Good day, and welcome to McKesson's analyst meeting conference call. Today's conference is being recorded. At this time, I'd like to turn the call over to McKesson's Senior Vice President of Investor Relations, Holly Weiss. Please go ahead.
Thank you, Amy. Welcome everyone, and thank you for joining 2019's sell-side analyst meeting. We're excited to be here today at our new corporate headquarters in Irving, Texas. I'm joined by Brian Tyler, McKesson's CEO, and Britt Vitalone, McKesson's CFO. The presentation slides for this meeting are available on our website at investor.mckesson.com, along with a link to the audio webcast. Before we begin, I want to remind you that today's discussion will include forward-looking statements, such as forecasts about McKesson's operations and future results. Please refer to our SEC filings and page two of today's slide presentation for additional information concerning risk factors that could cause our actual results to materially differ from those in our forward-looking statements. Additionally, we will discuss non-GAAP financial measures.
Information about our non-GAAP financial measures, including a reconciliation of those measures to GAAP results, is included in today's slide presentation available on our website. Turning to slide three, first we'll go through business and sector reviews, provide a financial update before ending with a question and answer session. I'll be moderating the Q&A, to more efficiently get through our question and answer queue, please limit your questions to one only with no follow-up. With that, let me turn it over to Brian and Britt.
Thank you, Holly. Let me extend my welcome to all of you and my thanks for traveling. I hope this will be your last trip of the year and a successful return home. We really do appreciate your investment to spend a little time with us today. We also have in the room with us the senior operating presidents who have spent the earlier part of this week together working through some of our plans, priorities, and strategies that we'll share with you today. Maybe just some context for this session. You're aware we didn't host the June event that we normally host, and largely because we started in April, it felt like it would be better to push that off. Today is not by any means intended to replace that.
This approach here end, natural time for reflection to think about what's been accomplished and we thought, why not pull a session together to review some of the things we've been working on since April, certainly, and get to some. We're also selfishly excited to show off our Dallas headquarters. We have made the move. We made it official. We're well into the transition. The transition's going quite well. We're very proud of the space because we think it's very reflective of who we are as a company. If you had a chance to go through the Vision Center, if you had a chance to look at the walls and see the screens, hopefully, you get a sense for the culture and the environment and the team that we're building here.
We do think we have already seen benefit and will continue to see benefit from this great kind of contemporary collaborative space, which really helps facilitate teamwork and helps facilitate communication, helps build great career paths for our teams, and lets us leverage really the very diverse and skilled workforce that we have. We're happy to have you here and, again, pleased to give you that time. On the screen in front of you is our vision statement, a new vision statement, really, to improve care in every setting, one product, one partner, one patient at a time. A lot of what we've been doing internally is building out underneath that, what we call the McKesson Playbook. For those of you that have followed us for a while, you'd be familiar with our ICARE values, integrity, customer centeredness, accountability, respect, and excellence.
What the Playbook does is build off that foundation, talk about the cultural behaviors and the way we're going to work together in the execution of the strategies that we're going to share with you today. I'm not going to elaborate too much on that other than to say that's a big part of the transformation that we're going through. When you hear Britt and I talk about momentum, a lot of that momentum is the feeling of better alignment, better focus, better speed, all these really, really hard things that start and don't show results day to day or quarter- to- quarter, but really are the foundation, in my opinion, to building a really strong business. What I hope you'll take away from today is that we are executing.
We are executing against our strategy to enhance our competitiveness and deliver growth. We're doing that in a time of great change. I'm very proud of our ability to operate a lot of really hard executional, transformational work and still deliver on the commitments that we've made. We're going to share with you where our growth areas are. We'll try to address some of the questions that you've had around those growth areas. I hope you'll see kind of the actions we're taking that we think are driving speed and focus into the business. The last thing we want you to take away is that we remain confident in our fiscal 2020 outlook and our ability to continue to increase shareholder value. I got the clicker? Yeah.
We talk about our priorities to drive growth. I put them in three broad buckets. Those broad buckets are on the screen in front of you. Obviously, you think about the last several years for our core U.S. Pharmaceutical and Specialty Solutions business, we've had some major shifts in the historic drivers or underlying drivers or trends in that business. We're very focused on taking that business and adapting and rewiring and positioning it to get back to growth in the environment that we're now in. We're encouraged by the stability we see in that market. I talked about the need to simplify the business to operate with greater speed and focus. We're going to do that focus by really a sharp view on what our strategic growth initiatives are.
Each of those growth initiatives for us is anchored in an existing business or an existing competency and experience that we have resident in the business. It's a matter of heightening the focus, and the speed to market in some of those areas. I'll talk about each of these in just a little bit more detail, and I'm sure you'll have questions when we get to the end that we'd be happy to take on. I'll start actually on the right-hand slide here, leveraging our differentiated specialty portfolio. We have described historically, four components to our specialty assets. Some of those, I'll go through in a minute here, are not so differentiated distribution businesses. Some are very, very highly differentiated businesses, like our The US Oncology Network and our really tight partnership there. Several years ago, that business was really not growing.
We had a great base and a great foundation, but we weren't expanding. Through a lot of work and retool of the value proposition and a relook at that business, we sort of reinvented that model with our physician partners, and we have now seen growth over the last two years. In fiscal 2019, we added 101 new physicians to the group. We think that's not only great for that business, but it's great for the insights, the knowledge, the touch points, and the relationships that gives us into oncology more broadly. We've also launched a product called AMP, Access for More Patients. This is bringing some of our technology assets into a fresh look at a business we've been in for 20 years, frankly, and that's the hub services-related business.
Through the technology innovation and the core resident experience, we think we've been able to reinvent and innovate in a way that's going to be very exciting for pharma manufacturing. What I most like about this is, seven months ago, this was an idea. This product is actually live and in the market now. That speaks to the speed and cadence and some of the earlier comments that I made. We've obviously signaled quite directly that we're making investments in growth. As we focus on the core and stabilize the core, we have a long view on the business, and we know that we've got to continue to reinvent and innovate. We're making investments into these areas of specialty oncology, our manufacturer services, and data and analytics as a way we think to underpin and deliver sustained growth.
Then we continue to be very focused in the execution of the core business. We've been very pleased to renew all of our big contracts. We recently got the news that we were selected once again by the VA. It's a great award for us, and I'll tell you internally, it's just a great point of pride. We have a very big focus on veterans within McKesson, and it's a great sense of pride for us to be able to continue to serve the VA. I want to talk a minute about our specialty portfolio because I alluded to that, and I'll work across the top row first and then maybe the bottom. You start in the upper left-hand corner. This is the traditional wholesale distribution business. This is the delivery of specialty medications to retail pharmacies, health systems. It's our Plasma and Biologics business.
This is by far the biggest segment in the business. When you hear us talk about the fact that specialty, the growth is good, but can be margin rate dilutive, this is the segment we're really talking about. Specialty, as you can see from this chart, is complicated. It can mean a lot of things to a lot of people, depending on your lens. When we talk about the growth margin rate pressure of specialty growth, it's largely in that segment that we're focused on. We have a provider solutions business, which is distribution and GPO services to community-based providers. We have embedded in that business a host of what we call value-added products and services. Some of those used to attract and win and grow the channel. Others could be actually fee-based services.
This is where we begin to expand our reach into the community settings and benefit from all the products that go through the Part D community-based segments. You shift over once again to the right, it's the same basic distribution GPO-type services, but now embedded in a very comprehensive practice management business that does everything from revenue cycle management, staffing, scheduling. We try to do everything so that the oncologists in these practices can focus all their time on providing care. Sitting here in Texas today, the big member of this organization in Texas is Texas Oncology. It has the largest community-based share of all oncology that happens in this state. This is important to us because the depth of that relationship allows us to not only focus on practice management, but participate in clinical trials through health economic outcome research.
All of those things help feed into that bottom bucket, which is our Life Sciences business, which is selling businesses to manufacturers to increase access, help them find patients to get on meds, help those patients get started on meds, and help them stay on their meds. We really think of the top three boxes as relationships and channels, and they underpin and help feed the high-value-add services we deliver through our McKesson Life Sciences business. I talked about our second priority, simplifying the business and operating with increased speed and focus. I don't want to understate how pleased I am with our ability to do this. This is a lot of heavy lifting. This can get organizations distracted, and we've shown great ability to execute these transformations to our model, which we think support the strategies that we're rolling out.
These are things like centralizing functional services, centralizing IT, consolidating some back-office finance. Some very tactical like Spend Smart. This has been producing real value to the organization, allowing us to both take some to the bottom line, also make and fund these investments that we're making into the organization. We've also been looking at our organizational structures, with a realignment, with the movement of the headquarters from Irving to Texas. I was sharing with someone earlier, in my opinion, it was a very obvious move to co-locate teams, have the business together with the corporation. It's great for career paths for people, it's great for communication, it's great for everything. When business is going good, it feels like a risk. Why take a risk if business is good? When business is a challenge, you say, I got enough headwinds. Why take on a challenge?
This, I think, is fundamentally important to the culture that we're building here, the way we're going to work to delivering speed and execution. I couldn't be more pleased with the way the team has executed that, both the folks in San Francisco that will not be coming, but their ongoing commitment to the business, and the new talent that we've been ramping up here. We've also had some pretty significant leadership transformation. There's five, I guess, counting me, new members of the leadership team, soon to be six in January when our new CIO starts. I think the team has quickly gelled, been very cohesive, and I couldn't be more happy with the way we've got through these transitions, and the new team is kind of on the ground running right now.
Lastly, at the board level, we've been focused on refreshment, and we've recently brought on two new members, both diverse, both with expertise that we think extends the existing expertise in our boardroom, particularly around technology, particularly around customer experience. We're very excited to have them with us in the boardroom. Then we talked ongoing about our portfolio review, the fact that we have a process, that it's not a point in time, it's an ongoing process to review our strategy, our portfolio, look for businesses that we think we have are natural owners. We have great assets. We can do additive things and invest differentially. The flip side of that is sometimes we find businesses that we may no longer be the natural owner for, or we may not think the growth prospects are as strong as some others.
The outcome of that is to divest non-core assets. We recently announced our joint venture with Walgreens Boots in Germany, our patient care solutions. I don't want to overstate or overplay this, but this is the kind of natural outcomes that come from focus and the processes and the structures that we're putting around these portfolio reviews. Progress on all three of these dimensions. These are our strategic growth initiatives. As I think about these manufacturer value proposition, manufacturers have long been an important constituent to this business. As we've grown our forward-facing channel solutions with our customers, whether that's a retailer, a hospital, a community-based physician, we've expanded capabilities that we think have a lot of value to the manufacturers.
As we look across the portfolio of these capabilities, what we're trying to do is bring them more cohesively into an integrated value proposition for our manufacturer customers. Similarly, in specialty, we look at that array of assets I showed you and say, this is differentiated. I don't like the word unique, but as a group, this is broad scale, this is lots of capability, and no one has that same set of assets and competencies. The question for us is how we leverage those competencies to extend our lead in the areas that we're in, to branch off into other adjacencies, and to use the insights we get there to further fuel our manufacturer value proposition business. We're very focused on these as growth pillars for the company.
When I talk about focus and speed, these are the areas that I think you'll continue to see them manifest themselves in. That's just a quick flyby, probably longer than Holly wanted, but quick flyby of just framing, kind of, a little bit what we've been doing, our real push on focus, speed, and particularly in these growth areas. I'll let Britt now talk a little bit about how that's translating into the business.
Thanks, Brian. I'm just going to spend a few minutes here. I've just got a couple of slides. I wanted to really just start out with the track record that we've developed over a long period of time, but in particular, the last couple of years, around the guidance that we provide you, whether that's at the consolidated level, as I'm showing here on the left-hand side, or this year at the segment level. When we give you a guidance, it's important that we do what we say we're going to do, and we've been able to do that. We're doing that now, as Brian talked about, the improving performance that we have, we're doing that with growth.
You see solid growth last year in adjusted EPS. Again, the guide that we reaffirmed this morning is showing that continued improving performance and growth into FY 2020. On the right-hand side, over a long period of time, we've shown very strong and stable cash flow, and that has provided us a really good baseline for capital allocation. We've reaffirmed our guidance this year on free cash flow of $2.8 billion-$3 billion. That really puts us in a good position to invest in the business and to have other allocation opportunities within the enterprise. We did reaffirm our guidance this morning. I'd like to step back and not only say that we're confident in that, as Brian talked about.
We remain confident in that, as we've talked about all year-long. I do want to talk a little bit about the cadence of our earnings, and I think it's important to use as a reminder that we do not provide quarterly guidance because of the variability in the timing of certain items within our business. These items tend to balance out over the course of the year. It does present some challenges when you look at our year-over-year results on a quarterly basis. As a reminder of what some of these items are, some of these really manifest in our largest business. It's the customer volumes and the customer mix, in particular, what we're seeing in FY 2020, it's the timing of some of those customer volumes. It's product mix. Brian talked about our specialty business and the dilutive impact that wholesale specialty distribution has.
What we're seeing this year is that our largest customers are growing faster in our wholesale specialty distribution. I would also point out two other things that can impact the timing of the cadence of our earnings, and one would be branded compensation. We've talked about how we've continued to evolve our compensation with branded manufacturers. Approximately 95% is on a fixed fee or service rate basis. However, there is still a small contingent portion that is based on inflation, which we don't have any insight into and we don't control, and that can impact the timing throughout the course of the year. Then finally, tax. As you know, the timing of certain tax items, whether those be positive or negative discretes, are very difficult for us to project on a quarter-to-quarter basis.
Just as a reminder, we try to give you some guide on a first half, on a second half, but in a large business like ours, these certain items, they can really fluctuate quarter- to- quarter. We're pleased not only to reaffirm our adjusted EPS guidance, I'll talk about here in a minute, that as we provided at the beginning of the year, we're very happy to be able to provide you a guidance of growth in each of our segments. We're reaffirming that today. Brian talked about the focus and the discipline and how we're investing in the strategies and priorities of the business, utilizing some of the cost savings and some of the transformation in our operating models, a portion of that being reinvested and extending some key differentiated positions that we have. Then Change Healthcare.
We talked in our second quarter earnings call that we would anticipate that we would exit Change Healthcare 6 - 12 months from that date, that the exit activities have begun, and that it's possible that we could exit this investment by the end of our fiscal year. Nothing has changed from that timing. Here's our segment outlook. Again, we're quite pleased that we were able to start the year off and now continue to reaffirm growth in each of these segments. As Brian mentioned, we've had some challenging environment in our U.S. Pharmaceutical and Specialty Solutions segment over the past few years. We were really pleased to be able to provide guidance for low to mid-single digit growth in adjusted operating profit. I'll talk a little bit more about this in a couple of minutes.
We're reaffirming our segment view on our European business as low single-digit growth in our medical surgical business, which continues to have great momentum, high single-digit growth in revenue, and high single to low double-digit growth in adjusted operating profit. I would just remind you that in our other segment, the low to mid-single-digit decline in adjusted operating profit is we are lapping a one-time contractual liability reversal related to our ownership in Change Healthcare that happened in the second quarter of last year, which was $90 million. I want to spend a few minutes on our U.S. Pharmaceutical and Specialty Solutions segment and the outlook. A few things that I'll call off right off the bat.
Again, given the challenges that we've had in this segment over the past few years, we are pleased to be able to provide guidance at the beginning of the year that shows growth in adjusted operating profit. We've reaffirmed that in the first quarter and the second quarter. We're reaffirming that today. We did hear from you that it is difficult to model out based on the size of the range that we gave you, both on a revenue and adjusted operating profit perspective. We wanted to provide you some additional clarity and update that outlook. Revenue guidance from high single digit, we've narrowed that down to 7%-9%. In adjusted operating profit, guidance was low to mid-single digit growth, and we've narrowed that down and provide additional clarity of 3%-5%.
We're quite pleased to be able to give you full year adjusted operating profit growth in this segment of 3%-5%. I think it reflects the momentum that Brian talked about, the investments that we're making, the focus that we have in some differentiated positions. Let me talk a little bit about our first half performance. Again, this gets back to my comments earlier that when you look at year-over-year results on a quarterly basis, it can be challenging given the variability and the timing of certain items in our business. In our first half of the year, between our Q1 and Q2, quite honestly, we had uneven performance. We had high revenue in the second quarter, but we had lower adjusted operating profit growth, but we had strong adjusted operating profit growth in our first quarter.
What we're seeing in that uneven performance between the quarters is really related back to customer mix, customer volumes. Our largest customers were growing faster as they were continuing to win. The timing of that customer volume has been lumpy so far this year, and we would expect that to continue on a quarter-to-quarter fluctuation in the back half of the year. Then the product mix. Our largest customers were growing, but they were also growing faster in wholesale specialty distribution. Those types of factors certainly have impacted the Q1 to Q2 progression. Additionally, as you recall last year. In the first quarter, we recorded the New York State opioid surcharge in our segment, $17 million. Then in the second quarter, we reversed that out and began to record that in our corporate segment.
Again, quarter-to-quarter, there's a little bit of timing and unevenness, but again, over the balance of the year, that really did balance out. As we look at our second half of the year, we would anticipate that our largest customers will continue to grow faster. We anticipate that there's going to be some uneven timing in the way that that volume comes on. We expect that these largest customers will continue to grow faster in wholesale specialty distribution. Again, for the balance of the year, we remain very confident in this adjusted operating profit growth of 3% - 5%, which we feel is a reflection of improving operating performance. Quarter-to-quarter, you should expect to see some continued variations in the back half of the year.
What I'd point out in the back half of the year is there's a couple things that you should recognize. Last year, in our third quarter, we had the customer bankruptcy related to Shopko, and that was approximately $60 million. As we talked about on our second quarter call, Brian talked a little bit more today, we called out about $25 million of investments into this segment to support these differentiated positions in specialty and manufacturer services. For the balance of the year, we're seeing good revenue growth, slightly stronger than we had guided at the beginning of the year, 7%-9%. adjusted operating profit growth, we remain confident, and we are reaffirming that guidance, but we're giving you additional clarity at 3%-5%.
We're guiding to you for your modeling purposes that it could continue to be a little bit uneven on a quarter-to-quarter basis given customer volumes, customer mix, product mix, and a couple of those one-time items that I called out. Again, we remain very confident, and we're very pleased with the performance in this segment. We're very pleased that we're able to return to growth in our U.S. Pharmaceutical and Specialty Solutions segment. Let's talk for a minute about capital allocation. Over a long period of time, we've had a very disciplined and balanced approach to capital allocation. It all starts with having good, stable, and strong operating cash flow. I've shown here FY 2017 to FY 2019, we generated a little over $13 billion of operating cash flow.
That disciplined capital allocation has been relatively balanced between investing in growth, whether that's M&A or internal investments, or returning capital to shareholders, and you can see how that has played out over this time period. I'd remind you that over the last 12 months, that we have been more shifted to returning capital to shareholders. First half of our FY 2020, we returned $1.4 billion to shareholders in the form of share repurchases. Over the last 12 months, we've allocated roughly about $100 million to M&A. We still want to invest in growth, and we're still open to investing in growth in the priority areas that Brian called out. M&A starts with strategy, and so as we look for assets that fit that strategy and fit these priorities and have the right return, we'll certainly look to continue to invest in growth.
We like the fact that investing in the right assets is going to continue to generate more cash flow. Over the last 12 months, we've been more disciplined, more balanced toward returning capital to shareholders. We think that our stock still represents a pretty good investment for our shareholders, and we've allocated more towards share repurchases over the last 12 months. Underpinning all of this, we've been able to maintain investment-grade credit rating. We have strong financial positions, giving us good financial flexibility. Maintaining our investment-grade credit rating is a priority for us, and we're pleased that we've been able to do that, and we've been able to do that with stable cash flows. With that, Brian, maybe want to wrap up with some takeaways.
We've talked about all of these. Look, I guess, for me, the main takeaways are, again, I think that collectively as a group, in addition to executing on all the things we told you we would when we launched the beginning of this fiscal year, we are inside sharpening our strategic focus. We're focused on simplifying the business. We want to introduce speed. I think we've got some proof points that we're already yielding some benefits from that. From my perspective, I guess now eight months into the job, I'm very encouraged by what I see from the team. I'm encouraged from the engagement and energy levels internally. I think that's showing up in our execution against the priorities.
We're very pleased that we're able to confirm the outlook for FY 2020 and that we've got a good track record, I think, of delivering on the things and the components and the building blocks that we thought would get us to that number, and that's why we have confidence. It's really we're executing along our plan. Britt talked about the disciplined capital allocation. I don't think I need to elaborate on that. We are interested in growth M&A, but it has to be tightly aligned to our strategy, and it's obviously evaluated in the context of where our share price is now and what are the returns available in the various avenues to us.
Our commitment is to continue to be very disciplined in this area and to maximize the capital we have in terms of the returns and the strategic positioning it yields to the business over time. That's really a quick thumbnail. We want to make sure we left some time for you. I know there's lots of questions. Holly, are you going to facilitate this?
Will. Thank you. We'll now take questions in the room, then we've got some on the line as well. As we move through the room, please introduce yourself with your name and your firm.
Sorry. Steve Valiquette from Barclays. Just to follow up on that reiteration of guidance for the U.S. Pharma Solutions. Curious how much of that reiteration is any sort of preliminary view you have into brand inflation trends for January of 2020? I know you talked about 95% of brand economics tied to fee for service, 5% still floating. Obviously, in that March quarter, that's how most of that shows up. I'm curious if that's a key variable in that reiteration of guidance?
Yeah. Thanks for that question. As we've talked about at the beginning of the year, our assumption was around mid-single digits for branded inflation. We've not changed our outlook on that. There's nothing that we see that would change our view on that. Obviously, January is a pretty key month for us to see that, but there's nothing that indicates that we'll be off that mid-single-digit guidance. We would affirm that assumption going forward.
Okay. All right. Thanks.
Great. Mike Cherny, BofA Securities. Greatly appreciate the color you gave on some of the cadence and the customer demand dynamics. Obviously, we saw it in the first half of the year. As you think going forward, I'm of the belief that your bigger customers are likely to continue to get bigger. Is the thing about that revenue growth to profit differential, not giving necessarily long-term guidance, but thinking about the relationship between those two areas, the way to think about how the business should be modeled on a long-term basis, or are there things you're trying to do, particularly, for example, changing that mix in specialty that can offset some of that dynamic differential between the revenue versus profit growth?
Sure. I'll start, then I think Brian will want to add. I think it's a little early to look at long-term guidance. Certainly, what we've seen this year is that some of our largest customers are winning faster than the pace that we had assumed. Whether that plays out over the long term, I think it's a little bit hard to say. We're very pleased that while they're growing, and they're growing in our more dilutive product area, which is specialty distribution, that we're able to still grow and then grow in a 3%-5% range. I think as Brian talked about, we've been very focused on really leveraging and investing in some differentiated assets that we have. We talked about the breadth of capabilities that we have on specialty and continuing to invest there.
We think that that's going to continue to allow us to grow our operating profit, in that 3%-5% range, at least through the rest of this year. As we continue to invest in that really differentiates our position and puts us in a better spot to grow with our customers. I feel very good about the fact that we've been able to grow at 3%-5% as our largest customers have grown faster. I feel great about the investments that we're making and really furthering our differentiated positions and the breadth of specialty assets that we have, particularly around oncology. I think it just positions us really well.
No, I think that's well said. I would just also remind everyone that our big customers are also getting more complex. They're in more businesses, more channels, and we can grow our relationship with them in many other ways than just the traditional core.
Okay. Bob Jones, Goldman Sachs. I guess, just to go back to the unevenness that you talked about, Britt. Clearly, the largest customer or larger customers growing faster impacted 2Q relative to 1Q. What changes about that trend as we think about the cadence from 3Q to 4Q? Because clearly caught the market off guard with the 1Q versus 2Q. Just want to understand, is there something that would change from 2Q to 3Q, or should we expect to see what we saw in 2Q continue into 3Q before things normalize by year-end?
Yeah. It's a great question, Bob. I think if we had had a little bit better visibility on that at the beginning of the year, we would've provided it to you. I think what we would expect is that our largest customers, in some cases, are onboarding some large customers themselves. That's difficult for us to predict. We work very closely with our customers and try to understand the purchasing volumes and the timing of that. I think it'll be difficult for us to predict if that lumpiness is if Q2 becomes Q3 or Q3 becomes Q4. As we look at the balance of the year and the conversations that we've had with our customers, we think a lot of this will even out.
In terms of the cadence from 1 Q to the next, it's going to be very difficult for us to provide you anything more than we had. We're trying to provide you at least on the halves. I think what could change is really the timing of customers and how they're onboarding customers, and certainly the mix. We saw a heavier specialty distribution mix in Q2 than we had seen in Q1. That mix could change again, but I think over the balance of the year, the guidance that we provided you, we feel comfortable with and confident in.
Brian.
Brian Tanquilut, Jefferies. Brian, I guess just to follow up on that point, I know we're asking the same questions over and over again, philosophically, how are you thinking about just balancing maintaining a certain margin profile or taking the business as it comes, knowing that wholesale specialty distribution is just a lower margin book of business. Does that matter, when you're seeing above-average growth from that book?
Well, generally in distribution, as a general statement, scale is good. Generally, growth is good. It allows us to continue to leverage our fixed cost infrastructure, et cetera. Now, the way I think about it is what kind of capital you got to deploy against growth, and how do you manage your mix and your customer segmentation, and it's multiple factors. How much possible growth is there? If we stop participating in market growth, we get beat up with different questions. What's the relative returns on investments and channels to get above-average growth, and what's the margin profile associated with that? We went through four buckets that all have different macro growth profile, have a different gross profit margin profile. It's a mix, but generally, I would say growth tends to be good for our business.
The other thing I would add is if you think about the growth in specialty, while it may be dilutive on a product distribution perspective, it really helps and provides a good set of baseline and scale as we move into services with manufacturers. I think about our specialty business now across the breadth of that. The distribution component may be a little more dilutive, but it really provides a great baseline to continue to innovate and wrap services around and puts us in a set of different conversations with our manufacturing partners.
Lee Lueder from Deutsche Bank. Can you talk about what factors drove the partnership with Walgreens in Germany? What other kind of partnerships or joint ventures would you be interested in pursuing in the next few years?
Sure. I'll take Germany first. We've been in the European markets now for five years, and I think right before we acquired in Germany, the competitive landscape in there just became a very difficult country to make a lot of profit in, to be honest. We've done all of the things you would expect us to do. We've done restructuring, we've done reorganization, we've pushed disciplined pricing into the marketplace. The ultimate realization was, as a number three or four market share player, we just didn't believe there was a very easy path to growing to any kind of profitability that would become material, and it is a bit of a capital-intensive business. I think the business logic was quite compelling. It's a difficult decision to make emotionally, if I could use that word.
We're a German-headquartered business, and we just sold off a 180-year-old German wholesale business, which was the founding asset of that business. There's a legacy, there's a history, but our job is not to get tied up in that. Our job is to be unemotional and to look at how we best get growth. In this instance, the best way we could get growth was to give up operating control, get a little bit of monetization out of this, but create a business that will now be positioned with leading scale in Germany, and we think much better positioned to become a healthy, growing business. That's how we got to Germany, and I'd say we'll take that same lens, forget Europe, across the portfolio, as we look at our businesses, those are the lenses that we have to bring to make these decisions.
It's about speed, it's about focus, it's about capital requirements, it's about our natural ownership and our ability to win, or maybe we can take a business and use assets from other parts of our business to get differential growth, then I'd say, hey, I'm a natural owner there. Where I'm not, and I've just got to look at these things objectively.
Hey, it's Steve Baxter with Wolfe Research. Sticking with Europe and 2020 numbers, another question that we've gotten quite frequently is on the path to the back half of the year in Europe. Obviously, it implies a pretty big step-up. I know you've talked about the fact that you have an expectation of receiving a tariff in the back half of the year that helps offset some of the underfunding that's gone on to date. I'm hoping you can help us understand how much of the improvement in trend is going to be operational versus how much is dependent on factors like a tariff, which, especially after the elections there, may or may not be within your control.
You want me to go through the numbers?
Yeah, I think as we think about the second half of the year, we are seeing improving performance in that set of businesses, including stabilization, a more stable environment than we've seen in the U.K. Of course, that is always going to be dependent on the reimbursement environment based on what we see, what we have been able to ascertain. We think that we have a more stabilized environment in the U.K. going forward. We are seeing improving performance across the countries that we operate in. We would expect that to continue in the back half of the year. I would remind you, in our fourth quarter last year, we did call out a one-time inventory charge, and so we'll be lapping that as well. Principally, the back half of the year is built on operating performance across the business.
There is a seasonality effect in Q3 with the retail businesses in Europe, so Q3 tends to be a stronger quarter. I was going to mention the Q4 thing as well. As it relates to the U.K., your comments about Brexit are good ones. When we think about the macro landscape there, we do have a new five-year contract with NHS, we meaning the pharmacy industry there, which at least locks in reimbursement at a fixed rate. Now, there's a lot of complicated reimbursement mechanisms beneath that, Cat M and Cat C and Cat A. There could be little tweaks and headwinds, but nothing, I would say, material like we experienced with 4% coming right out of the top line two consecutive years from just a macro reimbursement cut.
We still expect, we still believe that there is some underfunding from NHS that we should see. We frankly were hopeful we'd have seen it in October. We haven't seen it yet. We suspect it would come in January. It won't be a full catch-up for the year, but it will be a partial and helpful catch-up. I think in the overall scheme, I don't think that's super material. I would underscore that I think in the business itself, we've gone through several hundred store closures for reorganization of that business, retooling, really, of some of the formats, and the underlying performance metrics are showing solidification and stabilization.
Yeah, I was going to say that we did talk last year about some cost actions that we were taking, which included some store closures. We're seeing the benefits of that in the back half of the year and going forward. I think it's the cost actions that we took, some of the store closures, but just generally, good focus in improving performance in the other countries that we operate in.
What happens with Brexit, both candidates, both parties were talking about injecting funding into NHS. Now that the vote's happened, we'll see what happens. If that were to happen, regardless of whether it came into pharmacy directly, NHS being more healthy, ultimately should help the pressure that that business is feeling.
Yes. Hey, [darren simon] from [Stanley]. You talked about $45 million in gross cost savings in the first half. I am wondering if you can give us a sense of how much flows to the bottom line, and if you can attribute that within the various segments. What are your expectations for the back half as well as 2021?
Yeah. Well, just to step back for a minute, we updated our cost savings target to $400 million-$500 million by the end of fiscal 2021. What we did talk about is we expected there to be a ramp over that time period. We're very pleased with the performance that we've had thus far. We had savings that we generated in FY 2019. We wanted to give you some visibility into the cost savings that we've seen in the first half of 2020, and we're continuing to hit the cost savings in line with our expectations. Now, a portion of those we have taken to the bottom line, but a portion of those we've reinvested back in the business. We found opportunities such as our specialty and manufacturer services, businesses where we have differentiated positions.
Those are great opportunity for us to take some of those savings and reinvest those back into the business. We haven't given specific guidance on what portion has gone to the bottom line versus been reinvested. You should expect that as we're in the earlier stages of this, that a portion of these savings will continue to be reinvested back in the business, and there will be a ramp over time, and that ramp will continue to increase as we get closer to the end of the time period that we gave you. Generally speaking, we are on target with the expectations that we set, and we're really pleased with the efforts, not only just in pure cost savings, which I would remind you is part of that is just leveraging the scale of McKesson and getting more spend under common management.
We're a big company in lots of different geographies, getting more spend under management gives us a greater opportunity to leverage. As Brian talked about, we're really transforming and standardizing a lot of the back office functions that we have, and we think that as we get closer to 2021 and beyond, that's going to generate some significant savings.
I think I talk about the product AMP is a good example of something that was really April 1, not even on the whiteboard. Through our strategic work, we got convinced of this opportunity, and that's a place where we took savings efficiencies and reinvested in the business because we think it can drive growth into the future. That's how we're trying to think about balancing that split.
Overall, we're pleased that not only are we reinvesting these cost savings and making additional investments, but we're still being able to deliver the guidance that we provide, and we're still seeing growth in the business. I think we're trying to manage that balance of the innovation and the opportunities.
Operator, why don't we move to the phone line for some questions there?
On the phone, if you'd like to ask a question, please press star, then one on your telephone keypad. Our next question will come from Lisa Gill with JP Morgan.
Thanks very much. Good afternoon. Thank you for allowing us to dial in. First, I want to just make sure. There were a lot of questions in trying to really understand the cadence and what you're trying to say. Britt, is what you're trying to say, in the next several quarters, you have visibility overall based on your contracts as to what that revenue is going to be, what the margin's going to be? Given the fact that you have a lot going on with your customers and what they have going on with their customers, it's not an exact science to be able to say, this is going to fall in the third quarter versus the fourth quarter. Am I thinking about that correctly?
Yeah. Let me just clarify a little bit. I wouldn't say I'm providing visibility over the next several quarters. I'm providing visibility over the balance of the year. What I would tell you is we have great conversations with our customers, and we work very collaboratively with them. There are certain items that will have timing associated with them, the customer volumes, customer mix, the timing of our customers winning. What I'm telling you with that is while we have good collaboration with our customers, it's difficult for us to actually pinpoint exactly what quarter some of those volumes or how that mix is actually going to come in. What I wanted to project today is that over the balance of the year, we are very confident in the 7%-9% revenue growth and the 3%-5% adjusted operating profit growth.
Quarter- to- quarter, for some of the items that I called out, in addition to the items like Shopko and where we recorded, for instance, New York State opioid surcharge, that you're going to get more fluctuations quarter- to- quarter. We realize that that can be frustrating, but it is challenging given the number of variables for us to pinpoint year-over-year results on a quarterly basis.
Okay, great. That's very helpful. If I can just actually ask a question, that would just be on Change. If I go back and I think about unlocking the value for shareholders, is there a benefit to doing a spin versus a split? Is there one that's more beneficial to McKesson or McKesson shareholders? Is there any updated view on a spin versus a split? Thank you.
Yeah, it's a great question, Lisa. We've not guided or given you any indication or concluded on whether we're going to do a spin or a split. We are looking at what is the best return for our shareholders on a tax-efficient basis. We think there's benefits for doing a spin or for doing a split. We haven't concluded on what's the right thing for our shareholders yet. Certainly, you should expect us to provide that guidance to you here in the upcoming quarters.
Operator, next question.
Your next question will be Eric Percher of Nephron Research.
Thank you. A question on the VA renewal. We don't usually see the terms of your contracts, but it seemed notable that you were able to achieve differentiated pricing for brand and specialty. Would you characterize that at this point as a major accomplishment, or is that just a natural progression given where the market is today?
Good question. Is that a major accomplishment or a natural progression? It's probably both. Our view is this is very consistent with where we've been trying to migrate all of our supplier and customer relationships. We've been the incumbent and have the benefit of being the incumbent in this business for a long period of time, and so we have great relationships. As we talked to the VA, I think they saw the logic, both from their side and our side, of given the growth dynamics and the way mixes and businesses can shift of making this split. We think it's the right way to go. We think it's the right structure. We're pleased that we got this structure, and obviously, we were even more pleased we got the award.
Operator, next question.
Certainly. That question will come from John Ransom with Raymond James.
Hey, good afternoon, everybody. You guys have been at the helm for a while. I think if we were to look objectively among not just yourself, but your peers, and look at the last five years of M&A, it's really hard to find deals that worked out like people thought. I wonder just a couple things. In your strategic review process, should we expect trimming around the edges, or is there maybe a bigger rethink happening in terms of what does McKesson look like two or three years from now? Some of the businesses that you own, frankly, it's hard, at least for me, to understand the synergy of having, say, a retail pharmacy in the U.K. or Celesio. Some of the businesses I don't really understand what the fit is long-term strategically.
I just wonder if we should expect you guys to be nibbling around the edges, or are we going to maybe think about this a little more fundamentally? The corollary to that is when you think about future deals, is the bar going to be different than it was in the past, where frankly, you've taken a fair amount of write-downs? Thanks.
The first part of that question was, you guys, being the distributor industry and a collection of deals that in retrospect don't look so good. For us, I'd say, look, the financial return on the Celesio acquisition has been terrible. Obviously, if we had the knowledge we have now, we would have thought about the acquisition price of that deal quite differently. We got quite surprised by some reimbursement shocks that were not knowable. The underlying strategy at that time to do that deal was good. Rexall is the other big deal that we've done that we've struggled with for some similar reasons, I suppose. If you look outside of that, a lot of the M&A we've done has actually been quite good. MSD has been quite good. Biologics has been quite good.
RxCrossroads has been quite good, and they're also all core to the growth areas that we sell. Yeah, we missed on a couple of the big ones. I think we've got most of them right. Now, in terms of our forward-looking view, I think we talked a little bit about this. We've long been a very acquisitive company, and we have lots of businesses in our portfolio, and we can always find things to buy. What we're really trying to do is bring a much sharper focus to things that are aligned to the strategy, where we have assets where we're differentiated. We think we already have good growth prospects, but this can extend the moat or accelerate the growth. We're trying to bring those strategic lenses to our acquisitions.
The reality is the last 12 months, as we've really refined our strategy, we have been much more cautious on acquisition, and that, by the way, makes perfect sense given the valuation of our stock, the valuation of the deals, and the discipline we want to bring to our capital deployment. As to the bigger question of macro portfolio, we look at everything. We look at the enterprise level. We look at the collection of the BUs. We look at the businesses within the BUs, and we'll continue to bring that discipline look. I think I said early on in my tenure that we don't fall in love with our businesses. They're not children. They're businesses. We continually ask ourselves, does this add value to the enterprise? Does the enterprise add value to that? Are we a natural owner?
Is this a good return on the capital it takes to invest? That's my continuing commitment to you, is we'll continue to bring that lens. I'd also remind everybody, these are complicated things. We made the change decision 4+ years ago, and we're still in the process. We also balance against that distraction factor, management attention, and a lot goes into our contemplation. It's a very holistic view on these decisions.
Yeah, I might just add, John, while I acknowledge your comments, I think what you saw today, as Brian talked about the breadth of our specialty business and our manufacturer services businesses, our Life Sciences, you have some acquisitions that are core to that. Brian already talked about Biologics and RxCrossroads. I would also mention CoverMyMeds.
Yeah, for sure.
Which is really critical to our AMP product that we're developing. Yes, we've had some challenges with some of the larger acquisitions, but there are a number of acquisitions that are now core to our strategy and are helping drive some innovation, and AMP is a good example of that.
Why don't we come back and see if there's any other questions here in the room?
Brian?
Brian again for Jefferies. Just with the Trump administration coming out today with rules on reimportation, how are you thinking about that? Even taking that a step further with IPI, how are you thinking about how that could impact your business?
Yeah. We are establishing a great track record of having the administration release something hours before we start to analyze it, so super proud about that. Reimportation, A, we expected it. I think at the most macro level right now, we're more in the season of politics than policy. I'll start with that. Yeah, I struggle to think about how importation is really going to work, and if it works, how it's going to have material impact. I say that for a couple reasons. First and foremost, we're super committed to supply chain security. We've got DSCSA and new regs, our internal focus is incredibly high, as it always has been, on supply chain security. That will be our first bias. I know that they're talking about provisions of it's got to be FDA-approved.
That means there's going to be extra costs that go into the system to make sure it's FDA-approved, the product's valid, it's labeled correctly, it's in the right unit of measure, right dosing. There's going to be costs that have to go around with building that model. I can't tell you we've modeled that all out, but I think as you look at the arbitrage spread and then you start to close it with the shipping costs and regulatory compliance costs and costs, it starts to close. Then, my friend from Canada sitting over here, and I'm sure his prime minister is very excited to think that the 30 million citizens of Canada and the pharmaceutical supply chain that supports them is going to be siphoned off to support the 22 million citizens of Florida or whatever other states.
There just becomes a math issue here of how much. A small product, the particular molecule, is the arbitrage opportunity big enough, and does it sustain long enough that you can build the supply chain and get the product imported before that arbitrage opportunity gap closes? I don't know. Look, we're all for commitments to figure out lower drug costs for American citizens, got to protect the quality and the access. If something were to come out and a model were to be emerged, believe me, we think we're in the best position. With our assets on both sides of the border, our assets in Europe, our experience in parallel importation, I think we're going to have a great view on this.
If you were to say, boy, am I getting excited about the big reimportation opportunity that lies ahead for us? I'm not ready to go there.
One more. Go ahead.
Bob Jones, Goldman Sachs. Again, you talked about your largest customers growing faster. I know that was more specifically related to specialty, but in general, I think that's probably a fair statement as well. We hear from the large national chain retailers that they're doing more and more file buys. Could you talk a little bit about your vantage point on the health of the independent pharmacy, and then within that, obviously, you have a pretty interesting perspective with Health Mart, maybe the overall health of Health Mart and where you see that playing out going forward?
Yeah, great question. Thank you. It's one we get a lot. We actually do see some file buys increasing. If we look macro, though, across our experience in independents for many years, we still generally see the same number of independents. We're generally seeing the same level of turn. I think we were at 600, 700 last year. Our range would be 500-700 probably if you go back a decade. We're used to that kind of churn that we're seeing in the book. I do think there's been a subtlety that it's an independent pharmacy. One owner may own two pharmacies now as a way to keep their income higher. Each store might be a little bit less. That's how they're leveraging themselves. We haven't seen a macro trend break. We watch this very closely.
We've been very focused for many years on Health Mart. This is not new, these headwinds. It's not new the thought that independent pharmacies are under pressure. Health Mart is really about the aggregation effect. It's about the effect of leveraging our scale. It's about the idea that we can help develop tools and solutions for them to manage every level of their P&L. It's not just generic procurement, right? It's what's my footfall? How do I market to my doctors? How do I get people in my stores? What plans do I need to be in? The scripts do I have to be access to? How do I staff, manage my pharmacy efficiency, optimize my hours? Even front shop. What are my planograms? What's my product mix? What's emerging? It's not huge and independent.
I don't want to overplay that, but 10%-15%, and obviously our independents, you find every format imaginable in independents. We're thinking at every level of that P&L, how we continue to support them. We've seen great growth in Health Mart over the last years, and I think part of that is rallying around the PSAO or the reimbursement and contracting we can bring, rallying around the solutions we can bring, and the feeling of it's a lot better to be aggregated and be benefiting from that scale than to truly be out there on your own.
All right. That concludes our event, and thank you everyone for participating today. Thank you, Amy, for facilitating this call.
I was going to wish everyone happy holidays, but you cut me off.