Britt Vitalone
Executive Vice President & Chief Financial Officer at McKesson
Thank you, Brian, and good afternoon. My comments today will refer to our adjusted results. I'll start with consolidated results, followed by a review at the segment level and conclude with an update on our full-year fiscal '25 outlook. We reported another strong quarter with notable momentum across the enterprise. We're pleased to report record quarterly revenue and operating profit, including year-over-year operating profit growth in each segment. These results demonstrate the remarkable breadth of McKesson's products and services and reflect the focus and execution against our company priorities. Consolidated revenues increased 18% to $95.3 billion, led by growth in the US Pharmaceutical segment due to increased prescription volumes from retail national account customers and growth in the distribution of specialty products, including higher volumes in oncology and specialty provider settings. Gross profit was $3.3 billion, an increase of 7%, primarily a result of specialty distribution and provider growth within the US Pharmaceutical segment and growth in the Prescription Technology Solutions segment driven by our access and affordability Solutions. Operating expenses increased 2% to $1.9 billion, driven by higher expenses to support growth in the US Pharmaceutical segment. We're pleased with the focus in driving a lower operating cost structure, implementing efficiencies through automation and data capabilities and delivering insights to improve our operations, products and service offerings. This is reflected in the operating expense to gross profit ratio, which improved over 250 basis-points as compared to the prior year. Operating profit was $1.5 billion, an increase of 16%. Year-over-year results benefited from growth across all segments. Interest expense was $62 million, an increase over the prior year, resulting from higher average balances of our loan portfolio during the quarter. The effective tax-rate was 23.9% compared to 10.6% in the prior year. This rate was in-line with the guidance provided at recent investor industry conferences. 3rd-quarter diluted weighted-average shares outstanding was $126.6 million, a decrease of 5%. And 3rd-quarter earnings per diluted share increased 4% to $8.03. Year-over-year growth was driven by strong operational performance and a lower share count, partially offset by a higher tax-rate resulting from discrete items in the quarter. Turning to 3rd-quarter segment results, which can be found on Slides 8 through 12 and starting with our US Pharmaceuticals segment. Revenues were $87.1 billion, an increase of 19%. Revenue growth was led by higher volumes from retail national account customers, growth from specialty product distribution, including higher volumes from oncology and specialty provider settings and partially offset by the anticipated decline of certain brand volumes due to formulary changes by a retail national account customer beginning in our fiscal 2025 first-quarter. Revenues from GLP-1 medications were $10.9 billion in the quarter, an increase of approximately $3.4 billion or 45% when compared to the prior year. We anticipate continued GLP-1 medication growth year-over-year. However, with variability from quarter-to-quarter. Operating profit increased 14% to $944 million, driven by growth in the distribution of specialty products to health systems and specialty providers, the onboarding of a new a new strategic customer and growth in our differentiated oncology platform, partially offset by expected lower distribution volumes of COVID-19 vaccines as compared to the prior year. In the Prescription Technology Solutions segment, organic and new program growth across our access and affordability solutions led to strong growth compared to the prior year. Revenues increased 14% to $1.4 billion and operating profit increased 22% to $235 million. 3rd-quarter results reflect increased prescription transaction volumes, which drove higher demand for our access solutions, including prior authorization services for GLP-1 medications and growth in our third-party logistics business. Year-over-year growth was also supported by increased sales to new customers and programs across our access and affordability solutions. Turning to Medical-Surgical solutions. As Brian mentioned earlier in his remarks, we observed lower-than-anticipated volumes due to less demand for illness season products. As we've previously discussed, each illness season is unique and the timing and severity level of each illness season could drive variability from quarter-to-quarter. Through the fiscal 3rd-quarter, this illness season had lower severity levels compared to prior years and lower than our expectations impacting foot traffic in the primary-care settings that we serve. As measured by IQVIA data, illness severity was approximately 62% of the average of the previous five non-COVID illness seasons. In the 3rd-quarter, revenues decreased 3% to $2.9 billion. The decline in revenues can be attributable to the lower levels of seasonal vaccines, illness testing and related Medical-Surgical supplies in the primary-care channel. Operating profit increased 4% to $294 million, driven by operational efficiencies from the cost optimization initiatives that we announced in Q1 and growth in the extended care business. These were partially offset by lower contributions in the primary-care channel as compared to the prior year. As we previously guided, we anticipate the cost optimization initiatives will deliver $100 million of cost-savings in the second-half of fiscal 2025 with a higher proportion coming in the 4th-quarter. We're pleased with the execution to date and we remain confident in achieving these savings. Next, let me address our international results. Revenues were $3.9 billion, an increase of 6% and operating profit was $124 million, an increase of 18%, driven by higher pharmaceutical distribution volumes in the Canadian business. Operating profit included $19 million or $0.11 of earnings accretion resulting from the held-for-sale accounting-related to the sale of our Canada-based and well.ca businesses, which was completed on December 30, 2024. Wrapping up our segment review with corporate, corporate expenses were $134 million, which included a pretax gain of $6 million or $0.04 per share-related to equity investments within the McKesson Ventures portfolio compared to pre-tax losses of $8 million or $0.05 per share in the 3rd-quarter of fiscal 2024. Let me turn to cash and capital deployment, which can be found on Slide 13. We ended the quarter with $1.1 billion in cash-and-cash equivalents. During the quarter, we had negative free-cash flow of $2.6 billion. Timing, including the day of the week that the quarter ended on, led to approximately $2 billion of cash shifting from our fiscal 3rd-quarter to our fiscal 4th-quarter. This does not impact our full-year free-cash flow guidance. Additionally, free-cash flow included $196 million of capital expenditures, primarily related to investments in new and existing distribution centers as well as investments in technology, data and analytics to support our growth priorities. In the 3rd-quarter, we returned $919 million of cash to shareholders, which included $827 million of share repurchases at an average price of $537 per share, and we made $92 million in dividend payments. Now let me discuss our updated fiscal 2025 outlook. As a result of our 3rd-quarter performance and the confidence that we have in the outlook for the remainder of the year, we're raising and narrowing our guidance range for fiscal 2025 adjusted earnings per diluted share to $32.55 to $32.95 $2.95. Our strategy continues to yield exceptional results, led by the growing and differentiated oncology and biopharma services platforms, supported by a foundation centered on a strong core of distribution assets. In the US Pharmaceutical segment, our core pharmaceutical distribution operations continue to demonstrate a diversified and strong value proposition to customers. We anticipate revenues to increase 18% to 20% and operating profit to increase 11% to 13%. This updated segment outlook incorporates strong 3rd-quarter performance as well as continued momentum in the core distribution business, including stable utilization trends, performance of our sourcing programs and continued growth in specialty Pharmaceuticals. We continue to be pleased with the strategic partner we announced and onboarded in July. 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 $32 billion of incremental revenue in-full year fiscal 2025 and it's incorporated in the full-year outlook. Our oncology platform is delivering across a range of capabilities, including distribution, practice management, data and analytics and clinical research. More than 2,750 providers in the US oncology network continue to experience solid growth with same-site visits increasing 6% in the quarter. And yesterday, we announced the signing of a definitive agreement to acquire a controlling interest in Prism Vision Holding, a premier provider of general ophthalmology and retina management services. This transaction advances McKesson's specialty position and our commitment to improve and expand patient access to quality community care. We intend to develop a leading platform for retinal care, delivering differentiated solutions and value across providers, biopharma partners and patients. McKesson's long track-record of leading practice management and clinical research outcomes with our differentiated oncology platform will allow us to expand our suite of solutions and continue to pursue our purpose of advancing health outcomes for all. McKesson will purchase an 80% ownership interest for approximately $850 million. We anticipate financing the transaction with a mixture of cash and debt. Following completion of the transaction, Prism Vision will be part of McKesson's broad set of specialty solutions and financial results will be consolidated within McKesson's US Pharmaceutical segment. Upon closing, Prism is anticipated to be approximately $0.20 to $0.30 accretive to McKesson's adjusted earnings per diluted share in the first 12 months post-closing and $0.65 to $0.70 a $0.65 to $0.75 accretive by the end-of-the third year following the close of the transaction. The transaction is subject to customary closing conditions, including necessary regulatory clearances, and we've not included any financial results from this transaction in our updated fiscal 2025 outlook. In the Prescription Technology Solutions segment, we anticipate revenues to increase 9% to 12% and operating profit to increase 12% to 15%. The updated outlook incorporates a strong 3rd-quarter performance and affirms our confidence in achieving operating profit growth at or above the long-term growth rate target in fiscal 2025. As we've previously communicated, we anticipate revenue and operating profit growth will not be linear and will vary from quarter-to-quarter, driven by several factors, including 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 strategies, the annual verification programs that we provide for our customers that occur in our fiscal 4th-quarter and the size and timing of investments to support and expand our product portfolio. Moving to Medical-Surgical Solutions. During the 3rd-quarter, we observed lower-than-anticipated illness season volumes, including vaccines and testing and lower volumes in the primary-care channel, which negatively impacted 3rd-quarter results more than originally anticipated. As a result of 3rd-quarter performance and our revised outlook for the remainder of the fiscal year, we now anticipate revenues and operating profit to be roughly flat to the prior year, a result of the weaker-than-anticipated illness season. Despite these macro challenges, we've made progress toward our previously-announced cost optimization initiatives, which have already begun to drive anticipated operational efficiencies in this segment. We continue to anticipate these initiatives will deliver approximately $100 million in cost-savings in fiscal 2025 as previously outlined and will be more heavily weighted towards the 4th-quarter. In the International segment, we anticipate revenues to increase 3% to 7% and operating profit to increase 10% to 14%. As I mentioned at the beginning of my remarks, we completed the sale of our Canada-based Rexol and well.ca businesses at the end-of-the 3rd-quarter. This transaction closed earlier than we had previously anticipated, negatively impacting operating profit guidance and is the main driver behind the change in guidance for the segment. We also remain committed to exit and fully divest our European business. As a reminder, Norway remains the only operating country in Europe that we've not entered into an agreement to sell and contributions related to operations in Norway are included in the fiscal 2025 outlook for the segment. We intend to exit Norway as part of the completion of our European exit. Finally, in the Corporate segment, we anticipate expenses to be in the range of $480 million to $520 million, which incorporates the impact of $6 million of pre-tax gains related to equity investments within the McKesson Ventures portfolio in the 3rd-quarter. As a reminder, 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 of which can vary for each investment. Moving below-the-line, we anticipate interest expense to be approximately $255 million to $265 million, reflecting higher-than-anticipated interest expense in the 3rd-quarter and anticipated additional borrowing activities driven by the timing of working capital in the 4th-quarter. We anticipate income attributable to non-controlling interest to be in the range of $185 million to $195 million, owing to the success of Clarus One's generic sourcing operations. We anticipate the full-year effective tax-rate will be in the range of approximately 17% to 19%. And turning to cash-flow and capital deployment, we remain focused on shareholder value-creation and our disciplined capital deployment approach remains unchanged. It starts with stable and growing free-cash flow. For fiscal 2025, we anticipate free-cash flow of approximately $4.8 billion to $5.2 billion. Next, we'll continue to deploy capital to grow the business on-strategy. The acquisition of Prism Vision is a good example of this. Secondly, we'll return capital to our shareholders through a growing dividend and value-creating share repurchases. Our guidance includes plans to repurchase approximately $3.2 billion of shares in fiscal 2025. As a result of the share repurchase activity, we estimate weighted-average diluted shares outstanding to be approximately $128 million. And finally, we'll maintain a strong balance sheet with stable credit ratings. Wrapping up fiscal 2025 guidance, we anticipate revenue growth of 16% to 18% and operating profit growth of 13% to 15% compared to the prior year. For fiscal 2025, we anticipate earnings per diluted share of $32.55 to $32.95, which represents approximately 19% to 20% growth as compared to fiscal 2024. Before I close, I'd like to share some initial thoughts on fiscal 2026. We anticipate our operating momentum to persist. As Brian mentioned earlier, approximately 80% of the operating profit of the company is growing at double-digit growth rates in fiscal 2025. As a result, we maintain confidence in the long-term adjusted EPS target of 12% to 14% growth. In US pharmaceutical, there are several positive items that we anticipate will continue to support growth in fiscal 2026. These include the scale and efficiency of our pharmaceutical distribution operations, our leading position in specialty, including the breadth of our oncology platform, the US oncology Network, GPO services, Ontata and the Sarah Canon Research Institute. The growth of other specialties in areas like retina and ophthalmology, which include the recently-announced acquisition of Prism Vision and our leading generics offerings, including the strength of Clarus. We anticipate that the strength we're seeing across the Prescription Technology Solutions segment will continue to benefit from our leading products and capabilities, supported by several factors, which would include stable utilization trends, differentiated access and affordability programs, unmatched connectivity as our solutions are in the workflow of over 950,000 providers in more than 50,000 pharmacies and innovative products and services supported by ongoing investments. Our Medical-Surgical Solutions segment is well-positioned as care continues to move across the alternate site settings. We're confident that the cost optimization actions we've taken will better align our business to the markets and customers that we serve. We'll continue to evaluate the environment as the illness season progresses as primary-care markets continue to stabilize and the overall impacts from our early cost optimization efforts materialize. Finally, we'll continue to invest in adding capabilities to our North American distribution footprint. These investments include increased capacity automation and regulatory excellence capabilities. We are modernizing the enterprise and we're investing in data and analytics, including the acceleration of several investments in cloud, networking and infrastructure. We're also accelerating the use of AI to unlock the potential to deliver customer and foundational enhancements. We're using AI to improve the customer experience and improve productivity, including supply-chain disruption predictions, forecast accuracy algorithms and fraud detection. In closing, our 3rd-quarter results represent another strong performance with operating profit growth across all segments, demonstrating remarkable execution against our strategic growth pillars. Through the durability of our business models, the scale and differentiation across our solutions and services and the investments we're making to modernize and accelerate the enterprise, we're committed to delivering value-creation. We're confident in McKesson's bright future. We have leading positions across distribution and biopharma services, driven by our execution and innovative solutions. Before turning to Q&A, I'd like to take a moment to thank Rachel Rodriguez. Rachel is taking a new role on our corporate FD&A team. I'd like to thank Rachel for her positive impact leading Investor Relations for the past 3.5 years and the partnership with both Brian and me. And I'd like to welcome Jenny Dominguez, who will now be leading the Investor Relations team. Jenny has a long track-record in several leadership positions across our finance teams at McKesson. And with that, let's move to the Q&A session.
