Britt Vitalone
Executive Vice President & Chief Financial Officer at McKesson
Thank you Brian, and good afternoon. As Brian mentioned, we delivered solid second quarter results, led by strong performance in our US Pharmaceutical segment. Execution of our enterprise strategy delivered solid operating performance and robust cash flow results. Adjusted operating profit grew 7% to $1.3 billion and adjusted earnings per diluted share of $7.07 increased 13% compared to the prior year. These results exceeded our expectations and were above the long-term growth targets.
Before I review our adjusted results, let me provide three updates. First, I'll share an update on our Canadian divestiture activities. In September, we announced an agreement to sell our Canada-based Rexall and Well.ca businesses for an adjusted purchase price of approximately $148 million. We have remeasured the net assets to fair-value less the cost to sell. This resulted in a GAAP only charge of $643 million in the second quarter.
In September, due to held-for-sale accounting treatment, we discontinued recording depreciation and amortization on the assets involved in the transaction. This had a $0.04 accretive impact in the second quarter. For full-year fiscal 2025, we anticipate held-for-sale accounting to drive approximately $0.15 of adjusted earnings accretion. McKesson Canada will continue to own and operate Rexall and Well.ca until the transaction closes, which is subject to customary closing conditions, including required regulatory clearances.
After the transaction close, we will remain the wholesale distribution supplier to each business. This transaction enables McKesson to further focus and prioritize investments to grow our oncology and biopharma services platforms. We have differentiated and leading distribution and biopharma platforms in Canada, delivering solutions to ensure the delivery of better health outcomes.
Next, during the second quarter, we began a series of company-wide initiatives focused on accelerating and modernizing the enterprise, delivering operational, digital and customer centric efficiencies, which will underpin our long-term growth. These efforts include the previously-announced initiatives within the Medical-Surgical segment. We recorded charges of $227 million in the second quarter of fiscal 2025, including $147 million related to the Medical-Surgical cost optimization program that we previously-announced. We anticipate the costs related to the Medical-Surgical segment initiative to be substantially completed by the end of the first half of fiscal 2026, and we anticipate these costs will have a payback period of less than two years.
Additionally, our acceleration and modernization program will be focused on enterprise technology opportunities and will be comprised of initiatives, which will unlock innovation, modernize our technology operating model and infrastructure and increased customer-centricity. These initiatives align with our continued evolution as a diversified healthcare services company, meeting customer and market needs and driving further leadership in the areas of oncology and biopharma services. These initiatives will generate meaningful benefits and savings over the long-term.
We anticipate the costs related to the accelerated -- acceleration program will be substantially complete in fiscal 2028 and will generate approximately $250 million in benefits over the next five years with an annual run-rate benefit of approximately $100 million by the end of fiscal 2030.
Finally, as a result of Rite Aid's emergence from bankruptcy in August of 2024, we reassessed our initial estimates made in conjunction with the previously reserved balances, which included cash received as part of the bankruptcy emergence, resulting in a reversal of $203 million recorded in our US Pharmaceuticals segment during the second quarter of fiscal 2025.
The remainder of my comments will refer to our adjusted results and let me start with our second quarter results.
Consolidated revenues were $93.7 billion, an increase of 21%, led by strong growth in the US Pharmaceutical segment, resulting from the onboarding of a new strategic partner and increased prescription volumes, including higher volumes from retail national account customers, specialty products and GLP-1 medications.
Adjusting for the addition of a new strategic partner, consolidated revenues increased 8% versus the prior year. Gross profit was $3.2 billion, an increase of 7%, primarily a result of specialty distribution growth within the US Pharmaceutical segment, including our provider solutions business and higher distribution volumes resulting from a new strategic partner. Operating expenses increased 7% to $2 billion, driven by higher expenses to support growth in the US Pharmaceutical segment. We're pleased with the progress and discipline we're making in managing our cost structure as reflected in our operating expense to gross margin ratio, while also continuing to invest in the business to bring innovation to our products and to our partners.
Operating profit was $1.3 billion, an increase of 7%. Year-over-year results benefited from continued growth in the US Pharmaceutical segment and our Canadian distribution business, partially offset by lower volumes in the Medical-Surgical Solutions segment. Interest expense was $72 million, an increase over the prior year, resulting from higher average balances of our loan portfolio throughout the quarter. The effective tax-rate for the quarter was 21%, which was in-line with our guidance, driven by the recognition of net discrete tax benefits of $44 million in the quarter.
Second quarter diluted weighted-average shares outstanding was 129.3 million, a decrease of 4%. And second quarter earnings per diluted share increased 13% to $7.07, which was ahead of our previously expected guidance range. Year-over-year growth was driven by strength in the US Pharmaceutical segment and a lower share count.
Turning to second quarter segment results, which can be found on slides eight through 11 and starting with US Pharmaceutical. Revenues were $85.7 billion, an increase of 23%. Revenue growth reflects increased prescription volumes, including higher volumes from retail national account customers, specialty products and GLP-1 medications, offset by the anticipated decline of biosimilar volumes with a retail national account customer.
During the quarter, we successfully onboarded a new strategic partner. Excluding this, revenue growth was approximately 8% in the segment. Revenues from GLP-1 medications were $10.4 billion in the quarter, an increase of approximately $3.3 billion or 47% when compared to the prior year. We anticipate continued GLP-1 medication growth year-over-year. However, with variability from quarter-to-quarter. For the quarter, operating profit increased 11% to $902 million, driven by growth in the distribution of specialty products to health system and specialty providers, bolstered by the continued growth of our oncology platform.
Moving to Prescription Technology Solutions. Revenues were $1.3 billion, an increase of 11%, driven by increased prescription volumes in our thirdparty logistics and technology services businesses. Segment operating profit increased 4% to $218 million, reflecting increased demand for our technology solutions, including growth in our affordability product suite and higher volumes in our pharmacy automation solutions. Operating profit was also impacted by higher investments to support future growth across the business.
Turning to Medical-Surgical Solutions. Revenues increased 4% in the quarter to $2.9 billion, driven in part by higher levels of specialty pharmaceuticals and other illness season related volumes in the primary-care channel. As a reminder, each illness season is unique. The timing and severity level of each illness season can drive variability from quarter-to-quarter across several products within this segment, including seasonal vaccines, illness season testing, foot traffic and primary care sites and over-the-counter product sales. Our second quarter operating profit decreased 4% to $243 million due to lower volume levels in the primary care channel as compared to the prior year, including the impact from customer and product mix. These results were in line with our expectations.
Next, let me address our international results. Revenues were $3.7 billion, an increase of 7% and operating profit was $100 million, an increase of 12%, driven in part by higher pharmaceutical distribution volumes in the Canadian business compared to the prior year. Second quarter operating profit included $0.04 of earnings accretion, resulting from the held-for-sale accounting-related to the announced sale of our Canada-based Rexall and Well.ca businesses.
Wrapping up our segment review with corporate. Corporate expenses were $172 million, which included pre-tax losses of $15 million or $0.09 per share related to equity investments within the McKesson Ventures portfolio compared to pre-tax losses of $10 million or $0.06 per share in the second 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 for which can vary for each investment.
Let me turn to cash and capital deployment, which can be found on slide 13. We ended the quarter with $2.5 billion in cash and cash equivalents. During the quarter, we had free cash flow of $1.9 billion, which included $218 million of capital expenditures for technology, data and analytics to support our growth priorities as well as investments in new and existing distribution centers. This strong cash flow performance is a reflection of our operating execution and disciplined working capital management.
In the second quarter, we returned $1.6 billion of cash to shareholders, which included $1.5 billion of share repurchases and $80 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 the quarter ends on and therefore can vary from quarter-to-quarter.
Now let me discuss our fiscal 2025 outlook. As a result of our second quarter performance and our confidence in the outlook over the balance of the year, we are raising and narrowing our guidance range for fiscal 2025 adjusted earnings per diluted share to $32.40 to $33.00. We remain confident in our differentiated oncology and biopharma services assets and platforms and our strategy to advance McKesson as a diversified healthcare services company as we accelerate and modernize the enterprise.
In the US Pharmaceutical segment, our core distribution business continues to demonstrate its strong value proposition to our customers. We anticipate revenues will increase 16% to 19% and operating profit to increase 9% to 11%. This updated segment outlook incorporates the strong second quarter performance as well as further growth in specialty distribution, including our differentiated plasma and biologics businesses and growth from retail national account customers. In July, we successfully onboarded a new strategic partner. This partnership is a testament to our leading distribution and sourcing capabilities and our strong customer value proposition. We anticipate the strategic partnership will contribute approximately $31 billion of incremental revenue in full year fiscal 2025, and this is incorporated in the full-year outlook.
Let me take a moment to discuss the agreement we announced and signed in September to acquire a controlling interest in Community Oncology Revitalization Enterprise Ventures or Core Ventures, an internal business and administrative services organization established by Florida Cancer Specialists and Research Institute. McKesson will purchase a controlling interest representing 70% ownership for approximately $2.49 billion in cash. We anticipate financing the transaction with a mixture of cash and debt. The transaction is subject to customary closing conditions, including required regulatory clearances. This transaction marks an important step as we continue to grow our oncology platform with the goal of improving and expanding patient access to quality cancer care close to home, while reducing the overall cost of care for the patient.
Following completion of the transaction, Core Ventures will be part of the McKesson's oncology platform and financial results will be reported within McKesson's US Pharmaceutical segment. We estimate this transaction to be $0.40 to $0.60 accretive in the first 12 months following the regulatory approval and close of the transaction. We also estimate by the end of the third year following completion of this transaction to achieve accretion of approximately $1.40 to $1.60. We have not included any financial results from this transaction in our updated fiscal 2025 outlook. This transaction will accelerate McKesson's oncology strategy by providing opportunities to enhance and expand existing offerings across our oncology platform. It will allow us to enhance quality cancer care, expand patient access and accelerate clinical development.
In the Prescription Technology Solutions segment, we anticipate revenues to increase 8% to 12%, a modest decline from the prior guidance, and we anticipate that operating profit will increase 11% to 15%. The updated revenue outlook for the segment reflects continuation of product launch delays and slower manufacturer program ramp-in our third-party logistics business. For the segment, we remain confident in our ability to achieve operating profit growth at or above the long-term growth rate targets on an annual basis.
As we previously communicated, we anticipate the revenue and operating profit growth will not be linear and will vary from quarter-to-quarter, driven by several factors, which include the timing and trajectory of new product drug launches, utilization trends, the evolution of a product's program support requirements as it matures, which could result in the shift to other services or program termination, product delays and supply shortages, payer requirements, including utilization management and formulary requirements, the annual verification programs that we provide to our customers that occur in our fiscal fourth quarter and the size and timing of investments to support and expand our product portfolio.
Moving to Medical-Surgical Solutions, we anticipate revenues to increase 1% to 5% and operating profit to be at the low end of the initial guidance range of 6% to 8%. As market conditions have normalized following the COVID-19 period, we have noted instances of lower volumes in the primary care channel. This has led to lower sales and operating profit contributions throughout the first half of the fiscal year. As Brian mentioned in response to the market conditions, we've previously announced a series of business rationalization initiatives within the segment to drive operational efficiencies and increased cost optimization efforts.
In addition to delivering improved operating performance, these actions will result in efficiencies across the segment and greater alignment with our customers and partners. We anticipate these initiatives will deliver approximately $100 million in cost savings in fiscal 2025, beginning with the third fiscal quarter, we'll have a payback period of less than two years. Our updated full-year outlook reflects first half results, trends that we're observing in the markets that we serve and the impact from the business rationalization initiatives that I previously announced.
The Medical-Surgical business is well positioned with an unmatched breadth of products and depth of services across alternate sites of care led by an unparalleled customer focus. We remain confident in our ability to continue delivering long-term growth as we support our customers' evolving needs with a diversified portfolio of products and solutions.
Finally, in the International segment, we anticipate revenues to increase 5% to 9% and operating profit to increase 16% to 20%. We're pleased with second quarter performance in our Canadian distribution business. And anticipate continued growth throughout the rest of fiscal 2025. As I mentioned at the beginning of my remarks, we recently-announced an agreement to sell our Canada-based Rexall and Well.ca businesses. This transaction is subject to customary regulatory approval. We anticipate this transaction will close in our fiscal fourth quarter. And based on this anticipated timing, our updated outlook assumes approximately $0.15 of earnings accretion related to the held-for-sale accounting.
We also remain committed to exit and fully divest our European businesses. As a reminder, Norway remains the only operating country in Europe that we have not entered into an agreement to sell. Contributions related to operations in Norway are included in the fiscal 2025 outlook for the segment. We do intend to exit Norway as part of the completion of our European exit.
In the Corporate segment, we anticipate expenses to be in the range of $510 million to $560 million, which incorporates the impacts of $15 million of pre-tax losses related to equity investments within the McKesson Ventures portfolio in the second quarter.
Now moving below the line, we anticipate interest expense to be approximately $240 million to $260 million, reflecting the impact from increased average balances of the company's loan portfolio and higher interest rates throughout the second quarter. We anticipate income attributable to non-controlling interest to be in the range of $180 million to $190 million, reflecting the success of ClarusONE's generic sourcing operations. And we anticipate the full-year effective tax rate will be in the range of approximately 17% to 19%. We also anticipate that the tax rate in the third quarter will be higher than the fourth quarter due to the timing of discrete tax items.
Turning to cash flow and capital deployment. We anticipate free cash flow of approximately $4.8 billion to $5.2 billion. Our working capital metrics and resulting free cash flow will vary from quarter-to-quarter and are impacted by timing including the day of the week that marks the close of a quarter. Our guidance assumes an increase to full-year share repurchases.
Based on our strong free cash flow and cash position, we've updated our guidance to repurchase approximately $3.2 billion of shares in fiscal 2025 from our previous guidance of $2.8 billion. As a result of this share repurchase activity, we estimate weighted-average diluted shares outstanding to be in the range of approximately 127 million to 129 million.
Wrapping up fiscal 2025 guidance. We anticipate revenue growth of 15% to 17% and operating profit growth of 13% to 15% compared to the prior year. For fiscal 2025, we anticipate earnings per diluted share of $32.40 to $33.00, which represents growth of 18% to 20% as compared to fiscal 2024.
In closing, our second quarter results demonstrate outstanding execution against our strategic growth pillars. In addition to our strong operating performance, our acceleration and modernization initiatives are creating a more efficient organization, delivering meaningful differentiation. Our fiscal 2025 outlook combines continued operating momentum across the business in the second half of the year with a disciplined capital deployment approach. We remain focused on strategically investing in long term opportunities that will increase returns and create shareholder value.
And with that, let's move to our Q&A session.
