McKesson Earnings Call Nuggets: Internal Budgets and Drug Distribution Outlook

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

Internal Budgets

Thomas Gallucci – Lazard Capital Markets: I guess first question, just on the margins in the distribution space. Clearly, you beat the street by a lot. I was curious how much did you beat your own internal budgets by for the quarter itself; and what were the key drivers there?

John H. Hammergren – Chairman, President and CEO: We state our assumptions with you guys every year annually about our expectations for the year, and I think that most of the businesses performed in line with where we thought they were going to be. Clearly, U.S. Pharma had a very strong quarter and a nice start to the year, and as we both mentioned, I think that performance was primarily driven by the performance of generics. It helped carry us above what we had expected originally, and it helped us deliver a nice solid quarter.

Thomas Gallucci – Lazard Capital Markets: And by that, you’re talking about pricing, I guess John?

John H. Hammergren – Chairman, President and CEO: Well, it was really across the board. Clearly pricing played a role, but we also I think executed some very nice growth in our OneStop Generics program, and we had some customers that were buying off of our portfolio in a more aggressive way than even we would’ve anticipated. So I think all in all, it was the overall generic offering that we have, and benefited by some price inflation from our suppliers.

Thomas Gallucci – Lazard Capital Markets: Can you offer an update on the CFO role?

John H. Hammergren – Chairman, President and CEO: We’re continuing to make good progress on our search for a replacement for Chief Financial Officer. I have to; once again, thank Nigel Rees for the great work he is doing as interim Chief Financial Officer. He has been a long-tenured executive, 12 years with us, and we have just a terrific financial organization. As you noticed, we’ve got Erin, who will be stepping into Jeff’s shoes as it relates to this conference call, and the preparation for this call. The depth of the financial organization is really showing as we go through this period of transition. I’m hopeful that we will make progress on a selection of a replacement, and we will build to move on with the kind of quality which you’d expected from us.

Drug Distribution Outlook

Lisa Gill – JPMorgan: I was wondering if maybe you could just talk about, John, in the quarter – or Erin, you talked about it being unusually strong, but how much of this was pull-forward from other quarters versus what we’ve seen historically, and what is your outlook around drug distribution as we move forward just given what we’ve seen in this first quarter?

John H. Hammergren – Chairman, President and CEO: Well, clearly, it was a very strong quarter for the quarter and the year, and we’re really pleased with our results. You can see in that we’ve taken our guidance up for the year that we do believe that this outperformance in the quarter is not an entire pull-forward of future quarters. Having said all of that, there are nine months left in this year, and we have a significant dependence, as you know, on brand price inflation, and much of that we anticipate will come in the latter half of the year. So, it’s really too early to call success, but I think the ability for us to take the guidance up, at least early in the year like we have this quarter, is some indication of our view of the strength of the business.

Lisa Gill – JPMorgan: Then, John, I guess my follow-up question just would be that, in the past we’ve talked about international expansion, and clearly, things are going pretty well in Canada but you’ve exited Mexico, can you just give us updated thoughts on global purchasing and where McKesson stands on thoughts around getting into other areas of the world from a distribution perspective?

John H. Hammergren – Chairman, President and CEO: There’s really two questions there; one is the question of global sourcing in our – the scale and buying power and the ability for the team to execute it. I think, once again, the strength of our performance in generics (from) most of the scale – I should say the scale matters most, is evidence of the fact that we continue to execute very well there. And it really is a combination of not only important scale, but the ability to be adroit in terms of opportunities and take advantage of our relationships, and to build value both for our customers and our suppliers. We’ve been doing the global sourcing thing now for a long time and have built a significant amount of expertise in it. As it relates to distribution in other markets, clearly we have done a nice job in Canada. Our position there has continued to perform well over many years, and they show evidence of our ability to manage beyond the borders of the United States. Having said that, our disciplined approach to capital deployment remains, and we’ve built a strong track record of doing smart things with our shareholders’ money. The first thing is that things have to financial sense and strategic sense before we move forward, and we have to be able to obvious feel we can execute against the opportunities that are in front of us. So, we think scale is important but executable scale and a simplicity to the approach, I think is very important.

A Closer Look: McKesson Earnings Cheat Sheet>>