Britt Vitalone
Executive Vice President and Chief Financial Officer at McKesson
Well, thank you, Brian, and good afternoon. We are pleased to report June quarter financial results that continue to demonstrate our ability to grow our businesses and execute effectively as a diversified health care services company. Our fiscal first quarter results are ahead of our expectations, reflecting progress against our strategic priorities, demonstrating the continued strength of our operations.
Let me begin today with a few company updates before reviewing our first quarter results, and I want to start with Europe and our ongoing focus to streamline our portfolio. Over the past two years, we've taken deliberate actions to streamline the business and deploy capital more effectively, ensuring the organization is operationally efficient, and delivering solutions that are focused on solving our customers' biggest challenges. This is exemplified by our actions to exit European region announced in July of 2021. Since that time, we've divested or entered into agreements to sell business operations in 11 of the 12 countries in which we operate. To date, we've successfully closed the following transactions.
In the fourth quarter of fiscal 2022, and we completed the sales of our Austrian business and the remaining share of our German joint venture. In April of 2022, we completed the sale of our U.K. retail and wholesale operations. And in July of 2022, we completed the sale of our Denmark business. The transaction with the Phoenix Group to sell operations and other certain assets in several European countries is also proceeding well. We anticipate it will close in the second half of fiscal 2023, subject to regulatory reviews. We continue to explore strategic alternatives to exit remaining operations in Norway, the only country and we've not yet entered into an agreement to sell.
For fiscal 2023, we anticipate our remaining European operations will contribute adjusted operating profit of approximately $0.85 to $1.15 per diluted share, which includes accretion resulting from the held-for-sale accounting through the transaction with the Phoenix Group. As discussed at our December Investor Day, we intend to deploy capital through share repurchases to offset the dilution resulting from the European divestitures.
Exiting operations in Europe allows us to focus on another important strategic priority. Expanding our oncology and biopharma services ecosystems. And we took an important step this quarter in our oncology ecosystem. In June, we announced an agreement to form a joint venture combining McKesson's U.S. Oncology Research and HCA Healthcare Sarah Cannon Research Institute, including the acquisition of Genospace, Sarah Cannon's personalized medicine platform. The combination of these assets complements our existing operations.
It aligns to our strategic growth priorities and it supports our vision to improve care in every setting. The transaction is anticipated to close by the end of calendar year 2022, again, subject to regulatory review and approval. We do not anticipate this transaction will have a material impact on our fiscal 2023 adjusted earnings per share outlook.
Next, as Brian mentioned earlier, our contract with the U.S. government to serve as a centralized distributor for COVID-19 vaccine was recently extended through July of 2023. And the contract for the kitting and storage of ancillary supplies was extended through January of 2023. I'll discuss the impact of fiscal 2023 guidance later in my remarks.
Finally, I want to point out one additional item that will impact our fiscal second quarter GAAP-only results. In July of 2022, McKesson exited one of its investments in equity securities for proceeds of $179 million. We will recognize a GAAP-only gain within other income in the second quarter.
Moving now to a review of our first quarter fiscal 2023 results. My comments today will refer to our adjusted results on a year-over-year basis unless I state otherwise. Consolidated revenues of $67.2 billion increased 7%, reflecting growth in the U.S. Pharmaceutical segment, partially offset by lower revenues in the International segment as a result of the European divestiture process. Gross profit was $3 billion for the quarter, a decrease of 4%.
Excluding the impact of our European business operations and completed divestitures, gross profit increased 9%, a result of organic growth in our Medical Surgical Solutions segment, increased volume of specialty products in our U.S. Pharmaceutical segment and growth in the Prescription Technology Solutions segment.
Operating expenses decreased by 10% in the quarter due to completed divestitures in the International segment. As a result, operating profit was $1.1 billion for the quarter, an increase of 4%, led by growth in U.S. Pharmaceutical and improved prescription transaction volumes in the Prescription Technology Solutions segment. When excluding the impact related to the distribution of COVID-19-related products and services and gains and losses associated with McKesson Ventures equity investments, operating profit increased 13% year-over-year.
Interest expense was $45 million in the quarter, a decrease of 8% due to a net reduction of debt year-over-year, and the effective tax rate was 18.4% for the quarter.
Wrapping up our consolidated results. First quarter diluted weighted average shares outstanding were 145.9 million, a decrease of 8% year-over-year, resulting from share repurchases throughout fiscal 2022 and the first quarter of fiscal 2023. Overall, first quarter adjusted earnings per diluted share was $5.83, an increase of 5% compared to the prior year.
Now on to our first quarter segment results, which can be found on Slides seven through 12, and starting with U.S. Pharmaceutical. Revenues were $56.9 billion, an increase of 14% year-over-year, resulting from increased specialty product volumes led by retail national account customers and market growth, which was partially offset by brand to generic conversions.
Operating profit increased 4% to $711 million, led by growth in distribution of specialty products to providers and health systems, generic launches and improved performance of Ontada, which was partially offset by lower volumes of COVID-19 vaccine distribution. The contribution from our contract with the U.S. government for COVID-19 vaccine distribution provided a benefit of approximately $0.18 per share in the quarter, which is compared to $0.30 per share in the first quarter of fiscal 2022.
Excluding the impact of COVID-19 vaccine distribution, the U.S. Pharmaceutical segment delivered operating profit growth of 9%. Results in the quarter benefited from the timing of generic launches and the improved performance of Ontada.
Operating margins were modestly lower in the quarter, impacted by mix as the growth from health systems and multi-specialty providers were partially offset by robust retail national account customer growth which contributed 7% to the overall 14% year-over-year top line growth.
Next, as Brian noted earlier, our Prescription Technology Solutions segment delivered another strong quarter. Response to our access, affordability and assurance solutions continue to be strong across biopharma, providers and payers. The scale and expanded suite of offerings continue to deliver for all stakeholders including patients.
Revenues were $1.1 billion, an increase of 21% year-over-year, driven by volume growth from Biopharma Services which includes third-party logistics services and increased technology service revenues. Operating profit increased 19% to $165 million, reflecting the continued favorable market acceptance to a growing set of access, affordability and adherence solutions.
Moving now to Medical-Surgical Solutions. Revenues were $2.6 billion, an increase of 3% year-over-year. as growth in the primary care business partially offset anticipated lower demand in sales for COVID-19 tests and lower contribution from kitting storage and distribution of ancillary supplies for the U.S. government's COVID-19 vaccine program.
Operating profit increased 4% to $268 million, driven by strength across the primary care business. Improved volumes and greater incidence of respiratory illness and the flu contributed to higher testing and patient visits in the primary care business. The contribution from COVID-19 tests and our contract with the U.S. government for the kitting, storage and distribution of ancillary supplies provided a total benefit of approximately $0.25 per share in the quarter compared to $0.35 per share in the first quarter of fiscal 2022. Excluding the impact of these COVID-related items, the Medical Surgical Solutions segment delivered operating profit growth of 20%.
Next, let me address our international results. Revenues were $6.5 billion, and operating profit was $138 million, which was a decrease of 19%. On an FX adjusted basis, revenues were $7.1 billion, a decrease of 23%, and operating profit was $152 million, a decrease of 11%. Our first quarter results reflect the impact from the divestitures of McKesson's U.K. and Austrian businesses.
Moving on to Corporate. Our Corporate expenses were $145 million, a decrease of 6% year-over-year. In the quarter, we recognized a tax receivable gain related to our previous change health care investment and lower opioid-related litigation expenses. We incurred opioid-related litigation expenses of $19 million in the first quarter. We anticipate that the fiscal 2023 opioid-related litigation expenses to be approximately $45 million.
During the quarter, we had net losses of $22 million related to equity investments within the McKesson Ventures portfolio, which compares to net gains of approximately $7 million in the first quarter of fiscal 2022. As a reminder, the impacts on our consolidated results can be influenced by the performance of each individual investment quarter-to-quarter. And as a result, McKesson's investments may result in gains or losses, the timing and magnitude of which can vary for each investment. It's difficult to predict when gains or losses on the McKesson Ventures portfolio companies may occur, therefore, our practice has been and will continue to not include McKesson Ventures portfolio estimates in our guidance.
Let me turn to our cash position, which can be found on Slide 13. As a reminder, our cash position, working capital metrics and resulting free cash flow can be impacted by timing and vary from quarter-to-quarter. We ended the quarter with $2.2 billion in cash and cash equivalents. During the quarter, we made $100 million of capital expenditures, which includes investments in technology, data and analytics to support our growth priorities, including our oncology and biopharma services ecosystem. For the quarter, we had negative free cash flow of $1 billion.
We also returned $1.1 billion of cash to shareholders during the June quarter, which included $1 billion of share repurchases and $71 million in dividend payments. In July, our Board of Directors approved a 15% increase to our quarterly dividend to $0.54 per share. And the Board also approved a new $4 billion share repurchase authorization, which brings the total remaining share repurchase authorization to $6.3 billion.
Our fiscal 2023 guidance for share repurchases remains unchanged. These actions demonstrate the confidence that the Board of Directors and management have in the execution against our strategic priorities.
Our capital deployment principles remain firmly in place. We prioritized growth by investing internally and through M&A. Our focus continues to center on the areas of oncology and biopharma services, including the expansion of access affordability and adherence solutions.
Next, we'll continue to return capital to shareholders through a combination of our growing dividend and share repurchases. And the third piece of the framework focuses on a strong balance sheet and financial position. which is underpinned by the maintenance of our investment-grade credit rating.
Let me turn to our fiscal 2023 outlook, starting with the consolidated view. I'll walk you through the key items, beginning with additional details of fiscal 2023 consolidated guidance. A full list of these assumptions can be found on Slides 15 through 19 in our supplemental slide presentation.
On a reported basis, our fiscal 2023 guidance assumes 3% to 7% revenue growth and flat to 6% operating profit decline compared to fiscal 2022. When excluding the impacts related to the U.S. government's centralized COVID-19 vaccine and kitting distribution programs, COVID-19 tests and net gains or losses associated with McKesson Ventures equity investments, we anticipate adjusted operating profit to increase 4% to 10%. We also anticipate corporate expenses in the range of $550 million to $620 million, which included the impact of net losses associated with McKesson Ventures equity investments in the first quarter. Given the current interest rate environment, we now anticipate interest expense to modestly increase and be in the range of $205 million to $225 million. Our anticipated full year effective tax rate of approximately 18% to 20% remains unchanged.
Based on our first quarter results, our continued solid operating performance in each segment and the contract extensions with the U.S. government for COVID-19 vaccine distribution and the kitting, storage and distribution of ancillary supplies, we are increasing our guidance range for fiscal 2023 to $23.95 to $24.65 from the previous range of $22.90 to $23.60. Our fiscal 2023 outlook aligns with the previously communicated long-term growth targets, and it demonstrates the commitment to deliver sustainable growth.
Our revised guidance also includes $0.99 to $1.29 of contribution attributable to the following items: $0.35 to $0.45 related to the U.S. government's vaccine distribution in our U.S. Pharmaceutical segment, $0.75 to $0.95 related to COVID-19 test in the kitting, storage and distribution of ancillary supplies in our Medical Surgical Solutions segment, and $0.11 of net losses associated with McKesson Ventures equity investments.
Excluding the impacts of these COVID-19-related items and net gains and losses from McKesson Ventures equity investments from both fiscal 2023 guidance in fiscal 2022 results, our fiscal 2023 adjusted earnings guidance indicates approximately 10% to 15% growth over the prior year.
Moving now to the segment outlook. In the U.S. Pharmaceutical segment, our outlook reflects the solid operating performance in the first quarter, the efficiency and durability of our core distribution platform and continued development of our oncology ecosystem. We anticipate reported revenue to increase 11% to 14%, and operating profit to decline approximately 1% to 3% growth year-over-year. Our outlook includes approximately $0.35 to $0.45 related to COVID-19 vaccine distribution, a result of the previously outlined contract extension. When excluding the impact of COVID-19 vaccine distribution for the U.S. government, we anticipate 4% to 6% operating profit growth, which is modestly above the long-term growth target.
In the Prescription Technology Solutions segment, we now anticipate revenue growth of 15% to 21%, and operating profit growth of 16% to 22%, which reflects increased affordability solution volumes.
In the Medical Surgical Solutions segment, we anticipate reported revenues to decrease 3% to 7% and operating profit to decrease 5% to 10%. Our outlook includes approximately $0.75 to $0.95 related to COVID-19 tests and the kitting, storage and distribution of ancillary supplies for the U.S. government, which incorporates the contract extension of the U.S. government to January of 2023. Excluding the impact of these COVID-19 related items, we anticipate medical surgical operating profit to increase 11% to 17%.
And finally, in the International segment, we continue to anticipate revenues to decline by 34% to 38%, and operating profit to decline by 22% to 28%, and this year-over-year decrease includes a loss of operating profit contribution from businesses and transactions we've closed to date and those we expect to close during fiscal 2023.
Let me conclude our fiscal 2023 outlook with a few comments on cash flow and capital deployment. In fiscal 2023, we continue to anticipate free cash flow of approximately $3.2 billion to $3.6 billion, which is net of property acquisitions and capitalized software expenses. As a reminder, our working capital metrics and resulting cash flows vary from quarter-to-quarter. Each working capital metric can be impacted by timing. And in fiscal 2023, a our cash flows, including the progression of these cash flows may be impacted by European divestiture activity.
Our fiscal 2023 outlook incorporates plan to repurchase approximately $3.5 billion of shares. A significant portion of the share buyback assumption is associated with mitigating the year-over-year impact of European divestitures. As a result of the share repurchase activity, we estimate weighted average diluted shares outstanding for fiscal 2023 to be in the range of approximately 142 million to 144 million.
To wrap up, we are pleased with our solid start to the fiscal year. We continue to deliver on our growth strategy as a diversified health care services company. Our talented associates continue to deliver exceptional performance. Our first quarter financial performance reflects their dedication and their execution in a dynamic operating environment, and it also represents the resiliency of our portfolio. Looking ahead, the combination of our solid first quarter financial performance, our growth strategy and continued execution positions McKesson to deliver sustainable long-term performance and shareholder value creation.
With that, let me turn it back to the operator for your questions.