Aaron Alt
Chief Financial Officer at Cardinal Health
Thanks, Jason, and good morning.
Q1 delivered an excellent start to Cardinal Health's fiscal 2025 with outstanding results from the Pharma segment, accompanied by solid operational performance from GMPD and the businesses included in Other. As an enterprise, we grew operating earnings by 12% and EPS by 9%, despite the recent customer transition. At the same time, the team adeptly managed through and anticipated negative working capital unwind over-delivering on our Q1 cash flow expectations and enabling us to continue to both invest in the business and execute on an early accelerated share repurchase program. With a solid start to the year, I am delighted to share the headline that we are raising our EPS guidance to an EPS range of $7.75 to $7.90, and raising our adjusted free cash flow outlook for fiscal '25 to a range of $1 billion to $1.5 billion. More on that shortly.
Let's review the results, starting with Slide 4. Total company revenue decreased 4% to $52 billion, better than we expected. Adjusting for the customer transition, total company revenue increased 15% versus the prior year, reflecting our strong organic revenue growth across the rest of our business. We also started to successfully onboard the first of the new customers that make up the over $10 billion of incremental revenue in Pharma, that we've referenced in our guidance for the year. Total company gross margin increased 9%, driven by positive trends in both Brands and Generics in the Pharma segment.
While we tightly controlled discretionary spending during the quarter, on the face of our financials, SG&A grew by $91 million or 8% versus prior year. Approximately half of this increase was driven by incremental health and welfare employee costs. This included substantially higher employee plan utilization costs, both numbers of claims and cost per claim, as well as a one-time catch up charge resulting from our third party actuary on whom we rely notifying us of a mistake in the calculation of our health and welfare plan liabilities from prior years. Even with that impact, we delivered operating earnings of $625 million, 12% higher than last year.
Moving below the line, interest and other increased $15 million to $27 million, primarily driven by lower interest income due to the anticipated lower cash balances. Our first quarter effective tax rate finished at 23%, up 2 percentage points due to the non-repetition of some positive discrete items in the prior year. As a result of our share repurchases, Q1 average diluted shares outstanding were 245 million, 2% lower than a year ago. The net result for Q1 was EPS of $1.88, growth of 9%.
Now turning to the segments, beginning with Pharma and Specialty Solutions on Slide 5. First quarter revenue decreased 5% to $48 billion due to the impact of the customer transition. Excluding that, revenue increased 16%, driven by Brand and Specialty Pharmaceutical sales growth from existing customers. This included 5 percentage points of revenue growth from GLP-1 sales. During Q1, we saw strong Pharmaceutical demand across product categories, Brand, Specialty, Consumer Health and Generics and from our largest customers. Segment profit increased 16% to $530 million in the first quarter, driven by a higher contribution from Brand and Specialty Products, including a favorable impact from the earlier seasonal launch of COVID-19 vaccine distribution and positive Generics program performance. This more than offset the profit impact from the customer transition.
In Specialty, we saw strong broad based performance across Specialty distribution and Biopharma Solutions. Notably Specialty Networks contributed to this performance as expected and we are pleased with the progress on the integration. With COVID-19 vaccines recall last year, the FDA's original approval for commercial distribution came on September 11th and our demand peaked in October. This year, we've seen distribution peak within the first quarter. While the demand for COVID-19 vaccines in the second quarter is difficult to predict, trends tell us that we should continue to expect a modest headwind for the full year with the tailwind we saw in Q1 more than offset by lower year-over-year COVID-19 vaccine sales in Q2. This overall impact is consistent with our prior guidance for the year.
Our Generics program continued to see volume growth coupled with consistent market dynamics, including strong performance from Red Oak. We also need to give our team significant credit for planning ahead and executing quickly on our plans to optimize our cost structure and operations following the customer transition. We found incremental opportunities to improve our overall business as a result of the flexibility created by the contract transition. So overall, we are very proud of the Pharma team navigating a large, complex change to the business, while delivering a tremendous quarter of 16% segment profit growth in Pharmaceutical and Specialty Solutions.
Turning to the GMPD segment on Slide 6. Revenue increased 3% in Q1 to $3.1 billion, driven by volume growth from existing customers. The solid operational progress made in the quarter was obscured by a $17 million year-over-year increase in the previously mentioned health and welfare costs and resulted in GMPD segment profit decreasing to $8 million in Q1. As previewed last quarter, our results were also impacted by increased manufacturing costs, including some startup costs related to expanding domestic manufacturing to enhance our supply chain resiliency, which we expect to also impact Q2. On the positive, an improvement in net inflationary impacts, including our mitigation initiatives and growth from existing customers, mostly offset the decline in the quarter, and we also again saw year-over-year growth in Cardinal Brand volumes during the quarter.
Finishing with the businesses reported in Other, as seen on Slide 7. First quarter revenue increased 13% to $1.2 billion due to growth across all three businesses; atHome Solutions, Nuclear and Precision Health Solutions, and OptiFreight Logistics. I'm pleased with the underlying performance of all three of our businesses and Other, as they collectively grew segment profit in the quarter by 8%, driven by the performance of OptiFreight Logistics. OptiFreight had another strong quarter, as demand for health care logistics, technology and services continues to grow.
Now turning to the balance sheet. We ended the quarter with a cash position of $2.9 billion, which includes $200 million earmarked for the November debt maturity with an additional $200 million to be paid through the time deposits held in prepaid assets and other on the balance sheet. Adjusted free cash flow was a use of $1.4 billion for the quarter, better than our expectations and, as guided, reflected the large contract unwind and the unfavorable quarter end day of week timing we previewed on our Q4 call.
During the first quarter, we continued to deploy capital according to our disciplined capital allocation framework. We invested $90 million in capex back into the businesses to drive organic growth. We returned approximately $500 million to shareholders through the share repurchase and dividends, including a $375 million accelerated share repo program. We continue to invest in Specialty by reaching an agreement to acquire Integrated Oncology Network for $1.1 billion, a deal which is not yet closed. Jason will elaborate on that shortly.
Now for our updated fiscal '25 guidance on Slide 9, beginning with the Enterprise. After the strong start to the year, we are raising our fiscal '25 EPS guidance to the range of $7.75 to $7.90, a $0.20 increase at the midpoint from our prior guidance of $7.55 to $7.70, primarily reflecting our improved Pharma segment profit expectations. We are raising our adjusted free cash flow guidance to a range of $1 billion to $1.5 billion.
We are also adjusting our guidance for our individual segments as seen on Slide 10. For Pharmaceutical and Specialty Solutions, we are improving our revenue outlook to a decline of 2% to 4%, reflecting the strong broad based pharmaceutical demand trends we've seen so far, including increased expectations for GLP-1 sales. Our full year COVID-19 vaccine expectations are unchanged. Normalizing for the customer transition, fiscal '25 revenue growth at the midpoint would now be between 18% to 20%. Our expectations for incremental volume from new customers and customer expansions is generally unchanged from what we outlined a quarter ago, over $10 billion of revenue in fiscal '25.
For segment profit, following the strength of the first quarter, we are raising our Pharma segment profit guides for the full year to 4% to 6% growth, which I'll note is consistent with our long term target, despite the contract transition. In terms of Pharma segment profit cadence, given the earlier COVID-19 vaccine season along with the contract expiration, we continue to expect Q2 segment profit to be slightly down year-over-year with growth resuming in our third and fourth quarters.
Turning to GMPD. We are updating our GMPD segment revenue outlook to 2% to 4% growth to reflect the recent notification of lost lower margin VA government distribution contracts, which will partially offset some of the new distribution volume we are onboarding in fiscal '25. We do continue to expect 3% to 5% Cardinal Health Brand revenue growth for the year. For segment profit, we are updating our fiscal '25 guidance, primarily to reflect the impact from the health and welfare costs I referenced. We are still in the fight to hit $175 million in segment profit for the year, and the GMPD team is executing on additional initiatives to recover the gap arising from Q1 results. Nevertheless, given the unanticipated health and welfare impacts and other externalities impacting the business, we think it pragmatic in the near term to adjust our GMPD segment profit outlook to a range of $140 million to $175 million.
I want to emphasize that while the timing and impact of specific incremental actions identified by the team to support the GMPD strategy and profit growth may be pressed to fully impact our fiscal '25. Those efforts continue to support our focus on $300 million as our profit goal for fiscal '26. Regarding GMPD's segment profit quarterly cadence, we continue to expect profit to be back-half weighted with sequential improvements each quarter, driven by the ongoing commercial and operational improvements in the business as well as seasonality.
We continue to expect Q2 to be impacted by higher manufacturing costs along with some carryover from the higher health and welfare plan utilization we saw in Q1. In Other, we are reiterating our prior guidance of 10% to 12% revenue growth for the full year and approximately 10% segment profit growth. One note on Other's cadence, we are expecting an industry wide raw material shortage of Moly-99 to impact the Nuclear business volume and profitability in Q2. As a result, we expect Q2 segment profit growth for Other to moderate to the low to mid single digits for the quarter. However, we expect these volumes to generally return in subsequent quarters as delayed procedures are rescheduled.
With those details on the table, let's return to the enterprise guidance for a second. On the positive side, we have the combination of a raise to our Pharma full year guidance, which is reflective of our anticipated offset in Q2 from the earlier COVID-19 contribution, and anticipated efficiencies in corporate for the rest of the year. Those positive trends are partially offset by a wider full year profit range we are providing today on GMPD. The combination gets us to our $0.20 raise to guidance at the midpoint following our first quarter.
Before I wrap up, a couple of comments on capital deployment. Our disciplined capital allocation strategy continues to be our North Star; invest in the business, protect our investment grade credit rating, provide baseline return of capital, and assess additional M&A and return of capital opportunities. Of note, even with our announced investment and return of capital plans, we expect to be at the bottom end of our targeted leverage range of 2.5 times by the end of fiscal year '25. As I hope you can tell from our fiscal year '24 and Q1 fiscal '25 announcements, our eyes remain firmly focused on delivering shareholder value creation over the long term.
To close, we started fiscal '25 strong. I am especially pleased to see the performance in our Pharma segment, raising segment guidance in our largest and most significant business to our long term target, while managing through quite a large change is further proof of the strength and resilience of this business. Across all of our businesses, I'm excited for the value creation opportunities in front of us and look forward to updating you on that in coming months.
With that, I will turn it back over to Jason.
