Craig Mercer - SVP, IR John Hammergren - Chairman & CEO James Beer - EVP, CFO

Robert Jones - Goldman Sachs Steven Velazquez - Bank of America Ricky Goldwasser - Morgan Stanley Garen Sarafian - Citi Lisa Gill - JPMorgan George Hill - Deutsche Bank Ross Muken - Evercore ISI Michael Cherny - UBS Robert Willoughby - Credit Suisse

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 Mr. Craig Mercer, Senior Vice President of Investor Relations.

Thank you, Noah. Good afternoon, and welcome to the McKesson Fiscal 2017 Third Quarter Earnings Call. I am 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 business update, and then James will review the financial results for the quarter. After James' comments, we will open the call for your questions. We plan to end the call promptly after one hour, at 6:00 PM Eastern Time. Before we begin, I remind listeners that during the course of this call, we will make forward-looking statements within the meaning of the 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. Please note that on today's call, we will refer to certain non-GAAP financial measures. In particular, John and James will reference adjusted earnings, which excludes four items: amortization of acquisition-related intangibles, acquisition expenses and related adjustments, claim and litigation reserve adjustments, and LIFO-related adjustments. Finally, I would call your attention to the supplemental slides, which we will reference on today's call, and those can be found on the Investors' page of our website. We believe the supplemental slides, which include non-GAAP measures, will provide useful information for investors with regard to the company's operating performance, and comparability of financial results period-over-period. Please refer to our press release announcing third quarter fiscal 2017 results and the supplemental slides, for further information and a reconciliation of the non-GAAP performance measures to the GAAP financial results. Thank you. And here's John Hammergren.

Thanks, Craig, and thanks, everyone, for joining us on our call. Before I begin my review of our third quarter results, I’d like to take a few moments to share my thoughts on a number of recent topics. During January, we’ve heard from the new administration of the prospect for planned changed to the U.S. Healthcare System as well as potential tax changes. We are all interested in these topics yet it is extremely difficult to provide any kind of assessment on the impact of reform as we don’t have solid details on what those changes will be as we sit here today. We look forward to engaging in the dialogue regarding these issues that may impact our industry, our business and the customers we serve as proposals evolve into real policy positions. There are many moving pieces to reform and we will continue to monitor and assess the potential impacts of any proposals as we receive more information. Moving now, we are pleased to have announced today that we have entered into a definitive agreement to acquire CoverMyMeds. CoverMyMeds mission is to help patients get access to the appropriate drugs for their care. Their service automates and accelerates the prescription approval process known as electronic prior authorisation, which is otherwise manual and time consuming. CoverMyMeds takes administrative cost out of the system which supports patient help through drug adherence, manufacturers by reducing prescription abandonment and providers and payers through automation and appropriate patient access to medications. CoverMyMeds products today streamlined a prior authorisation process for 47,000 pharmacies and 700,000 prescribers in the nation’s largest health plans. The Company has partnered with McKesson’s RelayHealth Pharmacy business since 2010 to expand its reach and offer its capabilities to a broad customer base. As a reminder RelayHealth Pharmacy is a connectivity network providing real time claims, processing and other services to more than 50,000 retail pharmacy locations. Together, CoverMyMeds and RelayHealth Pharmacy can develop even more innovative tools for manufacturers, pharmacies, patients, payers and prescribers and continue to take administrative costs and inefficiency out of the healthcare system. CoverMyMeds, RelayHealth Pharmacy and our other pharmacy technology businesses underpin our strategy to differentiate and add value to our distribution solutions business. As a reminder, RelayHealth Pharmacy will remain with McKesson following the close of the transaction to the Change Healthcare. We are also making good progress on a couple of other important transactions. First on December 20, the Department of Justice closed its review and terminated the waiting period under the Hart-Scott-Rodino Act bringing us one step closer to the creation of the new change Healthcare. Key leaders have been named and they are building up their teams as well as the support structure to allow the new business to meet the demands of its customers from day one. Management expects to raise the necessary financing and close the transaction later this quarter. We will provide additional updates after the transaction closes. Additionally, we are pleased to have closed the Rexall transaction and the integration work is underway. I look forward to working again with Domenic Pilla, who will assume overall leadership responsibility for McKesson’s distribution and retail businesses in Canada, including Rexall Health. Some of you may remember Domenic. He previously spend 10 years leading McKesson Canada from 2001 to 2011 and then built his retail expertise running Shoppers Drug Mart through its successful sale in 2014. I want to welcome the thousands of employees to joining McKesson on this new exciting opportunity. Last we are very excited about the progress we’ve made early on in launching [Claris 1] our sourcing activity with Wal-Mart. That organization is up in running and expanding our capabilities for suppliers. Our objective is to enhance our great partnerships with manufacturers and look for innovative ways to create value for all stakeholders. Turning now to our recent financial performance. In our U.S. pharmaceutical business as a result of the generic pricing actions we began to implement late in our second quarter, we won back units and retained our independent stores. However, our prices were ultimately set at a lower level and our initial expectations that were included in our previous guidance. As a result, we’ve realized a lower contribution in the current quarter from this part of our business. And although branded pharmaceutical pricing trends were weak in the third quarter relative to our expectations, full year contribution from branded pharmaceutical compensation remains on track with our revised expectations that we shared with you last quarter. Additionally, we incurred a few non-recurring charges in our distribution solutions segment that resulted in lower than expected operating profit contribution. James will go through those in a moment. As for our other North America Pharmaceutical businesses we continue to realize strong growth and we are making solid progress integrating Biologics, Vantage and Rexall. Moving onto our international operations despite meaningful U.K. pharmacy reimbursement cuts that we previously discussed I am pleased with the constant currency revenue growth reported in the quarter. Our U.K. business continues to be impacted by reimbursement actions taken by the government. However, our teams are diligently working to offset and grow through these changes. I’d also like to take a moment to acknowledge the tremendous contributions by Mark Owen over his past 15 years with McKesson. From leading our enterprise strategy to most recently heading up our operations in Europe. Mark will retire at the end of this fiscal year, so we are preparing for the transition of responsibilities to Brian Tyler a 20 year veteran who has served leadership positions across nearly all of our distribution solutions segment including most recently as President and Chief Operating Officer of Celesio working with Mark. And last in our medical surgical business despite some revenue softness from the termination of a long term care customer and a weaker impact from the flu season, I am encouraged particularly by the progress we are making to expand our presence in the fast growing lab in Homecare businesses. Now for technology solutions, we again posted strong performance relative to our expectations in prior year, even amidst all of the work underway to prepare for the changed Healthcare transaction. I commend the team for their focus throughout these events and I look forward to a strong finish to a very productive year. Now turning to our outlook for fiscal 2017. Upside from our share repurchase activity in the quarter combined with a lower effective tax rate more than offset the lower than expected full year contribution from our distribution solutions segment. Based on these updates we now expect our full year outlook for fiscal 2017 to be in a range of $12.60 to $12.90 compared to our previous outlook of $12.35 to $12.85. Now to wrap up my comments. McKesson is a company that has seen a significant change over its more than a 180 year history and we’ve built a resilient company, a business that focuses everyday on the success of its customers and the efficiency of the Healthcare system it serves. As we look to the future, we see significant growth prospects and it put in place the right assets in the right markets to take advantage of these opportunities. For example, McKesson now operates its scale and is highly efficient in every segment we serve. Our diverse set of global businesses are well positioned to take advantage of over arching demographic trends. We believe that retaining control over our global procurement and sourcing capabilities is key and we have built comprehensive capabilities to capture growth in specialty. We have a large and growing footprint in retail. We have a strong value proposition to partner effectively with manufacturers and to service our customers including meaningful pharmaceutical technology solutions. Across McKesson there is an experienced and long tenured management team and finally we continue to expect robust operating cash flow growth that is deployed in a disciplined approach and focused on long term shareholder value creation. With that, I’ll turn the call over to James and will return to address your questions when he finishes. James?

Thank you, John. And good afternoon, everyone. Today I will review our third quarter results and discuss our fiscal 2017 outlook. In addition, I will provide updates with respect to our recently closed and announced M&A transactions. Before I get to our results, I want to note that in addition to our earnings press release and customary tables, we have published a supplemental presentation on our website. This presentation provides an operational view of our fiscal 2017 earnings or adjusted earnings excluding unusual items. We exclude from this view charges or related reversals associated with the cost alignment plan that we announced in March 2016. This view also excludes the non-cash pre-tax goodwill impairment charge taken in our EIS business within our technology solutions segment during the second quarter, as well as prior-year gains on the sales of two businesses. Now let’s move to our results for the third quarter. Our adjusted EPS was $3.03 per diluted share. Our adjusted EPS excluding unusual items was for $3.05 per diluted share as we recorded a $0.02 charge related to the cost alignment plan. Now I will review our consolidated results. Consolidated revenues for the third quarter increased 6% in constant currency versus the prior period. Third quarter adjusted gross profit excluding unusual items was down 6% in constant currency year-over-year, driven by the increased competitive customer pricing activity we discussed last quarter. The timing of branded manufacturer inflation and the expected weaker profit contribution from generic manufacturer inflation trends partially offset by our recent business acquisitions and organic growth in our specialty and Canadian businesses. Third quarter adjusted operating expenses excluding unusual items increased 2% in constant currency, driven by recent acquisitions, partially offset by our ongoing cost management efforts. Other income was $26 million for the quarter, an increase of 93% in constant currency, driven primarily by our equity investment in [Indiscernible] a pharmacy operator in the Netherlands. For fiscal 2017, we now expect other income to increase approximately 50% year-over-year. Interest expense of $74 million decreased 15% in constant currency for the quarter, consistent with our prior expectations. We continue to expect interest expense for fiscal 2017 to be down by a mid teen percentage compared to fiscal 2016. Now moving to taxes, our adjusted tax rate was 14.3% for the quarter, driven by the beneficial impact of an inter company sale of software, a mix of income and discreet tax benefits. Expanding on this sale, in December McKesson sold various software and ancillary intellectual property relating to our technology solutions segment to a U.S. based McKesson entity. This sale allows McKesson to claim tax deductions for the fair value of the assets and recognize the resulting tax benefit in our P&L over the estimated remaining lights of the assets. As a result of this sale and excluding the EIS impairment charge taken in the second quarter, we now expect a full year adjusted tax rate of approximately 2 4.5%. I want to caution you that fiscal 2017s expected adjusted tax rate is not an indicator of our future expected adjusted tax rate. Going forward, I would expect our adjusted effective tax rate to be closer to 30%. Our income attributable to non controlling interest excluding unusual items was $14 million for the quarter. We now expect income attributable to non-controlling interest to increase approximately 20% from fiscal 2016. Our adjusted net income from continuing operations excluding unusual items totaled $677 million. Our third quarter adjusted EPS excluding unusual items of $3.05 decreased 4% versus the prior year. Wrapping up our consolidated results, during the quarter we completed share repurchases of common stock totaling $2 billion resulting in our diluted weighted average shares outstanding decreasing by 4% year-over-year to $222 million. As a result of the share repurchase activity in the third quarter we now expect our weighted average diluted shares for fiscal 2017 to be approximately $223 million. And we now have $3 billion remaining on our share repurchase authorisation. Let's now turn to the segment results. Distribution Solutions segment constant currency revenues of $49.9 billion were up 6% year-over-year during the quarter. North America pharmaceutical distribution and services revenues increased 5% in constant currency. International pharmaceutical distribution and services revenues were $6.6 billion for the quarter on a constant currency basis, up 10% driven by acquisitions and market growth. Revenues were impacted by approximately $440 million in unfavorable currency rate movements. Moving now to the Medical-Surgical business, revenues were down 1% for the quarter, driven by the termination of a long term care contract and a weaker impact from the flu season. For Medical Surgical, we now expect low to mid single digit revenue growth in fiscal 2017. Distribution Solutions adjusted gross profit, excluding unusual items, was down 8% on a constant currency basis for the quarter, driven by the increased competitive customer pricing activity we discussed last quarter. The timing of branded manufacturer inflation and the expected weaker profit contribution from a generic manufacturer inflation trends, partially offset by our recent business acquisitions and organic growth in our specialty and Canadian businesses. Third quarter Distribution Solutions segment adjusted operating expenses, excluding unusual items, increased 3% on a constant currency basis. Segment operating expenses reflect an increase related to recently completed acquisitions, partially offset by our cost reduction actions. Distribution Solutions third quarter segment adjusted operating profit, excluding unusual items, was down 23% in constant currency at $815 million. The third quarter segment adjusted operating margin rate, excluding unusual items, was 163 basis points, a decrease of 61 basis points on a constant currency basis driven by the same factors as previously discussed As John mentioned, the segment adjusted operating profit results include two non-recurring charges. Together, these total approximately $68 million. We expect our Distribution Solutions segment adjusted operating margin, excluding anticipated cost alignment charges to be approximately 35 to 40 basis points below the corresponding fiscal 2016 figure of 234 basis points. Now moving to Technology Solutions. Revenues were flat for the quarter at $694 million on a constant currency basis, driven by the anticipated decline in our hospital software business, offset by growth in our other technology businesses. Third quarter adjusted segment gross profit excluding unusual items was up 7% on a constant currency basis. Third quarter adjusted segment operating expenses, excluding unusual items, decreased 4% in constant currency from the prior year driven by our ongoing cost management efforts. Adjusted segment operating profit, excluding unusual items, increased 25% in constant currency, resulting in a corresponding adjusted operating margin of 23.92%, up 476 basis points versus the prior year. The increase was driven by growth outside of our hospital software business, and lower operating expenses. We continue to be pleased by the ongoing execution of our technology solution segment as we work to close the change healthcare transaction. I’ll now review our balance sheet metrics. As you’ve 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 the given quarter. For receivables, our days’ sales outstanding were little changed at 26 days. Our days sales in inventory decreased two days from the prior year to 31 days, and our days sales in payables increased five days from the prior year to 59 days. The increase in payables days sales relative to the prior year is largely due to a steady increase in our generic pharmaceuticals sourcing scale, and the fact that generic pharmaceuticals have longer payment terms than branded pharmaceuticals. We ended the quarter with a cash balance of $2.4 billion, with approximately $1.8 billion held offshore. For the first nine months of the year, McKesson paid $4.2 billion for acquisitions, repurchased $2 billion in common stock, repaid approximately $390 million in long term debt and spent $369 million on internal capital investments. We now expect property and acquisitions and capitalized software expenses to be between $550 million and $650 million in fiscal 2017. And earlier today, the board of directors approved the quarterly dividend of $0.28 per share. The cash been generated $3.3 billion in cash flow from operations during the first nine months of our fiscal year. In this quarter alone we deployed more than $4 billion on acquisitions and share repurchases. For the full-year, we continue to expect cash flow from operations to increase approximately 15% year-over-year excluding approximately $270 million in cash payments released to the cost alignment plans and the recent settlement with the DEA and DOJ. Now I will focus on our fiscal 2017 outlook. Relative to our prior expectations, our third quarter earnings were favorably impacted by the lower-than-expected tax rates. We now expect a full-year adjusted tax rate excluding the EIS, goodwill impairment charge in the second quarter of a 24.5%, a decrease of 3% points from our prior expectation. In addition, we now expect the weighted average diluted shares for fiscal 2017 to be $223 million following share repurchase activity in the third quarter compared to our previous expectation of $226 million. These tax and share cap items will drive upside of approximately $0.65 of earnings per diluted share for the full-year. As a reminder, during the third quarter we recorded non-recurring charges that are approximated $60 million which will impact our full-year. And as John discussed, while our pricing of generic pharmaceutical in our independent pharmacy channel has helped us retain share, our pricing is now set at a level lower than our previous expectations. As a result, we expect the profit contribution from these customers will be reduced versus our previous guidance. Regarding the brand manufacturer pricing environment, pricing remained weak in the third quarter as discussed at a recent investor conference. However, we have seen activity in January that is in-line with our previous full-year expectation of mid to high single digit brand manufacturer price inflation. And lastly, we expect our distribution solutions adjusted operating margin excluding anticipated cost alignment charges to be approximately 35 to 40 basis points below the corresponding fiscal 2016 figure of 234 basis points. As a result of these updates, we have raised and narrowed our fiscal 2017 guidance for adjusted earnings per diluted share from $12.35 to $12.85 to a new range of $12.60 to $12.90. This range excludes approximately between $1.28 and $1.30 from adjusted earnings driven by the combination of the EIS goodwill impairment charge taken in our second quarter and the anticipated charges during the fiscal year for the cost alignment plan. A list of the key assumptions underpinning our updated fiscal 2017 outlook can be found in the supplemental slide presentation on slide 17 and 18. Before I wrap up my comments on our fiscal 2017 outlook, I also wanted to mention the while not yet a material contributor to our current earnings, we are pleased by the progress we are making in establishing Carrollton our sourcing initiative with Walmart. Now, I would like to take a moment to discuss our recently closed and announced M&A transactions. First, we closed the Rexall transaction in late December. As a reminder, for fiscal 2017 we expect the earnings attributable to Rexall Health will be offset by an anticipated charge related to a fair value adjustment of acquired inventory. Now, moving to our announced acquisition of CoverMyMeds. McKesson has ended into a definitive agreement to acquire CoverMyMeds for approximately $1.1 billion or approximately $900 million net of incremental cash tax benefits. An additional $270 million will be paid if CoverMyMeds reaches certain performance matrix through fiscal 2019. The transaction is subject to customary closing conditions including end trust approval and is expected to close in the first half of fiscal 2018. We expect the transaction will be funded by a mix of cash and debt. By the third year, following the close of the transaction, we cast an expect attrition of $0.30 to $0.40 to adjusted earnings per diluted share. This transaction will complement our other distribution solutions technology businesses such as a Relay pharmacy and our McKesson pharmacy technology and services business which are both core to executing on our strategy. Given the double digit growth opportunities we see for these businesses, I believe they can drive combined revenues of approximate $1 billion and become a material contributor to McKesson's operation profit growth within three years. Moving now to the pending change healthcare transaction. We expect the transaction will close this quarter and at that time we expect to record a significant one time gain on the contribution of our net assets to change healthcare. This gain will be excluded from our adjusted earnings. In addition, McKesson will receive $1.25 billion of cash at closing. Due to the numerous moving pieces that are involved in the transaction of this kind, we will provide more detailed information following its close. To be clear, McKesson's current fiscal 2017 guidance range of $12.60 to $12.90 assumes a full quarter of MTS earnings. In closing, we are actively engaged in planning for the next fiscal year and we'll provide our fiscal 2018 outlook and underlying assumptions when we announce our fourth quarter earnings in May. 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 opportunity to participate. Noah?

Thank you. [Operator Instruction] Our first question comes from Robert Jones with Goldman Sachs.

Great. Thanks for the question. I guess John I am still struggling on to understand a little bit the magnitude over the last two quarters from the negative impact from branded pricing specifically. If we think about some of the comments previously about 10% to 20% of branded contract being linked to non-fee per service just having trouble bridging the reduction given from the last few quarters. So, I was hoping maybe you could just walk us through a little bit of how we bridge that gap around the EBIT within pharma distribution and the reductions from last quarter and now, this quarters?

Well, I will turn it over to James to start out though, I think we have done some really good work over the last several years to make sure we have the right balance of fixed compensation and variable compensation for the branded manufacturers and that work continues and I believe now the split of our profit from the branded partners is roughly in that 90:10 kind of a range. So we have reduced the exposure to both the risk and the opportunity here. And but having said that it still remains a material amount of our profitability to your point and we knew that there was going to be some risk in this quarter related to our back-half guidance but we hope that the fourth quarter was going to be stronger than certainly the third quarter in line with the guidance we provided you on the last call. And that's really I think what we are seeing today is that our from full-year perspective based on January we believe we are going to have the back half performance that we had anticipated. James?

Yes. I just had that in Q3 the profit contribution from branded manufacturer price inflation was really quite weak. That was real holding back in terms of manufacturers taking price increases and that certainly held was a material driver in our Q3 EPS result. As John saying, we are seeing a different situation playing out in Q4 thus far so our expectation is when you look at the back-half and then the full-year, we are able to continue to forecast what we had said previously about branded inflation being in that mid to high single-digit range. So, certainly a soft Q3 but it appears to be stronger in Q4.

Great. And I guess just the follow-up related to the reduction in the quarter or the short form a quarter related to pharmaceutical distribution. It sounds like John if I heard you correctly the pricing on independent ended up ultimately being a little bit lower than what you guys has assumed last quarter? I guess what drove this and is there still what you would describe as maybe outside pricing pressure in the marketplace around that customer segment?

Well, I think you have the first half of that assumption correct. It ended up being a little lower than what we had built into our previous guidance and when the price for our customers was set at the end of the quarter we ended up producing less profitability than we had anticipated but clearly the units we covered and our relationship with our customers improved as we went throughout the quarter. So, I think we have got that issue behind at this point at least today and I think it's just a question of making an estimate early in the quarter when we are still in the process of implementing our reaction to those pockets of increased competition.

And then the other day I were just -- reinforced the third quarter that impacted the results were these two non-recurring items that I referred to in my text, the total $60 million in profit contribution. So, that was certainly an important drive as well.

Got it, thanks so much.

Our next question comes from Steven Velazquez with Bank of America.

Thanks. Good afternoon. I guess just for us, you guys absolutely don't normally break out any sort of operating profit by geography but just thinking about the side the distribution solutions was down by 24% year-over-year in the quarter. Share me the comment at sort of high level from when thinking about US versus Europe. Was the decline in the US more or less than that 24% average and then also just thinking about some of the moving parts in a year or two? I guess we're all just curious how geographically things shook out just between those two when thinking about the average. Thanks.

Well, as you mentioned we don't break out the profit by geography. I think the way to think about it is that we had gone into this fiscal year with a view of what might happen from a reimbursement perspective in the UK and then we very quickly realized that UK reimbursement environment was going to be more difficult. And I think ourselves and others talked about the challenge that put in front of us and I think we have done a really good job of now understanding what that effect is on that business and working hard to offset it to grow and to grow through it. I think the thing that became surprise obviously at the end of the year here for us in the back-half was both these onetime items as well as the view that independent generic pricing environment was going to be a bit difficult for us. I don't, I think other than that it's probably difficult for us to provide you more nuance guidance other than cleanly having two markets that are significant to us being negatively impacted simultaneously and then in addition having the inflation environment and brand being below what we had expected at the beginning of the year both played into it weaker than we had expected certainly quarter end and obviously the year as well.

And I would just add that while obviously we have seen those challenges in the UK market around reimbursement, we haven't seen similar things playing out in other European countries for Celesio, those have been tracking very much along the lines of our expectation during the year.

Yes. We are happy with the growth in those markets. I think the team is beginning to expand beyond just sort of the retail pharmacy business into other areas of opportunities or encouraged by that and the acquisitions we have made have been well executed and are delivering that real value. So, we talked about the revenue growth on the call but you look under the covers if you take out the UK reimbursement challenge, the business is performing well.

Okay. I appreciate, just a color, thanks.

Our next question comes from Ricky Goldwasser with Morgan Stanley.

Yes. Good afternoon. So, just turn to a waterfall app on the prepared comments, you talked about the weaker trends on generic inflation but when we think about these trends, where they environment with what you expected when you provided the guidance at the end of the second quarter or in generic deflation environment deteriorated throughout the quarter as well?

Well, I'd say couple of things. The way that we have been seeing generic inflation playing out obviously that's on a very small subset of the overall molecule base that has continued to be in line with our expectations very similar, so the story of the last couple of conference calls.

In terms of the generic deflation environment which is obviously the norm in this part of the marketplace across the across the complete sways of molecules. We continue to gain see nothing as normal here that's having material impact on the business model, so very much adequate system with what we have been saying overall this year.

Okay. And then with all the uncertainties around manufacturer's ability to raise brand prices and questions on whether 2nd July price increase can ultimately happen. Since it's shifting all the revenues, see for service and removing this contingency on price is increasingly more relevant. So, one can you talk about where you are in this process. I know John that you have talked about it in your prepared remarks but if you can give some more details. And second of all, if hypothetic be branded manufacturers are after only one price increase in the calendar year, how should we think about this when we model? Should we then model and I know that I'm stealing into 2018 question but should we hypothetically then think about a September core is where good profits would be down 10% year-over-year if no price increases happen this quarter? Just conceptually how should we be thinking about that and how we can assess that kind of like embedded risk or that bare case scenario?

Well, I think to your first part of your question, we are working actively with the manufacturers to make sure that we have our line of sight to the economics that are appropriate for the service that we provide. I think the manufacturers very much appreciate the work that we do and certainly have a willingness to fund our business model and to help us manage their business in a way that's more efficient frankly for them. And so, we are excited to continue to play that role. And with many of our manufacturer relationships, our economics have been properly set for a long time in the vehicle that we have been using to be paid. And that is risky as a price increase vehicle might be as the method by which we would be paid the piece that we deserve. And so, to your point, to the extent that we have been dependent on price increases as a funding mechanism with a manufacturer who is no longer on their own taking those price increases will certainly go back to them and because of that behavior change, worked and negotiated a relationship that gives us as I said our compensation. On the second front, it was difficult for us to predict when manufacturers are going to have price increases. Whether they are going to have one or two or more, what the rate of increase will be, are they say going to, if they say they're going to have one and they are going to have all the ones at the same time or are they going to have multiple on these products at different times of year or different products at different times during the year. So, I think it is a little bit of black box to your point. From a modeling perspective, it's probably a little premature for us to give you a view as to how we are going to think about the quarterly progression of our profitability and clearly when we are on our conference call in May to the extend we have better visibility we will try to help you not only understand that the risk we still have in our model which we try to outline at the beginning of every fiscal year with our assumptions but we'll try to also try to help you understand how price increase behavior quarter-to-quarter may create variability or risk.

Okay, thank you.

Okay.

Our next question comes from Garen Sarafian with Citi.

Good afternoon John, James. Following-up on a prior question regarding independent pharmacy price and to further clarify, could you discuss the current market alignment that you are seeing. So, has pricing stabilized, was any of the downside related to additional actions by either the competitors or which was just your only in the midst of the process we made an estimate or any other factor that you could elaborate on, would be appreciated.

Clearly we have great visibility to our customers demand from us and we have a great visibility to the mix of products that they order and just the relationship overall. As I mentioned in my prepared comments, with our customer base, we saw our recovery in both units and frankly added to it related to their long-term partnership with us and we've retained our relationship and our business for those stores. That's an indication that the pricing decision that we made in the quarter and talked about in the previous call was appropriate and then the price that we set at the end of the process in the quarter was the appropriate price otherwise we would have not seen that customer retention or that unit recovery. So, I hesitate to say that pricing isn't a fluid environment but we typically don't see these large pockets of price competition in our basic customers and we seemed to have resolved that with the actions we took earlier in the quarter. And I think lastly what I would say is that I think the estimate we made early was more informed as we got through the process and it was more of an estimate as we started the process and so to answer your question about continued heightened or unusual competition in our independent customer base we believe has largely subsided because of the actions we take.

That's useful. And then a follow-up on the branded drug that you mentioned that you are now at 90 ton breakout. So, within that 90% that fee for service, do you typically build in any flexibility into those types of contracts where you be relatively not that to either net or gross pricing or any cause to revisit the contracts, certain situations occur?

First of all, I'd like to maybe clarify a point about the contracts being 90:10 as opposed to the income being 90:10. So, when James and I talk about 90:10 ratio on profit from branded manufacturer, that's really how the dollars result out of those relationships. We shouldn't take it to mean that 90% of our contracts are fixed and 10% of our contracts aren't.

Absolutely, I misspoke. Correct.

And secondly, we have an ongoing discussion with our partners as you might imagine. And it is a good relationship and I believe that the dollar value of the service we provide is where our conversations typically are focused. Now it's obviously drive by a multiple of revenue or throughput through our business but the dollars are what fund are activity. And so, if there were to be a dramatic change in the way our partners price their products and your description is going from the gross price to a net of rebates price, we clearly would only be happy if we could cover the same dollar result out of that new matrix as opposed to a different kind of relationship. So, I think that the likelihood of that happening number one is slim and second if it were to happen we currently would actively renegotiate our contracts to create a mirror image result that we have today with the different set of multipliers or factories involved. At least that’s where I would attempt to reconcile.

That's very useful. Thank you.

Our next question comes from Lisa Gill with JPMorgan.

Thanks very much. Good afternoon, John and James. James let me just start with the first question around the non-recurring items that you called out for $60 million. 1) Did I just miss all the commentary what they are for 2) and if they were included in this quarter does that help to explain the progression as we get into your guidance for or the implied guidance for drug distribution in the fourth quarter?

So, the $60 million with the two items recorded in Q3, so yes that's the an important element in bridging through to the full-year guide. So, that is something I particularly do want to emphasize. That's correct.

Can you tell us or give us little more color what they were for?

One was a resolution of a customer contract that had related to a variety of years going back in time so certainly something that I think of as a onetime type item. And the other was an accounting reserve that we believe was appropriate to take again around receivables in the certain segment of the business within distribution solutions. So we feel as though we are being appropriately conservative around those reserves.

Okay, great. And then just to think about a topic as we think about going into the fourth quarter John, you discussed a ton around this in your dynamic, in the independent market but I just want to make sure that I understand in the third quarter we saw all the pricing impact so when we think about this progression from the third quarter to the fourth quarter independent stays the same the pricing on branded looks a little bit better because it's coming in within your expectations versus the third quarter was below we don't have these onetime items as we go into the fourth quarter and I think that you commented also again correct me if I am wrong that generic price deflation is also roughly within your expectations, but we also see [Claris 1] start to impact the numbers in that fourth quarter?

Pretty a good bunch of questions Lisa, but let me start, I will have James jump in if I miss something. Clearly there might be a little bit of a tail of continued lap negative on the independent pricing just because as I mentioned our estimate on the last call was slightly higher than where it actually netted when we set the price and that netting process probably left us a month or weeks off in the full quarter effects in Q3 if that makes sense to you. As you go into Q4 there is a little missing hole there on that net price affect on the independent business. The branded price inflation I think that is, what’s early in this quarter to call it but I would say that we believe that on the back half guide for branded price inflation we are going to be in pretty good shape. We didn't have much in our expectations around generic price increases and then we had these onetime items that James referred to a few moments ago. James.

And in Claris 1, I wouldn't expect that to be material contributor in Q4. I think that will help us in FY 18.

Okay great. That's helpful. Thank you.

Our next question comes from George Hill with Deutsche Bank.

Good afternoon guys. Thanks for taking the question. I know this hasn't come up yet, well it has come up, but James can you quantify or I guess provide any kind of sense of severity around what was the step down in the [selfie] pricing versus what you thought was at the end of fiscal 2Q versus where it came in the end of fiscal Q3?

I am not again to sort of offer a specific guide around that as John was alluding to the expect, it's going to be at the sort of the full run rate in Q4 and we saw significant majority of that same effect in Q3, but there was a certain movement downward during the quarter after we had last spoken to you on this call.

Okay. And then maybe just kind of a quick follow-up on just kind of one more on this topic is that if most of the impact was observed in fiscal Q3, I guess fiscal Q2, Q3 and Q4 then there is - there is a little bit of lapping impact that takes place early in fiscal ’18 and then it's kind of fully behind us from a comp perspective. I want to make sure that I am not missing something either in the contracting methodology or in the pricing methodology or the pricing impact of this is able to be contained and then margins expand again it's kind of the pricing that’s, the pricing is occurred with the segment of the market that those profits have kind of been extracted here and have been passed through the customer. That's not something that returns to us?

So, I would expect the lapping effect that you are referring to in the first half of the year just a little bit into A Q3 as well because system was what I was saying just a moment ago.

And George, I think some people probably don't fully understand that we priced the generics, every day we are pricing generics. So to forecast where the generic profitability will for our customer base next year is probably difficult. Obviously, Clais 1 will have an effect on us from a buying perspective and we set our sell prices on the generic space so that our customer get a competitive price and a fair price but that is a bit of a moving target I don't want you to think that our pricing has been “locked in” and sometime form us a lake way, it really is responsive to market conditions.

Okay that's helpful. Thank you.

Our next question comes from Ross Muken with Evercore ISI.

Hi, good afternoon. So I realize you are not going to give us details on 2018 in terms of guidance in general. But, from a methodology standpoint given the volatility we’ve had in results this year and given some of the challenges in forecasting some of the specific factors, is there any thoughts just sort of whether it’s from a transparency or in terms of other things you all give us sort of help understand the trajectory. Any thoughts on sort of the methodology of whether or not you intend to sort of guide as you typically do and provide many of the same metrics or do you think now that with some high data is there other things we should be looking at to get a better sense. Because it does feel like there is a lot going on in the business right now. It's kind of hard to ascertain Q to Q kind of the flow of where profits are going?

I am certainly sympathetic to the difficultly in terms of understanding the dynamics of our business. I think that I will let James jump in here little bit on the whole forecasting and what we might provide you in terms of view as we get into next fiscal year. I will say however that the business is always complex and they are lots of moving parts to it and they always have the lots and moving parts. The challenge that we have this fiscal year in particular is it that the moving parts are moving negative on us simultaneously and usually you have things that are offsetting in the business so we don't end up with as you said the challenge and forecasting because we have generally offset some of the negative things with more positive things and unfortunately this year we haven't had that type of dynamic.

Yes, I would just add that obviously was still going through however FY 18 planning process. As I think about the discussions we have had on these three conference calls of this fiscal year obviously we’ve ended up having to talk about different things in a more detailed manner to be able lay out the underlying drivers of the results and we will take that perspective into how we think about discussing our guide as well. So I think that does logically expand the variables that we have traditionally talked about when we have done the May earnings calls just because we have been expanding all the discussions during the last three conference calls with you.

And that’s helpful perspective and I guess obviously executing quite a bit share repurchase in the quarter you saw quite a bit outstanding but you also have a lot of cash cutting in and you have the proceeds from change I mean obviously you guys have always done a portfolio approach. Is there any bias to share repurchase medium term still just given where the stock is and how you compare that to kind of the external opportunities or you still see a ton in the pipeline that you feel like it can give you more superior returns than buying your own stock today?

Well, we certainly continue to light the portfolio approach to capital allocation that we have deployed for a number of years. Obviously in the last quarter, we did a goodly amount of both M&A as represented by the rightful transaction as well as share buyback. Today we have announced the acquisition of Cover my meds. So, I think that's an illustrative we continue to see opportunities to deploy capital to M&A that we believe can generate long term cash flow profit growth and build the strategic capability of the company. That said, we aptly through the cash flow generation and that's of course giving us more flexibility to take advantage as I think we have in this last quarter with a quite large share buyback action. At a time we are not stocks trading at a relatively low multiple.

Great, thanks James.

Our next question comes from Michael Cherny with UBS.

Good afternoon guys. Most of my questions have been answered, but I think there was a question while back around your conversations with manufacturers and how that's changing the [indiscernible] changing pricing dynamics. I guess John, overtime you mentioned the relationship you guys have, is a value for value rationale, you guys are true partners. As you think going forward, as you go back to have these conversations, what are the key selling points that you are focused on offering them particularly environment where these manufacturers continue to get questions about their pricing environment and how do you think about the incremental value proposition above and beyond what you guys have done for the last 10-20-30 or 100-80 years with these various different companies?

Well clearly, we are trying to build our capabilities so to your point the value proposition we delivered to them hopefully year in and year out is increasing in value. And frankly the Cover my meds discussion we had in the beginning of this call is a very positive example of where we are deploying capital to help our manufacturers particularly the branded manufacturers the revenue side of their P&L which frankly is probably a lot more important to them then the basis point side of their P&L where they pay us and I think that - the ability for us to get people on their meds to reduce the friction associated with getting prescription filled and to keep people on their meds after they have been prescribed and to reduce the administrative cost associated with payers and pharmacies dealing with patients and physicians who are trying to get prescriptions filled will be very helpful and has proven to be very helpful. And clearly, we have done the same thing on our U.S. oncology business where we are no longer just necessarily a commodity wholesaler trying to sell oncology products, but we are a company that can truly partner with the physician to change the character of their practice and the profitability of their practice. So, you will see us continue to do that and on the specific issue of the fee structure with manufacturers, clearly if we have been working alongside them for years and developed a relationship around being paid through price inflation, I think it's fair for us to go back and ask them when they have changed their behavior not related to us to go back to them and ask them to pay us a different way if they are no longer going to use our price increases as the funding mechanism for their wholesale relationship. So, we are going to be successful as rapidly as we want and we are going to be 100% successful not yet to be seen but that clearly is our objective adding more value and making sure that we strike a bargain where they can feel fair the composition we have asked for is fair.

Thanks John. I know, it’s odd time, so I appreciate the color.

You are welcome.

We will take our next question from Robert Willoughby with Credit Suisse.

Just a quick one for James, you mentioned that you would comment on the changed healthcare transaction upon closing. Is that sometime inter-quarter as you mentioned or will the comments really on the guidance and the contribution come with the May conference call?

No, I would expect that we will be closing the transaction during this quarter and it will be appropriate to update you at that time.

Okay, press release then and call or just press release?

Well, I am not sort of those details, so it maybe a press release. We will see how things play out in the next three or four weeks.

And certainly, we don't have a public call. Obviously, the IR team is available to help address questions if it's not clear from the press release.

Perfect. Thank you.

I want to thank you, I know, for your help today and I want to thank all of you on the call for your time today. We continue to focus on the success of our customers and the value we deliver everyday and we look forward to updating you on our fiscal 2018 outlook when we provide you our fourth quarter earnings results in May. So thank you and good-bye.

And that does conclude today's conference. Thank you for your participation and you may now disconnect.