McKesson, Inc. Earnings Call Nuggets: Direct Customer Revenue Growth, Margins

On Monday, McKesson, Inc. (NYSE:MCK) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Direct Customer Revenue Growth

Thomas Gallucci – Lazard Capital Markets: First one just on the quarter to follow-up on some of your comments in your remarks. You said direct customer revenue growth was stronger due to the growth of some of your consumers, Can I assume that those were bigger customers that were probably a little bit of a lower margin?

John H. Hammergren – Chairman, President and CEO: Yeah, that’s a fair assumption Tom. There’s been some moving parts in the industry that have caused some of our larger customers to grow a little more rapidly than otherwise and I think that’s what’s reflected in those numbers.

Thomas Gallucci – Lazard Capital Markets: Then just thinking about the outlook, you guys mentioned some of the headwinds and tailwinds and quarterly ups and downs throughout the year. Can you just comment maybe at a high level your thoughts on generics and how that may affect the quarterly progression?

A Closer Look: McKesson Earnings Cheat Sheet>>

Jeffrey C. Campbell – EVP and CFO: Well, as I said generics are an important driver for us in FY ’13, given the unprecedented year in oral generics. As we’ve also talked about of course it’s a down year for specialty generics. I’d really come back to the fact there’s other items that are just as big driving some quarterly volatility. So the guidance I gave at the end there for the effect on EPS by quarter, where in particular for the June quarter, as a percentage of our total year’s earnings, we’d expect it to look actually pretty similar to last year and it will – the results will again be back half loaded pretty similar to last year. So, a lot of the differences in the oral generic launch calendar are getting offset by some of the other timing differences we see year-over-year.

Margins

Lisa Gill – JPMorgan: Jeff, just as we look at bulk versus direct store deliveries, can you just remind of – on a relative magnitude the difference in the margins between the two? As we think about that next year, do you expect these increases in volumes to continue with these customers or is this more related to the Walgreens Express Scripts dispute?

Jeffrey C. Campbell – EVP and CFO: Well, the Walgreens, Express dispute certainly drove some traffic everywhere else in the industry and many of our customers benefitted from that and therefore us. The increase at least in the warehouse revenues is really driven by the small handful of customers for whom we do warehouse business, I’d remind you that we only do warehouse business as part of a broader service offering to these customers where we do lots of direct store delivery, the warehouse revenues themselves already very low margin which we don’t disclose but are an important part of the broader service offering to these customers. When you look at 2013 because the increase is more importantly driven by some of the new business that our customers have won we would actually expect double digit growth in the warehouse revenue line in 2013.

John H. Hammergren – Chairman, President and CEO: I might recall there was a large contract that changed hands between one of our competitors customers and one of our customers and as a result our warehouse revenue for the next three quarters had a minimal will be growing nicely as a result. To Jeff’s point though it does come in with low margin puts a little pressure on us from a mix perspective in terms of driving our margin rate up but we did guide to margin rate increase for the year and basis points we talked about earlier. So, even with that pressure I think we can still get good leverage in our business and we are pleased that our customers are winning and we get to reflect that through our revenues as well.

Lisa Gill – JPMorgan: Then, John, just as a follow, VA, obviously congratulations on keeping that contract. Can you comment at all if anything has changed within the contractual relationship, obviously, that the pricing was public but how should we think about that in context to some of your other customers; number 1, and number 2 are there any new services that you will be providing to VA that you didn’t previously provide in this new contract?

John H. Hammergren – Chairman, President and CEO: As we said earlier, we are really pleased that we were able to win that award and renew that relationship and we are very happy about that. The contract itself has some nuances associated with it, but I think it largely is similar to the contract we had before. As it relates to other customers though, this customer is unique in its approach and the contract reflects its uniqueness in terms of the way it vibes and the way it behaves. So, we had an eight-year run understanding how the VA contract worked for us, and clearly that gives us good insight as we put our proposal in and fortunately allowed us to win that award. We don’t believe other customers have any confusion about the uniqueness of the VA. So, we’re hopeful that we’ll continue to move forward with them like we have in the past as well.