Q2 2022 Mckesson Corp Earnings Call
Yeah.
Please standby welcome to Mckesson's Q2 fiscal 2022 earnings call.
Today's conference is being recorded at this time I would like to turn the conference over to Rachel Rodriguez. Please go ahead.
Thank you Sarah good afternoon, and welcome everyone to Mckesson's second quarter fiscal 2022 earnings call.
Today, I'm joined by Brian Tyler, Our Chief Executive Officer, and Brexit 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 such as forecasts about mckesson's operations and future results.
Please refer to the cautionary statements in today's press release, and our slide presentation and to 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.
Yeah.
During this call we will discuss non-GAAP financial measures.
Additional information about our non-GAAP financial measures, including a reconciliation of this measure 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.
Thank you Rachel and good afternoon, everyone. Thank you for joining us on our second quarter call today, we.
We are happy to report another strong quarter for Mckesson, driven by continued market improvements and underlying fundamentals of our businesses.
We achieved double digit adjusted operating profit growth in all four segments based on our strong operating performance and alignment across the enterprise.
As a result of our second quarter performance, our confidence in the second half of the fiscal year and Mckesson's continued role in the COVID-19 response efforts, we are raising our guidance range for fiscal 2022 adjusted earnings per diluted share from $19 80.
The $20 and 40.
To a new range of $21 95 to $22 55.
We continue to believe we will see a return to pre COVID-19 pharmaceutical prescription and patient engagement levels in the second half of our current fiscal year.
We're encouraged by the trends, we continue to see across primary care specialty and oncology patient visits in addition to overall prescription volumes.
We are pleased to see our markets are recovering in line with our original expectations.
Our enterprise wide focus on our company priorities is driving operating performance and furthering the advancement of our long term growth I would like to take the time today to talk about each of our company's priorities first we have a focus on our people and the culture, which is guided by our eye care and I lead values. These valley.
<unk> include a commitment to both our local and global communities, our customers and the health care industry to innovate and deliver opportunities that make our customers more successful.
For the better health of patients.
Along with these values were committed to fostering an inclusive workplace that celebrates our differences and respects the diverse world in which we live and work as an organization. We continue to be committed to diversity equity and inclusion through a more diverse and inclusive workplace, where a stronger a more creative and a more productive team at mckesson.
Our priority has been the health and safety of our employees and we're deeply committed to supporting our team members across the organization, which why I'm incredibly pleased to have announced mckesson's first ever day of wellness, which we call your day your way.
This will take place this Friday November 5th.
We understand that mental physical and emotional well being are of the utmost importance to our team. So we've made the decision to set aside a special day to help ensure our employees can rest recharge and take time for themselves.
Grateful for all the contributions from the team over the last 19 months Mckesson employees continue to be in the center of the fight against COVID-19, and we want to make sure everyone gets a chance to take a well deserved break or.
Our second priority is to strengthen our core pharmaceutical and medical supply chain businesses across North America, we have a best in class pharmaceutical supply chain as a reminder, in the U S. We have a scaled distribution presence that delivers roughly one third of prescription medicines each day, our operational excellence and our ability to leverage our scale with glu.
Abel suppliers is one of the many reasons why Mckesson continues to be the partner of choice for hospitals health systems and pharmacies of all size.
We strengthened our business when we strengthen our customers and partners. This past quarter, we held our annual Mckesson idea share educational event, which brought together independent pharmacy operators to help them learn new skills, how to grow strategically and how to operate efficiently.
The virtual experience helped 2000 independent pharmacies, prioritize education, and networking, which we believe will shape the future of community pharmacy and strengthen the independent business for the better.
In Canada, we've been the leader in healthcare related logistics and distribution for 100 years, and we support hospitals community in retail pharmacies to ensure that medication is always available.
We're a leader in medical distribution to alternate site markets and our footprint in the U S. Healthcare is underpinned by our strong sourcing and supply chain capabilities, we deliver medical and surgical supplies and services to over 250000 customers.
Our pharmaceutical and medical distribution businesses continue to play an integral role in the pandemic response efforts and our capabilities have been highlighted through our evolving partnership with the U S. Government's COVID-19 vaccine distribution kitting and storage programs.
I'm glad to say that the fundamentals in our core business remains solid and our execution has continued to improve as we accelerate our growth and work to deliver high quality resilient supply chains to our customers.
Our third company priority is to simplify and streamline the business. We're prioritizing the areas, where we have deep expertise and are central to our long term growth strategies largely within the North American market. As a result, we made the decision to fully exit mckesson's businesses in the European region in July we announced that we've entered into an agreed.
<unk> to sell our European businesses in France, Italy, Ireland, Portugal, Belgium in Slovenia to the Phoenix group today.
Today, we're announcing that Mckesson has made the decision to sell our U K retail and distribution businesses as a whole.
The transaction is expected to close in Q4 of fiscal 2022 subject to customary closing conditions, including receipt of required regulatory approvals.
We believe this step toward a full exit of our European business is an important milestone in our strategy as a streamlined efficient focused organization.
Building upon the foundation of a strong company culture, and a stable business. The last company priority encompasses our two strategic growth pillars, we are investing to advance our oncology and Biopharma services, which includes building integrated ecosystem that leverage our differentiated assets and capabilities and our strategic focus on these two.
<unk> is important as both of these areas have good inherent growth opportunities.
Mckesson's oncology ecosystem supports over 14000 specialty physicians through distribution and GPO services and we are the leading distributor in the community oncology space. We have over 1400 physicians in the U S oncology network spread over approximately 600 sites of care in the U S.
Within our oncology ecosystem on Tata generates insights at the intersection of technology and data and supports community providers with precise cancer care by improving patient outcomes and delivering evidence and insights to help accelerate life Sciences research ecosystem helps the clinicians to provide better care and an increasingly complicated on.
<unk> care landscape.
By helping them grow their businesses attract more patients and produce better health outcomes. We can then leverage interconnected technology in real world insights to feed data back upstream to manufacturers, which can help them think about identifying new product innovations and new markets.
Within the Biopharma ecosystem, the prescription technology solutions business has leveraged technology networks and access to provider workflows to serve Biopharma in life Sciences partners and patients. We have built this ecosystem over many years as it includes assets like relay health pharmacy cover my Meds and Rx Crossroads. It allows.
US to connect providers payers and patients together to focus on access adherence and affordability solutions.
Our two strategic pillars of oncology and Biopharma services are not just businesses or products, but fundamentally our suite of solutions that solve longstanding problems in ways that bring more speed impact and efficiency, we will continue to invest and accelerate the execution against those strategies, which support our long term growth for Mckesson.
I am confident in the progress against our company's priorities that they will enable the advancement of our growth.
Before I turn to our second quarter results just a brief update on our board of directors in September our board of Directors welcome Dr. Richard Carmona as a new independent director Dr. Carmona has a strong focus on improving public health care and extensive experience in clinical sciences healthcare management and emergency preparedness.
Each led to his nomination and unanimous.
Senate confirmation as the 17th surgeon general of the United States from 2002 until 2006.
Currently Dr Carmona as chief of Health innovations at Canyon Ranch, and a professor of public health at the University of Arizona is hands on health care experience will be invaluable for Mckesson's Board of directors now I want to turn to the business performance within the second quarter.
We are pleased with our strong second quarter performance and we remain encouraged by the underlying fundamentals in our business. Let me start with U S pharmaceutical where our solid results for the second quarter reflected continued improvement of prescription trends, which were in line with our expectations within specialty oncology visits we saw an exit rate of pre COVID-19 level.
<unk>, which again was in line with our expectations.
The U S. Pharmaceutical segment saw a 12% adjusted operating profit growth, which was underpinned by the distribution of specialty products to providers and health systems and the contribution from our successful COVID-19 vaccine distribution operations.
We are in a strong position to continue to support the government and private enterprise in the future for distributing COVID-19 and flu vaccines.
And our investments in the distribution business continued to be showcased through our successful vaccine response through October 28, our U S. Pharmaceutical business has successfully distributed over $311 million, Madonna and Johnson and Johnson COVID-19 vaccines to administration sites across the United States and to support the U S government.
<unk> donation mission.
And prescription technology solutions business continued to perform well this quarter as our technology and service offerings have accelerated the support and growth of our biopharma customers and we've been successful in adding new brands to our platforms.
The segment had excellent momentum and delivered a 38% increase to adjusted operating profit growth during the second quarter. In addition to the operational strength I'm proud to say that we are helping patients get access to the therapies through our market leading technology offerings in this segment.
In medical surgical we saw an increase in COVID-19 tests and improvement in patient care visits and we announced we are expanding our work with the U S government through a new kitting and storage contract our medical surgical business remains well positioned to continue to support the government as needed the growth in our medical surgical.
<unk> segment is reflective of strong top line performance and underlying business improvement.
As it relates to international the segment had solid adjusted operating profit growth benefiting from both local COVID-19 programs and a new partnership with one of Canada's largest retailers, we are partnering with local governments to distribute and administer COVID-19 vaccines and through September we have distributed over 58 million vaccines to administrate.
<unk> sites in select markets across our international geographies.
As a reminder, excluding our planned divestitures in Europe, we have businesses in Norway, Austria, Denmark, and Canada, and our international segment.
For our remaining European businesses, we are exploring strategic alternatives as we align future investments to our growth strategies.
Before I close I'd like to update you on the status of the proposed opioid settlement.
Recently, we announced that enough states have agreed to settle to proceed to the next phase, which is the subdivision sign on period.
During this phase each participating state will offer its political subdivisions, including those that have not sued the opportunity to participate in the settlement for an additional 120 day period, which ends January 2nd 2022.
We are pleased with this important step and we believe the settlement framework will allow us to focus our attention and resources on the safe and secure delivery of medications and therapies, while expediting the delivery of meaningful relief to the affected communities.
In closing.
I am encouraged as we continue to make progress and accelerate growth as we advance our company priorities, our underlying distribution business have stable fundamentals, great teams and strong execution.
We're investing in what we believe are two good growth markets, where we have differentiated capabilities and we look forward to sharing more of those successes and proof points with you at our upcoming Investor day.
Thank you for your time and with that I'm going to turn it over to Britt for a few additional comments.
Thank you, Brian and good afternoon, everyone.
We're pleased to be here today to discuss our fiscal second quarter results, which reflect strong performance and momentum across the business driven by operational excellence and execution against our growth strategies.
This momentum can be seen in each of our segments with.
A summary of our second quarter results and updated guidance assumptions can be found in our earnings slide presentation, which is posted on the investors section of our website.
Let me start with an update on Europe. This morning, we announced that we've entered into a definitive agreement to divest our retail and distribution businesses in the UK to <unk> for approximately $438 million. The ultimate proceeds from this transaction are subject to certain adjustments under the agreement.
Therefore, the proceeds may differ from the announced purchase price.
Which has and will continue to operate these businesses and record revenue and income until the transaction is closed which is expected to occur in our fourth quarter of fiscal 2022 pursuant to the satisfaction of customary closing conditions, including receipt of regulatory approvals.
The assets involved in this transaction contributed approximately $7 $8 billion in revenue and $64 million and adjusted operating profit in fiscal 2021.
The net assets included in the transaction will be classified as held for sale.
Held for sale accounting will be effective beginning with our fiscal 2022 third quarter.
We will re measure the net assets to lower a carrying amount where fair value less cost to sell and we estimate that this will result in a GAAP only charge of between $700 million to $900 million in our third quarter of fiscal 2022.
Due to held for sale accounting treatment, we will discontinue recording depreciation and amortization on the assets involved in the transaction.
This impact is not included in the fiscal 2022 outlook provided today.
This transaction provides us the focus to pursue the growth strategy has been collagen and biopharmaceutical services in North America, and as Brian mentioned, we remain committed to a full exit of our European businesses, which includes announced transactions to the Phoenix group and really is as well as our remaining operations in Norway, Austria and Denmark.
Let me now turn to our second quarter results.
Before I provide more details on our second quarter adjusted results I want to point out two additional items that impacted our GAAP only results in the quarter.
First we recorded a GAAP only after tax charge of $472 million related to our agreement to sell certain European businesses to the Phoenix group.
To account for the Remeasurement of net assets to lower a carrying amount of fair value less cost to sell this transaction is expected to close within the next 12 months.
Also during the quarter, we recorded an after tax loss of $141 million on debt extinguishment related to the successful completion of a bond tender offer.
Moving now to our adjusted results for the second quarter, beginning with our consolidated results, which can be found on slide seven.
Our second quarter results were highlighted by strong operating performance, which included record revenue and double digit adjusted operating profit growth across all segments. We are encouraged by the ongoing market improvement in both prescription volume and patient visits which we observed in our second quarter.
These improvements are supported by our strategic agenda setting us on a path of disciplined growth.
And our work to support the U S government's COVID-19, domestic and international vaccine Keating efforts continues to contribute to growth. In addition to the momentum we have built across the business.
Second quarter adjusted earnings per diluted share was $6 15.
An increase of 28% compared to the prior year.
This result was driven by the contribution from COVID-19 vaccine and kitting distribution and growth in the medical surgical solutions segment, partially offset by a higher tax rate.
Second quarter adjusted earnings per diluted share also includes net pre tax gains of approximately $97 million or <unk> 46 per diluted share associated with Mckesson ventures equity investments as compared to $49 million in the second quarter of fiscal 2021.
Consolidated revenues of $66 6 billion increased 9% above the prior year, principally driven by growth in U S. Pharmaceutical segment, largely due to increased pharmaceutical volumes, including growth in specialty products and our largest retail national account customers.
Actually offset by branded to generic conversions.
Adjusted gross profit was $3 3 billion for the quarter up 12% compared to the prior year.
Comparable adjusted gross margin for the quarter was up 10 basis points versus the prior year adjust.
Adjusted operating expenses in the quarter increased 4% year over year and adjusted operating profit of $1 3 billion for the quarter was an increase of 34% compared to the prior year and reflected double digit growth in each segment.
Interest expense was $45 million in the quarter, a decline of 10% compared to the prior year driven by the net reduction of debt in the quarter.
Our adjusted tax rate was 18, 8% for the quarter, which was in line with our expectations and.
In wrapping up our consolidated results second quarter diluted weighted average shares were $155 8 million a decrease of 5% year over year.
Moving now to our second quarter segment results, which can be found on slides eight through 13, and I'll start with U S pharmaceutical.
Revenues were $53 4 billion, an increase of 11% year over year as increased pharmaceutical volume, including growth in specialty products and our largest retail national account customers were partially offset by branded to generic conversions adjusted.
Operating profit increased 12% to $735 million.
Driven by growth in the distribution of specialty products to providers and health systems and the contribution from COVID-19 vaccine distribution.
The contribution from our contract with U S government related to the distribution of COVID-19 provided a benefit of approximately 28 per share in the quarter.
Which was above our original expectations.
And the prescription technology solutions segment revenues were $932 million, an increase of 40% driven by higher Biopharma service offerings, including third party logistics services and increased technology service revenue, partially resulting from the growth in prescription volumes.
Adjusted operating profit increased 38% to $144 million driven by organic growth from access and adherence solutions.
Moving now to medical surgical solutions revenues were $3 1 billion, an increase of 23% driven by increased sales of COVID-19 tests and growth in the primary care business.
Adjusted operating profit increased 52% to $319 million driven by growth in the primary care business increased sales of COVID-19 tests and the contribution from kitting storage and distribution of ancillary supplies for the U S. Government's COVID-19 vaccine program.
The contribution from our contract with U S government related to the kidding distribution and storage of ancillary supplies for COVID-19 vaccines provided a benefit of approximately <unk> 14 per share in the quarter, which was above our original expectations.
Next let me address our international results.
Revenues in the quarter were $9 1 billion, a decrease of 5% primarily driven by the contribution of Mckesson's German wholesale business to a joint venture with Walgreens Boots Alliance, partially offset by volume increases in the pharmaceutical distribution and retail businesses.
Excluding the impact from the contribution of our German wholesale business, which was completed in the third quarter of fiscal 2021.
Segment revenue increased 13% year over year and was up 9% on an FX adjusted basis.
Adjusted operating profit increased 41% year over year to $163 million.
On an FX adjusted basis, adjusted operating profit increased 34% to $155 million driven by the discontinuation of depreciation and amortization on certain European assets classified as held for sale beginning in the second quarter of fiscal 2022.
The held for sale accounting in our international business contributed 13.
To adjusted earnings and our second quarter of fiscal 2022.
Moving on to corporate.
Adjusted corporate expenses were $83 million, a decrease of 39% year over year, driven by gains of approximately $97 million or <unk> 46.
From equity investments within our Mckesson ventures portfolio.
This quarter, we had fair value adjustments related to multiple portfolio companies within Mckesson ventures compared to fiscal 2021 gains from Mckesson ventures contributed 24 year over year.
As previously discussed its difficult to predict when gains or losses on our ventures portfolio companies may occur and therefore, our practice has been and will continue to be to not include ventures portfolio impacts in our guidance.
We also reported opioid related litigation expenses of $36 million for the second quarter and anticipate that fiscal 2022 opioid related litigation expenses will be approximately $155 million.
Consistent with the proposed settlement announced in July. We also made the first annual payment into escrow of approximately $354 million during the quarter.
Let me now turn to our cash position, which can be found on slide 14.
We ended the quarter with a cash balance of $2 2 billion.
And for the first six months of the fiscal year, we had negative free cash flow of $109 million.
In Q2, we completed several debt transactions.
In July we redeemed the 600 million Euro denominated note prior to maturity.
In August we completed a cash funded upsized tender offer which resulted in the redemption of $922 million principal outstanding debt.
And finally, we completed a public offering of a note in the principal amount of $500 million at one 3%.
These actions aligned with our previously stated intent to modestly delever and to further strengthen our balance sheet and financial position.
Year to date, we made $279 million of capital expenditures, which included investments to support our strategic pillars of oncology and Biopharma services.
For the first six months of the fiscal year, we returned $1 $4 billion in cash to our shareholders through $1 3 billion of share repurchases and the payment of $134 million in dividends.
We have $1 5 billion remaining on our share repurchase authorization and continue to expect diluted weighted average shares outstanding to range from $154 million to $156 million for fiscal 2022.
Let me transition now and speak to our outlook for the remainder of fiscal 2022.
For our full list of fiscal 2022 assumptions. Please refer to slide 16 through 19, and a supplemental slide presentation.
As a result of our strong first half performance and our outlook for the remainder of the year. We are raising our previous adjusted earnings per share guidance range for fiscal 2022 to $21 95 to $22 55.
Which is up from our previous range of $19 80 to $20 40.
Our updated outlook for adjusted earnings per diluted share reflects 27, 5% to 31% growth from the prior year and our guidance assumes growth across all of our segments.
Additionally, fiscal 2022 adjusted earnings per diluted share guidance includes $2 30 to $3 five of.
<unk> impacts attributable to the following items.
50% to 70 cents related to the U S. Government's COVID-19 vaccine distribution, which is an increase from the previous range of 45 to 55.
80 to $1 10 related to the kitting storage and distribution of ancillary supplies, an increase from the previous range of 50% to 70.
As discussed at a recent conference.
50% to 75 cents related to COVID-19 test impairments for PPE related products.
And approximately 49 from gains and losses associated with Mckesson Mckesson debentures equity investment within our corporate segment year to date.
Excluding the impact of these items from both fiscal 2022 guidance in fiscal 2021 results.
This indicates a $20 to 29% forecasted growth.
Let me provide a few additional assumptions related to our guidance.
We continue to expect prescription and patient engagement volumes will return to pre COVID-19 levels in the second half of our fiscal 2022, which is in line with our original guidance.
In the U S. Pharmaceutical segment, we now expect revenue to increase 8% to 11% and adjusted operating profit to deliver four 5% to seven 5% growth over the prior year.
We continued to see stable fundamentals, specifically our outlook for branded pharmaceutical pricing remains consistent with our original guidance and the prior year of mid single digits increases in fiscal 2022.
And our view is that the generics market remains competitive yet stable as our volumes have continued to improve in the September quarter.
Our guidance includes contribution related to our role as a centralized distributor for the U S. Government's COVID-19 vaccine distribution. This includes work preparing vaccines for international emissions.
Our current outlook remains aligned to the volume distribution schedule provided by the CDC and the U S government.
The current guidance excludes booster shots due to the timing of the recent approvals as well as vaccines for pediatrics, which had not been approved by the CDC. We will continue to update you on the progress and contribution from this program.
When excluding COVID-19 vaccine distribution in the segment, we expect approximately 3% to 6% adjusted operating profit growth.
In addition, our investments in our leading and differentiated position in oncology will continue to represent an approximate <unk> 20 headwind in fiscal 2022.
In our prescription technology solutions segment, we see revenue growth of 31% to 37% and adjusted operating profit growth of 23% to 29%.
This growth reflects the strong service and transaction momentum in the business.
Now transitioning to the medical surgical are.
Our revenue outlook assumes 8% to 14% growth in adjusted operating profit to deliver 35% to 45% growth over the prior year.
As mentioned previously our outlook includes 80 to $1 10 related to the contribution from the U S government's distribution of ancillary supply chain some storage programs.
And $50 to 75 cents related to Covid, 19 tests, and PPE impairments and related products.
Excluding the impacts from these items from both fiscal 2022 guidance and fiscal 2021 results. This indicates 13% to 19% forecasted growth.
One additional note related to our U S distribution businesses.
One of the pillars of our enterprise strategy is talent the ability to attract and retain the best workforce in healthcare.
The labor market remains competitive and we have assumed a modest expense impact to ensure there is continued service continuity through the holiday season, and the back half of our fiscal year.
Therefore, the guidance that we're providing today includes approximately 10% to 20.
Adjusted operating expense impact for labor investments in our U S distribution businesses in the second half of the year.
Finally in the International segment, our revenue guidance is 1% declined to 4% growth as compared to the prior year.
As a reminder, this reflects the impact of the contribution of our German wholesale business to a joint venture with Walgreens Boots Alliance.
For adjusted operating profit our guidance reflects growth in the segment of 39% to 43%.
Which includes approximately 38 are expected adjusted earnings accretion in fiscal 2022 as a result of the held for sale accounting related to our agreement to sell certain European assets to the Phoenix group.
It also includes our strong performance in the second quarter and the contribution from COVID-19 vaccine distribution in this segment.
Turning now to the consolidated view.
Our increased guidance assumes 8% to 11% revenue growth and 18% to 22% adjusted operating profit growth compared to fiscal 2021.
Our full year adjusted effective tax rate guidance of 18% to 19% remains unchanged.
And we anticipate corporate expenses in the range of $610 million to $660 million.
On our May six earnings call, we outlined an initiative to rationalize office space in North America to increase efficiencies and to support employee flexibility.
We've made good progress against this initiative and based on this progress. We now expect earlier benefits from these actions, resulting in the realization of annual operating expense savings of approximately 15% to $25 million in the second half of fiscal 2022 with.
With annual savings of $50 million to $70 million when fully implemented these.
These savings will be realized across all of our segments.
Let me now turn to cash flow and capital.
'twenty, two which is net of property acquisitions and capitalized software expenses.
As a reminder, historically, we generate the majority of our cash flows in the fourth quarter of our fiscal year.
This strong cash flow generation provides the financial flexibility to execute a balanced capital allocation approach.
Investing in our strategies of oncology and Biopharma services positioning our business for long term growth, while remaining committed to returning capital to shareholders through our dividend and share repurchases our investment grade credit rating remains a priority and underpins our financial flexibility.
In closing we are encouraged by our strong performance through the first half of our fiscal year the momentum across the business, including our partnership with the U S government positions us to deliver the updated fiscal 2022 outlook provided here today.
Finally, we're looking forward to providing additional details on our strategies and the strength of our businesses at our upcoming Investor day on December eight.
Thank you for your time and now I will turn the call over to the operator for your questions.
Thank you.
Victor techno with questions. Please press star one on your touch turned telephone.
Joining us today using a speaker phone. Please make sure. The mute function is turned off to allow your signal to reach our equipment.
Again that is star one if you would like to ask a question.
And we'll pause for just one moment.
Okay.
And we will take our first question from Lisa Gill with Jpmorgan.
Alright, thanks, very much and good luck.
Thanks, very much good afternoon, and congratulations on a great quarter.
Great I appreciate your comments around what youre seeing as far as wage inflation goes but one of the other questions. We've gotten around inflation is around freight costs can you remind us of how that works between the manufacturer and distributor and if youll bear.
Are there any of those costs from a distribution perspective or is it just the manufacturer of the barrels that Todd are you able to pass it onto the customer.
Just any color around that would be helpful.
Yes, Thanks for your question Lisa.
Certainly we will bear some costs for freight we've been able to pass that on to this point in time, both are our pharmaceutical and our medical business. We are responsible for the freight from our from our distribution locations to our customers and to this point, we've been able to manage through that without any.
Material impact in our guidance for the rest of the year assumes that that will continue we did call out the.
Incremental labor impact the investment that we're making to make sure that we have continuity through the rest of the year, but as it relates to freight we are responsible from.
Operator can you go ahead with the next question. Please.
Operator can you go over the next question. Please.
Yes.
Okay.
Ladies and gentlemen, you will hear music for just a brief moment, while we reconnect the speakers line.
Hi, This is the Mckesson presenter line.
Please proceed.
We'll go ahead and take the next question.
Thank you and we'll take our next question from Michael.
Cherney with bank of America.
Yes.
Good afternoon. Thanks for taking the question first of all the call cut off I don't know if you've got a chance.
Finished leases question on freight I know if you want to highlight that again and then I guess just from my perspective, I don't want to get too far ahead of things, especially at the analyst day coming up but I. Appreciate all the breakout you have on the strong work tied to all of the Cobra related elements I know one of the questions that guests will come up as what that means into next year given that you're out.
<unk> some of the benefits that youre seeing specifically this year that it's all our tanks, we all hope that don't.
Okay.
Gross trajectory into next year is there any way to think about that 230, 305, and how we should think about that as a whole in terms of your overall growth versus what your core business will continue to do.
Hey, Mike This is Brent.
Thanks for hanging in there.
Let me just get back to Lisa's question.
Just to finish that up we are responsible for the freight from our distribution centers to our customers to this point. This year, we have not had an impact in our financial statements. As a result of increased freight and we don't we don't expect any of that in our guidance as well so just to be clear.
On that we did call out for you investments that we're making in labor in the back half of the year. So that we can ensure the holiday season in the back half of the year for our customers has continuity as it relates to your question Mike What we've really tried to do here is provide you some clarity on those items that are related to our distribution.
<unk> of Covid vaccines, and ancillary kits as well as the increase that we've seen in Covid test kits, which are very quite a bit from quarter to quarter over the last year. We've tried to isolate those for you. So that you can have a good view into the.
<unk> of our core business I would remind you that the first quarter of this year it was lapping a.
Very low quarter from the prior year, which was really the first quarter.
Post the Covid pandemic, so the growth that youre seeing this year, while strong includes the first quarter, which lapped a very low quarter due to COVID-19 in FY 'twenty. One so we will provide more detail for you on sort of the core components of each of the segments at our Investor Day, We're very pleased with the performance that we've seen thus.
As far our core businesses performed well.
But again I just would remind you that in addition to that we did have that low quarter for lap in Q1 of last year.
Okay.
Okay.
Well Michael.
About the vaccine and kitting operation.
Continue to run that operation at the direction of the BDC in accordance with the.
The schedules production schedule that they gave us it's obviously been quite dynamic over the past months, we are prepared and will continue to run that operation as long as the CDC.
These value added and asked us to do it.
Next question please.
We will take our next question from Charles <unk> with.
With Cowen.
Yes, thanks for taking the question.
I wanted to ask a little bit.
Technology solutions, obviously very strong growth here in the quarter and and you raise for the full year outlook.
When we look at sort of like slide four when you talk about the various services within this for Biopharma services can you kind of highlight which are the ones are really driving the growth here.
Obviously some of it is tied to.
Prescription utilization and I know that we are still kind of coming out of the COVID-19 period, but.
Maybe any comments around growth among some of these various services.
And I guess, just a sense on which ones will benefit as we continue to.
Recover from.
From the from the Covid levels. Thanks.
Okay. Thank you. Thank you for the question.
Luke.
We continued this business is.
Sponsors to absolute levels of activity relative to prescription volumes in the market. We continue to see benefits from the prior investments. We've made in these technologies services offerings, we do see good underlying growth across the portfolio clearly we benefited from the recovery in COVID-19 related.
Mick.
Volumes and honestly some of the.
Policy decisions payers would have made around the way they manage prior authorization, we're really seeing that market kind of return to pre COVID-19 level kinds of conditions and requirements coming out of the payers. So.
We believe as as patients continue to start new prescriptions. This business is well positioned to support and support the access and adherence to those medications and we will continue to invest from that we are seeing returns on some of the investments we highlighted for you in previous calls and things.
And then we are a component of this business that we haven't talked much about like like <unk> and we saw strong <unk> growth in the quarter.
Okay next question. Thank you.
We will take our next question from Kevin Caliendo with UBS.
Hi, Thanks for taking my call. So I was wondering it looks like in the slide presentation, the non COVID-19 pharma growth.
<unk> is slightly lower it's now 3% to 6% versus 5% to 8% at the end of <unk>.
<unk>.
Can you just walk us through what the Delta Whats change there and a part of it is probably labor, but it doesn't explain it all and then maybe do the same for med surge, which is also now higher than what you saw.
Our expected at the end of <unk>.
Yes. Thanks for that question, Kevin Let me just maybe pointed out a couple of things first of all we're pleased with the continued performance of our U S. Pharmaceutical segment momentum. There is really good there is a couple of things that we've called out for you where I called out for you in my opening comments first of all the <unk>.
Investments that we're continuing to make in our oncology business and on Tata called that out as a <unk> 20 headwind year over year disconnect and then as I also talked about and you referenced the labor investments that we made into our business. Our U S distribution business is those two things.
Really had an impact on on the growth of U S pharma and in our medical business. We're really pleased with not only the performance against the U S government program and the increase in Covid test kitting, which is really reflective of the strength of our lab solutions business, but we're pleased with the performance of our primary care business in the <unk>.
Core business underneath our medical business. In addition to the labor investment that I called out to both businesses continue to have good momentum in the case of our U S pharmaceutical business continuing to invest in oncology as well as the labor investment and our medical business really continuing to leverage the strength of the lab business.
And the investments we made there and we're seeing good performance in our primary care business.
Thank you we'll take our next.
Eric Percher with Nephron research.
Yes.
Thank you a question on the brand marketplace, maybe brand pricing in particular, I think you've made it pretty clear that the book is no longer tied in a material way to brand price increases given the reimbursement policy debate going on can you remind us what your view is.
Could happen if we saw a change in list prices, particularly a downward change in how you may or may not be exposed to that.
Thanks for the question, Eric maybe I'll start and take the first part of that question and Brian can maybe respond to the policy piece Youre right. We've continued to evolve our business over really the last several years in terms of tying the services that we provide to our customers and through our manufacturers to the pricing.
The agreements that we have and it is less.
The brand inflation is less impactful than it has been in the past we've talked about that a lot over the last few years as it relates to really the policy piece Bryan I'll, maybe let you talked.
<unk> talked about that yes, just to build on that comment before we move on and then I think one of the tenants we've always held through to through multiple changes in dynamics in the industry over my career here.
Our services provide real value and regardless of how what sorts of mechanisms get changed in the marketplace.
We will continue to be paid fair market value for those services as it relates to the public policy debate and it's a dynamic now as ever I suppose.
I think the main issues that we're discussing are issues that frankly have been long discussed I mean, we are active at the company with <unk>.
Elected officials on both sides of the aisle on key policy priorities. We track these discussions very care carefully.
We're always advocating for the role of care being provided in the community.
We obviously have very strong presence in the community channels, but we believe that fundamentally thats, where you get the best access the best care and an equally good quality.
We have been at the forefront in many of many of the experiments I suppose you could call them think about you saw in our value based care. We've had robust participation in the oncology care model, that's delivered substantial benefit to CMS. So I think the mix is it's really it's not exactly clear with.
This will go I think we have a lot of assets. We're engaged in the discussion we'll find we'll find a way to navigate through them as an old man right now.
I think these are issues had been long discussed and well discussed.
Hey, Keith we'll take it.
From Brian <unk> with Jefferies.
Hey, good afternoon, guys. Congratulations I just have one question Brent as we think about the investments in labor that you called out it sounds like it's a back half thing.
Is it a bonus structure or is this a reset in the wage rates that we should be thinking about as we as we start thinking about our models for fiscal 'twenty three.
Yes. Thanks for the question, Brian you were just going to guide to date fiscal 2022, we thought that this was an investment that was important for our frontline associates for our delivery drivers and others to get us through 2022 with continuity, we're not guiding anything beyond that.
So I think you should take this as an important investment to make sure that our customers have the continued service that they would expect from the constant through the holiday season in the back half of the year.
Thank you we'll move on to our next question with George Hill Deutsche Bank.
Okay.
Good afternoon, guys and thanks for taking the call I guess.
Brian I would ask you or Brian I know that you guys have said you put on the record in the past is talking about not wondering wanting to enter any big new businesses, but as you continue to retrench away from Europe with a focus towards the United States. I guess is there any rethinking of the capital deployment priorities are an appetite.
For maybe bigger transactions.
Well I would start by saying that I don't think our overall capital deployment strategy has changed we've take a balanced approach to capital deployment, we want to prioritize strategic growth. We think we've got a really clearly defined strategy, we've laid out what we consider.
Our strategic growth areas.
Assuming the alignment to those strategies and assuming they meet our disciplined financial review process and our great value for our shareholders, we would love to be deploying capital against those strategies.
We obviously always balanced that again, returning capital to shareholders through stock buybacks at or modestly growing dividend, but we think we've really identified that.
Set of differentiated assets and good markets focused in North America, when we execute against will deliver at the long term growth that we're looking for a strategic alignment with financial discipline.
It's really what drives capital deployment and I think what youre seeing here by our actions is a focus on return on invested capital and we're really making sure that we're reallocate capital that finds the highest returns in the company and our actions. Thus far you've heard US talk about last couple of quarters have been focused on divesting and moving capital.
Away from lower returning assets to higher returning assets into Brian's points are right on strategy.
Okay.
Thank you our next question.
From Steven Valiquette with Barclays.
Yes.
Thanks, Good afternoon everybody.
The med search segment clearly a lot of variables driving the strong profit growth. There on slide 10, you mentioned the increased primary care business is one of those drivers.
Well to comment just on the current level.
Patient volumes.
In the quarter, either as a percent of pre COVID-19 baseline either for your customer base or just your assessment of the overall U S marketplace for physician patient visits.
Yes.
I'll start and Britt can add some comments if you'd like obviously, we think about patient visits as we think about elective procedures, you think about than primary care versus specialty I would say generally we have been pleased with the market recovery. It's recovering in line with how we expected it to at the outset of the year.
It is it is we think it's continuing to strengthen but it will reach in the second half of our year, what we call I guess people call pre COVID-19 levels.
We think we're more or less right in line with our expectations and we're really pleased with the performance of the medical surgical business.
Next question please.
Will come from Ricky Goldwasser with Morgan.
And Stanley.
Yes, hi.
Yes, Hi, Hi, Ricky.
Hi, there.
So a quick follow up on your last comment you said pre COVID-19 levels second half of your fiscal year for the med search business.
How should we think about or when do we get to pre COVID-19 levels for the drug distribution. It sounded like specialty is already there.
But how should we think about the segment data integrity and core today with kind of a follow up question.
And then youre hosting the analyst day in December So maybe can you give us a sense of granularity around what should we expect.
From the day next month.
Do you want to start with pharma and I'll take that yes.
Similar to medical we are pleased with the performance of volume they're approaching.
Pre COVID-19 levels in pharmaceutical prescription volumes as we expected. So I think as we look to the rest of the year. We expect that these prescription volumes will get back to what we guided originally in May which is in line with those pre COVID-19 levels. So we're continuing to see improved performance and improved volumes.
Across all both brand specialty and as well as generics, we expect that that will continue in the second half of the year.
Great and as it relates to Investor day, we're really excited to have.
To be able to have an investor day, we're going to host it December eight in New York City.
<unk>.
Probably would have done it sooner, but it's been quite a crazy environment for the last 18 or 20 months in terms of well, what we hope to see as.
We really want to bring some more members of the management team the executive team that have been leading the results that we've had a great chance to review with you.
The team that's been responsible for developing these strategies, we want to provide just a little bit more insight and granularity into each of our growth strategies.
And some of our core distribution businesses and we plan to begin to outline our long term growth prospects. So we think it's going to be a great day. We hope you can all join us.
Next question please.
Thank you we have one final question from Caroline dressing credit Suisse.
Okay. Thank you. Thanks for taking my questions here just wanted to make sure I understand what is and what is not in the guidance with respect to vaccine benefit it seems youre not including the benefit from vaccines designated for Capes are booster shot is that true on both vaccine distribution benefit and the benefit related.
Getting storage and ancillary supplies as well just trying to understand if we see a reasonable adoption of both dose and vaccine among Kate will that drive incremental revenue and both Bottomline merch search.
So your first part of the question I think answered your question.
We are not including.
We have provided guidance based on what the CDC has provided to US at this point that does not include boosters and and pediatric vaccines.
Thank you and there are no further questions.
Okay, well, thank you Sarah and thank you everyone for it.
Great questions and for joining our call.
I want to conclude my remarks today by just underscoring that we're hosting an investor day on December eight and we hope everyone will get a chance to join us in tune and we're going to have our leadership team there.
The team that's been responsible for building the momentum in the business and executing the strategies that have been put in place we will spend some.
Quality time on our oncology and Biopharma strategic growth pillars, I think it is going to be a great day, we're really excited to be with everyone and see you.
Also don't want to let this call last about banking the mckesson team for their incredible work and their dedication as we round out the first half of our fiscal year.
That's where the real work gets done and I'm. So proud of them. So thanks, everyone. I hope you have a great evening.
Okay.
Thank you for joining today's conference call you may now disconnect and have a great day.
Sure.
[music].
Yes.