Craig Mercer - Investor Relations John Hammergren - Chairman and Chief Executive Officer Britt Vitalone - Executive Vice President and Chief Financial Officer

Steven Valiquette - Barclays Lisa Gill - JPMorgan Glen Santangelo - Deutsche Bank Elizabeth Anderson - Evercore ISI Brian Tanquilut - Jefferies Robert Jones - Goldman Sachs Ricky Goldwasser - Morgan Stanley Eric Percher - Nephron Research Michael Cherny - Bank of America/Merrill Lynch

Good day, ladies and gentlemen. Welcome to the McKesson Fourth Quarter Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Craig Mercer. Please go ahead sir.

Thank you, Nicole. Good morning and welcome to the McKesson’s fiscal 2018 fourth quarter earnings call. I am joined today by John Hammergren, McKesson’s Chairman and CEO and Britt Vitalone, McKesson’s Executive Vice President and Chief Financial Officer. John will first provide a business update and then Britt will review the financial results for the quarter and full year. After Britt’s comments, we will open the call for your questions. We plan to end the call promptly after one hour at 9:00 a.m. Eastern Time. Before we begin, I will remind the 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 forward-looking statements slides and 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 Britt will reference adjusted earnings, adjusted operating profit margin excluding non-controlling interests, free cash flow and items excluding foreign currency exchange effects. Please note, McKesson will no longer provide forward-looking GAAP earnings per diluted share guidance. The company is unable to provide this information without unreasonable efforts given the inherently uncertain factors impacting forward-looking GAAP results. Many of which are beyond the company’s control, such as LIFO inventory related adjustments, gains from antitrust litigations and certain impacts from federal tax reform. We filed the second 8-K with the SEC today, which includes supplemental historical statement financial information for fiscal 2016, 2017 and 2018 results as well as quarterly information for fiscal 2018. This will allow you to compare our fiscal 2019 outlook to our historical results on the same segment basis. Finally, I would call to your attention the supplemental slide presentation that we will reference on today’s call which maybe found on the Investors page of our website at mckesson.com. We believe the earnings press release, supplemental slides and the supplemental historical segment information 8-K filing, which I will include non-GAAP measures will provide useful information for investors with regard to the company’s underlying operating performance and comparability of financial results period-over-period. Please refer to these materials which maybe found in the Investors section of our company website for further information and a reconciliation of the non-GAAP performance measures to the GAAP financial results. Thank you. And here is John Hammergren.

Thanks, Craig and thanks everyone for joining us on our call. I am pleased to report our fourth quarter adjusted earnings of $12.62 representing a 1% growth year-over-year. These results were consistent with what we communicated a month ago which included a lower tax rate, stronger operational performance, and our $100 million contribution to create the new nonprofit foundation. And our fiscal 2019 outlook for adjusted earnings of $13 to $13.80 per diluted share represents low to high single-digit percentage growth year-over-year. This outlook reflects a competitive, but more stable market environment and effective capital allocation, while including the anticipated headwinds in our European and Canadian businesses. I would also remind you that our multiyear strategic growth initiative is not expected to materially impact our financial results in the coming year. We are in the preliminary phase of implementing the strategic growth initiatives and efforts are well underway across the organization. We will provide more details on our progress as well as our growth initiatives at our Investor Day, which is scheduled for the end of June. Turning back to our operating performance, I am pleased with our fourth quarter results, which were driven by solid execution across multiple businesses. And for the year, we were able to deliver results that were largely in line with our expectations outlined at the beginning of the year. Britt will cover our annual financial performance in greater detail, but let me provide some color on the year just concluded. During fiscal ‘18, we demonstrated our sourcing expertise and shared significant benefits with our partner, Walmart. We are excited about what we are able to deliver as well as the potential for expanded opportunities through this partnership. We bring new value to health systems customer relationships and renewed our extended contracts with all of our major independent buying groups in the past 18 months. We recorded the first full year of operations of Change Healthcare and scaled healthcare information technology business, which began integrating the combined businesses, realizing targeted cost synergies and preparing for the future initial public offering. And we made changes to our leadership team, including optimizing our management structure and combining our U.S. pharmaceutical and specialty health businesses. We made several important acquisitions during the fiscal year and we recently announced the acquisition of Medical Specialties Distributors, or MSD, which is intended to, among other things, expand our manufacturer value proposition in specialty capabilities. We successfully executed against each of these operational and organizational changes, which are aligned with our strategic growth initiatives and help positioned the company for the long-term. However, we did not anticipate the sizable additional government-driven headwinds in the UK and Canada. Let me take a moment to provide more details on these two topics specifically. First, the UK government initiative has not only impacted our current year performance, but will continue to have an impact going forward. These actions are on cost containment and medicine optimization among other things resulted in the designation of some prescription drugs as over-the-counter. While each year we modeled typical reimbursement cuts, we saw incremental cuts that drove a greater headwind than we had anticipated. As we entered the new fiscal year, we have assumed the mitigation efforts will fully offset anticipated government actions. We believe this assumption is appropriate given actions we announced in our second quarter earnings call to close or divest underperforming stores in the UK market. Switching now to Rexall, in many ways, the impact of the government initiatives in Canada are similar to what we saw in the UK. And while the reimbursement and minimum wage headwinds impact the entire Canadian supply chain, retail pharmacy operations are more impacted significantly. We do, however, had clear line of sight into generics reimbursement environment, for the next 5 years. And as I mentioned on our April call, we remain committed to retail in delivering high-quality care in a way that works for patients. In response to these government actions, our Canadian business has begun work on mitigating their impact, which includes advancing revenue diversification opportunities and additional reimbursed pharmacy services driving increased operational efficiencies, while ensuring consistent high-quality patient care delivery and taking on the leadership role and industry efficacy with governments on a sustainable reimbursement model. Next, we are pleased with the progress of our multiyear initiative to implement differential pricing for brand, generic, specialty, biosimilar and OTC drug classes in line with the services we provide to both our customers and manufacture partners in all of these five categories. We continue to address these important changes as we work through our contract renewal cycles. We remain confident in McKesson’s path forward, the critical role of the services we provide to the healthcare industry today and our ability to identify and apply solutions to address the most pressing challenges to healthcare systems globally. In summary, fiscal 2018 represented a year of stabilization, while providing a solid platform for our multiyear growth initiatives. I was encouraged by several developments during the year. First, despite the ever competitive environment we operate in, the revenue growth of our combined U.S. pharmaceutical and specialty health businesses was in line with our expectations, with higher growth being from the Specialty Health. We expect low to mid single-digit revenue growth for fiscal 2019 reflecting continued strong organic growth in this business. Additionally, RxCrossroads acquisition further expands our broad range of solutions throughout the lifecycle of the drug for biopharma companies. This transaction aligns squarely with our growth priorities supporting manufacturer programs and specialty solutions. Next, looking past the UK government actions we previously discussed, Europe’s businesses performed well. We began realizing synergies from prior acquisitions, which provide a foundation for our retail pharmacy growth initiative. We anticipate revenue to be flat to growing by mid single-digits driven by market growth in fiscal 2019. In Medical-Surgical, we delivered another year of solid growth and we are well positioned to support the growing alternate-site opportunity with the announced acquisition of MSD. This acquisition complements our alternate-site service platform and in combination with strong organic performance is expected to deliver revenue growth in the low double-digit range for fiscal 2019. McKesson Prescription Technology Solutions, or MRxTS, is a fundamental part of our strategy to help manufacturers and retail pharmacies to be successful. We are excited by innovative solutions like Express Coverage, a collaborative new solution, leveraging the expertise of McKesson’s Health Services and RelayHealth Pharmacy and CoverMyMeds, vast healthcare network and we believe we can do much more to benefit patients with the complementary capabilities we have built. And in Canada, while the government actions will create a near-term headwind, the business grew nicely in fiscal 2018. In addition, the acquisition of Well.ca provides patients with another channel to connect with us and forms part of the platform for future growth as we execute our retail pharmacy of the future initiative. Before I wrap up, our Board of Directors welcomed Brad Lerman as a new independent director in late April. Brad brings with him extensive compliance government relations and corporate strategy experience further strengthening the diverse backgrounds and perspectives we have on our board. I am extremely proud of this management team’s ability to adapt and maintain a constant focus on the patient in building our value proposition to help make our customers and suppliers more successful, which will continue to drive growth and long-term value creation for our shareholders. Last, I’d like to take this opportunity to thank our employees for their dedication, leadership and consistent focus on putting patients at the center of everything we do. With that, I will turn the call over to Britt and will return to address your questions when he finishes. Britt?

Thank you, John and good morning. Today, I will review our fiscal 2018 results, discuss our new segment reporting structure, provide a brief update on our multiyear strategic growth initiatives and provide details around our fiscal 2019 adjusted EPS guidance range of $13 to $13.80 per diluted share. As a reminder, we provide guidance on an annual basis due to both the seasonality in quarterly fluctuations inherent in some of our businesses. In this context, an annual view of our financial results can be more meaningful and provide more insight into key trends. Therefore, my comments today will focus primarily on annual results. Let me begin with a review of our results for fiscal 2018. Today, we reported fiscal 2018 adjusted EPS of $12.62 reflecting a lower tax rate and share count as well as solid operating results partially offset by the fourth quarter, $0.31 per diluted share contribution to create a nonprofit foundation to combat the opioid epidemic. Turning to Slide 6 of the presentation, our fiscal 2018 adjusted earnings exclude the following GAAP-only item. Amortization of acquisition-related intangibles of $2.60 per diluted share, acquisition-related expenses and adjustments of $1.20 per diluted share, LIFO inventory related credit of $0.31 per diluted share, restructuring charges of $2.82 per diluted share, including long-lived asset impairment charges and other adjustment net charges of $6.01 per diluted share comprising the non-cash goodwill impairment charges for our European and Rexall businesses and the early repayment of long-term debt that we disclosed last month, which was partially offset by benefits related to the Tax Cuts and Jobs Act of 2017 and the sale of our Enterprise Information Solutions business in third quarter. In connection with the annual goodwill impairment testing that takes place in our fourth quarter, we recognized non-cash after-tax goodwill and long-lived asset impairment charges, principally related to McKesson’s European and Rexall businesses, which were driven primarily by government actions in these markets. The European charges were driven by a weakening script growth outlook in our UK retail pharmacy business and a more competitive environment in our French wholesale distribution business. The Rexall charges relate primarily to the reason we implemented generics reimbursement reductions across Canada and minimum wage increases in multiple provinces. As it relates to our fiscal 2019, these two items, the reimbursement reductions and the minimum wage increases represented gross pre-tax headwind of between $100 million and $120 million. As John discussed, the Canadian team is working to mitigate the impact of these actions and we are confident that these initiatives will reduce the negative impact to our results in fiscal ‘19. Now, let’s turn to the details of our consolidated full year fiscal 2018 adjusted earnings, which can be found on Slide 8. Consolidated revenues for the full year increased 4% in constant currency versus the prior period primarily driven by market growth in acquisitions partly offset by the contribution of the majority of our technology solutions businesses to Change Healthcare in late fiscal ‘17 and the transition of Rite-Aid stores in the second half of fiscal ‘18. Full year adjusted gross profit was down 2% in constant currency year-over-year, primarily driven by the Change Healthcare transactions and the year-over-year effect of increased price competition in our independent pharmacy business in fiscal 2017, which we fully lap during fiscal 2018. These drivers were partially offset by organic growth, including contribution from our joint sourcing entity, ClarusONE and contributions from acquisitions closed in fiscal 2017 and 2018. Full year adjusted operating expenses increased 3% on a constant currency basis driven by acquisitions partially offset by the Change Healthcare transaction and ongoing cost management efforts. Adjusted income from operations was $3.9 billion for the year, a decrease of 4% in constant currency. Interest expense of $283 million decreased 8% in constant currency for the year driven primarily by the refinancing of debt at lower interest rates and net long-term debt repayments, which is partially offset by short-term borrowings. Now, moving to taxes, our adjusted tax rate was 19.6% for the year driven by our mix of business, a lower U.S. tax rate from recently enacted federal tax reform, the beneficial impact of the onshoring of our technology intellectual property in the third quarter of fiscal 2017 and discrete tax benefits. Additionally, income attributable to non-controlling interest was $230 million for the year, an increase of 173% in constant currency primarily driven by fee income from Clarus. Our adjusted net income from continuing operations totaled $2.6 billion for the year, with full year adjusted EPS at $12.62 per diluted share, up 1% compared to $12.54 in the prior year. Wrapping up our consolidated results, during the fourth quarter, we completed $750 million of share repurchases bringing our total share repurchases for the fiscal year to approximately $1.7 billion. As a result, share repurchase activity late in fiscal 2017 and in fiscal 2018 our full year diluted weighted average shares outstanding decreased by 6% year-over-year to $209 million. Next, I will review our segment results, which can be found on Slide 9 and 10. Starting with our Distribution Solutions segment, revenues were $208.1 billion for the year. Revenues benefited from $1.6 billion in favorable currency rate movement. On a constant currency basis, revenues increased 5% year-over-year. North America pharmaceutical distribution and services revenues increased 6% driven by market growth in acquisitions partially offset by brand to generic conversions, lower revenues due to the transition of Rite-Aid stores and 2 less sale days in our U.S. pharmaceutical business. International pharmaceutical distribution services revenues were $27.3 billion for the year. Revenues benefited from $1.3 billion in favorable currency rate movement. On a constant currency basis, revenues were up 5% driven by acquisitions and market growth. And finally, Medical-Surgical revenues increased 6% for the year driven by market growth, including a stronger than anticipated flu season. Segment adjusted gross profit was up 12% on a constant current basis driven by acquisitions in organic growth across multiple business units, including strategic sourcing benefits from ClarusONE. These gains were partially offset by the year-over-year lapping effects of increased price competition and our independent pharmacy business in fiscal 2017 and the impact of reduced reimbursement in our UK retail pharmacy business. Segment adjusted operating expenses increased 14% on a constant currency basis. This increase was driven by acquisitions in the midst of retail and technology businesses partially offset by ongoing cost management efforts. Full year segment adjusted operating profit increased 8% on a reported basis and 7% on a constant currency basis to $4.1 billion driven by the same factors as previously discussed. The full year segment adjusted operating margin rate was 196 basis points, an increase of 3 basis points. Turning to our Technology Solutions segment, revenues for the year of $240 million reflects the contribution in the first half of the year from the now-divested Enterprise Information Solutions business, which also contributed $32 million to adjusted operating profit. Adjusted equity income from Change Healthcare was $272 million for the year, which was in line with our expectations. Next, McKesson reported $527 million in full year adjusted corporate expenses, an increase of 30% year-over-year primarily driven by the previously discussed fourth quarter $100 million contribution to create a nonprofit foundation. I will now review our working capital metrics and cash flow which could be found on Slide 11. For receivables, day sales outstanding decreased 2 days from the prior year to 25 days. Day sales and inventory was flat at 30 days and days payables outstanding decreased 1 day from the prior year to 60 days. I would remind you that our working capital metrics and resulting cash flow maybe impacted by timing including the day of the week that marks the close of a given quarter. These working capital metrics, along with our continued focus on cash generation, results in $4.3 billion in cash flow from operations in fiscal 2018 above our original guidance. In addition to our outstanding execution, a portion of the gains we made in fiscal ‘18 were related to timing. Approximately $500 million of the operating cash flow performance was driven favorably by the fiscal year ending on a Good Friday and the early receipt of a customer payment that was anticipated to be received in fiscal 2019. Outside of year end timing impact and the transition of approximately 1,900 Rite-Aid stores late in the fiscal year, we had solid focus and execution on cash generation. We ended the quarter with a cash balance of $2.7 billion. For the year, McKesson repaid approximately $765 million in net long-term debt and $580 million on internal capital investments, a $2.9 billion for acquisitions repurchased approximately $1.7 billion in common stock and paid $262 million in dividends. And yesterday, our Board of Directors approved an increase of $4 billion to our existing share repurchase authorization. We now have a total of $5.1 billion remaining on our share repurchase authorization. Now, let me take a moment to discuss our new segment reporting structure effective in fiscal 2019. As previously disclosed we began an evaluation of our management and reporting structure. As a result of this review, we will now report our financial results in three reportable segments: U.S. pharmaceutical and specialty solutions, which included our now joint U.S. pharmaceutical and McKesson Specialty Health businesses, European pharmaceutical solutions and Medical-Surgical solutions. All remaining operating segments and business activities are included in other primarily comprised of our McKesson Canada business, our MRxTS business and the equity method investment in Change Healthcare. We believe this new segment reporting will provide increased transparency and visibility for the underlying operating performance of the businesses within McKesson. I encourage you to review the second 8-K that we filed today provides historical supplemental information on the basis of this new reporting segment structure and will help you frame our 2019 outlook. Before I get to our fiscal 2019 outlook, I’d like to briefly update you on the multiyear strategic initiatives we announced in late April. As we have discussed, we are focused on driving growth by improving the alignment of our operations to support the key growth pillars that we have discussed with you in April. Specific areas of operational focus over this multiyear period through delivering efficiency, driving cost out functional areas such as informational technology, finance and human resources. Additionally, we are focused on investing and developing world class data and analytics platforms and building solutions to become more efficient and agile. These efforts are expected to yield increased productivity and operational flexibility. I am sure that our operations have the right operating and financial rigor and generate meaningful cost savings for the organization and fiscal 2019 will help fund the growth pillars that we have outlined. As part of preliminary phase of this initiative, we continue to expect to incur GAAP-only after-tax restructuring and other charges of approximately targeted $150 million to $210 million in fiscal 2019. I will remind you that these GAAP charges are not included in our adjusted earnings outlook. Now, let me provide context to our fiscal 2019 outlook. As described in our press release issued today, McKesson will no longer provide forward-looking GAAP guidance. We will continue to provide transparency around our GAAP results, including the reconciliation of our adjusted earnings to GAAP results. We expect adjusted earnings per diluted share of $13 to 13.80. This guidance reflects low to high single-digit growth in adjusted earnings year-over-year. As a reminder, our fiscal ‘19 adjusted earnings outlook excludes the following items: amortization of acquisition-related intangibles, acquisition-related expenses and adjustments; LIFO inventory-related charges or credits, gains from antitrust legal settlement, restructuring charges and other adjustments, which may include gains or losses from divestitures, asset impairments or adjustments to claim and litigation reserves. I refer you to the list of assumptions included in the press release we issued today, which are also on Slides 14, 15 and 16 rather than go through each assumptions, said walk you through the key items in our outlook. On a consolidated basis, we expect revenue growth in the mid single-digits year-over-year driven by market growth and previously closed our announced acquisitions. Adjusted income from operations anticipated to be down slightly to up mid single-digits. For the U.S. pharmaceutical and specialty solutions segment, we expect low to mid single-digit revenue growth year-over-year reflecting market growth and acquisitions partially offset by Rite-Aid and adjusted operating profit is anticipated to be flat to down mid single-digits driven primarily by customer losses partially offset by organic growth and accretion from acquisitions. In the U.S. market, we anticipate branded pharmaceutical percentage price increases in the mid to high single-digits consistent with fiscal 2018. As I noted on our third quarter earnings call, while the overall brand inflation rate is important, it’s less important to McKesson as we have evolved our branded compensation arrangements to reduce the variability associated with brand inflation. And for the generic environment, all of our customers will continue to benefit from our strategic sourcing through ClarusONE. And on the sell side, we see the market environment as competitive, but stable. Last, in terms of new oral generic pharmaceutical launches in the U.S., the profit contribution is expected to be nominal. For the European pharmaceutical solutions segment, we expect flat to mid single-digit revenue growth year-over-year reflecting market growth and flat to mid single-digit adjusted operating profit growth, which is anticipated to be driven by organic growth partially offset by the lapping effect of the UK government initiatives I mentioned earlier. This outlook assumes typical reimbursement cuts in the UK market. As we discussed on our second quarter earnings call, we initiated a cost savings program in response to the UK government announcement of additional reimbursement cuts, which were incremental to their more typical annual reimbursement reductions. This initiative included identifying and implementing actions to offset the fiscal 2019 impact of reimbursement cuts, which included approximately 200 store closures or divestitures. The program is substantially completed in fiscal 2018 and we anticipate realizing savings of fiscal 2019 as a result of the program. For Medical-Surgical Solutions segment, we expect low double-digit revenue growth year-over-year, reflecting the anticipated close of the MSD acquisition and market growth and mid to high single-digit adjusted operating profit growth which is anticipated to be driven by the ongoing shift of care to lower cost alternative-site care we serve and modest accretion from MSD, which we expect to close in the first half of fiscal 2019. For other, we expect low single-digit revenue growth year-over-year reflecting market growth and flat adjusted operating profit, which is anticipated to be primarily driven by growth in our MRxTS business offset by the negative impact of Canadian government initiatives, which I mentioned earlier. For Change Healthcare, we anticipate the equity contribution to grow in the low to mid single-digits primarily reflecting progress against the cost synergy target partially offset by anticipated higher interest expense. As a reminder, the equity contribution from Change Healthcare maybe impacted by the tax rates applicable to the underlying businesses, which includes a mix of pass-through and taxable income. Corporate expenses are expected to decline year-over-year primarily driven by the fiscal ‘18 contribution to create a nonprofit foundation partially offset by incremental technology investments planned in fiscal 2019. We expect both interest expense and NCI to decline year-over-year and the guidance range assumes an adjusted tax rate of approximately 21% to 23%, which may vary from quarter-to-quarter. This adjusted tax rate reflects our mix of businesses and the benefit of a lower federal tax rate partially offset by a changed accounting rules no longer allows the company to reduce its tax rate for the amortization benefit related to the intercompany sale software with Technology Solutions segment in the third quarter of fiscal 2017. We expect weighted average diluted shares for fiscal 2019 to be approximately $200 million, which reflects the impact of share repurchase activity completed in fiscal 2018 and the benefit of share repurchases anticipated in fiscal 2019. In addition, we expect the positive foreign currency impact of up to $0.10 in fiscal 2019. In terms of fiscal ‘19 earnings progression, we expect the first half quarterly EPS progression to be similar to last year and that the second half will have a stronger relative EPS constitution. Turning to cash flow, beginning in fiscal 2019, we plan to provide guidance on free cash flow as we believe this non-GAAP measure provides a more useful metric as the company’s ability to generate cash. We defined free cash flow as cash flow from operations, less property acquisitions and capitalized software expenditures. We expect free cash flow to be approximately $3 billion in fiscal 2019, which is net of property acquisitions and capitalized software expenditures estimated to be between $600 million and $800 million. In closing, I am pleased to reiterate our fiscal ‘19 adjusted EPS outlook of $13 to $13.80 and introduced our new segment reporting structure, which we believe will provide you with more insight into our performance. And I am confident that the efforts underway to transform our operating model will drive increased efficiency and allow us to capitalize on growth opportunities. With that, I will turn the call back 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. Let’s turn the call over to our operator.

Thank you so much. [Operator Instructions] And we will take our first question from Steven Valiquette with Barclays.

Hey, thanks. Good morning, John and Britt. Thanks for all the extra segment details. I guess just drilling in a little bit deeper on the U.S. pharma segment with the operating profits expected to be flat to down a little bit in fiscal ‘19 you mentioned Rite-Aid as the key factor, but I am curious just two other quick questions around that. First, are there any material customer contract renewals also baked into that assumption and also is there any quantification of the acquisition contribution into that U.S. pharma segment EBIT expectation as well? Thanks.

Thanks for the questions, Steven. This is John. Our assumption around customer contract renewals is pretty consistent with what we have experienced in the past. So as you know we typically renew our customer contracts when they come up and we do a pretty good job of making sure that value is delivered to our customers and then we continue to drive efficiency in our organization. So I think the time that we have really come up on the negative end of customer contract renewals has been related primarily to consolidations where sometimes we can’t predict which way a customer might land or certainly the acquiring company might weigh more heavily in those decisions. So I think our forecast clearly would expect us to continue to renew our contracts and they have the normal kind of cadence of those renewals. Britt, perhaps you can help with the second question?

Yes, thanks for that. As it relates to M&A and the impact that we expected to have, as you know last year, we completed a number of acquisitions and in the fourth quarter, we completed the acquisition of RxCrossroads and I would remind you that we provided you an accretion estimate by the end of year three of about $0.25, but we completed a number of acquisitions that we are excited about, we think that they are going to add to the overall excitement and RxCrossroads is a good example of that.

Sorry, it’s future acquisitions though is there any assumption for that in there or is that not in there?

No, we have outlined for you the acquisition of MSD which we announced in our April call.

Which is in the medical segment.

Okay, got it. Okay, thanks.

And we will take our next question from Lisa Gill with JPMorgan.

Thanks very much. John, I just want to go back to your comment though about renewals on existing customers, can you just remind us are contracts generally renewed exactly at the date that they expire or is the anticipation that perhaps you give up some pricing prior to that expiration date, because that’s an important relationship?

Well, that’s a good question, Lisa. I would say, our history is that we maintain these relationships for very long times. The contracts might have duration of let’s say an average 3 years, but many of their relationships go decades and our typical pattern is to renew those relationships or extend those contracts in a form that’s very similar to what it’s been in the past. So, I’d say most of them don’t renew exactly on the expiration date. They usually sort of a rolling process of renewals before they expire to the standard to move forward with the relationships. So, your point is accurate. I can’t give you specific time, but these things would renew usually in advance of their expiration date.

And so I think what we just want to understand is that, that’s included in the guidance you gave, your anticipation is that you are going to renew the relationships that you have and that there could be some element of renewed pricing in the guidance that was given today?

Absolutely. I mean, our guidance fully reflects what we anticipate will happen in fiscal ‘19 and reflects the contracts that are expiring in our anticipation of not only the renewal, but also likely financial impact of those renewals. So, that’s fully included. Now, clearly, we could be surprised and we don’t anticipate that we are going to lose our customer base and that our assumptions are built into this forecast.

And then as a follow-up to that, when we think about incremental opportunities, we should think about those renewals and I think about ClarusONE, what are some of the incremental things you can add to that platform, over-the-counter products is one thing that comes to mind for me. Is over-the-counter an opportunity, do you think of other things that you can put into your purchasing procurement as you think about those renewals with some of these larger contracts that you have?

Well, Britt helped us build ClarusONE, I will let him address ClarusONE specifically, but obviously one of the things we are trying to do also is to get more and more of our customers to buy all of their generics from us and that compliance to our generic purchasing requirements continues to expand. So that’s part of the value that we derived both for our customers and for ourselves is getting more and more people into sourcing all of their generics from McKesson. As it relates to going beyond just generic purchases, Britt, maybe you can talk about future opportunities.

Sure. Thanks for that question. With ClarusONE, we are certainly working with Walmart, but also our other customers to understand where we have opportunities to leverage our scale collectively with our customer base. OTC is certainly an opportunity for us and it’s one that we have discussed among other, many other opportunities at Walmart. So clearly looking at how we can help our customers and how we can leverage scale across ClarusONE and our customers to deliver across multiple categories is certainly something that we are talking about and considering as we move ClarusONE forward.

Okay, great. Thank you.

And we will take our next question from Glen Santangelo with Deutsche Bank.

Yes, thanks and good morning. John, it’s pretty clear that your pharmaceutical and specialty solutions business is going through a pretty significant evolution here with respect to specialty and the generic tailwinds seemingly are largely in the rearview mirror. In your prepared remarks, you talked about your differential pricing strategy for brand and specialty and generics, could you talk about maybe how some of those contract renewals have gone with respect to this new pricing strategy? Is that having a near-term dilutive impact on your margins or how should we think about that?

Well, thanks for the question. I think as we have indicated and we began this process several years ago and as our contracts have renewed we have been very successful in working with our customers to provide specific pricing to the five categories of product purchases that I described. I think we have been quite successful and I would anticipate we will complete this process throughout this fiscal year and perhaps slightly into next fiscal year. I think what you are seeing in our business is a continued focus on driving value for our customers on many dimensions. Certainly, the specialty business is focused on the clinics, the U.S. oncology business, the things we do outside of the hospital continues to perform very well and grow rapidly, but there is also a growing portion specialty that’s inside of our standard U.S. pharmaceutical business. That mix change continues to be reflected in some margin pressure in our business and that’s what we have been attempting to alleviate when we renegotiated these contracts, having said that, there is incremental profit being derived from the sale of the specialty items even in these hospital settings. So I think the margin expansion opportunity that we have achieved in the past has been partially driven by the move to generics, it’s certainly been driven by the efficiency in our operations and now it’s going to increasingly be driven by our ability to become more efficient in our operation to offset a little bit by the mix change that we are seeing.

I would add to that, John, that, clearly the focus is not just on the customers as we think about the growth of specialty we work very collaboratively across our customers and our manufacturing partners to find the value not only for our customers, but our manufacturer partners if you think about our specialty business which we have invested in, we have a range of services and capabilities that we can help provide our manufacturing partners as well. So our focus here is obviously to get the right compensation for all five categories, but we do that looking across collaboratively on manufacturing partners and our customers.

Okay. Maybe just one quick follow-up and I apologize if I missed it on Change Healthcare, have you given us an update on the timing for the IPO?

We haven’t been very specific on the timing, I think because we are continuing to evaluate when the best time is for that company to go public. It’s going to be dependent on our view of the synergy and the flow of the synergies that we outlined at the beginning of the business case, obviously, the revenue projections for the business and then clearly market conditions. So I think stay tuned as we get closer to picking a date, we will certainly advise you, but the plan remains as it has been to take the company to an LDO – or excuse me an IPO process.

Thanks for the comments.

Our next question comes from Ross Muken from Evercore ISI.

Hi, this is Elizabeth Anderson in for Ross. Just sort of following up on Glen’s question, can you touch more broadly about the opportunity that you see in specialty today versus in the past, I know that there has obviously been some changes and commentary from HHS about shift of Part D. The Part D is sort of, how would that impact U.S. oncology or sort of your thoughts more generally on the topic would be very helpful?

Well, certainly, the exposure we have in specialty continues to grow and we have put the company in a position where we think we can benefit through this new growth cycle. A lot of the innovation that’s coming from the pharmaceutical industry is coming as you mentioned in the specialty categories in particular in oncology. And as Britt was talking about a few minutes ago, some of the acquisitions we have done on the internal development we have done has been to provide incremental services to pharma manufacturers, particularly those that are focused on specialty launches and what can we do to support them. So we have an increasing revenue and profit stream coming from the manufacturer services part of our business both in medical and in pharmaceutical products and we continue to increase the exposure the company has and the opportunity we have to support those launches with the manufacturers. As it relates specifically to reimbursement, clearly, we are following that very closely. We do, our customers in particular, had some exposure to what type of reimbursement models the government might put in place, but I think clearly everyone would agree that service provided by community-based physicians provides not only better access and convenience at people, quality, but it also does it at a much lower cost. And so I think that certainly ourselves and other people that are involved in the channel would clearly recognize and the payers as well recognize that community-based services of these specialty products is the place that people should go. So I am pleased with our footprint and I think we will continue to grow nicely as these products come to market.

Alright, that was helpful. Thank you. And then as a follow-up outside of specialty, what are your, sort of organic and inorganic priorities given your general shift towards higher gross margin business segment?

Well, you can see some of it played out in the acquisitions that we are doing. And as we have talked about the acquisitions in last year and the years prior, we are obviously trying to increase our exposure to specialty in the manufacturer services which we have talked about. We would see us continuing to invest in our Medical-Surgical business, MSD is a good example of that and you have seen us continue to expand our ability to attract customers through innovation from a technology perspective. So I think you will see us continue to invest across some very good dimensions and we obviously have done some acquisitions in our U.S. pharmaceutical business as well that have performed very well. So, I think it remains opportunities for us to continue to expand our service for our customers.

Okay, great. Thank you.

We will take our next question from Brian Tanquilut with Jefferies.

Hi, good morning. John, as we think about these contract renegotiations and you have been talking about the services that you can offer to manufacturers, so how are you thinking about the ability to leverage some of these wraparound services and capabilities that you have and how that could help you, so as we think about the contract renegotiations?

Well, you mentioned manufacturers in the middle of it, so we do have obviously contracts with providers.

I am sorry, I mean contract with the providers, but do the services that you provide the manufacturers and the wraparound, I mean, does that help you at all as you look at negotiating your contracts with the clients – with the providers?

Well, I certainly think on many dimensions it will. In some cases, we have exclusive access to products that we might be shipping to do our specialty pharmacy businesses. Clearly, in the medical side of our business, we have special arrangements with lab supplies and others, so that our customers would have a difficult time finding the complete set of solutions from another source and so that would be part of it. I would say that the services we provide to our customers in our biggest business, our U.S. pharmaceutical business continues to be driven by our ability to innovate and help them deliver value beyond just the cost of goods that we provide. So you have seen this grow our business significantly, for example, with Health Marts over a decade now, over close to 5,000 stores and that’s driven largely not just by the price of our generics as an example but by the value we can deliver to the store, improving their profitability, improving their access to patients and putting them into these narrow networks and making sure that they are getting a consistent supply of customers and new customers and growing the way the relationship can become over time through a more fulsome set of capabilities and we are doing the same thing on many dimensions with our largest customers. And that’s why our renewal rate with our customer basis has been so successful. We mentioned in our prepared comments that we have renewed or continued or expanded or pushed out our date of expiration on these large independent GPO customers. So, almost all of those now have been renewed and have been expanded. That happens because of the total value that we are able to deliver to our customers. I mean, if you back and look at our customer retention across even our largest most sophisticated customers, we largely retain those customers unless there is something disruptive that happens in the marketplace. So I think we are quite confident that we will continue to build these relationships and continue to expand in it. That doesn’t mean that we don’t have price pressure in it. We don’t have to renegotiate and get back some of the efficiencies we have derived over years in serving the customer, which will provide obviously some downward pressure on our margins, which is reflected in our guidance. I think we remain pretty committed to adding value to our relationships and expanding them.

Now, appreciate it, John. Just my follow-up since you have touched on generics, as we think about your guidance for 2019 and then you talked earlier about the stability or 2018 was the stabilization year, what are you expecting in terms of generic pricing, what are you baking into the guidance at this point? Thanks.

Well, we don’t talk specifically about generic pricing. I would say the way we think about generics, that was when we want to be the best buyer of generics in the marketplace and we believe we are today or currently equal to everyone that’s sourcing generics, our scale is quite significant. ClarusONE has performed exceptionally well and our customers benefit from the scale that we provide and certainly the manufacturers do from the share we are able to deliver consistently to them through these relationships. On the sell side of our relationship, we are committed to making sure that our customers retain or I should say obtain a competitive price and we know where the market price is for our customers on a molecule by molecule basis and we are committed to making sure that they remain competitive. And in the middle, between those are the spread or the return that we get for the work that we do. So, I think we see a more normalized generic market as compared to the recent past and we are confident we continue to manage that business on both the buying side and the selling side appropriately.

I appreciate it. Thanks.

And our next question comes from Robert Jones of Goldman Sachs.

Great. Thanks for the questions. I just wanted to go back to the U.S. pharma and specialty business and how you are thinking about growth over time, I know you have mentioned Rite-Aid, we have talked about contract renewals, obviously M&A is always going to be a part of the algorithm, but John, if you take a step back you know the guidance for flat to down mid single-digit EBIT in that segment obviously a lot of moving pieces in ‘19, but if you take a step back, how are you thinking about growth in that business? I mean, is it flat to down the right algorithm or do you think that there is things based on even some of the things you just discussed, is there ways that could expand EBIT, grow EBIT as we look forward maybe even beyond ‘19 in the U.S. pharma and specialty segment?

Robert, I want to turn this question over to Britt in just a moment, because he has spent some time thinking about it. But I would – my earlier answer related to the total value proposition we delivered to our customers is part of the way we begin to grow profitability in the direction of revenue growth and clearly, that’s a priority for us. There are some near-term headwinds partially driven by mix, partially driven by our anticipation of contract renewals, I would say for the most part that the business is positioned to perform well and we really have a foundation setting year going on in our U.S. pharma and specialty business, but Britt maybe you can add some color?

Yes, thanks for the question. I would say that our ‘19 guide is really reflective of some of the customer loss activity in transition, but Rite-Aid stores that we mentioned during our prepared remarks, but as we think about that business, specialty has been outlined for us as one of the key pillars. We think we have a lot of services and capabilities that we can provide not only our customers, but our manufacturing partners. And we think that’s going to position us well to participate in the growth of specialty from a dollar profit growth perspective. We have also made a number of acquisitions that we outlined through FY ‘18 that we believe are going to continue to strengthen our position in not only specialty, but the manufacturer services component of that business. While we have some near-term headwinds as John outlined, the business we believe is well positioned to take advantage of growing specialty marketplace.

That’s helpful. And then I guess just to follow-up, you guys mentioned a multiyear cost initiative, can you share anything just as far as how much of that is expected to impact ‘19? And then I guess more specifically where within the segments and the corporate line should we be expecting to see a lot of those initiatives start to take hold?

Yes, sure. As we mentioned in our earlier remarks, we are in the preliminary phase of our operating model work. We have outlined for you an expected set of restructuring charges for that preliminary base and we have also outlined for you that we expect that these savings that will generate will be modest in FY ‘19 as we build through some of these capabilities and some of these cost programs that we are looking at. So, we are in early phases of it. In FY ‘19 you should expect to see some investments and some savings that will help fund those investments that will really benefit us as we go into ‘20 and beyond.

Alright. Thanks so much.

We will take our next question from Ricky Goldwasser with Morgan Stanley.

Yes, good morning and thank you for taking my question. The narrative out of Washington is very focused on the middleman and we are getting a lot of questions from investors about what a potential shift away from gross to net pricing model could impact you guys? So, John, can you just kind of like help us think through that and also how does – how and does this is being reflected in the some of the conversation that you are having with the manufacturers?

Well, thanks for the question, Ricky. Clearly, there is – unless the government decides to impose some type of price methodology and price fixing or some type of price controls like we have in other socialized countries, but the gross to net discussion is really one that is in some control with the pharmaceutical manufacturers. And as we analyze what’s being said and we think the question of middleman is primarily focused on people outside of the pharmaceutical wholesaling business, the people that are heavily involved in receiving and/or processing rebates, incentives etcetera. So, we don’t think the focus and the discussion is really wholesalers’ business model and so that will be a part of my reflection on the question. And the second is that you can imagine that at the net price it’s realized by pharmaceutical manufacturers is a derivative of all of the discounts that they are providing and rebates they are providing to many, many different customers. And if you were to think about how they would move to a single price and what effect that would have on their profitability, it will be quite dramatic. I don’t think the manufacturers would be inclined to move to a single price for all of their customers and to not use – to go forward without using some type of rebate in their incentive programs to recognize the various discounts that are required to obtain business from different players in the industry. Having said all of that if they were to pursue some type of an environment where our business model has changed and the economics would change for us, we would do what we have done in the past, which is to sit down with the manufacturers. I reflect to them what their change in behavior has done to our profitability or could do to our profitability and we recoup that profitability by reorienting our agreements in a different fashion. We did this in the past when we went from a purchase process where we were focused on price inflation to a more stabilized environment through fees and we would do a very similar process with the manufacturers in this environment where we attempt to recapture the dollars that are involved here through a different mechanism. And I think we will be successful as we were before. No one in the supply chain has indicated an interest in getting rid of wholesalers and no one is focused on taking away our slim margins. No one has talked to me about the fact that they can find better utility in some other fashion. In fact, it’s quite the opposite. Our provider customers are using us more and more. They are relying more and more on our service. They order more and more of their products through shutting down their own warehousing. They are dismantling their own purchasing activities. So, they are focused on partnering closely with us. And on the manufacturer side, they are doing the same. They are more and more dependent on our national redistribution center and more focused on our manufacturer services in fact going more and more away from their own operations and using McKesson as a valued partner. So, although there maybe some disruption certainly concerns in a process of the transition that would be significant, I think we would emerge on the other side where we are today are better.

That’s very helpful. Thank you. And then Britt just one follow-up question on the guidance, I mean, obviously there is a wide range in guidance for U.S. North America operating income, it’s somewhere between flat to $150 million. You highlighted Rite-Aid, it’s about a third of the impact. So when we think about the low end of the guidance when we think about the swing factor, what is the biggest factor there outside of Rite-Aid, is it the sell side contracts renegotiation that you highlighted earlier in the call or is it something else?

No, well, thanks for the question. As John mentioned, we fully factor in all of the upcoming renewals into our guidance. So that’s already in there. I think what we are reflecting here is as we talked about before we have a couple of customer losses through consolidation in transition with Rite-Aid that is providing a little bit of a near-term headwind for us, but we continue to invest in the business through some of the acquisitions that we have outlined before and we believe that those acquisitions will continue to add value and be accretive to us over the longer term. So I think our guidance on the flat to down mid single-digit as you identified is really reflective of couple of customer losses that we talked about earlier in the call.

And perhaps, Ricky, what folks have missed is that there was a very large acquisition in the grocery business that affected us negatively and we don’t typically talk about specific customers or contracts and maybe some people measure that transaction and its effect on us as well in other grocery operators. We had a couple of transitions last year that we had not anticipated and really do largely to consolidation and we don’t anticipate that going forward, but you see it reflected at least partially in our guidance in addition to the loss of nearly half of those Rite-Aid stores.

And I would just reiterate as I talked about the generic environment, we do see a continuing competitive environment, but a more stable environment. I think that’s an important factor to just remind you of.

Which basically means that it might be a headwind, but it’s a stable one, so as we think about that range we should factor that as well, is that fair?

I think as I mentioned the sell side environment is competitive as it always has been, but it’s a very stable environment now as opposed to what we saw in fiscal ‘17.

Okay, thank you.

We will take our next question from Eric Percher with Nephron Research.

Thank you. I wanted to go back to the question on pharma and specialty and maybe you could put more simply, what is your view of the organic growth rates top line as well as the type of margin leverage de-leverage you would see on an organic basis kind of taking away the noise that we are seeing at the moment?

Well, thanks for that question, Eric. I will start off with that as we have outlined in our guidance here, our revenue is expected to grow low to mid single-digit. Now, that is reflective of some of the headwinds that we have already identified in our U.S. pharma business. Specialty is clearly the fastest growing product category in the marketplace today and while it has an impact on our margin rate, we are still participating well in growing margin dollars as a result of that specialty growth. And add to that, some of the things we have already talked about our position in specialty and some of the investments that we have made in specialty, it helps us to really leverage and capitalize on those opportunities to grow with specialty. So I think what you are seeing in our overall segment guide is a reflection of the headwinds from the customer losses, but specialty continues to grow nicely and we are continuing to participate in that op profit dollar growth.

I was just going to say is it fair to say that in a normal – given mix shift, the op profit growth would be modestly less than the revenue growth that’s reasonable, the investments that you are making are to drive op profit growth at or better than the top line growth rate?

I think that’s a fair way to characterize it.

Thanks, operator. I think we have time for one more question.

And we will take our final question from Michael Cherny with Bank of America/Merrill Lynch.

Good morning and thanks for the details so far. So one last question on the U.S. EBIT growth rate, you talked about some of the potential headwinds as you think about the bottom end of the range, if we get to the top end of the range in terms of the flattish number, where are the biggest drivers of that, is it better branded pricing that you expect, is it a push-out of some of the renewal pressure that you may or may not be feeling just trying to understand the full range of outcomes there to understand where the numbers could shake out as you are thinking about the various moving pieces in your business over the course of the year?

Thanks for that question. I think as we think about the range, there is a number of factors that can drive it. I have given you an idea of what our assumption is on branded pricing environment, which we expect to be similar to FY ‘18. So, certainly if the branded pricing inflation environment is different that could certainly impact it. We are very excited about the contributions from ClarusONE we think that we are making great progress there. We certainly have a lot of other opportunities in other product categories as we have talked about today and so that certainly is an element for us that we think that can help us continue to grow and to help our customers grow. And as specialty continues to grow and we continue to position ourselves well with some of the investments that we have made, I think that we are well-positioned to continue to take advantage of that. So, these are few of the factors that I would point out that could help us to get to closer to the top end of that range.

Thanks. That’s all I have.

Well, I want to thank you operator for your help today and thanks also to all of you on the call for your time. We have a clear strategy and a solid operating plan for fiscal 2019 and exciting growth opportunities across McKesson. Please enjoy the holiday weekend. And now, I will hand the call off to Craig for a review of his upcoming events for the financial community. Craig?

Thank you, John. We will participate in the Goldman Sachs Global Healthcare Conference in Southern California on June 13 and we will be hosting an Investor Day event on June 28 in Boston. We look forward to seeing you in the new fiscal year. Thank you and good bye.

Thank you for joining today’s conference call. You may now disconnect. Have a good day.