybe I'll just ask a couple of questions about the guidance for back half of the year. Net of the IT charge, is it right to think about that you guys are actually kind of taking the guidance up by $0.20 considering the $0.11 -- or call it $0.21, given the IT charge kind of taken in the quarter?

Well, certainly, obviously, we do include that IOG charge, workforce business charge, in our adjusted earnings. So absent that, yes, we are upping the formal guide by $0.10. But in the first quarter, yes, you're right. We did absorb an $0.11 charge associated with that workforce business.

Okay. I wanted to make sure I understood that quickly. And then maybe just a quick follow-up either for James or John. Generic drug price inflation has obviously been very strong in helping the performance of the IT business. I guess, can you talk about expectations for the back half of the year, given the strength that you saw in the front half of the year?

Well, we did think -- we do think there was some pull-forward, George, of our generic price inflation models for the full fiscal year, but we really don't change -- we haven't changed our outlook if you think about it on a full year basis. So I think right now it's early for our fiscal year, but we believe that the guidance we gave you at the beginning of the year is still reasonable.

And for our next question, we go to Lisa Gill with JPMorgan. Lisa C. Gill - JP Morgan Chase & Co, Research Division: I was wondering if maybe if we look at the overall drug distribution revenue, and then, John, I think you talked about the Hep C drug. But if you back out Hep C in the quarter, can you maybe give us an idea of what you're seeing for underlying utilization and any early signs of ACA? We see Rite Aid just reported this morning again strong results on the pharma side. So I'm just wondering what you're seeing in your model.

Well, it's difficult to account for what the Affordable Care Act effect is in our business. We came into the year believing there would be some modest effect from it and we still believe that's the case. We really had strength across the entire segment of Rx revenues, Canada and Specialty, in particular, came in very strong for us. So I think we're pleased with the momentum that we have. And as you mentioned, the Hep C drugs were also a surprise to us, of how quickly they've been taken up, and the volumes that we received there. So I think, overall, we're pleased with the performance of the revenues in that business. Lisa C. Gill - JP Morgan Chase & Co, Research Division: And then, John, just as a follow up, you mentioned the extension of your relationship with CVS. Are there any changes of note to that new relationship that goes through 2019?

It's basically the same form that we've had with them in the past in terms of the service and the relationship. So we're pleased to have renewed it, and we think it continues to show the quality of the service and the relationships we have with our customers.

And we go next to Ricky Goldwasser with Morgan Stanley.

A couple of questions here. First of all, I think, I heard the comment on the operating margin now expected to grow at mid-single due to mix. So can you guys just give us some more color on the underlying kind of like revenue mix and kind of like what you've seen that was different in your expectations?

Yes, the driver of my comments around the Distribution Solutions' operating margin is really the impact of the Hep C drugs that we saw really having a very strong rollout in this last quarter, and that is what's driving the margin effect.

Okay. And then just kind of like a quick follow-up. On kind of like just the Rite Aid generic contract, I know -- I think you said that you expect to see the benefits flowing through in the September quarter, so is this still kind of like -- is timing still consistent with your earlier expectations?

We're really pleased with the continued performance in our relationship with Rite Aid. I would say that our contract negotiations are -- have progressed the way we had anticipated. The conversation around September was probably more focused on our delivery of generics to their individual stores. So we are probably better than halfway through the implementation of store delivery of generics directed by McKesson, and that will continue to evolve until we have 100% of that responsibility as we get to the fall time frame.

Okay. And in terms of contribution to your bottom line, should we see that in the following quarter?

I think you -- our guidance anticipates the effect of Rite Aid's business flowing through McKesson. And so I -- other than the dilutive effect, it has been a bit of a surprise from Hep C from a margin rate perspective. The rest of the performance of the business is right in line with our expectations.

We'll go next to Glen Santangelo with Crédit Suisse. Glen J. Santangelo - Crédit Suisse AG, Research Division: John, I just want to talk to you about the North American Distribution business. The company continues to post very solid results in that segment and if I hear you correctly, obviously, specialty sort of helped the revenue line maybe volumes also helped the revenue line. But if I filter that down to the operating profit line, we're still seeing very sizable beats. And I'm wondering if you could help us sort of think through what might really be driving that better-than-expected result. Is it the branded and generic price inflation being pulled forward? Is it the volumes? Or -- we're not really sure what the margins look like on the specialty drugs you're talking about. So any sort of help in triangulating what's really driving that operating profit would be helpful.

I think it comes from many of the sources that you just highlighted. Clearly, the brand and generic performance in the quarter was very strong. We're pleased with the revenue growth we received, in particular, out of Canada and in Specialty. But even our standard Rx business has been supported by robust growth really across-the-board. And the continued uptake of our generic portfolio, the strength of Northstar, our ability to continue to bring market share to our customer base and the strength of OneStop, our generic program in our markets, continues to remain very strong. So I really feel like the businesses in North American pharmaceuticals are performing very well. Glen J. Santangelo - Crédit Suisse AG, Research Division: Maybe I'll just follow-up on Celesio. Obviously, they're out with operating results this morning and kind of looking through those results, it seems like maybe some of the segments might have performed a little bit better while some of the other segments continue to be -- face some challenges that I think you've talked about in the past. But maybe could you give us some high-level commentary about maybe what you thought of the results? And is everything kind of performing relative to where you would have expected?

Yes, I think so. Overall, we're basically in line with our expectations. As you noted, in their comments, they've talked a little bit about where their strength is coming and where some of their weaknesses are. And I think that their commentary is generally in line with what we expected.

Our next question, we go to Robert Jones with Goldman Sachs.

So I just wanted to go back to guidance, a couple of moving pieces here relative to the previous communication. Am I correct to assume that there was some slight synergies assumed previously from the timing of operational control of Celesio and would that now not be included in the new guidance range given the pushout of the expectation on operational control? And then on the International Technology business, I understand that you're absorbing the $0.11 charge. But as we think about the balance of the year, are there corresponding earnings from that business that come back into the P&L?

Yes, so on the first of your questions, what we've spoken about in the past was that we expected just a modest amount of synergies from Celesio during fiscal '15. So yes, at some level, the pushout of operational control by a few months does have some impact on that. But again, they were modest expectations in the first place, I just want to emphasize that. And in terms of the workforce business and the impact later in the year, I would expect that, that would continue year-over-year because again, we've recast history. So we have all of that in the schedules to the press release. I would expect that, that would continue to create something of a headwind year-over-year for the balance of the fiscal '15.

That's helpful. And then, John, I guess just on the cash deployment, I understand you got probably about 1.5 on hold for Celesio and there's some debt redemptions over the next 18 months. But still a lot of cash with over $4 billion on the balance sheet today, solid cash flow again. Anything you can give us around how we should think about that cash being returned to shareholders or any perspectives on the M&A landscape at this point?

Well, as you point out, there are a couple of uses of the cash that we already have sort of planned into our future. One is the purchase of the remaining outstanding shares of Celesio. We still have 24% left to accumulate, which we believe will happen over time, as well as the debt repayment that we've committed to accomplish as we go forward. We want to remain investment-grade, as we've indicated. And that, as a backdrop, will probably cause us to continue to have a portfolio approach to our capital deployment. But it doesn't mean that we won't return to shareholders, through dividends and share repurchase, some of that cash. But what it does mean is that our priority is to make sure we maintain investment grade and that we avail ourselves of opportunities from an M&A perspective that make sense, which we've done on a regular basis.

And we go next to Steven Valiquette with UBS.

So a couple of quick ones here. First the 2% revenue growth in the Med-Surg distribution segment, is that an indicative of a normalized run rate that we should expect maybe for the rest of the year?

Well, I think that we believe the Med-Surg business is growing in line with our original expectations. So we think mid-single-digits is probably where we're going to be. So it's a little softer in the quarter than we would have -- we would forecast for the full year. And I think the softness is really in line with what we believe the market performed at for the first [indiscernible] for us. And I have to emphasize that we're really pleased with the continued progress of Med-Surg. From an integration perspective, we are really accomplishing our objectives there, and the team is doing a good job.

Okay. And then just quickly, you guys had that previous commentary about the percent of earnings in the first half of '15 being similar to fiscal '11 through '13 and I know that was kind of loose sort of guidance or commentary previously. But is that still relevant with these 1Q results or does that sort of go out the window with the strength of 1Q?

Well, I think what I'd say is I'd stick to the annual guide that we've offered. I think given the quarter-to-quarter volatility in our results, it's hard to give directional assistance to you just for a single quarter. And I think this quarter is a good example of that. We saw some price increases both on the branded side and on the generic side move up into this quarter earlier than we had planned. And then also, we saw some of the brand-to-generic conversions that we were expecting pushed further back towards the end of fiscal '15. So I think I'd really just align you to the overall annual guide.

And for our next question, we go to Ross Muken with ISI Group.

So it's now been a pretty remarkable period for the company. I mean you obviously had the Celesio acquisition, the Rite Aid agreement. It sort of shows the value you can provide to some of your larger customers. How has that sort of begat discussions with other customers you have in terms of the McKesson value proposition and how you can obviously then prove that you can obviously provide more value to kind of the broader universe as well?

Well, we think our early success with the implementation of the Rite Aid relationship as well as our continued performance in these businesses is an indication of our customers' reliance on our ability to work in partnership with them to deliver superior results. And I think we continue to work with those customers that have not fully availed themselves of the offerings that we have to make sure that they understand the kind of results we think we can obtain together and to help them quantify, not only the savings from sourcing with us, but also the savings associated with having us manage the logistics requirements associated with the purchase of product as well. And there's still significant customers that are somewhat redundant with us related to those deliveries that we think afford both of us opportunities. Having said that, these are big strategic decisions that have to be made and it'll take some time for some customers, I think, to reach the same conclusion that others have already reached. But I think our performance, as the first quarter shows, is an indication of customers' continued reliance on our ability to help them on many dimensions, including sourcing of products.

That's helpful, John. And maybe just on Technology Solutions I mean, this has been a bumpy ride now for quite a while and I know you've done a lot to sort of scale-down some of the clinical pieces where you've struggled. But as you think about the investment in this space and you think about the footprint, I mean -- so what is, at the board level and at the management level, what is the debate on sort of longer-term aspirations and goals for certain businesses? And then how do you -- how did you figure out what needed to go versus what needed to stay and how does that sort of affect how you're going to continue to look at the portfolio, I guess, going forward?

Well, if you set aside the surprise we had, so to speak, going into this quarter, which was the lack of our ability to exit the portion of the international operations business that we had related to the workforce and to run that contract out as opposed to selling it, if you set that aside and you actually look at the performance of the business, it's basically in line with our expectation. And what we've been focused on there is making sure that we have the appropriate operating margin for businesses of this type. That we're growing the earnings of the business in a way that's responsible and reflects the opportunity that we see in front of us. That the growth coming from the positive businesses in that segment are able to offset the drag associated with businesses that are not growing, as we know that they won't in certain categories there. In particular, the Horizon Clinical business that we're in the process of winding our way out of. And I would say that the last dimension that's important to us is these businesses are significant cash producers for us and I think the management team knows how to operate them. So the bumpiness on occasion is caused by things like IOG that we didn't fully expect to roll back into operations, and we'll work our way through that as well. I think at the portfolio level, we have a responsibility to look at this business as well as all of our businesses, not so much in the aggregate in the way that we report them, perhaps. But if you disaggregate them, there are a lot of the smaller businesses and product lines that make up these 2 large segments -- or 3 large segments now. And I think what we're focused on is how do we make sure that we've got the right portfolio of products and services in those segments to grow the business.

And for our next question, we go to Greg Bolan with Sterne Agee. Gregory T. Bolan - Sterne Agee & Leach Inc., Research Division: Guys, I apologize if I missed this. But for the quarter, James, just thinking about the 14% North America pharmaceutical distribution business, what do you believe was the contribution from the Hep C launches for the quarter, just in terms of contribution to growth rate?

Well, you've seen Gilead announce their results, and I'd just say that directionally, our revenues coming out of Sovaldi, for example, would have been in line with the overall market share across the 3 big distributors in this country. Gregory T. Bolan - Sterne Agee & Leach Inc., Research Division: Okay, that's fair. And then just lastly, on the same topic, as it relates to kind of the margin dilution, if you will, year-on-year from the launch of the Hep C drugs, any noticeable impact just in terms of stomping margin expansion for the distribution solutions segment?

Well, the guidance that I offered a little earlier, mathematically it represents a very modest reduction in margins for Distribution Solutions. And obviously, those have been going up consistently in recent years. And at Analyst Day, you'll recall that we reset the long-term margin goal for Distribution Solutions up to between 250 and 300 basis points. So modest impact from these Hep C drugs in the short term.

And for our next question, we go to John Ransom with Raymond James. John W. Ransom - Raymond James & Associates, Inc., Research Division: Sorry to keep beating this horse, but one of your competitors mentioned that generic inflation was higher this year than they thought versus expectations of being lower. You talked about it just being more price pull-throughs earlier than expected, how do you -- how do we square those 2 comments? Has inflation, in fact, been higher than you expected or is it really just timing?

I can't really comment on other's -- other people's comments. But what I would say is that I would reflect on the fact that we all have different fiscal years. We all have different portfolios of generics. We have different proprietary programs in the generic world. We have different relationships with generic manufacturers. And having said all of that, our point of view on generic price inflation for our fiscal year remains unchanged from the guidance we gave you at the beginning of our fiscal year. The only thing that we really tried to clarify in this call was that we believe some of that inflation was pulled forward in the first quarter, but our full year remains sort of intact with our previous view. So I know that it's a complex, complex discussion to have. Just also makes it even more complex when we're trying to forecast the behavior of others in the channel where we don't have complete visibility. So it's -- frustrating, as it may be to you sometimes, we can't tell you what our goal for generic inflection will be for 12 months out. But frankly, it's a little bit of a black box for us as well, and have to make educated and informed estimates as to what we think will happen. And sometimes, those estimates are off either from a timing perspective or from a magnitude perspective. And what we're saying here is that really we're seeing some timing differences. But the magnitude, we think, will remain relatively the same.

Yes. And that magnitude that we talked about when we offered the guide for fiscal '15 was high single-digit growth year-over-year.

And with that, ladies and gentlemen, we have no further questions on our roster. Therefore, Mr. Hammergren, I will turn the conference back over to, sir.

Thank you, Rufus, and thanks to all of you on the call and for providing some time today to listen to our results. I'm pleased with our strong first quarter performance. We're certainly excited about the opportunities that lie ahead for us. I want to recognize the outstanding performance of all of our employees and their contributions to these great results. Now I'll hand the call off to Erin for her review of upcoming events for the financial community. Erin?

Thank you, John. I have a preview of upcoming events for the financial community. On September 9, we will present at the Morgan Stanley Global Healthcare Conference in New York. On September 30, we will present at the Leerink Partners Healthcare Services Roundtable in New York. And on November 11, we will present at the Crédit Suisse Healthcare Conference in Phoenix, Arizona. We will release second quarter earnings results in late October. Thank you, and goodbye.

Ladies and gentlemen, thank you for joining today's conference. You may now disconnect. Have a good day.