Baird Conference Presentation

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  • 1. Baird 2005 Growth Stock Conference Jeff Campbell Executive Vice President Chief Financial Officer May 11, 2005
  • 2. Safe Harbor Clause Some of the information in this presentation may constitute forward-looking statements that are subject to various uncertainties. These uncertainties could cause actual results to differ materially from those projected or implied. The risk factors associated with those uncertainties are described in the Company’s reports and exhibits filed with the Securities and Exchange Commission. Financial information is presented here in summary form. Full details are provided in the Company’s most recent 10-Q report. All of this information is available at www.mckesson.com. 5/11/2005 1
  • 3. Overview Who We Are Business Update Summary 5/11/2005 2
  • 4. Who We Are 5/11/2005 3
  • 5. McKesson’s Solutions … Building On Distribution Strength Since 1833 Solutions for medication safety Pharmaceutical & medical- surgical distribution to all sites Clinical, financial & resource management for hospitals & IDNs Inpatient automation Specialty Retail pharmacy pharmaceuticals automation Disease management Drug cards for seniors Pharmaceutical 5/11/2005 4 repackaging
  • 6. Our Business Today McKesson McKesson McKesson Provider Technologies Medical- Medical-Surgical Pharmaceutical 63% of health systems #1 in primary care #1 in U.S., Canada, and Mexico 51% of hospitals with #1 in extended 200+ beds care Large Rx repackaging Leader in clinical, Total supply Leading generics provider revenue cycle, solution in acute #1 in retail pharmacy and resource care automation management solutions Private label Specialty distribution & More “Best in KLAS” product offerings patient services for products than any Rapid growth in manufacturers other vendor physician office #1 in medical management #1 in robotic hospital pharmaceuticals software and services for pharmacy dispensing and equipment payors #1 in bedside scanning #1 in disease management for Medicaid agencies 5/11/2005 5
  • 7. Strong, Long-term Customer Relationships with Market Leaders Vanderbilt University Medical Center 5/11/2005 6
  • 8. McKesson’s Strategy To bring together clinical knowledge, process expertise, technology, and the resources of a Fortune 15 company to fundamentally change the cost and quality of healthcare. Create long-term Introduce relationships based Sell McKesson’s innovations that on custom solutions comprehensive address emerging that deliver offering healthcare ROI & quality challenges 5/11/2005 7
  • 9. Strong Financial Track Record Diluted EPS, continuing operations AGR C 35 % $2.19 $1.90 $1.44 $0.65 ($0.15) FY00 FY01 FY02 FY03 FY04 5/11/2005 8
  • 10. FY05 Consolidated Financial Highlights ($ and shares in millions, Q4 Full-year except EPS) FY04 FY05 FY04 FY05 Revenues $ 17,940 $ 20,612 $ 69,506 $ 80,515 14% 16% Net Income (Loss) 214 259 647 (157) 21% - Diluted Earnings (Loss) Per Share $ 0.73 $ 0.85 $ 2.19 $ (0.53) 16% - Weighted Avg Shares - Diluted 297 305 299 294 3% -2% 5/11/2005 9
  • 11. Securities Litigation Settlement Agreement reached January 12 to settle consolidated securities class action, subject to court approval $1.2 billion pre-tax charge in Q3-05, $810 million after tax: Class action settlement for $960 million plus $240 million reserve for remaining related cases Anticipate financing securities litigation settlement liability mid fiscal year Increased financial flexibility to continue to execute our strategy 5/11/2005 10
  • 12. FY05 Consolidated Financial Results** ($ and shares in millions, Full-year except EPS) FY04 FY05 Revenues $ 69,506 $ 80,515 16% Net Income** 647 653 1% Diluted EPS** $ 2.19 $ 2.19 -- Diluted Weighted Avg Shares** 299 301 1% Operating Cash Flow $ 595 $ 1,538 158% Gross Debt to Capital 22.3% 18.7% Net Debt to Capital 12.9% -12.8% ** Excluding the impact of $1.2B pre-tax securities litigation charge, net of tax $810M See Schedule 1 from 5/5/05 press release and reconciliation slide for complete reconciliation. 5/11/2005 11
  • 13. Business Update 5/11/2005 12
  • 14. Pharmaceutical Solutions 5/11/2005 13
  • 15. FY05 Financial Results – Pharmaceutical Solutions Q4 Full-year ($ in millions) FY04 FY05 FY04 FY05 Revenues U.S. direct distribution & services $ 10,225 $ 12,228 $ 39,412 $ 47,007 20% 19% U.S. sales to customer warehouses 5,573 5,983 21,622 24,100 7% 11% Subtotal 15,798 18,211 61,034 71,107 15% 17% Canada distribution & services 1,145 1,296 4,459 5,211 13% 17% Total Pharmaceutical Solutions 16,943 19,507 65,493 76,318 15% 17% Gross Profit 569 691 2,077 2,203 21% 6% Operating Expenses 285 308 1,119 1,152 8% 3% Operating Profit 288 391 980 1,077 36% 10% Operating Profit Margin 1.70% 2.00% 1.50% 1.41% 30 bp (9) bp 5/11/2005 14
  • 16. Pharmaceutical Solutions Business Update Negotiations with manufacturers to secure more predictable compensation are nearing completion More than 80% of manufacturer compensation will not be affected by the timing/magnitude of price increases when all agreements have been signed by mid-year Continued focus on customer contract compliance to improve profitability in Fiscal 2006 All major expiring customer agreements renewed Sell margins show signs of stabilization Strong generics position creates foundation for continued growth 5/11/2005 15
  • 17. Medical-Surgical Solutions 5/11/2005 16
  • 18. FY05 Financial Results – Medical-Surgical Solutions Q4 Full-year ($ in millions) FY04 FY05 FY04 FY05 Revenues $ 670 $ 738 $ 2,811 $ 2,895 10% 3% Gross Profit 153 171 604 654 11% 8% Operating Expenses 125 141 501 556 13% 11% Operating Profit 29 31 106 102 6% -4% Operating Profit Margin 4.39% 4.24% 3.79% 3.53% (15) bp (26) bp 5/11/2005 17
  • 19. Medical-Surgical Solutions Business Update Strongly positioned in higher growth/higher margin alternate site sectors Moore Medical strengthens position in alternate site Adventist experience validates value proposition of Optyx system in the acute care sector 5 additional agreements create market momentum Continuing to invest in technologies that will differentiate McKesson 5/11/2005 18
  • 20. McKesson Provider Technologies 5/11/2005 19
  • 21. FY05 Financial Results – Provider Technologies Q4 Full-year ($ in millions) FY04 FY05 FY04 FY05 Revenues Software & software systems $ 59 $ 79 $ 218 $ 246 35% 13% Services 227 251 869 936 10% 8% Hardware 41 37 116 120 -10% 3% Total Provider Technologies 327 367 1,203 1,302 12% 8% Gross Profit 172 175 567 608 2% 7% Operating Expenses 91 137 451 514 50% 14% Operating Profit 84 46 128 107 -46% -17% Operating Profit Margin -- as reported 25.63% 12.44% 10.66% 8.20% (1,319) bp (246) bp Operating Profit Margin** excluding reserve reversals 6.67% 12.44% 5.51% 8.20% 577 bp 269 bp **Excluding the impact of certain reserve reversals in Q4-FY04. See reconciliation slide for a reconciliation to GAAP reported amounts. 20 5/11/2005
  • 22. Provider Technologies Business Update Continued focus on accelerating implementations to drive customer satisfaction and revenue recognition Implementations at Duke and IASIS provide valuable experience to accelerate other installations Integrated medication safety solution changes view of automation products Investments in innovation paying off Top 20: 2004 “Best in KLAS” year-end report: 12 MCK products in top 3 in category, #1 among all companies Two “Best in KLAS” #1 rankings Two other Specialty Niche Category #1s 5/11/2005 21
  • 23. Summary 5/11/2005 22
  • 24. Fiscal 2006 Outlook (Provided May 5, 2005) FY06 expectation: $2.25 to $2.40 per share Revenue growth, excluding warehouse sales, at market growth, adjusted for our customer mix Warehouse sales flat Stabilization of customer sell margins Operating cash flow expected to exceed $1 billion Guidance assumes no share repurchases Historical seasonality should continue 5/11/2005 23
  • 25. What McKesson Represents Core pharmaceutical business positioned for sustained market growth Strongly positioned in value-adding businesses across spectrum of healthcare services Track record of financial performance and strong balance sheet Securities settlement removes uncertainty and increases financial flexibility, pending class action settlement Create Value for Suppliers, Customers and Shareholders 5/11/2005 24
  • 26. 5/11/2005 25
  • 27. EPS Reconciliation ($ and shares in millions except EPS) Full-year FY04 FY05 Net income (loss) - as reported $ 647 $ (157) -% Exclude: Securities Litigation charge - (1,200) - Estimated income tax benefit - 390 - - (810) - Net income, excluding Securities Litigation charge $ 647 $ 653 1% Diluted earnings per common share, excluding Securities Litigation charge * $ 2.19 $ 2.19 - Shares on which diluted earnings per common share were based * 299 301 1% * For the years ended March 31, 2005 and 2004, interest expense, net of related income taxes, of $6.2 million has been added to net income, excluding the Securities Litigation charge, for purposes of calculating diluted earnings per share. This calculation also includes the impact of dilutive securities (stock options, convertible junior subordinated debentures and restricted stock). 5/11/2005 26
  • 28. Provider Technologies – Operating Profit Reconciliation ($ in millions) Q4 Full-year FY04 FY05 FY04 FY05 Operating profit - as reported $ 84 $ 46 $ 128 $ 107 (46) % (17) % Exclude: Customer settlement reserve reversal (47) - (47) - - - International contract reserve reversal (15) - (15) - - - (62) - (62) - - - Operating profit, excluding reserve reversals $ 22 $ 46 $ 66 $ 107 109 % 62 % Operating Profit Margin - as reported 25.63% 12.44% 10.66% 8.20% (1,319) bp (246) bp Operating Profit Margin, excluding reserve reversals 6.67% 12.44% 5.51% 8.20% 577 bp 269 bp For the year and quarter ended March 31, 2005, reserve reversals have been added back to operating profit and the calculation of operating profit margin to aid in the period-over-period comparison of results. 5/11/2005 27