Q4 2021 Mckesson Corp Earnings Call
Thank you Stephanie good afternoon, and welcome everyone to Mckesson fourth quarter fiscal 2021 earnings call today, I'm joined by Brian Tyler, Our Chief Executive Officer, and Britt bit alone, 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.
As forecast about mckesson's operations and future results. Please refer to the cautionary statements in today's press release, and our slide presentation and for the risk factors section of our 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.
During this call we will discuss non-GAAP financial measures additional information about our non-GAAP financial measures, including a reconciliation of those measures to GAAP results is included in today's press release and presentation slides, which are available on our website at investor Dot Mckesson Dot com with that let me turn it over to Brian.
Holly and good afternoon, everybody. Thank you for joining us on our call. This afternoon.
On our fourth quarter call last year I talked about how the COVID-19 pandemic was beginning to impact our employees our customers our partners and the very communities in which we live.
It was one of the largest health care companies in the World I've said that Mckesson would play an essential role in protecting the health and safety of the health care supply chain.
While we were confident in our ability to help our customers during challenging times, what played out over the course of the year proved to be more unpredictable than anyone could have imagined the up and down trajectory of the recovery was certainly different than we had originally anticipated and our role in the COVID-19 response efforts evolved and expanded quickly as.
As a result.
Fiscal 2021 was one of the most challenging.
Yet fulfilling an inspiring years of my career a year like no other than the 188 year history of our company.
Want to thank the team Mckesson and our innumerable are innumerable public and private partners for their resilience commitment to our values and service to our caregivers and patients.
From the onset of the pandemic, our sourcing teams worked closely with manufacturers and various government entities to better forecast changing pharmaceutical and medical product demand in order to extend supply and channel inventory for critical areas of need.
Whether it was working to secure higher volumes of PPE for caregivers and frontline workers early in the pandemic, we're leveraging our expertise in lab capabilities to ramp up distribution of COVID-19 tests as they came to market Mckesson moved quickly to support our customers our partners and our communities.
Our role in the COVID-19 response was also highlighted by our partnership with the U S. Government's COVID-19 vaccine distribution effort.
Having been selected as the centralized distributor of refrigerated and frozen COVID-19 vaccines and the ancillary kits used to administer those COVID-19 vaccines.
We distributed our first COVID-19 vaccine in December shortly after Madonna's vaccine was granted emergency use authorization by the FDA.
On February 27th Johnson, and Johnson <unk> COVID-19 vaccine became the third COVID-19 vaccine granted EUA by the FDA and the second vaccine within the scope of our contract with the CDC.
We began distributing the J&J vaccine within 48 hours of its authorization and we're now distributing out of all for fit for purpose distribution centers. We've built for this program we.
We stand ready to support the distribution of additional vaccines as they come to market.
Through April we've successfully distributed over 150 million Madonna and J&J COVID-19 vaccines to administration sites in the U S and we remain on target with the U S government's distribution schedule.
Also through April we've assembled enough kits to support the administration of more than 550 million doses for all vaccine types.
This work remains our company's top priority and we are prepared to support the U S government for as long as they ask us to leave the centralized distribution model.
In Europe, and Canada. We are also partnering with the local governments in the COVID-19 vaccine effort through administration in our owned and banner pharmacies as well as distribution efforts in selected markets and countries.
Let me turn now to our financial performance.
Against a dynamic and challenging macro economic backdrop in fiscal 2021, we grew revenues, 3% and our adjusted earnings per diluted share result of $17 21.
Was up 15% over prior year.
When pressed with challenges and uncertainties, our customers and government partners continued to choose mckesson to help ensure stability of supply for their patients.
While prescription volume in primary care patient visit trends negatively impacted the core business throughout the fiscal year, the strength of our business model and our differentiated capabilities help us to grow the business and deliver value to our shareholders.
Our commitment to executing our strategy transforming and simplifying the operating model contributed to these strong financial results.
Looking forward into fiscal 2022.
I am confident that we operate and scaled in resilient markets with underlying trends that support long term growth we.
We invest in our business to differentiate our solutions and create value for customers patients and partners.
<unk> has not paused our progress on these strategic priorities.
<unk> investments into our business over time have positioned us well to succeed and respond quickly to changing demands from our customers and government partners. During these uncertain times.
We've been focused on building out a connected ecosystem over the last several years in the areas of oncology and Biopharma services.
These are areas, where we believe we have key differentiated capabilities through investments in technology, we've been able to develop more robust solutions that help connect patients providers and manufacturers and support our growth.
Turning first with our oncology assets, which have proven to be resilient throughout the pandemic.
Through scaled distribution GPO services on our U S oncology business, we're positioned well as innovative therapies come to market.
<unk> are just one example, where mckesson has been able to combine the breadth and scale of our specialty capability to help give providers choice.
And lower cost for patients.
We were pleased to add more more practices and over 100 providers to the U S oncology network in fiscal 2021.
Today through U S oncology and our non affiliated provider business, we're connected to over 10000 specialty physicians.
And our oncology technology platform has supported millions of patient journeys, providing us access to real world outcomes data and research.
Our recently launched technology and real World insights business, which we call on Tata is an extension of our oncology ecosystem and is a key area of investment for us going forward. We believe this business differentiates our value proposition to providers looking to drive better outcomes for their patients and to manufacturers focused on innovative.
Therapies in the area of oncology.
In terms of Biopharma services in fiscal 2021, we brought together our relay health pharmacy cover my Meds and Rx Crossroads businesses. Together. These businesses are focused on innovating and automating the ways in which biopharma connects with patients pharmacies and providers with the ultimate goal of providing stronger <unk>.
<unk> affordability and better adherence outcomes.
These assets.
<unk> in the daily workflows of over 50000, pharmacies and more than 750000 providers were integrated into over 75% of the HRS today.
And through our market leading position in advanced solutions, we're able to automate and simplify otherwise very manual processes. Ultimately our solutions help patients get on therapy is quicker and stay on those on those therapies longer this value proposition to our manufacturing partners is reflected by the over 500 brands we support.
<unk> covering nearly every therapeutic area.
In fiscal 2022, we will remain focused on these growth areas and we will continue to look for ways to streamline the business. So that we can operate with added speed and increased focus.
Part of our commitment to grow the business is to continually review and evaluate our portfolio, sometimes we find assets. We're not the natural owner of as was the case with our German wholesale business, where we created a JV with Walgreens Boots Alliance in November.
To further simplify the business, we continually evaluate and adapt the way in which we work.
For Mckesson.
Over a year since we successfully transitioned all of our office based employees to work from home seemingly overnight.
And without a loss of productivity.
While we are quite anxious to see each other in person soon.
At a time and place where its appropriate and safe to do so.
The success of our employees in this remote work environment.
And their desire for more work flexibility as challenged us to reevaluate the way, we work and our real estate and existing office space footprint.
This is yet another example of how we're looking to simplify operations and grow the business and do the right thing for our teams.
We will go into more detail about our thinking on these impacts going forward.
Now, let me turn for the business and touch on how we are positioned for success heading into fiscal 2022.
I'll start with U S pharmaceutical where we again grew adjusted operating profit despite soft prescription volume trends throughout the fiscal year.
Our priority on this business is to strengthen the core and deliver the world's highest quality supply chain to our customers and manufacturing partners, our focus on cost and working capital efficiencies underpinning this growth and helped fuel investments for growth across the business.
For generic pricing environment continues to track in line with our expectations.
On the buy side, we leverage our scale on our sourcing capabilities through claris, one to ensure stability of supply at low cost for our customers.
On the sell side Mckesson has taken a disciplined approach to pricing and the market continues to be competitive, but it has been stable for years.
While generic volume remain below pre COVID-19 levels in the quarter, we expect volume improvement over the course of our fiscal year.
I'm also pleased with the performance of our specialty business this past year.
Our U S oncology business patient visits were at pre COVID-19 baselines in March with many returning for in person visits to their providers and.
In fiscal 2022, we will look to grow both our U S oncology and non affiliated businesses, which are just another part of our connected oncology ecosystem at Mckesson.
Let me talk about prescription technology solutions.
They performed well this year, despite prescription volumes being down since the onset of the pandemic, we're continuing to invest in innovation in this business and despite this year's challenges we've been very successful in adding new brands to our platforms.
In fiscal 2021, our access solutions helped over 50 million patients get on therapy. After their original prescription was denied coverage and our affordability solutions help patients save over $7 billion in out of pocket prescription costs.
Under a single cohesive go to market strategy. This segment is positioned to return to growth in fiscal 2022 as patient mobility improves in prescription trends recover.
In fiscal 2021.
Medical surgical played a central role in providing supplies to our primary on extended care customers at a critical time of need.
Demand within this segment was volatile throughout the fiscal year for products, such as PPD and COVID-19 tests and our procurement teams worked diligently to find that supplies our customers needed to treat their patients at a time when supply was constrained and pricing was volatile while we took measures to meet the needs of our customers for PPE related products.
Demand has fluctuated in market dynamics for some of these products has changed since the onset of the pandemic.
As a result, we took action to position the business for lower demand levels, which resulted in inventory charges on some PPD and related products.
Further adapting to the impact of COVID-19 on our customers, we leveraged our existing lab capabilities to quickly distribute over 50 million COVID-19 tests into the provider settings, we serve demonstrating the breadth and expertise we have in our market leading lab business.
Despite patient mobility trends below pre COVID-19 levels for much of fiscal 2021, I'm proud of the way the business responded to the needs of our customers and I am confident that as patients return to consume healthcare and see their community based providers. Our core business is positioned well for growth heading into fiscal 2022.
Finally, turning to international.
Segment grew full year adjusted operating profit despite lower foot traffic in many of our retail pharmacies across Europe, and Canada, where the pandemic still lags the recovery, we're seeing in the U S.
Over the past several years, we've taken deliberate actions to address our cost structure and to evolve our retail footprint in these markets and we saw benefits from those actions this fiscal year.
We are also very disciplined in how we operate these businesses as evidenced by our thoughtful exit of unprofitable customers at the onset of the fiscal year and our Canadian business.
These businesses play an important role in the pandemic response in their respective markets and through our investments into digital assets, we're able to better reach patients who are increasingly choosing electronic means to access health care in those countries going forward, we will continue to find ways to position these businesses for future growth.
The pandemic still presents many unknowns and the trajectory of the cover recovery will likely show signs of non linearity at times in our fiscal 2022.
But we do expect to return to pre COVID-19 levels of prescription volumes and patient engagement levels in the second half of fiscal 2022.
As utilization improves over the course of our fiscal year, we expect the stable fundamentals underlying our core business to serve as the foundation for the outlook, we are providing you today.
Our fiscal 2022 outlook of $18 85 to $19 45 of adjusted earnings per diluted share includes a return to solid growth in our core businesses a continuation of our role in a COVID-19 vaccine efforts and investments in growth and a balanced approach to capital deployment.
<unk> Britt.
Britt will take you through additional detailed assumptions that make up this outlook.
As I reflect back fiscal 2021 has taught us a lot and it showed us once again that our business model is positioned well to adapt and succeed in uncertain times.
I'm on time again, we've proven our resiliency during crisis and I'm. So proud of the way our employees rose to the challenges brought on by the pandemic and society more broadly.
Our ability to be together to stand together focused on our values and purpose and service of the healthcare communities we serve.
Me so proud.
We will focus on building momentum on.
On our fiscal 2021 accomplishment and we will look to embrace the changes that have made us better to advance our growth strategy and grow the business. We will also continue to be front and center in the fight against COVID-19, helping to serve the communities in which we live and work I. Thank you again for your time and I'll turn it over to Britt.
Thank you, Brian and good afternoon, everyone.
Fiscal 2021 was an unprecedented year as Brian talked about earlier, when we spoke a year ago. You. Just finished our fiscal 2020 as the COVID-19 pandemic was beginning to take hold on our communities and economies during.
During that call we provided our full year fiscal 2021 outlook, we've quite possibly the highest level of uncertainty for Mckesson as a 188 year history.
Because I've said since the onset of the pandemic Mckesson operating momentum as a result of our strategic clarity focus execution and discipline.
As a company we've been operating in new ways for over a year, we're proud of the way our teams continue to execute and innovate.
We're stronger than before the pandemic and our fiscal 2021 financial results give us even more confidence in our ability to continue delivering compelling performance and the future today.
Today, I'll provide an update on our fourth quarter and fiscal 2021 results, including a detailed fiscal 2022 outlook and overview, which can be found on the investors section of our website.
Let me start now on our fiscal 2021 results for full year adjusted earnings per diluted share of $17 21.
15% Busters for 2020 and within our updated guidance range.
For fiscal year began with each of our segments experiencing volume declines due to the impact of COVID-19.
Volume improvements in our first quarter were earlier than originally anticipated and on.
Non linear trajectory on to remainder of the fiscal year correlating to the trajectory of the COVID-19 virus.
Our fiscal fourth quarter experienced a continuation of the volatility from COVID-19.
Well as a weak cold and flu season, and winter storm that impacted portions of our U S pharmaceutical business.
We also recognize benefits from our leadership role distributing COVID-19, vaccines and ancillary supply kits and our U S pharmaceutical and medical surgical segments, respectively.
Similar to previous two quarters from the fourth quarter, we recognized unplanned gains on equity investments within our Mckesson ventures portfolio.
I move now to a discussion of our adjusted earnings results for the fourth quarter.
Fourth quarter adjusted earnings per diluted share was $5.05, an increase of 18% compared to the prior year driven by the contribution from COVID-19 vaccine distribution in kidney programs in the U S government and the low share count because.
These items were partially offset by a higher tax rate from the prior year contribution from the company's investment in change healthcare.
Let's transition now to details of our consolidated results, which can be found on slide four.
Consolidated revenues of $59 1 billion increased 1% compared to the prior year, primarily due to market growth and higher volumes from retail national account customers in the U S pharmaceutical segment.
Partially offset by the prior year increased in demand driven by the onset of the COVID-19 pandemic.
And the contribution of our German wholesale business through joint venture Walgreens Boots Alliance.
Adjusted gross profit was approximately flat to prior year as inventory charges on our medical surgical segment and the <unk>.
Previously mentioned prior year demand increase driven by COVID-19, largely offset the contribution of our COVID-19 vaccine distribution and kitting program.
And the distribution of COVID-19 tests.
Adjusted operating expenses in the quarter decreased 6% year over year led by a reduction in operating expenses due to the impact from COVID-19, and the contribution of our German wholesale business to joint venture with Walgreens Boots Alliance.
Was partially offset by increased expenses related to our role distributing COVID-19 vaccines and ancillary supply kits.
And higher operating expenses to support growth investments in oncology and Biopharma services.
Adjusted operating profit was $1 $2 billion for the quarter, an increase of 12% compared to the prior year.
When excluding the $55 million contributed by change healthcare in the fourth quarter of fiscal 2020, which was previously reported in other adjusted operating profit grew 19%.
Interest expense was $52 million in the quarter, a decline of 20% compared to the prior year driven by the retirement of approximately $1 billion of debt and lower commercial paper balances.
Our adjusted tax rate was 22, 9% for the quarter in line with our expectations.
Fourth quarter adjusted earnings per diluted share also includes net pre tax gains of approximately $44 million or 21 per diluted share associated with Mckesson ventures equity investments.
And wrapping up our consolidated results fourth quarter diluted weighted average shares for $161 million, a decrease of 8% year over year driven by the successful tax free exit of our investment in change healthcare at the end of fiscal 2020.
Other open market share repurchase activity.
As a reminder, the exit of our change healthcare investment lowered our shares outstanding by approximately $15 4 million shares.
Moving on to our fourth quarter segment results, which can be found on slides five through nine starting with U S. Pharmaceutical revenues were 47 billion, an increase of 3% driven by market growth and higher volumes from retail national account customers.
Partially offset by the prior year increased demand driven by the onset of the COVID-19, pandemic and brand to generic conversions.
Adjusted operating profit on the quarter increased 7% to $813 million driven by the contribution from COVID-19 vaccine distribution.
We offset by the previously mentioned prior year COVID-19 pandemic impact.
Higher operating costs in support of the company's oncology growth initiatives and the impact of a weak cold and flu season.
Adjusted operating profit for the full year increased 3% to $2 7 billion driven by growth in specialty product distribution and the contribution from COVID-19 vaccine distribution offset by the previously mentioned prior year, increasing demand driven by the onset of the pandemic and.
And by higher operating costs in support of the company's oncology growth initiatives.
Next on to prescription technology solutions.
Revenues in the quarter were $789 million, an increase of 7% driven by higher volumes on technology and service offerings to support Biopharma customers.
Adjusted operating profit in the quarter increased 11% to $146 million.
Driven by organic growth from access and adherence programs supported by our technology solutions.
Full year adjusted operating profit was $467 million, which was flat from the prior year net organic growth from access and adherence solutions was offset by higher investment costs to support the growth for the company's Biopharma strategy.
Finished the year with strong momentum from these investments, including our new product and which contributed to profit growth in the fourth quarter.
Moving on to medical surgical solutions.
Revenues for $2 7 billion for the quarter up 23%, primarily driven by demand for COVID-19 tests for.
For the corner adjusted operating profit increased 13% to $192 million for the full year increased 19% to $805 million.
We previously outlined that demand for COVID-19 test kit and PPE products for closely associated with the rate of COVID-19 case levels.
Although COVID-19 test kit volume continued through the fourth quarter.
These levels moderated significantly from Q3 levels as U S. COVID-19 cases trended lower throughout the quarter.
As we discussed at various conferences during our fourth corner, we anticipated that these elevated levels of demand would moderate.
As we discussed in prior calls this year early on in the pandemic on medical surgical business built supply quickly to meet demand from our customers for COVID-19 tests and elevated levels of demand for PPE we.
We procured these products in the market with unprecedented and unpredictable supply and demand levels the volatility associated with COVID-19 case levels impacted demand levels for PPE.
The demand tapering occur sooner than we had anticipated and we took action to position the business for the lower demand levels.
As a result, some PPE and related products experienced market driven inventory charges in our fourth quarter, we recorded $87 million of charges related to these products.
Our underlying business was impacted by lower levels of elective procedures and patient visits partially resulting from the continuation of a weaker cold and flu season.
According to a curio electric procedures trend is approximately 20% below the prior year at times during the quarter.
Excluding the impact of the incremental COVID-19 tests, PPE and distribution of ancillary supply kits for COVID-19 vaccines adjusted operating profit in this segment increased approximately 1% in the quarter.
Next international where revenues in the quarter were $8 6 billion.
A decrease from 12% year over year.
On an FX adjusted basis revenues decreased 18%, primarily driven by the contribution of our German wholesale business to a joint venture with Walgreens Boots Alliance effective November one 2020.
Similar to the U S. Pharmaceutical segment. The International segment was also impacted by the prior year increase in volume, which corresponded with the onset of the COVID-19 pandemic.
Excluding the impact from the divestiture of our German wholesale business segment revenue increased 4% year over year and was down 4% on an FX adjusted basis.
Fourth quarter, adjusted operating profit increased 1% year over year to $138 million.
On an FX adjusted basis, adjusted operating profit decreased 8% to $126 million.
Due to the previously mentioned fiscal 2020 volume increase again, driven by the onset of the COVID-19 pandemic.
Adjusted operating profit for the full year increased 5% to $485 million and on an FX adjusted basis, adjusted operating profit increased 1% to $466 million.
Moving on to corporate for the quarter adjusted corporate expenses were $125 million.
A decrease from 42% year over year, driven by gains of approximately $44 million on equity investments within our Mckesson ventures portfolio in prior year, one time expenses.
For the full year adjusted corporate expenses were $584 million, a decrease of 9% compared to the prior year driven by gains of approximately $132 million or <unk> 60.
<unk> earnings per diluted share on equity investments within our Mckesson ventures portfolio, partially offset by lower interest income.
As in the previous two quarters net fair value adjustments related to several of our portfolio companies within Mckesson ventures.
As we've previously discussed we can't predict when gains or losses within our ventures portfolio companies may occur.
For our practice has and will continue to not include non interest portfolio impacts in our earnings guidance.
We reported opioid related litigation expenses of $153 million for fiscal 2021.
Until a settlement is reached and executed we anticipate a similar level of spend.
For fiscal 2022, we estimate opioid related litigation to approximate $155 million.
And finally fiscal 2021 also marked the end of our previously announced three year program to transform our operating model and drive cost reductions across the enterprise. We are proud to have achieved our original three year target of $400 million to $500 million in savings by the end of fiscal 2021.
A portion of the savings has been reinvested in our growth areas of oncology and Biopharma services.
Turning now to slide 11.
We continue to place a sharp focus on working capital efficiency and cash flow generation.
For fiscal 2021, we generated free cash flow of $3 9 billion.
And we ended the quarter with a cash balance of $6 3 billion ahead of our expectations.
Fiscal 2021, we've continued our long track record of solid cash flow generation.
<unk> from another year of operating profit growth and our continued focus on working capital efficiency.
Fiscal 2021, our cash flow was impacted by the COVID-19, pandemic, including uneven levels of customer demand.
Over the course of the year the dynamics for the operating environment, resulting from the early effects of COVID-19 introduced further volatility in our cash flow.
We experienced higher levels of inventory, primarily resulting from increased quantities of COVID-19 testing and PPE.
We anticipate this additional working capital volatility meeting the evolving needs of our customers all while we were increasing our work with the U S government to distribute COVID-19, vaccines and ancillary supply kits.
For auto recovery is forthcoming.
Do you expect prescription volumes will continue to demonstrate steady improvement from volume levels at the end of our fiscal 2021 through the first half of our fiscal 2022 in line with the rate of increasing vaccinations and decreasing COVID-19 cases.
We anticipate on return to pre COVID-19 prescription patient engagement levels and the second half of our fiscal 2022.
For fiscal 2022, we expect adjusted earnings per diluted share to be in the range of $18 85.
To 1945.
More heavily weighted towards the back half of the fiscal year.
We also expect core growth across all of our segments.
Other than outlining each assumption Ounsted walk you through the key items, starting with the segments for a full list of our fiscal 2022 assumptions tissue for to slides 13 through 16, and our supplemental slide presentation.
And the U S. Pharmaceutical segment, we expect revenue increased for to 7% driven by market growth and strong performance on our specialty business.
Just the operating profit is expected to deliver for to 7% growth and volumes continue to improve comparative fiscal 2021.
Our outlook also includes approximately 40% to 50 cents.
Related to COVID-19 vaccine distribution in fiscal 2022, the majority expect to be realized on our first quarter.
This compares with approximately 35 cents in fiscal 2021.
We will also continue to invest in our leading differentiated position on on college.
Creased investments to support future growth.
We expect these investments will represent an approximate 20 headwind in fiscal 2022.
Normalising for the COVID-19 vaccine distribution and our continued growth investments, we expect approximately 5% to 8% core adjusted operating profit growth.
Finally, we anticipate branded pharmaceutical pricing the approximate approximately mid single digit increases which is consistent with fiscal 2021.
And a generic market remains competitive yet stable, we continue to be pleased with the performance of Claris, one which provides competitive costs and supply stability to our customers.
This combined with our disciplined approach to pricing and improving overall volume of utilization gives us confidence in our ability to grow and generate positive spread.
For a prescription technology solutions segment, we expect revenue on adjusted operating profit growth of 12% to 17% driven by organic growth as we continue to recognize the benefits the investments, we've been making and technology offerings for our biopharma customers.
Transitioning medical surgical.
Fiscal 2021 saw notable impacts from the contribution of COVID-19 test kits and personal protective equipment as well as impacts to the underlying business due to office closures, social distancing and reduce patient visits.
For medical surgical business delivered strong results against these challenges and we continue to position that business for long term growth.
In fiscal 2022, we expect demand for COVID-19 test kitchen, PPE moderate further as vaccinations increase in case counts decrease.
As patients continue to return to their providers, we expect growth on our primary and extended care segments of this business.
Given these dynamics, we expect revenues down 5% to 1% growth and we expect adjusted operating profit to be flat to 6% growth over for prior year as growth in our underlying business is offset by a lower contribution from COVID-19 test kits.
Included in this guidance is 10 to 20 extensive contribution related to the kidding distribution of ancillary supplies for COVID-19 vaccines again, the majority of the be realized in our first quarter.
This compares to approximately 35 fiscal 2021.
Due to the timing of one we began executing our contract with HHS a larger portion of kidney revenue is realized in fiscal 2021.
Excluding the contribution of our COVID-19, kidding and distribution program. The contribution from COVID-19 test kits and the fiscal 2021 impairments for PPE and related products.
We expect year over year, adjusted operating profit growth of approximately 10% to 16%.
Finally in the International segment, we expect revenues declined 2% growth, 3% as compared to the prior year and this reflects the contribution of our German wholesale business to a joint venture with Walgreens Boots Alliance from the third quarter of our fiscal 2021.
We expect adjusted operating profit growth on this segment of for to 8% led by core business improvement as our Geography's continue the recovery from COVID-19.
And now I'm turning to consolidated view, we expect 3% to 6% revenue and adjusted operating profit growth compared to fiscal 2021.
We expect corporate expenses to be $670 to $720 million and as a reminder, or corporate expenses in fiscal 2021 were offset by net gains are approximately $133 million or 60 per diluted share from equity investments within our Mckesson ventures portfolio.
We assume a full year adjusted tax rate of approximately 18% to 19%, which may vary from quarter to quarter includes anticipated discrete tax items that we expect to realize during the course of the year.
As Brian mentioned in his remarks, we continue to transform and evolve are operating models drive efficiencies.
As part of this evolution, we plan to make changes to a real estate strategy to increase efficiencies supporting increased flexibility, including a transition to a partial remote work model for certain employees on a go for basis.
This will result in reduction to a real estate footprint.
And executing this plan, we will incur GAAP only restructuring charges of approximately $180 million to $280 million over the next year.
We expect these actions will result in the realisation of annual savings of approximately $60 million to $80 million when fully implemented these.
These actions will get underway in this upcoming fiscal year and therefore, we do not expect to see a material benefit in fiscal 2022.
We're in the early stages of its planning and will provide additional detail at a later time.
Let me wrap up our fiscal 2022 outlook with a few comments on cash flow and capital deployment.
The past year has reinforced the importance managing our business for the long term through a disciplined and balanced approach to capital deployment with a sharp focus on investments for innovation and growth further enhance our competitive position and leverage are differentiated assets and capabilities.
We expect free cash flow of approximately three $5 billion to $3.9 billion, which is net of property acquisitions and capitalized software expenses.
As we consider our capital deployment options, we first start with our commitment to maintain our current investment grade credit rating.
With respect to capital deployment, our priority is growth and the use of capital continues to be focused on supporting organic growth of our oncology and Biopharma services strategies, followed by retaining flexibility for acquisitions to accelerate the strategies we.
Complement these growth drivers with return of capital to our shareholders through a modest share growing dividend and share repurchases.
We continue to execute at a high level, we have confidence in the business today and in the future and we continue to believe that there's great value on our stock as indicated on slide 16, our fiscal 2022 outlook appropriates plans to repurchase approximately $2 billion of stock, which we expect will be more heavily weighted to the first half for that.
Fiscal year.
As a result of this activity, we estimate weighted average smooth chairs outstanding for fiscal 2022 to be the range of approximately 153 $5 million to 150 559.
We also anticipated use of cash to purchase shares of Mckesson Europe through exercises or a put right option of available to noncontrolling shareholders as.
As a reminder, mckesson originally acquired 77% of Celesio the.
The remaining Noncontrolling interest shareholders your team to put option for their shares.
Put bright options on minority stakeholders expires in Q1 of fiscal 2022.
Estimate that the remaining put right options could result in cash payments up to approximately $1.3 billion, which will be reflected in the financing activity section of our cash flow statement.
During fiscal 2021, Mckesson us $49 million of cash for exercise of these put right auction.
In fiscal 2021, we delivered strong performance and an unprecedented environment and we kept off our three year operating model transformation setting the stage for an acceleration of growth.
We look forward to continuing on role on the pandemic response by distributing COVID-19 vaccines, an ancillary supply kits as we continue our leadership role on the pandemic response.
Our outlook for fiscal 2022 reflects for continued confidence on our operating momentum with growth across all segments of the business supported by the strength of our balance sheet and strong financial position.
We will continue to invest inner strategies of oncology and Biopharma services as we build out our connected ecosystems and these growth areas delivering value to our customers and partners.
We're confident in our ability to leverage our position and capabilities to accelerate growth.
In closing I'd like to acknowledge and thank all the Mckesson associates across the world for their dedication execution unrelenting commitment to our customers and patients.
The results we achieve this year could not a impossible not for the data dedication of team Mckesson.
We're pleased with the results in fiscal 2000 from one and confident in our outlook for fiscal 2022.
Without Holly, let me turn the call back to you for Q&A.
Thank you, Brian I will now turn the call over to the operator for your question in the interest of time I asked for even limit yourself to get one question to allow other as an opportunity to participate operator.
Thank you for if you'd like to think no with questions. Please price star one on your touch Campbell.
Joining that today using a speakerphone, please make sure Amy function as turned on until I your signal to reach our company.
That is star one if you'd like to ask a question for you.
Question comes from Lisa Gal with J P. Morgan.
Thanks.
Thanks, very much good afternoon.
Brian and Britt I can tell I start with the oncology that day, so great I wonder if it understand that 20th and Batman 18 talk about in the guidance and help.
To understand and.
What type of investment you're making there are they <unk> acquisition is that technology that those kinds of things and then secondly, I think think about growth and the oncology and specialty business can you may need to talk about the impact of Biosimilars for H P and a quarter and kind of ear expectations going into 2022.
Good afternoon, Lisa face for that question, let me just talk a little bit about the mechanics, and then Brian can talk a little bit about some specific investments that we're making we did talk on our queue three call about the second half heavy investments in our ecology business and how that would be a modest headwind to the second half of the year when we did make though.
Investments, we're increasing our investments next year, we've talked about her on tired of business publicly now and we're making some good traction and having some good partnerships that were that we've been announcing and so we're going to continue to invest in our oncology ecosystem in FY 2002, it's another investment year, but we do see that we're going.
Returning profitability in years after we feel very confident that these investments.
On the oncology business and specifically on on Tata will bear fruit, Brian maybe talk about specific investments.
That is right for it may not I think any investments on a couple of buckets.
<unk> got a leading EMR in oncology.
To continue to invest in that as as the practice of oncology changes and the complexity of the therapies.
Continue to evolve and and things like an element that all these advanced diagnostics darker folded that's a bit of just infrastructure investment Britt talked about on TADA, that's our technology and data insights business that we're we're investing in that day that that growth for future growth area of opportunity for US and then we did not have any M&A and.
Oncology in this quarter, we'd add some great partnership we got some great momentum on that front.
As an area that is strategically on I'll is alive or enterprise strategy, and we would certainly be open to doing M&A. If it was on strategy and met our financial Threatful thresholds for good emanate.
And leaves for maybe I'll just.
Finish up on your Biosimilars question.
We're very pleased with how biosimilars are beginning to to hit the market, we see the pipeline growing particularly on the oncology space, it's not a material driver to our results right now, but we are encouraged by the pipeline were encouraged by the opportunities in the next in the coming years. So we think that biosimilars, they're going to continue to be.
A positive driver for the business for providers and for patients.
Customers and providing stability of supply and low cost we don't see anything that's really changed the dynamics around either the buy side or sell side, it's a competitive market, but its been stable now for several quarters and we feel is the strength of our sourcing operation and our disciplined approach on the sell side that will continue.
To see the.
The same types of contribution that we've seen now for several quarters.
Yes, actually here's yet.
Thank you. Our next question comes from Michael Cherny with Bank of America.
Good afternoon, thanks for taking the question.
Maybe if you could talk a little bit about pharmacy tech solutions, a bit it doesn't really get cut.
Kind of attention, but clearly it's a big piece of an EBIT as you think about the demand curve that you've seen heading into fiscal 'twenty, two and obviously in terms of the pharmacies are reacting from fiscal 'twenty, one and all the changes they've had around COVID-19 can you just give us a sense on what drives that growth.
Clearly standout in terms of your overall revenue overall profitability, it's higher margin. So how should we think about where the adoption levels are coming from your customers in terms of supporting net underlying growth.
Yes.
Thanks, Great question.
So fundamentally.
Transaction volume based business so.
On script growth returns Thats, a good fundamental underlying driver of this business.
Also grow this business by signing.
Signing more brands onto our programs.
And to innovating and putting more value on our network that delivers value even to a pharmacist to a provider or to our biopharma that allows us to grow our services revenue.
But fundamentally this is about growing transactions.
I think just the other thing I would add there the way that we're growing the transactions as were utilizing technology with great technology capabilities within that business from that allows us to leverage our capabilities in a unique way so our access to workflow our ability to automate.
What we're doing is creating new solutions that drive volume through transaction volume through our networks.
By solving real customer problems.
Thank you. Our next question comes from Eric Percher with Nephron research.
Thank you question on the medical side, the core growth of 10% to 16% is notable leaner I should to hear how the medical business has changed and can you continue to progress through the COVID-19 pandemic.
Then how much or to what extent can you follow testing of course. It is declining it's also moving toward retail on home shopping.
<unk> with <unk> warehouse.
How material could that be.
For you.
I'll start and give a few comments Eric.
Looked at that.
Certainly.
A dynamic year on the medical business I mean out of the gate with PPE.
Demand outstripping supply by by a wide margin, you're well familiar with with the early period of this fiscal year mid part of the year, we start to see COVID-19 test kits.
Really come to market and through our leading position as a lab distributor take our team did a fantastic job working with really a broad spectrum of those providers across all types of test molecular antigen antibody to get those into the provider communities that we serve and we had tremendous growth.
Growth probably peaked in Q3 it was frankly fell.
The way quicker than we had anticipated when we when we had earnings call on that in that.
Third quarter, we still there is still COVID-19 test kit volume out there, but it certainly was if any or all of our businesses I would say the medical business was the most dynamic in terms of the market dynamics for this year.
And maybe Eric just to follow up on that as Brian talked about the breadth of our <unk>.
Markets that we serve and the breadth of products and capabilities that we have.
Our leading capabilities go across Rx private brand lab as Brian talked about and if you go before the pandemic FY 'twenty net growth.
Growth of about 12%. So I think as we look at our guide for next year. It really speaks to the fundamentals of the business have remained very strong all the way through the pandemic.
As volumes begin to come back and utilization comes it.
Comes back online, we would expect that the business could continue to grow in that historical range.
Thank you. Our next question comes from Kevin Caliendo with UBS.
Hi, Thanks for taking my call.
Sure.
Hey, guys.
On the cash on your balance sheet looking at the cash flow from this year, even with the larger buyback and the dividend like you are still likely to add cash net net.
There's been a lot of talk about potentially what you might do in terms of M&A going forward whats your appetite in terms of M&A are you looking to just add on and bolt on is there a meaningful acquisition you'd be looking to do.
Anything anything notable sort of talk about where you sit now versus maybe where you had been on the path.
Yes.
Just a couple of framing comments on how we think of M&A.
So first if it.
What we would call a tuck in or it's our core business. We're in the business today, we understand the business, it's just about really adding customers or maybe a capability and scale for a.
Platform, we already have that's attractive M&A over the history of that.
And as a company we've been very successful doing that kind of M&A.
Second kind.
The second criteria, we really have to assess its alignment to our enterprise strategy, we have articulated our oncology ecosystem and our Biopharma services business as areas that where you want to deploy growth capital against.
But it's got to meet our third criteria, which is we're very financially disciplined about the way. We approach. These things. We know we have alternate uses to deploy our capital M&A is just one of them and so we're very disciplined as we think about approaching M&A, but I would say we would do M&A. If it was aligned to our strategy. It fits that first type of M&A tuck.
And it met our our financial discipline business criteria.
Thank you. Our next question comes from Charles <unk> with Cowen and company.
Yes, Thanks for taking question wanted to ask about.
So on the vaccine guidance contribution guidance the $40 to 50.
Should we assume that's pretty much front end.
Weighted into the fiscal year end.
And have you taken into account.
Some of the concerns of on vaccine hesitancy in.
The fact that.
On the pace of vaccine administration was going to slow down.
Thanks for your question, let me address that as I think I've mentioned in past calls, we take our guidance from the from the.
U S government make all the decisions.
Vision on the administration of the program until we leveraged the guidance that they gave us in terms of volumes and where those volumes need to be distributed and thats. How we put this guidance together.
So that's how we form the basis for the 40% to 50 for the vaccine distribution in the 10 to 20 for the kit distribution as I mentioned in my opening remarks, that's going to be weighted more towards the first half of the year first quarter of the year primarily.
Thank you. Our next question comes from Steven Valiquette with Barclays.
Great. Thanks, Good afternoon. So Britt in your prepared remarks, you called out the weak cold and flu season that did have some impact on the fiscal <unk> results just reported.
That dynamic did that cause a wide variation in financial impact across all three distributors, but I guess as we think about the fiscal 'twenty two guidance from you guys. You mentioned the return to the pre COVID-19 levels, a prescription the patient levels on the back half of the year I just want to confirm whether or not that includes the normal cough cold flu season and is that also a large factor or a small fact.
And that 5% for 8% core EBIT growth in U S pharma. Thanks.
Sure. Thanks for the question.
As I talked about there were a.
A couple of factors that really occurred during the fourth.
Fourth quarter, we cold and flu season was one of those we also had a winter storm those head.
Modest impacts on.
On our results. We do expect next year that we would have a normal flu season on those are very difficult to predict in the last several years, we've had some variations within within normal list based on history, but we expect that.
Flu season will be back to a normal cadence historically.
As utilization starts to improve over our first half of the year and get back to pre COVID-19 levels levels in the second half of the year, that's where we expect volumes will begin to ramp.
Thank you. My next question comes from Eric Coldwell with Baird.
Hey, Thanks, very much this somewhat tails on Charles question. It was.
In a nutshell, you guided to earnings being back half weighted again.
Frankly, if I look at the three years prior to COVID-19 your.
Your contribution was on average 54% of full year earnings. So I just wanted to make sure that this is more than anything kind of a reiteration of what happened in the past prior to COVID-19 impacts number one.
And then number two if the heavy weighting of your vaccine and kitting 50.
50 to 70 census in the first quarter, how do we true that up with with earnings being weighted towards the back half is by default is the implication that we should be.
A bit more cautious on <unk> results just trying to.
To bridge all of these these moving pieces. Thanks.
Yeah sure let me see if I can help you all you are correct historically.
Our earnings have been generated primarily.
<unk> in the second half of the year and we would expect that we would have on slightly higher second half contribution in the first half again. This year I think when you look at our guide and you look at the vaccine contribution of 40 to 50 on the range of 80% to 85% to 1945 inside.
That core business is still growing and we would expect that as utilization continues to improve through the first half and get back to pre COVID-19 in the second half that those core earnings would reflect that so yes, I think historically, we've had higher second half contribution in the first half we expect.
We'll have a slightly higher second half than first half contribution as well, we don't guide to quarters, So I'm really not going to comment on second.
Second quarter versus first quarter.
I think you should take our thinking on how utilization comes back online.
Thank you for our next question comes from Ricky Goldwasser with Morgan Stanley.
Yeah, Hi, good evening. So my question goes back to the guidance for 2018 for core distribution operating income growth, we get questions from investors around what's the long term growth algorithm for the business I think it's really helpful that you separated to core so when we think about it.
Growth from 5% to 8%.
It doesn't include South Dakota impacts. It does include from lower volumes in the first half for the year.
Should we think about that as sort of day.
The starting point or baseline for longer term growth.
And when volumes.
Right.
Starting with one could be even higher and then my follow up question is just on the <unk>.
<unk> litigation guidance sort of the same legal expenses in 2022, and 2020 ones on we can get any update on where you are on the process. Thank you.
Thanks, Ricky for the question Larry.
See if I can start with your from your first question.
I've talked about improving momentum in our business for the last several quarters and you referenced 5% to 8% core and Thats for our U S pharmaceutical business.
We expect that our business is going to continue to generate improving momentum over the course of FY 'twenty two and so we feel very good that we've had a return to growth in that segment.
The whole business over the last two years that we would expect that that will continue.
We've talked about some of the investments that we're making in the business and how we're leveraging some of those investments and so I think what you should you should not think about this as a long term jumping off point, we don't provide long term guidance.
I would hesitate for you to just take that 5% to 8%.
Take it out over over the long term, but what you should take from this is we expect continuing improvement in utilization continuing momentum in the business.
I think our core growth rate really reflects that.
No Brian for you on it.
Also embedded in the pharma segment is the is the assumption that the flu season returns to normal.
Historically would have been in the run rate and not incremental growth for the segment.
Relative to opioids.
The second part of your question Ricky.
There continue to have constructive discussions.
Round.
Broad settlement framework constructor, the parameters of that have been pretty consistent over the last several quarters.
Larry encouraged we're hopeful we can reach resolution, we think it'll be great for patients and communities, but as we said last quarter until we have a deal we are going to continue to prepare to defend ourselves.
And we've made significant investments in that defense, we're prepared to regulus rigorously and vigorously defend ourselves in court that comes to that so our assumption until such point in time that we have a resolution is that we'll continue to make the ongoing investment in our defense.
Thank you. Our next question comes from George Hill with Deutsche Bank.
Hey, good afternoon, guys and thanks for taking the question I was hoping you might be able to give you an answer your question that would settle from debate on the Investor community, which is I guess could you talk about your appetite for maybe adding another leg to the operational store through M&A and kind of how we should think about the company's.
Appetite for for deals that could be dilutive for value transfer transfer if that's the right word in the short term for to other segments that.
Could relate to your core customers.
You have a better long term growth profile. So that's kind of a really broad M&A question, but just interested in how youre thinking about the kind of low risk appetite versus valuation.
Well look first for we're always looking at the landscape and you look at the landscape in healthcare. This year, obviously with the pandemic, we saw a lot of the telehealth asset.
Really catch a lot of momentum we've gone back we've checked our strategies based on how we've seen the landscape change over the past year and I'll, just say that as we have a lot of conviction that our strategy, which is built around continuing to get growth out of the core continuing to focus on oncology and continuing to focus on Biopharma services where are we.
I think we have we have unique and distinguished capabilities, we have the opportunity to do internal innovation to drive growth and we have appetite for do external growth. If if we can find the right asset aligned to the strategy on the right way that meets our return thresholds.
Thank you for our next question comes from John Jesse <unk> with Credit Suisse.
Okay. Thank you.
I wanted to talk ask about your international segment maybe.
You can provide some more details on the key drivers behind towards 8% core growth, you're expecting that business in fiscal 'twenty two.
Sure.
I'll start I mean, let's first we should recognize that on the international segment. The pandemic recovery is lagging what we're seeing in the U S. A little bit, but we're very pleased with the performance.
This business has had we have worked diligently over the last few years to really think about how we organize and streamline and make that business more efficient capturing some of the scale across all of the countries. We've been rigorous in looking at our.
Our retail footprint and we've done some rationalization.
Of our physical estate there.
And we've made some investments frankly that digital.
Technology that really were turned out to be quite timely and important this year as patients decided they wanted to use digital health services more so.
We're very pleased with the performance of the European business, we run it in a very disciplined very tight way.
It is not inherently high growth market, so to get the growth that we that we see where we're very pleased with the team.
I guess I would just add similar to the U S market for international markets and also the COVID-19 headwind and we would expect that those markets will begin to recover along the same type of timeline, we laid out in our broader comments.
Operating at a time for one more question.
Certainly on that question comes from Brian <unk> with Jefferies.
Hey, good afternoon, thanks for taking the question.
Brian just on your <unk>.
Prepared remarks, you've talked about expanding U S. Oncology. So just curious how you see that you know philosophically is that day.
How will that play out as that expansion in terms of footprint number of practices capabilities and how are you thinking about the shift of that business or evolution of that as the value basis oncology world changes.
Yeah, Great. Great question. So look we we think we have a terrific value proposition for independent community based oncologists.
And we look to grow our price.
Our practices at our number of oncology oncologist in those practices.
That is part of the growth.
And we like that growth, but we also think we have the opportunity to grow our research efforts to grow our data and analytics and insight business.
We've got.
Opportunity to put more value into our EMR. So that we've taken temporary for patient care that we're innovating ahead of the marketplace and we view all of these things is kind of reinforcing each other right more scale on the network gives you a bigger distribution channel for the products and services that you develop more impact back upstream to the Biopharma as a net.
Why we have actually been referring to it as an ecosystem. Because these are not really disconnect connected growth strategies. They are actually quite connected under the umbrella of oncology.
Okay well.
Thank you everybody.
<unk>.
I want to end the call today by again, just reiterating the confidence that I have as Mckesson enters our fiscal 2022 I'm excited about the businesses and the markets that we operate in today.
Im very pleased with our performance and the momentum that gives us and I really do believe we are positioned for long term success.
Again, so proud of how resilient our employees have been throughout the pandemic and in fiscal 2022, we look forward to supporting our customers partners and communities as we hopefully resolve these uncertain times.
We wish you and your families good health and wellness get vaccinated.
Want to wish everybody a happy nurses day, thanks to all of those amazing nurses out there on the frontline thanks, everybody have a great evening.
Thank you for joining today's conference call you may now disconnect and have a great day.
Larry.
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