McKesson Earnings Call Insights: Healthcare IT Business and Global Scale

McKesson (NYSE:MCK) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Healthcare IT Business

Glenn Santangelo – Credit Suisse: Just two quick ones if I could. John, in your sort of prepared remarks you talked about the healthcare 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.

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John H. Hammergren – Chairman, President and CEO: I think certainly the first thing is we won’t have some of the one-time 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 planned to put into discontinued operations, obviously won’t be part of our adjusted earnings going forward. 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.

Glenn Santangelo – Credit Suisse: Maybe if I could just ask one follow-up on the Distribution segment. 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 talk about. Then 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 share because of the impairment. Did I hear that correctly?

Jeffrey C. Campbell – EVP and CFO: Well, let me be very clear. So if you look at FY ’13, Glenn, 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 the 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 to two things. Number one, as we’ve been talking about for a very long time, you have a really unprecedented one-year drop in our fiscal year, in the number of brand to generic conversions, 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 businesses is mostly brand. So, you have really factored into that margin rate assumption for FY ’14, both the brand to generic conversions downside and the fact that you’re going to have a big revenue number, that obviously has a dampening effect on the margins.

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Global Scale

Ricky Goldwasser – 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?

John H. Hammergren – Chairman, President and CEO: 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 shareholders. I think we have significant scale today. 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 are doing a great job for our customers and we will remain very well positioned. But that does not mean that we are not going to continue to evolve and innovate for the future and the partnership we referred to that was recently announced is an important industry move but it’s not going to change our strategy. 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.

Jeffrey C. Campbell – EVP and CFO: Ricky I’d also just on the specific question of Mexico, remind you that this is a minority investment for us. 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…

John H. Hammergren – Chairman, President and CEO: 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 U.S. and Canada has proven to be quite effective. So I think had we perhaps had a different position in Mexico we would’ve had a different result.

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Ricky Goldwasser – Morgan Stanley: 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 are thinking about that number correctly and then as we think about fiscal year ’14 guidance, I think the reported number was 207. Once we back over that we get back of the envelope to around 2.20% to 2.22%. Should we use that number as we model fiscal year ’14?

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

Ricky Goldwasser – Morgan Stanley: That includes already the deposited margin contribution from PSS?

Jeffrey C. Campbell – EVP and CFO: Correct.

A Closer Look: McKesson Earnings Cheat Sheet>>