McCormick 3Q17 Earnings Call Notes

Lawrence Kurzius

Vanilla bean prices have risen to $200 per pound

I’ll also say that we have taken several moves on vanilla as the cost of vanilla beans has moved from single digits per pound to well over $200 a pound and that’s been well understood in the industry and so their price increases have been accepted.

McKesson FY 2Q17 Earnings Call Notes

McKesson (MCK) Q2 2017 Results

Lowering outlook due to moderating branded pharma inflation trends

“we now provide an update to our expectation of a lower profit contribution, resulting from recent customer pricing activities, and lower operating profit as a result of further moderating branded pharmaceutical inflation trends, compared to previous expectations, both of which affect our U.S. pharmaceutical business within Distribution Solutions.”

Witnessed some evidence of inflation and pricing softness in line with original assumptions

“In our first quarter, we witnessed some evidence of inflation and pricing softness in line with our original assumptions. However, this softness became much more pronounced in our second quarter, first around brand inflation and later, around customer pricing. While we generally do not provide specific assumptions around customer pricing activity, we do operate in a competitive environment. And though competitive, we’ve always been focused on delivering value to our customers, value not just defined by price, but by service, innovation that helps our customers partner, manage, and run their operations, and manage their capital more effectively, and innovation that helps our customers connect with patients in a more informed and intimate way.”

Average price increases don’t necessarily capture price change dynamics

“branded inflation, it’s plus or minus what you’ll see from published sources of inflation. But it is also important to point out that those averages sometimes don’t necessarily tell the whole story, because of the mix, or the relationship, or the individual products that are going up or going down in the portfolios can be materially different. And so I do think the economics aren’t always necessarily driven with the direct correlation to the average price increases that everybody talks about.”

Pricing wont improve market share because our customers don’t want to change

“And that’s where we plan to stay. And I know at McKesson, at least, we think growing market share through a price-oriented approach ultimately will not be successful, because customers don’t want a change. Our customers, when they get a better deal, come to us and say, hey, listen, can you match this deal because I’d like to stay with you. And so that customer pressure to remain with us because they like us always provides McKesson an advantage when we’re in these discussions.”

McKesson FY 1Q17 Earnings Call Notes

McKesson (MCK) John H. Hammergren on Q1 2017

Strategic sourcing partnership with Walmart is a clear endorsement of our capabilities

“Last, in May we announced a strategic sourcing partnership with Walmart. Walmart is a very sophisticated company, not just on the logistics side, but around their sourcing and procurement operations. The selection of McKesson is a clear endorsement of not only our long-term partnership, but also McKesson’s world-class pharmaceutical sourcing and procurement capabilities. Building a long-term relationship made sense for Walmart and we were the right partner”

Both party platforms are emphasizing cost and quality

“I think the thing that’s most notable is that in both platforms, you hear a discussion about cost and quality at some level. And clearly we believe the healthcare industry is headed on a continued improvement front on both of those dimensions. We need to take cost out of the healthcare system, and we need better visibility to quality, and people are increasingly going to be paid in a way that reflects the value they deliver on those two dimensions.”

That theme should stay in place regardless of which candidate wins

“So I think regardless of the candidate that wins, or the party platform that gets adopted, we’re trying to help our customers prepare for that environment of more cost pressure, and more inspection of their ability to deliver value. And part of that is also going to require them to collaborate and connect across the boundaries of their individual businesses. So I would say that that theme is the thing that stuck out the most, is that I think the issues that have been raised in the previous administration around these issues, or I should say the interest raised around these issues in the previous administration will continue.”

James A. Beer – Chief Financial Officer & Executive Vice President

McKesson FY 3Q16 Earnings Call Notes

McKesson’s (MCK) CEO John Hammergren on Q3 2016 Results

Generic price inflation is modest

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

Fluctuation in valuations does make some opportunities more attractive

“I would say that, the fluctuation in valuations does make some opportunities more attractive than others and clearly even some of the private companies have might have dreamed of IPOs et cetera may be more available to a conversation with us than they might have been otherwise.”

Generic inflation has been driven by a small number of molecules

“we talked about generic inflation in the past, we talked about the fact that is driven by a small number of molecules from a small number of manufactures that have inflated to very high degree and I’d say that our current experiences at some of those out layer increases have diminished significantly. But overall if you think about the portfolio overtime it has been in more of a deflationary mode”

We think we’ll retain the Rite Aid business

“I’d remind folks that on early January I’ve made a comment about this business we believe will be retained by McKesson in its current form through late in our fiscal 17 numbers. ‘

People are probably thinking twice about raising prices with the current political discourse

“I would say the political discourse that’s taking place and the congressional inquires relative to pricing practices, I think are obviously going to have people at least pausing perhaps to consider whether now is the right time to take price increase.”

Performance of branded pharma companies probably easier to forecast

“I believe the performance of branded pharmaceutical companies is probably easier to forecast give that it has been less volatile in the last decade than perhaps the generic industry we’ve seen more volatility. And that volatility certainly is partially driven by supply and disruption.”

McKesson FY 2Q16 Earnings Call Notes

McKesson (MCK) John H. Hammergren on Q2 2016 Results

Our industry is going through a period of dynamic change

“There’s no doubt our industry is going through a period of dynamic change. I’ve been CEO of this company for 15 years and in healthcare my entire career.”

Despite the political headlines, pharmaceuticals are still the most effective and affordable way to treat patients

“Coming back to the broader industry environment, pharmaceutical pricing trends have become the frequent subject of news headlines as we get deeper into this presidential election cycle. The observation I would make is that this pharmaceutical pricing discussions tend to ebb and flow over time. However, what remains clear is that pharmaceuticals are still the most effective and affordable way to treat patients. And innovation and drug development and the trend toward higher levels of generic penetration continue to deliver real value and cost savings through the healthcare industry.”

Clearly there is more media attention on price inflation, but we don’t expect manufacturers to change their strategy

“clearly there is more media attention and there is more discussion about price inflation in the market. But I happen to believe that the manufacturers that we work with at least will largely retain their current strategy. And there may be some outliers that begin to change their perspective slightly, but overall I think we expect the trends to continue.”

We’ll do everything we can to help RAD with this transition

“Clearly we’ve had a longstanding relationship with Rite Aid and we’ll do everything we can to help them in this transition. And we have a great deal of respect for Mr. Pessina and his team at Walgreens and the kind of value they’ve delivered over a long time.”

Our job is to deploy capital intelligently

“our job is to find ways to grow our business and to do it intelligently and to do it in a risk-bounded way and to deploy capital intelligently. So I think our number one priority is to deploy capital in places where we have a base and an expertise and where it’s not a completely new leg of the stool, but it’s something that’s additive to what we’re currently doing.”

This is clearly a period of dynamic change

“Our industry experiences periods of dynamic change, and this is certainly one of them. And I’m confident that we will continue to participate in that change in an extremely positive way. We remain extremely well positioned to deliver the best service and value in the industry on behalf of our customers.”

McKesson FY 4Q15 Earnings Call Notes

29% EPS growth

“For the full year, revenues increased 30% to $179 billion and adjusted earnings per share from continuing operations increased 29% over the prior year to $11.11.”

Policy makers will support value based care in the US

“The policymakers have set meaningful direction to support a transition to value-based care in the United States. Recently Congress overwhelmingly passed H.R. 2 which permanently replaces Medicare’s sustainable growth rate system. The bill, which was signed by the President, provides needed reimbursement stability and predictability for providers in the near term while they transition to a more incentive-based payment system by the year 2019. The bill also contains provisions for healthcare data interoperability among other important provisions.”

Lots of considerations for biosimilars

“I want to acknowledge that there has been quite a lot of talk of late regarding biosimilars. We expect the biosimilar landscape to evolve over time and we believe this new category will play a growing role in the specialty market. The success of each biosimilar drug and drug class has many dependencies, including the channel of delivery, the disease which the drug addresses, physicians’ views on quality and efficacy and the value delivered by various participants in the supply chain.”

More dollar value of generics in FY 2016, but economics not quite as good

“I think we actually expect more dollar value of generic launches, or I should say branded generic launches – launches of branded drugs in fiscal 2016 than there were in 2015. So you’re right, there’s more dollar value of product going generic. I think as we look at our portfolio of generic estimates, we frankly see the character and characteristics of some of those generics being not quite as favorable for us as the launches that took place in FY 2015.

So an example would be a generic that might have many, many participants, and the value back to the supply chain as a result of that competitive activity wouldn’t be as great.”

If the Sup Ct. rules out of favor of subsidy, congress will probably act

“I think the end result or even if something were to come from the Supreme Court ruling that may put a question mark on the subsidy or support for these patients I think that there’ll be a quick reaction on the Hill to try to find another way to provide low-cost quality care to patients so they don’t fall through the crack and end up in the emergency rooms in America.”

Plug for our industry: Pharmaceuticals are the best way to treat patients

“I would remind also to the listeners that know this well that pharmaceutical use and the appropriate use of pharmaceuticals and primary care physicians is the best way to treat patients as opposed to letting them their situations falter and having them end up in an acute situation in one of our Great American hospitals and that I think needs to be avoided.”

Justification for focusing on Europe over Brazil:

“I think the way we think about Europe is the way I think about McKesson 16 years ago when I landed in this seat. How do we – how can we optimize the performance of the businesses we have and focus on those businesses and then how do we branch from those businesses to adjacencies that we know how to operate in markets where we can compete. And I think the situation with Brazil, it was not obvious that we could create a market-leading strategy there particularly given the vertical nature of some of the retailers in that market. And nuances associated with the business models down there and clearly whether it was scaled properly, et cetera, that I think the conclusion was reached that we should have our focus on Europe and in those markets where we currently have a strong beachhead.”

McKesson FY 2Q15 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Generic price inflation may be coming down a bit

“we believe that some of our second quarter inflation was pulled slightly ahead into the first quarter. Our outlook for the year remains unchanged, down slightly from the inflation rates we experienced last year but still pretty robust.”

We’ve been surprised by the strength in Hep C volumes

“We have been surprised by the strength of the hepatitis C volumes. And they come along with lower margins, as I intimated. Without those 2 hepatitis C drugs, our margin would have been right around the 250 basis point level for Distribution Solutions.”

German, French and Brazilian markets have been challenging for Celesio

” think stepping away from Celesio specifically and looking at the markets, clearly, there is continued price pressure in Germany, in the wholesaler side of the business, and which I think the industry has been talking about for some time. Clearly, the French economy has not performed at the level that some would have had expected. And there’s additional pressure in that market. And Brazil has been a challenge for many of the companies that are competing in the Brazilian market.”

Not everyone is affected in the same way by inflation and reimbursement pressures

“I think it’s interesting when you talk about customers because each one of our customers experience their business in an individual way because they’re a mix of payers, their view of inflation, their contracting processes, how they price their book, are all different. So I think it’s difficult to lump everybody into a giant basket and say this is how they’re being affected”

People who are saying that purchasing scale has not yielded benfits may be people who have something to lose

“I would point out that there are many voices in this discussion. And the voices have different objectives perhaps. And that maybe the objectives of some of those voices is to try to make sure that these purchasing collaboratives, cooperatives, joint ventures, whatever you want to call them are not successful in aggregating volume because it may be to the disadvantage of other people in these channels. And so I — all I can speak to is the fact that we continue to get the benefits that we had expected as we entered these arrangements. “

McKesson at Leerink Conference Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

We think global reach will bring value to our manufacturing partners

” we very much have the view that we’ll bring a strong value proposition to our manufacturing partners. Sometimes that’s around a manufacturer who wants to enter into a new geography that they haven’t necessarily been in before. But we have over a good long period of time now had a nice track record of really providing a lot of value to our upstream manufacturing partners as a result of our volume of purchases, as a result of the quality of our distribution network, the reliability of our distribution network. So, we think we bring a lot of capabilities to these new markets just as we have on traditional North American market.”

To be clear, the Rite Aid deal is purely commercial, nothing more

“Well, to be very clear, our relationship with Rite Aid is one where we do the buying of the generics for them. So, it is not a joint venture. There is no equity arrangement or anything of that nature, it’s just purely a commercial. We buy on their behalf, so thereby increasing our overall generic scale of buying. And that, along with various other attributes of product and service that we’re able to offer upstream to our manufacturing partners, allows us to get very keen pricing. And so, that’s been beneficial to us. And of course, it’s also beneficial to our downstream pharmacy customers, Rite Aid and all of the others included.”

We think we can help TGT and WMT with their generic buying

” we do have a number of current customers who do do their own generic buying today. And for a long period of time, we’ve been talking to these customers about the value that we think we can bring to them if we were to do the buying of the generics on their behalf. Obviously, it was good from our perspective to hear Rite Aid on their recent earnings call, talking about how they very much feel as we’ve delivered on the buying, generic buying savings that they were expecting that we’ve delivered on the $0.25 billion of working capital savings that they were expecting. And in fact, they’re delighted with the service levels that we’ve been able to now put into place [ph] that all of it does (10:22) with direct-to-door delivery five days a week. So, they’re obviously a nice advocate for some of these pillars of value that we think that we could bring to other customers.”

We’re taking a much different strategy than our competitors on sourcing

“Clearly, Cardinal and ABC have taken a very different stance, if you will, in essence, and we’re outsourcing that type of capability up to CVS for Cardinal, Walgreens for ABC. We’ve taken the stance that our sourcing capability is absolutely strategic to the future business direction of McKesson.

We see opportunities, particularly with Celesio, to further expand our worldwide reach of sourcing knowledge and capability. So, that’s the path that we’re heading down, whereas obviously Cardinal is paying $1 billion or potentially more to CVS over 10 years or so to be able to access the CVS price list. And then ABC is working as a participant in the joint venture owned by Walgreens and Alliance Boots. So, there is quite a distinction in the strategy that we’re taking in terms of generic sourcing versus our traditional competitors.”

Generic price inflation pretty narrow

“Well, we continue to see the price inflation being driven by supply shortages and of really a couple of flavors, either where the FDA is taking some action around enforcement; that is shutting down a line or a plant to particular manufacturer; or the other flavor really being where a manufacturer has for their own financial return reasons, their own resource allocation priorities, elected to do likewise, to shutdown a plant, maybe a line, maybe reduce capacity on a line, some flavor of that sort of activity that reduces the overall supply of a drug from that one source, providing opportunity to other sources to raise prices.

Now, it’s important I think to note that we continue to see this occurring on a really small minority of the generic pharmaceuticals with which we work.”

New blockbusters have a big impact on the top line but a more limited impact on gross profit

” while the drugs like SOVALDI and OLYSIO from J&J certainly have quite a significant impact to the top line. They have a much less of impact around the margins line. So, in fact, we updated our margin guidance for our Distribution segment, when we gave our Q1 result, saying that we think we can build Distribution segment margins a handful of points – basis points year-over-year. So, that’s a little bit less than what we articulated at the start of the year, in essence. And that’s very much driven by the lower-margin profile of this very high volume start to the year that SOVALDI and OLYSIO had.”

McKesson 2Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Raising EPS guidance

“Based on the strength of our Distribution Solutions results in the first quarter and our confidence in the full year, we are raising our previous outlook and now expect adjusted earnings per diluted share of $10.50 to $10.90 for fiscal 2015.”

HepC revenue in line with market share

“Well, you’ve seen Gilead announce their results, and I’d just say that directionally, our revenues coming out of Sovaldi, for example, would have been in line with the overall market share across the 3 big distributors in this country”

HepC drugs leading to very modest margin reduction

‘the guidance that I offered a little earlier, mathematically it represents a very modest reduction in margins for Distribution Solutions. And obviously, those have been going up consistently in recent years. And at Analyst Day, you’ll recall that we reset the long-term margin goal for Distribution Solutions up to between 250 and 300 basis points. So modest impact from these Hep C drugs in the short term.”

Generic inflation is going to affect each of the distributors differently

“would say is that I would reflect on the fact that we all have different fiscal years. We all have different portfolios of generics. We have different proprietary programs in the generic world. We have different relationships with generic manufacturers. And having said all of that, our point of view on generic price inflation for our fiscal year remains unchanged”

McCormick and Co 1Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings.

Weather was unfavorable for grilling

“There was a later start to the grilling season. The weather was not favorable for grilling. We’re expecting a pretty good grilling season as we go through the summer and we’re planning to extend it through the third quarter and even through Labor Day and to tailgate season so we’re pretty encouraged.”

Seeing some share creep from tiny branded spice companies

“Private label is more flat. Most of the — we have one larger branded competitor and that competitor is relatively flat. And so what we are seeing is very small inroads from a number of small and regional competitors that are gaining one-tenth of a share point or two-tenths of a share point. Their overall share base is still less than 1% or 2%, I think as I looked at the most recent period.”

Strong growth international, weak growth domestic

“We had the strong growth in the international markets and then we had obviously the U.S. consumer results that you saw as we reported. It’s too early for us to be that specific”

Half TV half digital and PR for marketing spend

“Where we are spending our money is about half in TV half in digital and PR and so we are encouraged by what we are seeing. What you’ll see in the back half is additional support for our big programs like holiday, fall cooking and also some digital initiatives that will help to drive some of our new product sales.”

UK is particularly tough for them

“Yeah the UK market is specifically tough market. There has been a lot of press on the large customers there and some of their challenge is specific to what we’re doing in our business. It’s very similar to what we’re doing in the U.S. with new products and with supporting our brands with advertising.”

There is some inflation, but not anticipating taking price

“we’re not anticipating any near term pricing, any new near term pricing in our consumer business at this point…There is some upward cost inflation specifically in commodities like pepper and vanilla and we’re working with our CCI programs to help to try to offset those. Obviously if it gets excessive then we’ll readjust our thinking. But certainly we’re not anticipating anything before the end of 2014.”

Anticipating 2-3% inflation

“We said it was in the low single digits, 2% to 3%.”

Snack foods customers innovating

“Our snack customers are continuing to do pretty well and continuing to innovate and we’re seeing that reflected.”

Packaged foods not doing so well

“Our packaged food customers are struggling with core volume and part of the way that they are trying to overcome that is with new product innovation that we are working with them on.”

Customers are pushing more innovation into the pipeline

“We have a stronger innovation pipeline this year than we had at this time last year. So we continue to have a good outlook on that obviously as customers adjust their thinking and focus more on promotional spending or on driving different core products, they may change that.”

Recovery in China QSR

“In China what we are seeing is a recovery in QSR, driven I think a lot by our customers having an increased frequency promotions and limited time offers to bring consumers back to the stores. ”

New businesses should be grown with a pay as you go philosophy

“we think India is certainly a longer term play…We’ve again taken the philosophy that we generally take in a market like this that we pay as we go. So as the business earns its ability to invest then we’ll make the investment”