McKesson Corporation (NYSE:MCK) Q2 2024 Earnings Call Transcript

McKesson Corporation (NYSE:MCK) Q2 2024 Earnings Call Transcript November 1, 2023

McKesson Corporation beats earnings expectations. Reported EPS is $6.23, expectations were $6.11.

Operator: Please standby. Welcome to McKesson’s Second Quarter Fiscal 2024 Earnings Conference Call. Please be advised that today’s conference is being recorded. At this time, I would like to turn the call over to Rachel Rodriguez, VP of Investor Relations. Please go ahead.

Rachel Rodriguez: Thank you, operator. Good afternoon, and welcome everyone to McKesson’s second quarter fiscal 2024 earnings call. Today, I’m joined by Brian Tyler, our Chief Executive Officer; and Britt Vitalone, our Chief Financial Officer. Brian will lead off, followed by Britt, and then we will move to a question-and-answer session. Today’s discussion will include forward-looking statements such as forecast 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 Factors section of our most current recent annual and periodic SEC filings for additional information concerning risk factors that could cause our actual results to materially differ from those in our forward-looking statements.

An older Medicare-eligible consumer smiling happily while receiving healthcare services at a clinic.

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.

Brian Tyler: Thank you, Rachel, and good afternoon, everybody. We appreciate you joining us on our call today. We are very pleased to report another solid quarter and fiscal 2024 with adjusted results of above expectations demonstrating our ability to consistently execute against company priorities and create sustained value for our shareholders. In the second quarter revenues increased 10% to $77.2 billion. Adjusted earnings per diluted share were $6.23. When excluding certain items, adjusted earnings per diluted share increase 14% from the prior year. Our performance through the first half of the fiscal year combined with the continued momentum in advancing our company strategies gives us the confidence to raise our guidance for fiscal 2024 adjusted earnings per diluted share.

Our previous guidance range of $26.55 to $27.35 has been updated to a range of $26.80 to $27.40. McKesson continues to deliver on our mission of improving care in every setting. As a diversified healthcare services company we are making important progress in strengthening our portfolio of differentiated assets and bringing more value to our customers and their patients. Before I turn my attention to our company priorities and the second quarter results, I want to briefly discuss Rite Aid's recent bankruptcy proceedings. We have been supplying Rite Aid with a majority of their pharmaceutical products for more than 20 years. As they navigate through their reorganization process, we are working closely with them to provide continued delivery of products.

We are closely monitoring developments, but as Britt will describe in his remarks, we anticipate that Rite Aids bankruptcy filing will not materially impact fiscal 2024 adjusted earnings per diluted share. Now let me move on to our company priorities and I want to start by recognizing our people, including the diverse dedicated and talented team we have built here at McKesson. Investing in people and culture is foundational to our strategy and we offer many engagement programs and initiatives to empower our employees and allow them to express new ideas to contribute their unique perspectives and to care for each other. We firmly believe that we achieve our full potential when our culture is diverse, inclusive and focused on best talent. Our efforts fostering a culture of belonging are well recognized.

Recently, we were honored to be named by Forbes as one of America's Best Employers for Women. And for the 8th consecutive year, we were named as one of the best places to work for disability inclusion, earning a top ranking score of 100. We appreciate all the hard work and dedication from Team McKesson and we recognize the importance of helping, respecting, and caring for each other. On October 27th, we celebrated our Annual Wellness Day called Your Day Your Way. This is the third year that we've celebrated this tradition and shown appreciation for our employees by providing them with additional day off work to prioritize their personal health and well-being. Let's take a minute to review the performance of the distribution business and the progress we've made driving sustainable core growth.

In the second quarter, we saw strong performance in the U.S. Pharmaceutical segment. Over the past ten quarters, the segment has consistently delivered double digit revenue increases demonstrating our ability to serve and grow with our customers. In the second quarter, we continued to observe solid prescription volume trends, particularly in the category of GLP-1 medications, which contributed to revenue growth in the quarter. And over the past three years, we were honored to support the U.S. Government as a centralized distributor of COVID-19 vaccines. Our team demonstrated incredible agility and dedication and standing up a fit for purpose operation distribute the vaccines across the country. This past September, we started transitioning the COVID-19 vaccine distribution to commercial channels.

We're working closely with the manufacturers to bring vaccines to patients in an efficient and timely manner. As one of the largest distributors of flu vaccines in the country, we have scaled channel reach and deep expertise in working with vaccine products. And I'm pleased to say that through October 20th, we have distributed nearly 8 million COVID-19 vaccines through our commercial channels. In the Medical-Surgical segment, we continue to support our customers evolving needs with a diversified portfolio of products and broad experience in medical-surgical and related supplies. As a reminder, while we serve many alternate site providers, the biggest channel within the segment is primary care including physician offices. We closely track market data and during the second quarter we observed general market moderations in primary care foot traffic.

We also saw a year-over-year decline in instances of respiratory illness and flu which contributed to lower illness testing and patient visits in the primary care business. These dynamics impacted the segment results in the second quarter and our full year fiscal 2024 outlook. However, we remain confident in the fundamentals of the business and the strength of our scaled assets within the Medical-Surgical segment.

InnoMed: Moving on to the biopharma services platform, through strategic acquisitions and investments, we've built a set of highly differentiated assets within the Prescription Technology Solutions segment. The combination of these assets creates a powerful and scaled network that includes multiple touch points throughout the patient treatment journey. We are connected to approximately 900,000 providers, enabling solutions that help move barriers to access prescription medications. We're also connected to over 50,000 pharmacies helping patients afford their prescriptions through solutions like cash, copay and digital coupons right at the pharmacy counter. In the second quarter, we were pleased with the strong performance in the segment with double digit growth in both revenue and adjusted operating profit, driven by growth in access solutions including increased volumes and prior authorizations for GLP-1 medications.

The year-over-year comparison was also partially impacted by lower prior year results which as we called out in Q2 of our fiscal 2023 included higher operating expenses resulting from the timing of increased headcount to support customer annual verification activities. One of the areas where we saw significant growth in the past two quarters is our access solutions, including prior authorizations for brands like GLP-1 medications. For selected prescription drugs, patients are required to obtain approval from their health plan, which sometimes can be very manual and cumbersome. What we offer is an automated technology solution that is embedded within the provider's workflow. Our technology solution introduces efficiency to the process. More than 40% of our prior authorizations are approved instantly and approximately 65% are approved within one hour.

We continue to add new features and functionalities to improve the user experience. The latest feature introduced allows providers to share prior authorization outcomes directly with their patients when a health plan makes a determination. Through improvements like this, we help remove barriers and provide greater patient visibility to the prior authorization process. Solutions like prior authorizations are great examples of the success of our business strategy. It's also a reflection of our efforts to improve medication access and ultimately advance health outcomes for all. As an impact driven organization, we're deeply committed to advancing our strategy and contributing to positive changes in the communities where we live and work. This past quarter we celebrated our Community Impact days, which is McKesson's largest annual company-wide employee volunteer event.

Thousands of McKesson employees participated in various community impact projects that aligned with this year's theme, Cancer Awareness, Prevention and Support. This year marked the 25th anniversary of the event and we will continue honoring this tradition and will work to find more ways to enhance the health of those who live in our communities. So let me pull everything together. McKesson delivered a solid second quarter, thanks to the contribution and dedication of over 50,000 McKesson employees, we continue to execute against our company priorities with focus and excellence. Leveraging our differentiated services and solutions, we're well positioned to continue to improve care in every setting. Looking ahead, we're confident in our ability to drive continued growth and strategic advancement in fiscal 2024 and beyond.

And with that, I'll turn it over to Britt for additional comments.

Britt Vitalone: Thank you, Brian. We're pleased with our second quarter results which reflect another quarter of solid performance driven by operational execution and meaningful growth in our U.S. Pharmaceutical and Prescription Technology Solutions segments. Before I turn to our consolidated results, I want to highlight one item that impacted our second quarter GAAP only results. We recorded a pretax GAAP provision for bad debts of $210 million or $155 million after tax. Within the U.S. Pharmaceutical segment for uncollected trade accounts receivable related to Rite Aid bankruptcy. We anticipate recording an additional provision for bad debts of $511 million in the third quarter of fiscal 2024. For trade accounts receivable that McKesson recognized from sales to Rite Aid in October 2023 prior to its bankruptcy petition.

We continued to provide distribution services to Rite Aid post their bankruptcy filing, providing the same efficiency and operational excellence as we have for over 20 years. We're operating pursuant to an interim agreement for distribution services which is pending final court approval, and includes reduced credit terms of seven days and certain other items as Rite Aid continues to reorganize. We are closely monitoring developments and we anticipate this customer event will not have a material impact to our fiscal 2024, adjusted earnings per diluted share results, our liquidity position and ongoing business operations. The remainder of my comments refer to our fiscal 2024 adjusted results unless I state otherwise. Let me start with a review of our second quarter results.

McKesson delivered solid growth in the second quarter, led by strong performance in U.S. Pharmaceutical and Prescription Technology Solutions segments. Our focus and execution against our company priorities positioned us to generate consistent, solid financial results. We'll continue to evolve and grow our diversified portfolio through focused strategic investments in oncology and biopharma services. As a result of our operating performance and outlook for the remainder of the fiscal year, we are increasing and narrowing our full year outlook for fiscal 2024, adjusted earnings per diluted share to a range of $26.80 to $27.40. Moving to our consolidated results, revenues increased 10% to $77.2 billion, led by growth in the U.S. Pharmaceutical segment resulting from increased prescription volumes, including higher volumes from retail national account customers, specialty products and GLP-1 medications, partially offset by lower revenues in the International segment resulting from fiscal 2023 divestitures of certain testing European businesses.

Excluding the impact of our European business operations and completed divestitures, revenue increased 15%. Gross profit was $3 billion for the quarter, a decrease of 1% and when excluding the impact of our European business operations and completed divestitures, second quarter gross profit increased 8%, primarily a result of growth in the U.S. Pharmaceutical and Prescription Technology Solutions segments. Operating expenses decreased 2% in the quarter. And when we exclude the impact of our European business operations including completed divestitures, operating expenses increased 9% year-over-year, which included approximately 2% from cost related to the second half fiscal 2023 acquisitions of RX Savings Solution and the joint venture with Sarah Cannon Research Institute.

Second quarter operating profit increased 1% to $1.2 billion, again primarily driven by growth in our U.S. Pharmaceutical and Prescription Technology Solutions segments. This was partially offset by slower growth in our Medical-Surgical Solutions segment, including lower illness season testing and the completed divestitures of our European business operations within the International segment. If we exclude the impact of COVID-19 related items of fiscal 2023 and losses associated with McKesson Ventures equity investments in fiscal 2023 and 2024, operating profit increased 12% in the quarter. Moving below the line, the effective tax rate was 23.5%, which included the recognition of a net discrete tax expense of $12 million. Second quarter diluted weighted average shares outstanding was $134.8 million, a decrease of 6% year-over-year.

Consolidated second quarter earnings per diluted share was $6.23, which represents an increase of 3% over the prior year. Excluding COVID-19 related items during the second quarter of fiscal 2023 and losses within our McKesson Ventures portfolio in fiscal 2023 and 2024, second quarter earnings per diluted share was up 14% over the prior year. Turning to our second quarter segment results, which can be found in Slides 7 through 11 and starting in U.S. Pharmaceutical. The U.S. Pharmaceutical segment delivered continued momentum and strong operating profit growth. Our ability to drive sustainable growth in this segment reflects a few factors. The efficiency of our scale distribution operations, the investments that we're making to unlock new capabilities that will further expand and strengthen our value proposition for our customers and partners, a balanced approach to managing a broad portfolio of pharmaceutical products inclusive of ClarusONE generic sourcing operations bolstering our competitive position and enabling a nimble approach to customer demands, new product launches and market movements and continued investment and expansion in our broad oncology platform.

We are pleased with the growth momentum across our oncology assets from provider solutions in the U.S. Oncology Network data and insights through Ontada and expanded clinical trial capabilities through our Sarah Cannon Research Institute joint venture. These assets contributed to revenue and operating profit results in the quarter, which exceeded our expectations. Second quarter revenues were $69.8 billion, an increase of 16% year-over-year. Revenue growth reflected increased prescription volumes, including higher volumes from retail national account customers, specialty products and GLP-1 medications. These increases were partially offset by branded to generic conversions. The growth of GLP-1 medications provided a revenue tailwind in the quarter.

As a reminder, we generally recognize lower margin rates for the distribution of GLP-1 medications in the U.S. Pharmaceutical segment. In our Prescription Technology Solutions segment, the growth of GLP-1 medications like other new brand launches has led to increased demand for our access solutions such as prior authorization services. Second quarter U.S. Pharmaceutical operating profit increased 8% to $815 million, driven by growth in the distribution of specialty products and increased contributions from our generic programs. When excluding the impact of COVID-19 vaccine distribution in the second quarter of fiscal 2023, the U.S. Pharmaceutical segment delivered operating profit growth of 15% year-over-year. Moving to Prescription Technology Solutions.

The strong results in the second quarter demonstrate the success of our product portfolio and the partnership with biopharma manufacturers that we've developed over the years. The strength of our differentiated capabilities and partnerships positioning testing to capture demand driven by strong prescription utilization trends, including the growth of GLP-1 medications. For the second quarter, revenues increased 12% year-over-year to $1.1 billion and operating profit increased 48% to $209 million. Second quarter results reflect increased subscription transaction volumes, which drove higher demand for our access solutions primarily related to prior authorization services and growth. The year-over-year growth also included higher operating expenses in the second quarter of fiscal 2023, which resulted from the timing of increased headcount to support customer annual verification activities.

Medical-Surgical Solutions revenues were $2.8 billion in the quarter, which was flat to the prior year, resulting from anticipated lower sales of COVID-19 tests and lower contribution from kitting, storage and distribution of ancillary supplies for the U.S. Government's COVID-19 vaccine program. The anticipated lower COVID-19 related revenues were partially offset by growth in the extended care business and increased distribution of pharmaceuticals in the primary care business. Operating profit was $254 million, a decrease of 17%, driven by anticipated lower contributions from kitty storage and distribution of ancillary supplies for the U.S. government's COVID-19 vaccine program and lower sales of COVID-19 tests. When excluding the impact of COVID-19 related items in the second quarter of fiscal 2023, segment delivered operating profit growth of 5% driven by increased volumes of nutritional supplements in the extended care business.

Based on IQVIA and other market indications, the second quarter exhibited moderating primary care market volumes. The Medical-Surgical Solutions second quarter growth rate reflects these market indications, which was partially related to a slower start to the illness season including illness season testing when compared to the prior year. Next, let me address our International results. Revenues in the second quarter were $3.5 billion, a decrease of 44% year-over-year and operating profit was $89 million, a decrease of 35%. Second quarter results reflect the year-over-year effects of the completed divestitures within our European business. Wrapping up our segment review, corporate expenses were $159 million in the quarter, an increase of 10% year-over-year.

During the quarter, we had losses of $10 million or $0.06 per share related to equity investments within the McKesson Ventures portfolio compared to losses of approximately $3 million in the second quarter of fiscal 2023. As a reminder, the McKesson Ventures portfolio holds equity investments in several growth stage digital, health and services companies. We're pleased with the insights and the results that we are obtaining through this portfolio. And as a result, McKesson's investment may result in gains or losses, the timing and magnitude of which can vary for each investment. Turning now to cash flows and capital deployment which can be found on Slide 12. We ended the quarter with $2.5 billion in cash and cash equivalents. We delivered free cash flow of $825 million in the second quarter and $4.3 billion for the trailing 12 months.

Our cash balance and free cash flow in the second quarter included payments totaling $529 million associated with settlement agreements for opioid related claims. As a reminder, our cash position, working capital metrics and 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. During the first six months of the fiscal year, we made $264 million of capital expenditures, which included investments in new and existing distribution centers as well as investments in technology, data and analytics to support our growth priorities. Year-to-date, we returned $1.7 billion of cash to shareholders, which included $1.5 billion of share repurchases and $149 million in dividend payments.

Now let me discuss our updated outlook. As a reminder, we do not provide forward-looking guidance on a GAAP basis. The following metrics are provided on an adjusted non-GAAP basis. The guidance I'm providing today relates to fiscal 2024. Our outlook assumptions can be found in Slides 13 through 17 and our supplemental slide presentation. Let me start with the outlook for our segments. For the full year, we now anticipate U.S. pharmaceutical revenues to increase 13% to 15%. And operating profit increased 6% to 8% year-over-year. Excluding the impact of COVID-19 vaccine distribution in fiscal 2023, we anticipate operating profit to increase 11% to 14%. This updated segment outlook incorporates the strong second quarter performance as well as further growth in our generic sourcing programs and specialty distribution, including our differentiated plasma and biologics business.

Our full year outlook assumes that volumes related to GLP-1 medications will remain elevated compared to the prior year and may vary quarter-to-quarter. We anticipate to consolidate GLP1 medication revenue and operating profit growth compared to prior year will slow in our fiscal fourth quarter reflecting the inflection of volumes for these medications in the fourth quarter of fiscal 2023. We anticipate GLP-1 medications will continue to be a revenue tailwind for U.S. Pharmaceutical. However, distribution of these medications has a lower distribution margin rate profile and represents a headwind to prior year results. In the Prescription Technology Solutions segment, we anticipate revenue growth of 7% to 13%. We have increased our operating profit growth outlook to 18% to 22%, reflecting strong momentum in our Access Solutions and strong first half performance.

We may continue to see quarter-to-quarter variability in this segment driven by prescription and transaction volumes, the timing, pace and trajectory of new product drug launches, the timing and size of investments to support and expand our product portfolio and the annual verification programs that we provide for our customers that occur in our fiscal fourth quarter. Our Medical-Surgical Solutions segment remains well positioned across all alternate site channels with unmatched scale, product assortment and capabilities. In the Medical-Surgical Solutions segment, we anticipate revenues to be approximately a 2% decline to 2% growth and operating profit decreased 12% to 16%. For the full year, we anticipate volumes of COVID-19 tests to continue to decline compared to fiscal 2023 and the impact from COVID-19 related items will remain immaterial to fiscal 2024 results.

Excluding the impact of COVID-19 related items from fiscal 2023 results, we anticipate operating profit to increase 5% to 7% year-over-year. Our outlook incorporates the second quarter results which I discussed earlier. We anticipate the general market moderations in primary care foot traffic. In part, driven by a modest illness season may persist through the remainder of fiscal 2024. Additionally, first half fiscal 2023 results benefited from an extended illness season, which did not repeat in fiscal 2024. Our outlook includes continued investments in our scale distribution network, adding state-of-the-art automation regulatory capabilities to serve the breadth of our customer base. These distribution network investments support the breadth of our non-acute customers and broader core distribution, for example COVID vaccines for physician offices.

We also anticipate further investments in data and analytics to expand the channel reach for our medical supplies, pharmaceuticals and private brand product portfolio. Finally, in the International segment, we anticipate revenues to decline by 30% to 34% and operating profit to decline by 23% to 29%. This year-over-year decrease includes a loss of operating profit contribution from European businesses and transactions that we closed during fiscal 2023. In the Corporate segment, we anticipate expenses to be in the range of $600 million to $660 million, which includes losses associated with McKesson Ventures equity investments recorded in the first half of the year and elevated technology spend to support the growth of our businesses.

ClarusONE: Turning to cash flow and capital deployment, we anticipate free cash flow of approximately $3.7 to $4.1 million. Our outlook incorporates plans to repurchase approximately $3.5 million of shares. As a result of the share repurchase activity, we estimate weighted average diluted shares outstanding to be in the range of approximately $134 million. In summary, as a result of solid performance in the second quarter of fiscal 2024, combined with our outlook for the remainder of the fiscal year, we are increasing and narrowing our earnings per diluted share outlook for fiscal 2024 $0.40 [ph]. We anticipate operating profit will be flat to 4% decline compared to the prior year. When excluding certain items, we anticipate operating profit increase by 6% to 10% year-over-year.

As a reminder, certain items include the following; net gains and losses associated with McKesson Ventures equity investments in fiscal 2023 and 2024. A $0.65 benefit related to the early termination of the tax receivable agreement would change health care in fiscal 2023 and $1.90 related to COVID-19 related items in our U.S. pharmaceutical and medical surgical segments in fiscal 2023. We anticipate the impact of COVID-19 related items will be immaterial to fiscal 2024 when compared to fiscal 2023. The increase to our outlook for adjusted earnings per diluted share indicates earnings per diluted share growth of 14% to 17% when excluding these certain items. When further excluding the contribution from the run off of our European operations, earnings per diluted share growth is indicated at 18% to 20% for the full year.

We also anticipate the fiscal third quarter to be stronger than the fiscal fourth quarter based on the development of prescription transactions, patient visits, internal investments and the recognition of discrete tax benefit in the third quarter. In closing, we are pleased with our strong first half performance. The momentum across the business, including growth in our oncology and biopharma services platforms, positions us to deliver for our customers and our partners and to create sustainable shareholder value. With that, let's move to the Q&A.

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