Good day, everyone. Welcome to the McKesson Q2 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Craig Mercer. Please go ahead, sir.

Thank you, Alan. Good morning, and welcome to the McKesson fiscal 2019 second quarter earnings call. I'm joined today by John Hammergren, McKesson's Chairman and CEO; Brian Tyler, our recently-appointed President and Chief Operating Officer; and Britt Vitalone, McKesson's Executive Vice President and Chief Financial Officer. John will first provide a business update, with Brian making some introductory comments. And then Britt will review the financial results for the quarter. After Britt's comments, we will open the call for your questions. We plan to end the call promptly after one hour at 9 AM Eastern Time. Before we begin, I remind listeners that during the course of this call, we will make forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve risks and uncertainties regarding the operations and future results of McKesson. In addition to the company's periodic, current and annual reports filed with the Securities and Exchange Commission, please refer to the text of our press release and forward-looking statement slide for a discussion of the risks associated with such forward-looking statements. Please note that on today's call, we will refer to certain non-GAAP financial measures. In particular, John and Britt will reference adjusted earnings, adjusted operating profit and margin, free cash flow and items excluding foreign currency exchange effects. We believe these non-GAAP measures provide useful information for investors with regard to the company's operating performance and comparability of financial results period-over-period. Please refer to our press release announcing second quarter fiscal 2019 results and the supplemental slide presentation for further information and a reconciliation of the non-GAAP performance measures to the GAAP financial results. The supplemental presentation is useful in reviewing the fiscal 2019 versus fiscal 2018 results discussed today. Thank you, and here's John Hammergren.

Thanks, Craig, and thanks, everyone, for joining us on our call. For the second quarter, we achieved total company revenues of $53 billion and adjusted earnings per diluted share of $3.60. And we are narrowing and raising the low end of our fiscal 2019 adjusted earnings range to $13.20 to $13.80 per diluted share from the previous $13.00 to $13.80 per diluted share. I'd like to take a moment to provide an update on our board of directors and leadership team. Our board of directors welcomed Dominic Caruso as a new Independent Director in September. As the former Chief Financial Officer of Johnson & Johnson, Dominic brings with him significant financial and healthcare experience, which further strengthens the diverse backgrounds and perspectives we have on our board. Also, I'd like to welcome Brian Tyler to this call, following his appointment as President and Chief Operating Officer reporting directly to me. Many of you are familiar with Brian, as he has regularly presented at previous Investor Day events in Boston and has led nearly all of our businesses during his 21-year tenure at McKesson. I'll now ask Brian to talk about his vision around leading our global operations. Brian?

Thank you, John, and good morning, everyone. Well, I'm very excited about the opportunities that lie ahead of us. Clearly, there's a lot of work ongoing and work to be done. We have an impressive range of capabilities to build upon, combined with a great track record of execution. Having led corporate strategy and business development in many of our business units, I'm very energized about leading our operations as well as our strategic growth initiatives. We have faced and overcome many challenges during my time at McKesson. I continue to be encouraged by this company's resilience, its ability to navigate evolving market conditions and our strategic focus to improve long-term performance. Our enterprise-wide multi-year growth strategy, including priority areas that focus on manufacturer value proposition, specialty pharmaceuticals and the role of retail pharmacy, all supported by data analytics, are promising areas of innovation. And importantly, we already have strong foundational businesses from which to build upon. The anticipated growth in conjunction with streamlined and aligned operations is strategically and financially attractive. This focus positions us well for the changing landscape of healthcare. It allows us to leverage the strengths we've built in our world-class distribution platforms and services businesses, and we see substantial savings opportunities through the improved spend management, centralization of support functions and expanded outsourcing arrangements. Britt will discuss these operating model initiatives in more detail shortly. And with that, I'll turn the call back to you, John.

Thank you, Brian, and welcome to your new role. I'm delighted to have you in this important expanded responsibility. Before I dive into the details of the quarter, let me briefly touch upon the evolving landscape across healthcare, primarily around drug pricing and our relationship within the supply chain. When I think about potential new developments, I step back and look at how we've adapted to and driven change in the healthcare industry, how we've broadened our capabilities well beyond the core function of distributing pharmaceuticals, how our services drive affordability, access and quality, supporting the value we deliver and how I think about future drug price changes. To take a deeper dive into these areas, first, all of McKesson's brand pharmaceutical purchases are done in partnership with biotechnology and pharmaceutical, or as we refer to them, biopharma companies; unlike the industry standard practice before we had these distribution service agreements. Our relationships between wholesalers and their biopharma partners are now governed and driven by these agreements and have been for several years. The partnership with biopharma companies has led to increased transparency and a more stable and predictable supply chain with inventory levels that are appropriate to meet customer demands and service levels. We've continued to evolve our relationships, reducing the economic variability in our distribution agreements and reducing our reliance on pricing decisions made by biopharma companies to approximately 5% of our total branded compensation. As many of you know, we have been revising our terms when we renew agreements with our supplier and customer partners to encompass the broad array of services and capabilities we offer. We've implemented differentiated pricing across each category of product we provide services for; specialty, brand, generic, biosimilar and OTC classes of medicine. Our approach is designed to provide our suppliers and…

Thank you, John. Let's jump right into our second quarter results, and please note that unless stated otherwise, the underlying assumptions that were detailed in our fourth quarter press release are being reiterated today. As John discussed earlier, our fiscal 2019 second quarter results were ahead of our expectations. Turning to slide six of the presentation, second quarter adjusted EPS of $3.60 was principally driven by a lower tax rate, including a discrete tax benefit, a reversal of a contractual liability associated with our equity investment in Change Healthcare and a lower share count. These benefits were partially offset by incremental challenges in our UK and French businesses, previously announced customer losses, and increased litigation expenses related to opioids. Our second quarter adjusted earnings results excludes the following GAAP-only items; amortization of acquisition-related intangibles of $0.75 per diluted share, acquisition-related expenses and adjustments of $0.27 per diluted share, LIFO inventory-related credits of $0.08 per diluted share, restructuring and asset impairment charges of $0.34 per diluted share, and other adjustment net credits of $0.19 per diluted share. Before I continue with the review of our second quarter results, let me take a moment to discuss the increased opioid-related expenses, including anticipated costs for the remainder of fiscal 2019. Earlier this year, the State of New York adopted the Opioid Stewardship Act, which required the creation of an aggregate $100 million annual surcharge that's attributed amongst all manufacturers and distributors licensed to sell or distribute opioids in New York. The first annual surcharge is assessed for calendar year 2018, payable in January of 2019, and measured based on opioids sold or distributed in calendar year 2017. The New York Department of Health notified manufacturers and distributors of this new law in mid-May. Given the timing of this new law, we did not…

Thank you, sir. Our first question comes from Michael Cherny with Bank of America. Caller, your line is open.

Good morning and thank you for all the color so far. I want to tie a little bit into the broader picture of drug pricing. Britt, you reiterated your view on what happens at the beginning of the year, or at least for your guidance, if there's no increases in the typical January 1 timeframe. As you think about what that could imply for the changing dynamics of the market as a whole, especially with news this morning about apparent changes to Part B coming, how do you think about positioning yourself and contracting with manufacturers, contracting with customers in a world where there continues to be a moving target on what that reference rate and what that pricing dynamic could be over time?

Well, Mike, thanks for that question. I think I would reiterate that, again, we have changed our assumption on branded price inflation to the mid-single digits. And I would reiterate my comments, if pricing inflation does go away then we expect that, that range could be $75 million to $90 million. I would also remind you that we have talked about over time, how we've continued to evolve our relationships and our agreements with manufacturers, as well as evolving our relationships and agreements with customers. And we believe that it's important for us to put the economics on each individual product that we service to our customers so that it reflects the services that we provide on those products for manufacturers to our customers. And so we continue to have strong dialogue with both manufacturers and customers. We continue to work with them and partner with them and try to understand the evolving dynamics. And we'll continue to evolve our relationships and our agreements such that we're being paid a fair value for the services that we perform on each of the product categories that we provide to our customers and for our manufacturers.

Great. Thanks a lot. I'll let others ask questions.

Next we'll go to Lisa Gill with JPMorgan.

Great. Good morning. John and Brian – John, I appreciated your comments at the beginning, but I want to really try to understand how to think about McKesson going forward. So, we talk about drug pricing, we talk about changes that are happening in D.C. I heard you talk about your Life Science business and maybe make incremental acquisitions there. As you think about the different businesses that you have today, for example, international that hasn't worked quite the way you anticipated when you bought Celesio, how do we think about McKesson over the next few years? Does it make sense to continue to invest in that business outside the U.S.? Are there larger incremental acquisition opportunities you see within Life Sciences? And then, as we think about, for example, your oncology business and this changing dynamic around pricing, are there other acquisitions that you need to make? Are there business model changes that need to be made? I know this is a big question, but I think if we just think about how McKesson is going to be positioned over the next few years, I think it'd be really helpful to hear your thoughts.

Well, thanks, Lisa, for the question there. And clearly that was a big question covering lots of different subjects. I think that if you look at McKesson historically, we've done I think a really good job of managing our portfolio of businesses. So first, as you pointed out, we're not afraid to buy and sell businesses and to react where we see the market opportunities emerging. Clearly, Brian was a big part of that in his previous role in corporate strategy and business development and will play a very important role in his new capacity. We think we are in the right businesses at the right time. You mentioned a couple of times our McKesson Life Sciences business and our continued increased exposure to the biopharma industry and these new product launches that are coming out. We believe there's not only an opportunity for us to make money in our core distribution businesses related to this innovation, but perhaps as important, or maybe more important, a lot of these biopharma companies are beginning to turn to McKesson and our Life Sciences business to provide them with incremental support that helps them get the product to market, improve the adherence and compliance to these products, help the patient get access to both the drug as well as expert advice and support, and also get the right payment structure set up so these patients can qualify with their payers and health plans to be covered for the use of these medications. So, we feel really good about where we are and we think we're positioned properly. When you think about changes to the pricing dynamic, I think Britt did a nice job of outlining for you how much risk McKesson might have related to price inflation. We've tried to bound that risk…

Right. Thank you for all the comments. I appreciate it.

Yeah, welcome, Lisa.

And next we'll go to Eric Percher with Nephron Research.

Thank you. Thanks for all the detail on how your expectations have changed during the course of the first two quarters. Maybe one specific question, which is, as you laid out guidance for the year, did you expect that you might see the change benefit occur in fiscal year 2019?

Eric, thanks for that question. As we laid out, this was in connection with our original Change Healthcare transaction. It was not part of our original guidance. It was a negotiated agreement that happened during the second quarter. So we did not have that visibility as we laid out our original guidance, and it was not included in it.

Okay. And, Britt, could you rank order the items that have created headwinds as you entered the year? I want to make sure we have some sense of the magnitude for these moving items.

Yeah, thanks, Eric. I think, as we've called out here, certainly Europe has been a challenge for us. And I think we've laid out for you some of the dynamics that have created that challenge. We did lay out for you in our U.S. Pharmaceutical and Specialty Solutions segment that, before the year, we did have some customer losses, and those customer losses were anticipated. They were part of our guide. And from a year-over-year basis, they have created a headwind for us. Beyond that, we also laid out for you at the beginning of the year the Canadian reimbursement or Canadian generics price decline. We laid out for you what the gross headwind was there. We've made tremendous progress in mitigating that. And as I laid out, we believe we've mitigated over half of that and should start to see some of the benefits in the second half of the year. But we obviously have felt the impact on that the first half of the year. And then we've continued to make investments in our business, and I talked about some of the planned technology investments that are running through our Corporate segment. We believe that these are going to help us optimize our cost structure and our model going forward. And while there are headwinds this year from a cost perspective, these are the investments that are going to really give us the type of flexibility that we need as we go forward. And then the last thing that I would point out is I gave more description on it certainly this quarter are the costs related to opioids and the opioid-related expenses. And as I pointed out, we have experienced a significant amount of costs in our first half of the year and I also tried to provide you and what our estimate is going to be for the full year on these opioid-related expenses. So I don't know if that's a perfect rank order for you, but I wanted to really summarize for you the headwinds and how we've made progress against some of these headwinds, particularly in Canada.

Thank you.

Your next question comes from the line of Brian Tanquilut with Jefferies.

Hey. Good morning, guys. As I think about the performance during the quarter, U.S. pharma still beat despite brand pricing coming in below expectations. So is that just generics driving that? And then, what are your expectations on generics going forward? And what are you seeing there in terms of pricing trend and contribution to the P&L?

Thanks Brian for the question. I'll ask Britt to talk specifically about pricing trends as we see it both on, sort of, the buy side of generics as well as what we're seeing on the sell side. But speaking at a higher level related to our U.S. Pharmaceutical business, I would say that we are beginning to see a very nice stabilization of that business. We talked about customer churn coming into the year. We believe strongly in our value proposition, and we continue to create great relationships with our customers, and I think we see that business reaching a point of recovery with the potential outlying risks still associated with what happens from a pricing model perspective related to governmental changes or big pharma, biopharma policy changes. But maybe he could talk specifically about generics.

Sure, and what I would add to that, certainly we're seeing that stabilization in our U.S. Pharma business. We're also seeing really strong growth in our Specialty Solutions business, and John talked about that at the beginning of the call. So that's also embedded in there. In terms of how we think about pricing on the generic side, we've talked about this now for the last couple of quarters. On the sell side, we continue to see a very competitive yet stable environment. And on the buy side, we have seen that the rate of deflation has stabilized over the last several quarters. And in some product categories, we are seeing certain molecules and product categories firming up from a price perspective on the buy side. So the environment overall is in a more stable state than it has been in the last – or that has been 18 months ago. And we're certainly in a great position with our ClarusONE sourcing operation to continue to create great buying opportunities that we can provide good cost savings for our customers, as well as to really create that spread between the buy side and the sell side. So we're very confident in our ability to continue to source well through ClarusONE with a more stabilized environment, it really sets us up quite nicely.

Thank you.

Your next question comes from the line of Robert Jones with Goldman Sachs. Robert Patrick Jones - Goldman Sachs & Co. LLC: Great. Thanks for the questions. Hey, Britt, just to follow up on the back-half guidance specifically on the U.S. business, you're now expecting it to be down towards the bottom end of the range, down mid-single digits. It seems like obviously the declines in the back half would be worse obviously than the front half in order to get to that bottom of the range, and you did share some of the moving pieces and expectations. But could you maybe just break out for us again, of the expected decline in the back half, how much of it is from the anticipated opioid expense versus some of your changes and assumptions around things like branded pricing?

Within the U.S. Pharmaceutical and Specialty segment, we do have certain costs related to the New York State Stewardship. So that will be in a part of our second half. And as we think about branded price inflation, we did give you an updated assumption around our guidance. So at the beginning of the year, we gave you mid-to high-single digit assumption for branded price inflation. We've now updated that to give more of a mid-single digit price inflation assumption. So those would be the two pieces that I would call out that have helped us to clarify for you our guidance assumption around closer to the lower end of our original range for U.S. Pharma. Robert Patrick Jones - Goldman Sachs & Co. LLC: That's super helpful. And then, Britt, just one follow-up on the free cash flow. I think it's about, what, $70 million through the first two quarters? You're still sticking with the $3 billion for the year. Can you maybe just help us understand what bridges that gap? What are some of the timing issues at play as far as cash flow for the back half?

Sure. As I mentioned, you're right. It's $70 million of free cash flow in the first half of the year. Typically, we do see, because of seasonality, also because of just the timing of how certain customer payments happen during the year, that our fourth quarter is our strongest cash flow performance. And we expect that to continue again this year. So our first half of the year, as I mentioned, is slightly ahead of our own internal expectation, and we would continue to expect to generate $3 billion with a stronger second half performance, which is typical to prior years. Robert Patrick Jones - Goldman Sachs & Co. LLC: Got it. Thanks.

Your next question comes from the line of Steven Valiquette with Barclays.

Great. Thanks. Good morning, John and Britt. So just in relation to the UK pharmacy operations, the other publicly-traded company with large retail pharmacy operations in the UK seemed to be performing maybe a little bit better relative to your operations. I know there are some differences in revenue and profit mix between pharmacy versus front end when comparing these operations, but the two quick questions I have tied to this is, one, is there any strategic consideration on your part to perhaps diminish your exposure to pharmacy and focus more on front end in the UK? And then just quickly, number two on this, you mentioned in the press release you continue to have conversations with the UK government to discuss the value-added pharmacies, low-cost setting of care, et cetera. It's unclear just from the outside whether or not these types of lobby efforts have really helped to improve any reimbursements. I was just curious to just, generally, have there been any historical examples you can recall where some overly aggressive UK reimbursement cuts were perhaps reversed and there was some relief for pharmacy providers? Thanks.

Well, I think those are very important questions, and it's terrific to have Brian on the call given that his most recent responsibility was to run our European operations. And he, in particular, spent a lot of time in the UK both in terms of the operations of the UK, but also the political environment of the regulators. So Brian, why don't you take that question for us?

Sure. Thanks, John. Thanks for the question. So I'd start with the first question of mix, and clearly the model of some of our competitors is quite different than the model we have in the UK. They tend to be much more front shop, health and beauty focused, might comprise as much as 60% to 65% of their overall mix where historically we've been a very healthcare, pharmacy-focused organization with roughly 85% to 90% of our mix from the Pharmaceutical segment itself. As we think about the front shop of that business, we continue to think about how we migrate to an overall healthcare value proposition, which puts retail pharmacy more in the front and center of the provision of care in the community. That could impact the mix of types of products we put in the front shop, and we're actively working through our merchandising strategies in that regard. The second thing you asked about, I believe, was just NHS policy overall, and we continue to be in very active dialogue with the regulators in the UK to champion our view. And we believe it's a view they actually share, that community pharmacy plays an important role in the overall population health of the communities that they serve. And so we continue to evolve our model in that direction. Clearly, the reimbursement landscape has been a challenging one for us, not just in the magnitude of the cuts we absorb, but in the difficulty of predicting when and how those cuts have hit us. I would say we are encouraged by the dialogue we're having, and you would see earlier this week, in fact NHS announced that they are going to keep the reimbursement rates for pharmacy flat for the coming year, where the original intent had been to impose some more decline. So, we view that as certainly incrementally positive news for us. I guess I'd just leave you with the thought that the team there is actively engaged on the policy arena, we're actively engaged with manufacturer partners as we reposition this business. And we continue to believe that it will play an important part in provision of health care in the UK.

Okay. That's very helpful. Thanks.

Yeah, thanks, Brian. Next question, please.

Next we'll go to Ross Muken with Evercore ISI.

Hi. Good morning, guys. Given sort of where the stock is trading today, both on a sort of EBIT, EBITDA or P/E basis and where the free cash flow yield is, I guess, how are you thinking about kind of internal versus external investments? And I guess that – I know you've always been balanced in how you've done it, but obviously this is really unique time in terms of valuation for your business. And then secondarily, on the M&A side, you had done some things on the technology front. You've moved into a couple of higher growth areas also in Med-Surg, as you talked about at Life Sciences. How would you, kind of, characterize the pipeline for some of those growthier assets and whether you think you're getting paid for some of those businesses you're moving into, kind of getting back to the original question, and the multiple that the market's implying for you overall?

Ross, thanks for that question. I'll start and then John can certainly add to this. From a capital deployment perspective, I would just reiterate my comments that we did repurchase shares in the second quarter, $580 million. We believe that a balanced approach still is appropriate for us. You've seen us balance our capital deployment during the year. We've made investments such as MSD. We've also returned capital. So we've really been very balanced this year in terms of cash. We like businesses like MSD because they provide good growth opportunities for us. They're in businesses that we know and have operated for a long period of time. They also fit into our strategic growth initiatives, so where there's opportunities such as MSD, we're certainly going to take advantage of looking at those and evaluating those. We also believe, though, that our shares are attractively priced. And we talked about the share authorization that is still outstanding. Our management and board both feel that the shares are attractively priced, and we've continued to execute share repurchases as a result of that. And John, if you want to add to the M&A pipeline?

Well, clearly, we are in the market. We're always active in the market evaluating transactions, and I think we make long-term bets on where we think the growth is going to be. To your point, some of the – in fact all of the recent acquisitions are performing very well for us and are producing returns that are significantly above our long-term cost to capital. We look at cash flow generation out of these businesses, and that's an important characteristic. And we can see our path to growing that cash flow. So, we're going to continue to use that combination. We're going to be disciplined. Clearly, the value of our own stock at these rates is, on a relative basis, improving in its attractiveness to us. And we're not blind to that, and we'll continue to be disciplined.

Thank you. I'll look forward to that.

You're welcome.

I think we have time for one more, operator. Alan?

Yes, sir. We'll take our last question from Ricky Goldwasser with Morgan Stanley. Ricky R. Goldwasser - Morgan Stanley & Co. LLC: Yeah, hi. Good morning and thank you for all the details. John, both Gilead and Amgen announced their lower WAC for some existing product. Can you share with us your views on what are you seeing the implications are for the industry, and if you had conversations with the manufacturers on what that means to your existing contracts?

Well, we have constant conversations with manufacturers, Ricky, as you know, and as we've said earlier on the call and on other calls, we are very focused on making sure we get a fair return for the value that we deliver to these manufacturers. We can't control what they do from a pricing perspective, but we certainly have a significant relationship that delivers tremendous value to the manufacturers and gives them access to our customers, most of which buy only from us, in a way that is really important. We continue to evaluate the economics of these changes from a price perspective, and we plan to maintain the economics that we've realized in the past on these products, certainly regardless of where the price point gets set. So that's our position, and we believe the manufacturers respect that and will continue to provide us with the right payment for the service that we continue to provide.

I want to thank everybody on the call today for your time. McKesson continues to execute against our fiscal 2019 plan, and I'm excited about the opportunities ahead of us. I want to recognize the outstanding performance of our employees and their contributions to help our customers improve lives and deliver opportunities to make better health possible, and especially their commitment to helping their communities and each other during times of need. I'll now hand the call over to Craig for his review on upcoming events for the financial community. Craig?

Thank you, John. I have a preview of upcoming events for the financial community. On Tuesday, November 13, we will present at the Credit Suisse Healthcare Conference in Scottsdale, Arizona. On Tuesday, November 27, we will present at the Evercore ISI HealthCONx, the conference in Boston. And in early January 2019, we will present at the J.P. Morgan HealthCare Conference in San Francisco. We will release third quarter earnings results in late January. Thank you and goodbye.

That does conclude today's conference. We thank everyone again for their participation.