Erin Lampert - SVP, IR John Hammergren - Chairman and CEO James Beer - EVP and CFO

Ricky Goldwasser - Morgan Stanley Robert Jones - Goldman Sachs Steven Valiquette - UBS George Hill - Deutsche Bank Lisa Gill - JPMorgan David Larsen - Leerink Ross Muken - Evercore ISI Garen Sarafian - Citi Research Eric Coldwell - Baird Eric Percher - Barclays Charles Rhyee - Cowen

Good afternoon, and welcome to the McKesson Corporation Quarterly Earnings Call. All participants are in a listen-only mode. [Operator Instructions] Today's call is being recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Ms. Erin Lampert, Senior Vice-President, Investor Relations.

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 repelled us to be leaders in the markets we serve. And most important, I'm confident in the extraordinary team we have at McKesson were 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 affectively 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 and made internal capital investments at $417 million and paid a $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 sales 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 discreet tax items which totaled approximately $0.07 primarily reflecting recent Celesio first of 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 reflecting 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 on 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 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 a $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?

[Operator Instructions] And our first question comes from Ricky Goldwasser with Morgan Stanley.

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 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 being 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 topline for 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 slow down, is it kind of like did you seen an abnormal growth from HCV?

We had a – Ricky, this is John. We had a very large - we have a very large customers in the mail business that had some significant year-over-year progress in terms of customer winds. You saw us benefit from a revenue perspective that help pushes into the 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 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 customers 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 still seeing kind of like benefit from kind of like buy side margin. So when we think about the new guidance that you provided 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 is 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 a 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.

Thank you. We'll next go to Robert Jones with Goldman Sachs.

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 10% increase in SG&A that would be way outside the boundaries if you look on 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 overtime you should expect our SG&A to grow more that 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 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 are 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 primarily 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 the 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.

And nothing changed on the end market side then?

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.

We'll next go to Steven Valiquette with UBS.

I guess for me just a quick question on the expected anti-trust 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 is 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 being driven by generic price increases changes.

We’ll next go to George Hill with Deutsche Bank.

John shifting gears 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 little about whether or not the company feels pressured to put capital to work and are on the capital deployment strategy may be talk about the appetite for increasing the companies leverage ratio and the appetite for deals that might add another leg to the store 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 is become healthier and we paid off some of the debt and made the commitments that we said we would make relative to de-levering 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 planned to continued to do so. I would say that, the fluctuation and evaluations does make some opportunities more attractive than others and clearly even some of the private companies have might have dreamed of IPOs et cetera 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 de-lever again give us creditability 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 make sense to its 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 in more line of side on deals that are in one of the segment that were currently participating in. And so I would tell you that our buyers is to go into businesses that we currently understand and operate as suppose 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 lot to those values if we don’t have synergies to bring into the transaction.

And then may be 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 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 saying 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 is driven by a small number of molecules from a small number of manufactures that have inflated to very high degree and I’d say that our current experiences at some of those out layer 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 its – 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 years is modest generic inflation.

We’ll next go to Lisa Gill of JPMorgan.

John, 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 are hold [ph] and some others. But can may be 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 affectively 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 have 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 45,00 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 are 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 opportunity for us.

Is there a way to quantify that number of may be using analogy of – if you want to use to baseball at 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 not in significant 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 an 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 their significant opportunity left for us.

And then just my follow-up would just be both sounds well, as well as UDT now in a second review process. Was that your initial expectation and how should we think about the timeline of closing those two acquisitions.

Our initial expectation was at the regulation, 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 customer buying on their own in other important markets for us where we and they have the ability to dispense to 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.

We’ll take our next question from David Larsen with Leerink.

Can you please talk about the competitive environment. So when you got a market and bid for a new pieces of business, how is the pricing environment now that we’ve got, couple of large JVs that are in the market, with 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 the 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 it 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.

We’ll next go to Ross Muken with Evercore ISI.

So may be just quickly we saw some headlines last week or so on some core rulings in Germany. Can you just remind us sort of where we are with the Celesio staff and the process let there, sort of determine 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 and 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 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 overturn 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 the - 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 be going to able to share with us, sort of, what the discussions go like [indiscernible]. 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've 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 at 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.

We’ll take the next question from Garen Sarafian with Citi Research.

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 or so 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 grade Rite Aid. Previously, you guys have sort of 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 and we would not be interested in buying them. That's not the business we're in in the U.S.

[Operator Instructions] We'll take a question from Eric Coldwell with Baird.

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 affect 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 manage medicate program in recent years. This really is a state medicate 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.

We'll next go to Eric Percher with Barclays.

John, I'd like to go back to the first question where you were asked to pine on 7% as perhaps a going-forward number. When we look at 7% in this quarter and the decline relative to the prior quarters, you mentioned a couple of items, but it's fair to think over the next several quarters we've got a contract movement, we have the sale of assets, FX may become an easier comp going forward. So is it fair to say that that's not reflective of long-term industry growth or how do you think about long-term industry growth today?

Well, I'm reluctant to make an industry call. You guys are and others are well positioned to do that. Clearly, part of what you have to look at is the amount of generic launches that come out, what kind of price inflation you're going to get on the branded launches. What kind of specialty drugs might hit and when. So there is lot of complexity. I guess what I was attempting to describe was that the relative higher rate that we had in advance of this quarter was driven by some specific customer wins that happen to flow through our P&L and that lapping affect of that success by that customer is what – is comparative that we’re chatting it outside. That makes sense to your -

Yes. And as we've gone a couple of weeks into the year as you look at brand inflation trends, have you seen the political discussion translate into any material change in those trends?

No we really haven't seen any change of any significance in the branded side and I'd say that the results are aligned with our expectations.

We'll take a question from Charles Rhyee with Cowen.

John, just going back to your expectations on inflation and not only just generic, but also maybe on branded, how you guys are thinking about in terms of this being election year and to the extent that you're seeing sort of a moderating environment. Any thoughts on as to how much you think may be an election cycle is impacting that?

Well, it's also is difficult to speculate on what the drivers are. We are not the ones making the decision on the generic or the branded side is relative to inflation. I would say the political discourse that's taking place and the congressional inquires relative to pricing practices, I think are obviously going to have people at least pausing perhaps to consider whether now is the right time to take price increase. There obviously are other circumstances related to pricing associated with supply disruption, availability, new product launches. I mean there is all kinds of things that probably play into the calculus here and I would say – I think the political discussions really, clearly and the media discussion probably has some impact to speculate on how much it would be difficult.

That's fair. And then just maybe one quick follow up on that. You mentioned earlier in a response that you're clearly looking at - there is nothing really - you're going to send us few items that kind of really drove some of the inflation that you saw. Historically, you've not really seen that right now. But is there anything structural to the market as you look forward in the next couple of years or something like that couldn't happen again or do you think there has been some changes in the market where it's probably less likely we'll see kind of what we saw maybe the last two years.

I believe the performance of branded pharmaceutical companies is probably easier to forecast give that it has been less volatile in the last decade than perhaps the generic industry we've seen more volatility. And that volatility certainly is partially driven by supply and disruption. So I would say that if you could forecast what supply disruptions might occur in the future then you might have the ability to at least have some inclinations to what happens with branded price or generic price inflation. I'm really reluctant to speculate on how things may play out. We clearly have given you guidance for the rest of this fiscal year on that dimension of inflation both branded and generic. And we've given you our thoughts relative to fiscal '17 our guidance on those two dimensions. And I think that we stand by our current speculation on that, but it's just that - those views are amongst other views we have to take every year and what might happen throughout the year and we just want to be transparent with you about what we're thinking so. I think that's probably the most I can say about it.

Thanks a lot.

I understand that we don't have any additional questions in the queue. I know we hit a lot of these subjects in early January and I appreciate all of the attention that you've paid to these matters and others and for your time on the call today. As we entered the final few months of our fiscal year and I look to the future, I'm excited about the opportunities I see for us to continue our lead from an innovation perspective and how we can help our customers meet the many challenges they may face. The fundamental strength of McKesson has long been our ability to constantly adapt and grow during times of change and by staying focused on our customers and through to our core values. I'll now hand the call over to Erin for a review of upcoming events for the financial community.

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.

Thank you for joining today's conference call. You may now disconnect. And have a good day.