McKesson Corporation

Investor Relations. Please go ahead. Thank you, operator. Good afternoon, and welcome, everyone, to McKesson's first quarter fiscal 2025 earnings call. Today, I'm joined by Brian Tyler, our chief executive officer, and Britt Vitilone, our chief financial officer. Brian will lead off, followed by Britt, and then we will move into a question and answer session. Today's discussions will include forward-looking statements, such as forecasts about McKesson's operations and future results. Please refer to the cautionary statements in today's earnings release and presentation slides available on our website at investor.mckesson.com and to the risk factor section of our most recent annual report and other SEC filings for additional information concerning risk factors that could cause our actual results to materially differ from those in our forward-looking statements. Information about non-GAAP financial measures that we will discuss during this webcast, including a reconciliation of those measures to GAAP results, can be found in today's earnings release and presentation slides. The presentation slides also include a summary of our results for the quarter and updated guidance. With that, let me turn it over to Brian.

Thank you, Rachel, and I'll extend my good afternoon to everyone as well. Thank you for joining our call today. Earlier today, we reported first quarter company revenues of $79.3 billion, reflecting 6% growth year over year. Adjusted earnings per diluted share increased 8% to $7.88, above our original expectations. As a result of our performance in the first quarter, we're raising our guidance for full year adjusted earnings per diluted share from $31.25 to $32.05 to a new range $31.75 to $32.55. The continued business growth and strong cash flow generation allow us to deliver on our commitment to our shareholders. We're also pleased to announce that our board of directors approved a 15% increase to our quarterly dividend and additional share repurchase authorization up to $4 billion. This brings the total share repurchase authorization to approximately $10 billion as of July of 2024. Underpinning the financial performance is our continued execution on our company priorities. It was nearly five years ago when we centered our strategy around four company priorities and embarked on the journey of transforming into a diversified healthcare services company. We've been consistently executing against these strategies, driving enhanced value to our customers and delivering sustained financial growth across our operating segments. Of course, transformation Execution is a lot of hard work, takes the efforts of the full team, and the path to sustainable growth is not always perfectly linear. During the first quarter, we saw solid operating performance led by our pharmaceutical distribution business in the U.S. and Canada. Meanwhile, we experienced some headwinds in other parts of the business. In medical surgical, growth in the primary care channels was really slower than we anticipated, resulting in a year-over-year decline for the first quarter. In prescription technology solutions, adjusted operating profit was unchanged from the prior year, driven by growth and affordability solutions offset by lower contributions due to the mix of the services within our access programs and higher expenses to support future growth. We remain committed to our long-term growth targets. We have strong conviction in our strategy and confidence in the strength of our differentiated capabilities across the enterprise. Looking ahead to the remainder of fiscal 2025, Our focus remains on our company priorities and advancing our role as a diversified healthcare services company. We are investing in the business, especially where we can leverage technology to enhance product offerings and improve operational efficiencies. We've made great strides in these areas and I'll plan to share a few examples before I hand it over to Britt. Let me start though with our focus on people and culture. We firmly believe that people are the foundation for everything we do here at McKesson. as we strive to become the best place to work in healthcare. Recently, we were named one of America's best employers for diversity by Forbes, recognizing our dedicated efforts to fostering inclusion, caring, and belonging in the workplace. We also take a very thoughtful and strategic approach to attracting and retaining talent across the company, and this, of course, includes our board of directors. In June, our board of directors welcomed Deborah, Dr. Deborah Dunsire, as a new independent director serving on the Compensation and Talent Committee as well as the Finance Committee. She brings decades of experience in biopharmaceuticals and in oncology specifically. She's a highly respected healthcare industry leader as the former CEO of multiple biopharmaceutical companies. We're grateful for the unique experience that Dr. Dunsire brings to our board as she joins us on this exciting journey of growth and innovation. Moving on to our next priority of driving sustainable core growth in our distribution business. During the first quarter, we saw solid growth in U.S. pharmaceutical segments. Adjusted operating profit grew 6%, driven by growth in specialty pharmaceuticals and strong results in our oncology platform, which includes U.S. Oncology Network, Ontata, Provider Solutions, and the Sarah Cannon Research Institute Joint Venture, which we often refer to as SCRI. The results demonstrated the diversity and breadth of our oncology assets. Also in the pharmaceutical segment, one of the achievements I really want to highlight is the successful onboarding of a large distribution customer this past July. This is a significant endeavor that requires close coordination across many, many parts of the organization. I'm deeply grateful for the dedication and the commitment of the teams at McKesson. They worked hard to ensure an efficient and smooth transition for our customer and, most importantly, for their patients. This is an example of the terrific execution McKesson is known for. Moving on to the international segment, we saw growth in the quarter above expectations, primarily driven by the performance of our Canadian business, which includes pharmaceutical distribution, retail pharmacies, and technology-enabled capabilities. We're pleased to see organic growth in the business supported by the stable trends in pharmaceutical volumes. Throughout the quarter, the team also identified opportunities to apply technology and artificial intelligence in areas like inventory control and supply chain management. We're still at the early stages of application, but the opportunities ahead of us are exciting. Let's turn to the medical surgical segment. Market environment over the last several years, which obviously included the COVID-19 era, has been pretty dynamic and introduced volatility, but generally it was very favorable for our medical business as market conditions continue to normalize we've seen some general market weakness in the primary care channel which impacted our first quarter we're taking actions to drive operational efficiencies and increase cost optimization efforts these efforts will enhance our core distribution capabilities while continuing to invest in efficiencies to better serve our customers partners and patients despite the weaker than expected start to the year We remain confident in our assets and unique positions in the alternate site markets and our ability to drive long-term growth. Moving on to our two strategic pillars of oncology and biopharma services. We are steadily executing our strategy to grow our oncology platform and improve patients' cancer care experiences. Building upon the foundational distribution services, we have built extensive capabilities spanning a patient's journey in cancer treatments. We're driving strong momentum across the oncology platform, demonstrating our differentiated value propositions and unique positions in this space. During the first quarter, we aligned all the oncology-related assets and teams, including the U.S. Oncology Network, ONTATA, Provider Solutions, and SCRI into one organization to further align our oncology platform. We view this as a a natural step as we accelerate our go-to-market strategies across our oncology capabilities. It will also allow us to better execute on our oncology strategy and deliver a connected and seamless customer experience across this diversified portfolio. One of the foundational assets in the oncology platform is the U.S. Oncology Network. In the past year, the network saw significant growth as reflected in the addition of new practices, the growth in physician numbers, and steady increases in patient visits. as both patients and providers continue to recognize the value of the network. In the last fiscal year, we welcomed four practices to the U.S. Oncology Network, expanding our geographic footprint and increasing access to lower-cost oncology care. And we're pleased to see the momentum continuing. We announced earlier today we welcomed the Tennessee Cancer Specialist to the network, bringing the total number of providers in the network to now exceed 2,600. In addition to practice management, we also support the community practices through the Sarah Cannon Research Institute Joint Venture, a fully integrated oncology research organization aimed at expanding clinical research and increasing access to clinical trials. SCRI's research network brings together more than 1,300 physicians who are actively enrolling patients into clinical trials at more than 250 locations in 24 states across the United States. In the past year, practices in the U.S. Oncology Network participated in over 200 clinical trials through SCRI. And earlier this year, SCRI announced a collaboration with AstraZeneca that will introduce modern solutions to accelerate clinical trial delivery timelines, reduce site burdens, and enhance patient enrollment. Let's move now to biopharma services, our second strategic growth pillar, which focuses on improving medication access, affordability, and adherence through a scaled and connected network. During the quarter, adjusted operating profit in the prescription technology solution segment was unchanged year over year. Growth in our technology services products, particularly within the affordability solutions, was offset by lower contributions due to the mix of services within our access programs and higher expenses to support future growth. Leveraging our differentiated physician, pharmacy, and patient networks and our transaction scale We believe we are strategically well-positioned to continue to deliver value to biopharma. In the first quarter, our affordability programs have saved patients nearly $2.2 billion in out-of-pocket costs. In addition, we continue to offer a variety of services and capabilities that help patients get the medicine they need to live healthier lives. Many of our products achieve this by integrating automation and technology into the existing processes. We support more than 650 biopharma brands and have a strong footprint in key therapeutic areas, including oncology, neurology, gastroenterology, endocrinology, and cardiology. Our provider network is able to reach more than 50% of the specialists in each of these growing therapeutic areas. To improve the efficiency of our solutions and enhance customer experiences, we continue to explore more use cases for technology and AI. One of the more recent examples includes the implementation of a chatbot, which leverages AI to answer common user questions about the prior authorization status. We're also leveraging AI to improve internal forecasting of customer demand, allowing us to better plan for operations and staffing needs. We really think that pairing AI with humans further differentiates our capabilities and will best position our business for the future. Now, let's pull everything together. We're pleased with the continued progress in advancing our company priorities. Despite the somewhat mixed segment results in the quarter, we are confident that we have a clear and robust plan to deliver on our financial commitments. We have a strong business foundation and a well-defined strategy and a track record of execution with dedication and excellence. Our differentiated offerings will continue to drive better health outcomes for our customers and their patients. With that, I'll hand it over to Britt.

Thank you, Brian, and good afternoon. As Brian mentioned, McKesson had another solid quarter with earnings per share results that exceeded our expectations, resulting in an increase to our full-year guidance. These results reflect the continued growth in our U.S. pharmaceutical segment, including our leading oncology and specialty capabilities and our Canadian pharmaceutical distribution operations within the international segment. I'm also pleased that our Board of Directors approved two actions in July. First, a 15% increase to the quarterly dividend to 71 cents per share, marking the eighth consecutive year of dividend increases. And second, an additional $4 billion of share repurchase authorization, bringing the total share repurchase authorization to approximately $10 billion as of July of 2024. These actions demonstrate the confidence that the Board and management have in the execution of our strategic priorities as we continue to focus on capital deployment to drive value for our shareholders. My comments today refer to our adjusted results unless I state otherwise. I'll start with the consolidated results, followed by a review at the segment level, and conclude with an update on our outlook. Consolidated revenues were $79.3 billion, an increase of 6%, led by growth in the U.S. pharmaceutical segment, resulting from increased prescription volumes, including higher volumes from specialty products, retail national account customers, and GLP-1 medications. Gross profit was $3.1 billion, an increase of 4%, primarily a result of specialty distribution growth within the US pharmaceutical segment, including our provider solutions business, and higher distribution volumes in our Canadian business, included in the international segment. These were partially offset by lower contributions from the primary care channel in the medical surgical solution segment. Operating expenses increased 7% to $1.9 billion, principally to support growth in the U.S. pharmaceutical segment. Year-over-year results were also impacted by increased technology investment across the enterprise and the lapping of prior year integration costs, results related to the SCRI joint venture and ARIC savings solutions. Operating profit was $1.3 billion, an increase of 12%, driven by $110 million of pre-tax gains associated with McKesson Ventures' equity investments included in corporate expenses, compared to pre-tax losses of $7 million in the first quarter of fiscal 2024. Year-over-year results benefited from continued growth in the U.S. pharmaceutical segment, partially offset by lower volumes across the primary care channel in the medical surgical solution segment. Interest expense was $70 million, an increase over the prior year, resulting from higher average balances of our loan portfolio throughout the quarter and a prior year gain on debt extinguishment of $9 million. The effective tax rate for the quarter was 13%, driven by the recognition of net discrete tax benefits of $125 million in the quarter. As a reminder, we had a net discrete tax benefit of $147 million in the first quarter of the prior year. As we've discussed previously, we provide annual effective tax rate guidance, as the timing and amount of discrete tax items are difficult to predict. First quarter diluted weighted average shares outstanding was $130.7 million, a decrease of 4%. Wrapping up our consolidated results, earnings per diluted share increased 8% to $7.88, ahead of our expectations, driven by pre-tax gains associated with Kessin Ventures equity investments, a lower share count, and operating profit growth in the U.S. pharmaceutical segment. Turning to first quarter segment results, It can be found on slide 7 through 11, starting with U.S. pharmaceutical. U.S. pharmaceutical segment delivered solid revenue and operating profit growth. Once again, first quarter results demonstrate the continued momentum across all customer segments and our ability to drive sustainable long-term growth. Revenues were $71.7 billion, an increase of 7%. Revenue growth reflects positive utilization trends, leading to increased prescription volumes including higher volumes from specialty products, retail national account customers, and GLP-1 medications. In the quarter, revenues for GLP-1 medications were $8.8 billion, an increase of approximately $1.8 billion, or 26%, when compared to the prior year. On a sequential basis, revenues for GLP-1 medications increased $1.3 billion, or 17%, as supply constraints moderated in the quarter. We anticipate continued GLP-1 medication growth year over year, however, with variability from quarter to quarter. For the quarter, operating profit increased 6% to $815 million, driven by growth in the distribution of specialty products to providers and health systems. Within the U.S. pharmaceutical segment, our comprehensive platform of leading oncology assets continues to grow and deliver value for customers and patients. Our ongoing investments in the oncology platform further differentiate our capabilities. More than 2,600 providers in the U.S. Oncology Network continue to experience solid growth, with same site visits increasing 6% in the quarter. U.S. Oncology Network is further strengthened by a set of broad capabilities, including provider solutions, GPO services, data and insight through ONTATA, and clinical trial capabilities through our Sarah Cannon Research Institute joint venture, which includes clinical trial matching and accelerated clinical trial setup. We remain excited about our leading and differentiated oncology offerings and intend ongoing investment to sustain the growth and progress we're seeing against our strategic priorities. Moving to prescription technology solutions. Prescription technology solutions segment delivered revenues of $1.2 billion an operating profit of $223 million, both flat to the prior year. First quarter results reflect growth across our technology services products, including increased demand for our affordability solutions, including growth in eVoucher and ePrescribe. Revenue included 18% sequential growth in third-party logistics. However, these results were lower than anticipated due to drug product launch delays which had an approximately 7% impact on segment revenue growth in the quarter. Operating profit was impacted by lower contributions from our access solutions due to the mix of transactions and services we provide across our access program and higher expenses to support future growth across the business. We remain confident that the segment operating profit will grow at or above the long-term growth target rate on an annual basis. Turning to medical surgical solutions, first quarter results in this segment were below our expectations. Revenues were $2.6 billion, an increase of 1%. An operating profit was $200 million, a decrease of 15%. These results were driven by higher volumes of specialty pharmaceuticals, offset by lower volumes across the primary care channel, including customer mix and product demand shifts. and the lapping of prior year nutritional product strength in the extended care channel. Next, let me address our international results. Revenues were $3.7 billion, an increase of 6%. And operating profit was $102 million, an increase of 13%, driven by higher pharmaceutical distribution volumes in the Canadian business compared to the prior year. Wrapping up our segment review, corporate expenses were $35 million in the quarter, which included pre-tax gains of $110 million or $0.62 per share related to equity investments within the McKesson Ventures portfolio compared to pre-tax losses of $7 million or $0.04 per share in the first quarter of fiscal 2024. As we've previously discussed, McKesson Ventures' impact on consolidated financials can be influenced by the performance of each individual investment quarter to quarter, which may result in gains and losses the timing and magnitude which can vary for each investment. Let me turn to cash and capital deployment, which can be found in slide 12. We ended the quarter with $2.3 billion in cash and cash equivalents. For the first quarter, we had negative free cash flow of $1.5 billion, which included $167 million in capital expenditures. In the quarter, free cash flow was impacted by the timing of tax payments, and working capital investments to support the onboarding of new customers in the U.S. pharmaceutical segment. We returned $609 million of cash to shareholders, which included $527 million of share repurchases and $82 million in dividend payments. As a reminder, our cash position, working capital metrics, and the resulting cash flows can each be impacted by timing, which includes the day of the week that a quarter ends on, and therefore can vary from quarter to quarter. Now let me discuss our fiscal 2025 outlook. We continue to make progress against our strategic priorities, leveraging our broad capabilities across the enterprise. As a result of our first quarter performance and confidence in the outlook over the balance of the year, we are raising our guidance range for fiscal 2025 adjusted earnings per diluted share to $31.75 to $32.55. Looking ahead to the remainder of fiscal 2025, we remain confident in our differentiated oncology and biopharma services assets and our strategy to advance McKesson as a diversified healthcare services company. Let me start with our segments. In the first quarter, we experienced strong momentum across our U.S. pharmaceutical segment, including our broad oncology offerings. The breadth of our capabilities and leading portfolio of assets across oncology have led to value creation for our customers, partners, and shareholders over the last five years. Our fiscal 2025 outlook for the US pharmaceutical segment is a continuation of this momentum. Our outlook also contemplates the impact of the distribution contract with Optum that went into effect in July of 2024. Thanks to dedicated effort from our employees, we delivered a seamless onboarding experience in July. As we previously outlined, startup costs associated with this contract implementation were not material to first quarter results. However, we made investments in working capital during the quarter in advance of the contract start date. We are pleased to expand our pharmaceutical distribution relationship with Optum, and this is a testament to our leading distribution and sourcing capabilities, including our strong customer value proposition. We now anticipate U.S. pharmaceutical revenues will increase 13 to 16%. When compared to prior guidance, we anticipate lower contribution from branded pharmaceuticals, which includes lower volumes for Humira. And we anticipate operating profit to increase 8 to 10%. In the prescription technology solution segment, we anticipate revenues to increase 14 to 18% and operating profit to increase 11 to 15%. a modest decline from the prior guidance. The updated outlook for the segment reflects the lower than anticipated first quarter results and the impact of product launch delays. During the first quarter, demand for our access solutions, including prior authorization volumes related to GLP-1 medications, demonstrated a slower rate of growth compared to the prior year, including the mix of transactions and services across our various access programs. and volatility driven in part by product delays and shortages. These results were lower than our expectations in the first quarter. As we previously communicated, we remain confident in the long-term growth rate targets on an annual basis. However, we anticipate the growth trajectory in this segment will vary from quarter to quarter, driven by several factors that include utilization trends, the timing and trajectory of new product drug launches, the evolution of a product's program support requirements as it matures, which could result in the shift to other services or a program termination, product delays and supply shortages, the annual verification programs that we provide for our customers that occur in our fiscal fourth quarter, and the size and timing of investments to support and expand our product portfolio. We see solid market demand for our differentiated suite of solutions and services that help improve patients' access, affordability, and adherence to medication, as well as help to support biopharma manufacturers throughout the lifecycle of their products. We continue to build differentiated, technology-enabled solutions that can seamlessly be used in the workflow of payers, providers, and pharmacies. We remain confident that our market-leading assets, depth of services and capabilities, and continued investment in innovation position us for growth in line or modestly above our long-range targets. Moving to medical surgical solutions, we anticipate revenues to increase 3% to 7% and operating profit to be at the low end of the initial guidance range of 6% to 8%. Over the last few years, including the period covering COVID, the medical surgical environment has been dynamic and experienced volatility across the customers and products within the primary care channel and sites of care. McKesson's unparalleled breadth of services and capabilities led to strong performance. As market conditions have normalized, we've noted instances of general market weakness in the primary care channel. This led to lower sales and operating profit contributions in the first quarter. Our updated full year outlook reflects the results from the first quarter and the trends we are seeing in the market. We anticipate that these trends will continue through the second quarter. As Brian noted in his remarks, in response to the market conditions, today we are announcing a series of initiatives within the medical surgical solution segment to drive operational efficiencies and increase cost optimization efforts. In addition to delivering improved operating performance, these actions will result in greater alignment across the organization while continuing to invest to better serve our customers, partners, and patients. We estimate total charges between $100 and $150 million, consisting primarily of employee severance and other employee-related costs, facility and other exit-related costs, as well as long-lived asset impairments. This restructuring program is anticipated to be substantially complete by the end of the first half of fiscal 2026. These initiatives will lead to improved margins, a streamlined infrastructure, and operating leverage. We anticipate the benefits from this program will begin in the second half of this fiscal year. We are well positioned with leading assets and capabilities across all the alternate sites of care, and we remain confident in our ability to continue delivering long-term growth. Finally, in the international segment, we anticipate revenues to increase 4% to 8% and operating profit to increase 8% to 12%. We are pleased with the first quarter performance in our Canadian business and anticipate continued growth in fiscal 2025. We also remain committed to exit Norway. part of the completion of our European exit. As a reminder, Norway remains the only operating country in Europe that we have not yet entered into an agreement to sell. Contributions related to operations in Norway are included in the fiscal 2025 outlook for the segment. In the corporate segment, we anticipate expenses to be in the range of $495 to $555 million, which incorporates the impact of $110 million of pre-tax gains related to equity investments within the McKesson Ventures portfolio in the first quarter, as well as increased technology spend. We're pleased with the development and contributions from our enterprise technology organization, including the pace of our technology investments focused on supporting growth, innovation, and efficiency. Our investments in AI will continue to focus on improving the customer experience. We continue to evaluate the enterprise technology operating model approach, to effectively support the development of our strategy and needs of the organization, our customers, and partners. We anticipate an increased level of investment in the technology operating model to accelerate the organization and improve business continuity, compliance, and operating efficiency. Wrapping up our outlook, we anticipate interest expense to be approximately $245 to $265 million, reflecting the impact from increased average balances of the company's loan portfolio and higher interest rates throughout the first quarter and our outlook for the remainder of fiscal 2025. We anticipate income attributable to non-controlling interest to be in the range of $175 to $185 million, reflecting the success of Claris One's generic sourcing operations. And we anticipate the full-year effective tax rate will be in the range of approximately 17% to 19%, reflecting the positive discrete tax items recognized in the first quarter. As a reminder, the timing and amount of discrete tax items are difficult to predict, and therefore we do not provide quarterly effective tax rate guidance. Turning to cash flow and capital deployment, we anticipate free cash flow of approximately $4.8 to $5.2 billion. Our working capital metrics and resulting free cash flow will vary from quarter to quarter, impacted by timing, including the day of the week that marks the close of quarter. Our guidance reflects plans to repurchase approximately $2.8 billion of shares in fiscal 2025. As a result of this share repurchase activity, we estimate weighted average diluted shares outstanding to be in the range of approximately $128 to $130 million. We will continue to execute our disciplined capital allocation strategy, creating value for our shareholders. This discipline has led to a return on invested capital approaching 28%. Wrapping up fiscal 2025 guidance. We anticipate revenue growth of 13 to 15% and operating profit growth of 10 to 15% as compared to the prior year. Fiscal 2025, we anticipate earnings per diluted share of $31.75 to $32.55, which represents growth of 16 to 19% as compared to fiscal 2024. Our guidance assumes that the first half of the fiscal year will deliver less contribution than previously anticipated, with the second half delivering approximately 53% of the full year earnings. In closing, our fiscal 2025 outlook incorporates continued momentum across the business. We remain confident in our leading positions and growth pillars across oncology and biopharma services platforms. We are confident the actions we are taking now will sustain the growth we have delivered over the past several years. We have a strong and stable financial foundation, which positions us to execute on our capital allocation strategy. We remain positioned to deliver for our customers and our partners and to create sustainable shareholder value. With that, we can move to the Q&A.