Mckesson Corporation (MCK) — Q3 2016 Earnings Call Transcript

Thank you, Mellissa. Good afternoon, and welcome to the McKesson Fiscal 2016 Third 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 brief 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. 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 that on today's call, we will refer to certain non-GAAP financial measures in which we exclude from our GAAP financial results the amortization of acquisition related intangible assets, acquisition expenses and related adjustments, and LIFO related adjustments. We also refer to certain non-GAAP measures calculated on a constant currency basis. We believe these non-GAAP measures will provide useful information for our investors. Please refer to our press release announcing third quarter fiscal 2016 results available on our website for a reconciliation of non-GAAP performance measures to the GAAP financial results. Additional information on constant currency effects is available in our SEC reports. Thank you. And here's John Hammergren.

Thanks, Erin, and thanks everyone for joining us on our call. As we had an opportunity to speak with many of our investors since we last provided an update just a few weeks ago on January 11, I'll keep my remarks fairly brief this afternoon. In a moment, I'll turn the call over to James, and he will walk you through our results for the third quarter. But before I do, I have three key messages I want to leave you with today. First, there have been no changes to the fiscal 2016 outlook and preliminary fiscal 2017 outlook, which we provided on January 11. We continue to expect adjusted earnings per diluted share of $12.60 to $12.90 for fiscal 2016. Second, our third quarter results were right in line with our revised expectations. I'm proud of the excellent progress we've made in expanding our global pharmaceutical sourcing scale, delivering operating margin improvements in our Technology Solutions segment, and successfully executing on the Celesio acquisition synergies. And third, I have great confidence in our future. As we enter the final months of fiscal 2016 and look to the future, I am as confident as ever in our industry and the unique role we play in making the business of healthcare more efficient. I'm confident McKesson, our focus on innovation in our customer-first mindset has propelled us to be leaders in the markets we serve. And most importantly, I'm confident in the extraordinary team we have at McKesson; we are truly the best in the business. Our businesses are very well positioned, both domestically and internationally. And we have a tremendously strong balance sheet, which we will continue to deploy effectively and strategically to deliver long-term value for our shareholders. Year-to-date we repurchased approximately $850 million of our common stock. We paid nearly $1 billion of long-term debt, made internal capital investments of $417 million, and paid $179 million in dividends. We ended the third quarter with approximately $3.4 billion in cash, and our expectation to deliver cash flow from operations of approximately $3 billion for fiscal 2016 remains unchanged from our original guidance. With that, I'll turn the call over to James to review our third quarter results, and we'll return to address your questions when he finishes. James?

Thank you, John. And good afternoon, everyone. As John discussed earlier, we provided our updated view on fiscal 2016 earnings on January 11, and we continue to expect adjusted earnings per diluted share of $12.60 to $12.90. Our results this quarter are consistent with our revised expectations. I will now review our third quarter consolidated financial results. As a reminder, Schedule 3 of the accompanying tables to our press release includes supplemental constant currency information to outline both the dollar and percentage impact of currency movements on our reported results. During the third quarter and the first nine months of our fiscal 2016, our reported adjusted earnings per diluted share included currency headwinds of approximately $0.03 and $0.11, respectively. Therefore, during my prepared remarks, I will reference both the reported and constant currency figures. Now, let's move to our results for the third quarter. My remarks today will focus on our third quarter adjusted EPS from continuing operations of $3.18, which excludes three 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 and 3. Consolidated revenues increased 3% for the quarter to $47.9 billion. Revenues were negatively impacted by $1.1 billion as a result of foreign currency rate movements. On a constant currency basis, revenues were $49 billion, an increase of 5%, led by growth in our Distribution Solutions segment. Adjusted gross profit for the quarter decreased by 3% to $2.9 billion. On a constant currency basis, adjusted gross profit was flat to the prior year driven by the performance of distribution solutions, primarily reflecting the impact of a weaker year-over-year profit contribution from generic pricing trends offset by growth across our other domestic and international businesses, and continued progress on procurement synergies related to our acquisition of Celesio. Total adjusted operating expenses of $1.8 billion were down 5% for the quarter on a reported basis and down 1% on a constant currency basis driven by diligent cost management in both segments and the sale of our nurse triage and ZEE Medical businesses earlier in the fiscal year. Adjusted other income was $14 million for the quarter. Interest expense of $87 million decreased 6% on a reported basis and 5% in constant currency. Now moving to taxes, this quarter's adjusted tax rate of 25.5% was driven by both a favorable mix of income and certain favorable discrete tax items which totaled approximately $0.07, primarily reflecting recent Celesio changes in both the U.S. and Europe during the third quarter. For the full year, we continued to expect our adjusted tax rate to be approximately 29.5%. Adjusted income for the quarter was $739 million, with our adjusted earnings per diluted share at $3.18, up 9% on a reported basis and up 10% in constant currency. Wrapping up our consolidated results for the third quarter, diluted weighted average shares decreased 2% year-over-year to $232 million. During the third quarter, we completed a share repurchase of common stock totaling $350 million. In fiscal year-to-date, we have repurchased approximately $850 million in common stock. Overall, we expect to continue our portfolio approach to capital deployment, which reflects a mixture of internal capital investments, acquisitions, share repurchases, and dividends, and we continue to expect our weighted average diluted shares outstanding will be $233 million for the full fiscal year. Now let’s turn to the segment results which can be found on Schedules 3A and 3B. Distribution Solutions segment revenues of $47.2 billion were up 3% on a reported basis. Revenues were negatively impacted by $1.1 billion as a result of foreign currency rate movements. Constant currency revenues were $48.3 billion for the third quarter reflecting growth of 6%. North America pharmaceutical distribution and services revenues were $39.6 billion in the third quarter, up 6% on a reported basis and 7% on a constant currency basis. Third quarter revenues primarily reflected market growth in our U.S. pharmaceutical Specialty and Canadian businesses, offset primarily by the expiration of a customer contract at the start of the third quarter. International pharmaceutical distribution and services revenues were $6 billion for the third quarter. International revenues were impacted by approximately $700 million in unfavorable currency rate movements, primarily attributable to a weaker euro relative to the U.S. dollar when compared to the prior year. Adjusting for this currency impact, revenues were approximately $6.7 billion in the third quarter, down 1% on a constant currency basis, primarily reflecting the loss of a hospital contract in Norway during fiscal 2015, partially offset by continued growth in our U.K. business. Medical-Surgical revenues were flat year-over-year, primarily driven by market growth in our primary care business, offset by the sale of the ZEE Medical business in the second quarter. Distribution Solutions adjusted gross profit of $2.5 billion decreased 3% on a reported basis and increased 1% on a constant currency basis to $2.6 billion. Overall, the third quarter adjusted gross profit reflected our mix of business including a growing proportion of specialty pharmaceuticals, a weaker profit contribution from generic pricing trends when compared to the prior year and continued progress on driving Celesio-related procurement synergies. Adjusted operating expense for the segment decreased 5% for the quarter on a reported basis. On a constant currency basis, segment operating expense was flat year-over-year, primarily driven by expense management and the sale of the ZEE Medical business during the second quarter. Segment adjusted operating profit of $1.1 billion was flat on a reported basis and grew 2% on a constant currency basis. The segment adjusted operating margin rate for the quarter was 224 basis points, a decline of 8 basis points year-over-year. On a constant currency basis, the segment margin declined 9 basis points primarily driven by the adjusted gross profit result. Generic pricing trends are anticipated to be weaker during the second half of our fiscal year as we outlined on January 11. Therefore, we now expect the Distribution Solution segment adjusted operating margin to be relatively flat to the prior year. Turning now to Technology Solutions. Revenues were down 8% for the quarter to $694 million. This decline was primarily driven by the sale of our nurse triage business in the first quarter and the anticipated revenue softness of the Horizon Clinical software platform, partially offset by growth in our other technology businesses. During the quarter, adjusted operating expenses in the segment decreased 7% on a reported basis and 6% on a constant currency basis, driven by our ongoing expense management efforts and the sales of the nurse triage business. Third quarter adjusted operating profit for the segment increased 7% to $133 million. And the adjusted operating margin rate was approximately 19%, representing an increase of 274 basis points versus the prior year. On a constant currency basis, adjusted operating profit increased 2%, representing an adjusted operating margin increase of 180 basis points versus the prior year. This increase was driven by strong performance in our Payer Solutions and Relay Connectivity and Medical Imaging businesses. For the full year, we now expect the adjusted operating margin for the segment to be in the low 20% range. Moving now to the balance sheet and working capital metrics. As you 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. For receivables, our days sales outstanding were relatively flat at 26 days. Our days sales in inventories increased by 2 days to 33 days. Our days sales in payables increased by 3 days to 54 days. We generated $566 million in cash flow from operations during the first 9 months of fiscal 2016. And 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 $3.4 billion, with $2.4 billion held offshore. For the 9 months ending December 31, we had $417 million of internal capital spending, repurchased approximately $850 million in common stock, repaid approximately $1 billion in long-term debt, and paid $179 million in dividends. Now I’ll turn to our adjusted EPS outlook for the year. As I mentioned earlier, we continue to expect fiscal 2016 adjusted earnings per diluted share of $12.60 to $12.90. Our outlook assumes a full year average exchange rates of $1.10 per euro, which is unchanged from our prior guidance. In addition, we now expect $1.27 per share in amortization of acquisition-related intangible assets and $0.31 of acquisition expenses and related adjustments. We also expect between $0.72 and $0.82 per share in LIFO related adjustments. In summary, McKesson delivered results consistent with our revised expectations for the quarter. Looking ahead to fiscal 2017, we expect to leverage the core operational strength and scale of our leading global businesses and our longstanding portfolio approach to capital deployment to create value for our shareholders, customers, and business partners. Thank you. And with that, I will turn the call over to the operator for your questions. In the interest of time, I ask that you limit yourself to just one question and a brief follow-up to allow others an opportunity to participate. Melissa?

First question is on kind of a distribution segment operating margin. When we look at gross for the North America business in a normalized basis about up 7% year-over-year, it's kind of like the disclosed level that we've seen since fiscal year '14. So should we think about this as kind of a new market growth for the segment, and is HCV kind of like the key factor there that kind of like contributed to that mid-teen growth in the last 18 months that we should – that have kind of like normalized and will do so going forward?

Well, the first part of your question I would expect that, is our normal cause give you more of a steer for FY17 margins when we do our update in early May. So as it relates to what is being impacting the margin thus far is obviously, we've spoken extensively about the impact for generic price increases. And that's really been the driver of that margin results the DS function. Could you just repeat the second part of the question?

Yes. The question was really not about the margin, it was more about the top line for the distribution solution for North America. It's kind of like up 7% in the last kind of like 18 months, we've seen this growth in kind of like low to mid and even high teens. So the question really is the two parts toward, like forward-looking is 7% the new growth rate and then when you look at what's driving the slowdown, is it kind of like did you see an abnormal growth from HCV?

We had a very large - we have a very large customer in the mail business that had some significant year-over-year progress in terms of customer wins. You saw us benefit from a revenue perspective that helped push us into double digits in addition to the launches of some of these specialty drugs. So the combination of those two events were probably the things that propelled us from the revenue perspective. The 7% from my perspective at least now is more consistent with what we think the market underlying growth rates are probably running out today. Obviously, there are some minor changes in what we might see from a mix perspective, and I think to James' point is probably a little premature for us to talk about FY17 revenue forecast. But I think we're probably going to grow like we are today in line with the market, it's just a question of any customer changes that might happen during the year either customers of ours that are winning or losing business or when on occasions sometimes we lose a piece of business like we did with a large mail to customer just recently.

Okay. And then just one follow-up on the gross profit margins – actually third quarter gross profit came in a little bit better than we've kind of like expected and seems – you're still seeing kind of like benefit from kind of like buy side margin. So when we think about the new guidance that you provided a few weeks ago, should we think about kind of like this quarter to third quarter it's kind of like the last quarter we should think about modeling as like seeing a benefit on the buy side from generic information? And from this point on we should think like a bad, like a slowdown or like modulated, like the 0% that you've highlighted a few weeks ago?

Well, I would emphasize our view around generic price inflation was normal, so not zero, but certainly modest – certainly significantly down from when we came into this fiscal year with much higher expectations.

So there is really no change in what we said to you on January 11. Things are coming through as we had sort of expected.

On the administrative cost structure review, you guys shared earlier this month. Just looking back over the last few years and trying to adjust for acquisitions like PSS and Celesio. It looks to us that SG&A has grown somewhere in the 10% range per year. As we think about the cost structure review and some of the client attrition you've experienced over the last year, how should we think about the right level of annual SG&A growth? Just any progress you guys have made. I know it's early, but any progress you've made in that review details behind it will be helpful for us.

Well, it is early in our work. Obviously, this is something that we did embed within the preliminary guide that we offered a couple of weeks ago for fiscal '17. But we're going through the detailed work now. We do think that there is opportunity and I've noted before that that opportunity would likely drive a one-time charge in Q4 of the current quarter. And will be able to hence provide an update in May. But certainly we feel that there is some opportunity.

And Robert, I think it's probably fair to say that looking at our SG&A without all of the acquisition noise that comes in and goes out and certainly currency fluctuation are really – if you look at our internal numbers in our calculations, our SG&A is normally growing in the low single digit kind of range. So we typically don't average at a 10% increase in SG&A; that would be way outside the boundaries if you look on a base core expense kind of trajectory; it's nowhere near that. So I think you might see some abnormalities occasionally because of M&A and how that flows through, as well as some of those currency stuff that I think over time you should expect our SG&A to grow more to those single digit rates, once we get passed at some of this work we're doing today on administrative costs.

Got it. I guess there is a lot of focus on the pharma business maybe just on medical. It looks like it was essentially flat revenue growth there both sequentially and year-over-year. I think originally what you guys were talking about mid-single digit type growth for this year. So I guess what's changed relative to your original expectations and then any thoughts about the trajectory of the medical business growth from here will be helpful.

With medical surgical revenues, we updated our guide quarter or so ago to be low to mid single digit revenue growth, and that was driven by our sale of ZEE Medical. So we talked also about the strength of the primary care business within medical surgical. And there were some challenges on the extended care side, but overall we're very pleased with the continued development of the business.

I think you have to net it for ZEE; that's probably the thing that most people miss when they look at those numbers. So we don't adjust those out. They are in our adjusted numbers with you and your reflection.

No, not really. And we've seen a little bit of weakness in flu, but that's not going to be something you're going to see dampen our overall revenue to significant extent. It really is the sale of ZEE.

I guess for me just a quick question on the expected antitrust litigation settlement gain for fiscal '17 that you alluded to a few weeks ago. And that extra $70 million year-over-year adds an extra $0.20 or $0.25 in fiscal '17 that we assume normal tax rate, which is fine. But just, is there any chance you can walk through the drivers of aerodynamic so what's going on there just to better understand? And why those gains were greater fiscal '17.

These things come through in unforecastable and sometimes lumpy fashions. It's really just a single settlement. It's quite large by comparison to others that we receive and certainly by comparison to other years, so I think that’s really it.

Yes. And the case is quite far along, which is why we felt it was sensible to make an assumption that we would enjoy that $140 million benefit in fiscal '17.

The other real quick on is just the $0.85 that you talked about for - you're heading fiscal '17 from a combination of a generic pricing and customer transitions. Obviously, we're still getting a lot of calls on that. Is there any chance that you're willing to maybe give just a bit more color just size-wise on the magnitude of one of those buckets versus the other within that $0.85 at this stage, or you still going to perhaps hold off on it till later?

Well, I'd like to say that the majority of that $0.85 has been driven by generic price increases changes.

John, shifting gears a little bit given the kind of recent pull back in the market assets would seem to be more attractively valued right now. I guess can you talk a little about whether or not the company feels pressured to put capital to work and on the capital deployment strategy maybe talk about the appetite for increasing the company's leverage ratio and the appetite for deals that might add another leg to the store or something that might be more transformational as it relates to the business.

Well, thanks for the question, it clearly - we try not to feel pressure on any dimension because it may cause you do something that doesn’t make sense. Having said that, as our balance sheet has become healthier and we paid off some of the debt and made the commitments that we said we would make relative to delevering after Celesio, we are very aware of the fact that we now have expanded opportunity to deploy our balance sheet in a portfolio way, and we plan to continue to do so. I would say that the fluctuation in evaluations does make some opportunities more attractive than others, and clearly even some of the private companies that might have dreamed of IPOs, etc. may be more available to a conversation with us than they might have been otherwise. And as it relates to putting leverage back on the company, I think the fact that we were able to lever up and then delever again gives us credibility with making our commitments a reality, and I think that the issue of another leg on the stool or transformational deal and clearly we look at any deal that makes sense to us financially and strategically. I don’t think we push anything away from the table. But having said that, synergies are usually more possible on deals that are more aligned with deals that are in one of the segments that we're currently participating in. And so I would tell you that our bias is to go into businesses that we currently understand and operate as opposed to something that’s for a field when the synergies are based on some expectation that the markets are going to be more attractive whether going to grow faster and we use we can add a lot to those values if we don’t have synergies to bring into the transaction.

And then maybe just a quick follow-up again we’ll kick and hit the generics topic again. You guys have pretty modest expectations for generic price inflation in fiscal '17, but a lot of the back - the drivers they drove generic price inflation haven’t changed much. I guess can you talk about, can you give us any color on what you’re seeing in the channel on what's driving the diminished rate of change and inflation? And I guess I’m looking for more anecdotal information that helps us kind of see what's going on in the market there. Thank you.

You may recall that we talked about generic inflation in the past; we talked about the fact that it is driven by a small number of molecules from a small number of manufacturers that have inflated to a very high degree, and I’d say that our current experiences at some of those outlier increases have diminished significantly. But overall, if you think about the portfolio overtime, it has been in more of a deflationary mode; so we talk about inflation. We really talking about the net effect of inflation on our business driven by those molecules, not the overall portfolio inflating or deflating because that typically deflates. We think that we're in a period now where we’re going to have modest inflation; that’s what we’ve been experiencing, that’s what we talked about in January 11, and that’s what we anticipate for the rest of this fiscal year and into next fiscal year, is modest generic inflation.

John, a few weeks ago we talked about the incremental opportunity to add incremental generic procurement deals. I think you talked about the fact that you've done some Safeway hold and some others. But can you maybe just remind us of what you see as incremental opportunities that are still available to you within your own book of business out in the marketplace?

Well, clearly we have made significant progress in helping our customers procure generics more effectively and use our distribution channel to bring them to their stores at a more cost-effective way as well. And so I think we’ve seen progress; you mentioned our hold and Albertson's Safeway, and many of our independent customers have continued to join us in the generic procurement side and have become more and more reliant on the customs ability to help them reduce their cost and improve their performance. Our Health Mart stores are now above 45,000 stores, and that program has been extremely successful in driving generics, and our proprietary generics programs are still growing in healthy double-digit kind of ranges. So overall, I think we continue to make progress. Some of our largest customers still procure some or all of their generics on their own, through their own distribution network and do their own sourcing activities, and we continue to have conversations with those customers about the value of using McKesson’s combined power with their to do an even better job, and those conversations obviously are important to us as we think about the relationship of these customers. It would be premature for me to talk about specifically which customers we think might provide the most opportunity, but I don’t think the table isn’t run yet relative to the opportunity for us.

Is there a way to quantify that number, or maybe using an analogy of – if you want to use baseball innings as far as how penetrated you are in your current book, just so we can think about as we move into '17 and '18 beyond what the potential incremental opportunities are as it pertains to these hyper generic procurement relationships?

I will say the opportunities are not insignificant, and many of you have talked to us about specific customers that you know are continuing to procure a large majority of their generics on their own. And so I think it's not a material impact in front of us if we’re able to persuade these customers with the data that we have that our procurement activity would be beneficial to them. I’m hesitant to describe it in innings, including customer count. We’ve got a lot of customers using us today, but in customer value based on the size of their generic spend, there is significant opportunity left for us.

Our initial expectation was that the regulatory process would be extended and follow about the pattern that we have seen before in this country, and I think we’ll remain extremely optimistic that these transactions are examined through their process that we will stand a very good chance of accomplishing the acquisitions in large and reform that we had expected when we announced them. And then answer to your earlier question, also Lisa, relative to procurement, I might also point out that the opportunities for us extend beyond just the U.S., and many times customers look - you look at customers that you know of in the U.S. that are buying on their own but there are also customers buying on their own in other important markets for us, where we and they have the ability to dispense generic that we’ve sourced together. And so I think that we remain very optimistic with our global activity and our procurement programs will continue to grow.

Can you please talk about the competitive environment? So when you got a market and bid for a new piece of business, how is the pricing environment now that we’ve got a couple of large JVs that are in the market, like Red Oak and Rite Aid? Can you sort of talk about what the pricing environment looks like? Has there been a significant shift in 2015, 2016 relative to previous years or not? Thanks.

It's difficult, Dave, to comment on pricing because it's sort of in the lands of where we are currently doing business and where we’re competing for business. I would say that overall the business remains competitive but stabilized. I don’t see a lot of customer changes that would drive one to believe that there is something going on that is materially different from a pricing perspective out in the marketplace. I can speak for McKesson's strategy, and that is, we continue to focus heavily on our selling efforts within our existing customer base trying to find ways to add more value to those relationships, and through that value added create a relationship that has more stability but also provides a better profit for our customers and better profit for McKesson as we evolve these partnerships. And so I think our principle focus is in the area of expanding our footprint with the existing customers and helping them perform better.

So maybe just quickly we saw some headlines last week or so on some court rulings in Germany. Can you just remind us sort of where we are with the Celesio staff and the process let there, sort of determining whether or not you, we’ll get to kind of ultimately acquire the remaining portion and how we should think about the purchase price?

Well, first of all, we own around 76% of Celesio. For the other 24 points or so of the ownership, they have a put to us. We do not have a call on those shares outstanding. As to the news these past few days related to a suit that Magnetar had brought that we had previously seen dismissed at the local court level if you will, back in December of 2014. That decision was appealed by Magnetar. It did get overturned just a few days ago. We are planning to appeal that decision and I would expect that process to play-out over a year or more. And given the issues specific to this case, I think it is unlikely that McKesson will be required to pay what some have been extrapolating as the substantial liability; the case at hand related quite narrowly to a few shares that had been put to us. And so the court decision related to around €260,000 total. We see an extrapolation from that figure up into the €370 million range. I would not expect given the specifics of the case and the process around German law, that we would be looking at that sort of payment.

And I'd also point out to this, obviously, there is no effect on the operating control we’ve already established with Celesio. There is really no effect on our financial statements other than this potential cash liability, but we consolidated their earnings, we operate the company, and to James' point, this outstanding share are remain outstanding and can be put to us when they decide they want to put them to us.

And just quickly on the Rite Aid front. Can you just help us think through, sort of, how you have to game plan for an outcome there? I mean, obviously, you are not going to be able to share with us, sort of, what the discussions go like. I’m just trying to think practically in terms of as you have to have that decision tree of what the various options are, how quickly, if the business ultimately transitions this year, next year whenever, how quickly you can adjust your cost structure? How flexible it is and what are these sort of things we should look for to best understand, how that will impact the parts of the P&L.

First off, I’d remind folks that on early January I made a comment about this business; we believe will be retained by McKesson in its current form through late in our fiscal 17 numbers. And so with the guidance we’ve given you for fiscal 17, that range includes that we would - or assumes that we’d continue to enjoy the Rite Aid business in relative its same relative form through that end of that period. Obviously, we could be off, plus or minus depending on what your view of the process by which Walgreens will complete the transaction and how that may actually take shape. I'd say that we were reluctant to ever comment on what a customer might do when the decision is in their hands. I’d say, however, you’ve seen certain customers of ours value the incumbent relationship and continue to enjoy a relationship with McKesson going forward like you do at Target or Omnicare where the relationship change from a mix perspective but we are able to retain at least a portion of the business. I would not take that speculation and apply it necessarily to Walgreens, but I’d just point that out as certainly an alternative that has some possibility other than that not much I can say Ross.

Good afternoon John, James. James, first question to you. Could you first repeat what the technology solutions adjusted constant currency margins were for this quarter, which I think favorably benefited margins? But even if so, it’s been quite strong year-to-date that you’re not guiding to the 20% margin level for the year. So is there anything unique for us to some of these trends wouldn’t continue into next year?

Well, I have been pleased with the operating margin trends in technology solutions in recent quarters, and I think it very much reflects the work that the team there has been doing to reorient our focus to specific businesses around our peer solutions, around our transactional type offerings and also our imaging business, as well as our revenue cycle management businesses. So we've really shifted the focus to those areas where we think we have nice growth opportunities and we have solid margins. And that has flowed through in combination with good cost control to allow us to record much stronger margins with the comment that we think for the full year will be in the low 20s. About one point of that margin benefit, of course, remember comes from the sale of our care management business a couple of quarters ago. So that's really the story on the technology margins. Overall, in constant currency, the margin number itself is 20.5%.

20.5, okay. Great. And then maybe going back to your question that was just asked regarding Rite Aid. Previously, you guys have shied away from acquiring to the retail pharmacy space as there could be some conflicts at least in the U.S. that's not present in Europe. So with the potential acquisition in Rite Aid where there is the possibility of a material amount of stores being sold. Are you willing to reconsider that view or would there still be too much of an impact with your remaining retail clients taken through that?

I don't think we will be interested in buying the stores. To the extent stores are divested, we would not be interested in buying them. That's not the business we're in in the U.S.

My primary McKesson ones have been covered at this point, but I am curious after many years of waiting, we finally got the AMP final rule 658 pages of glory. I'm curious if you and your teams have had a chance to go through that at all. And if there is anything that stands out to you as you think about your business over the next year once that – I guess it goes into effect actually starting fiscal '17 for you, but curious where your thoughts might be if you have any at this point.

I've read the whole thing several times and highlighted the areas of most interest to me. Obviously, it's still very early to understand all of the implications and to understand the ability of the states to implement this rule. I think that it's likely to be pretty limited in the states that have already largely moved to managed Medicaid program in recent years. This really is a state Medicaid fee for service kind of an application, and I guess our initial assessment is that we expected to have a fairly limited impact in the supply chain as we see it today.

Thank you, John. On February 10, we will present at the Leerink Partners Global Healthcare Conference in New York. We will release our fourth quarter earnings results in May. Thank you and have a good evening.