Executive Vice President and Chief Financial Officer at McKesson
Well, thank you, Brian. And good afternoon, everyone. We're pleased to report solid financial results for our fiscal second quarter, which reflect operating execution and progress against our growth strategies. As a result of our fiscal second quarter operational and financial performance, combined with our strong financial position and outlook for continued execution in the second half, we are narrowing and increasing our full-year fiscal 2023 adjusted earnings per diluted share outlook to a range of $24.45 to $24.95.
Let me start with a few company updates before reviewing our second-quarter results. During the quarter we made meaningful progress refining and strengthening our portfolio. We completed several key transactions executing against our disciplined capital allocation framework. Let me begin with Europe. As Brian mentioned on October 31, we completed the sale of certain European operations and other assets with the Phoenix Group. We're pleased that we were able to close this transaction sooner than our original fiscal 2023 guidance.
To date, we've successfully exited 11 of the 12 European countries that we operated in, and Norway remains the only country that we have not entered into an agreement to sell, and we continue to explore strategic alternatives to exit Norway. Our European exit activities have created a focused portfolio, streamlined capital allocation, and it positions the company for growth in oncology and biopharma services.
Next, I'm pleased to report on substantial progress with respect to our oncology and biopharma services growth strategies. And let me start with oncology. In June, we announced an agreement to form a joint venture combining McKesson's US Oncology Research and HCA Healthcare Sarah Cannon Research Institute, including the acquisition of Genospace, Sarah Cannon's personalized medicine platform. On October 31, we closed the transaction and successfully formed the joint venture. McKesson has a 51% ownership interest and will consolidate the results of operations within our US Pharmaceutical segment, beginning with our fiscal third quarter.
This transaction further advances our oncology ecosystem, which contains a broad range of scaled and differentiated assets and capabilities. For fiscal 2023, we anticipate that this transaction will have an immaterial impact on our results. We expect the joint venture and the Genospace acquisition to be $0.10 to $0.20 accretive by the end of fiscal 2026 on an adjusted earnings per share basis.
Let me next move to biopharma services. In September, we announced an agreement to acquire Rx Savings Solutions, a prescription price transparency and benefit insight company that offers affordability and adherence solutions to health plans and employers. Today, we announced the completion of the acquisition of Rx Savings Solutions, which will be included in our Prescription Technology Solutions segment.
The addition of Rx Savings Solutions complements our existing biopharma services assets and supports our vision to improve access affordability and adherence. We anticipate this transaction will represent a modest headwind to fiscal 2023. We anticipate that Rx Savings Solutions will be $0.50 to $0.60 accretive by the end of fiscal 2026 on an adjusted earnings per share basis.
As you've heard me say before and as is the case with all our recent acquisitions, we prioritize the deployment of capital towards growth directly on our stated strategies of oncology and biopharma services in a manner that delivers sound financial returns. These transactions represent capital deployment that make both great strategic and great financial sense.
Moving to a review of our second 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 $70.2 billion increased 5%, reflecting growth in the US Pharmaceutical segment, partially offset by lower revenues in the International segment, which were a result of our European divestiture activities.
Gross profit was $3.1 billion for the quarter, a decrease of 7%. Excluding the impact of our European business operations and completed divestitures, gross profit increased 5%, primarily a result of increased volumes in our US Pharmaceutical segment. Operating expenses in the quarter decreased 11%, largely driven by completed European divestitures in the International segment and lower opioid litigation costs.
Operating profit was $1.2 billion, a decrease of 6% due to lapping of prior year equity investment gains within McKesson Ventures portfolio and completed divestitures in the International segment, partially offset by growth in the US Pharmaceutical segment. When excluding the impact related to the distribution of COVID-19-related products and net gains and losses associated with McKesson Ventures equity investments, operating profit increased 6%.
Moving below the line, interest expense was $55 million in the quarter, an increase of 22%, primarily due to the unfavorable impacts in our derivative portfolio as we exit the European region. These impacts were partially offset by a net reduction of debt year-over-year. And the effective tax rate was 19.9% for the quarter.
Wrapping up our consolidated results. Second quarter diluted weighted average shares outstanding was 144.1 million, a decrease of 8%, resulting from share repurchases in fiscal 2022 and the first half of fiscal 2023. Overall, second-quarter adjusted earnings per diluted share was $6.06, a decrease of 1% compared to the prior year.
Moving now to our second quarter segment results, which can be found on Slides 7 through 12, and starting with US Pharmaceutical. Revenues were $60.1 billion, an increase of 12% year-over-year, resulting from increased volume of specialty products, including higher volumes from retail national account customers and market growth, which was partially offset by branded-to-generic conversions. Operating profit increased 3% to $756 million, led by growth in the distribution of specialty products to providers and health systems, partially offset by lower demand of COVID-19 vaccine distribution.
The contribution from our contract with US government for COVID-19 vaccine and distribution provided a benefit of approximately $0.24 per share in the quarter compared to $0.28 per share in the second quarter of fiscal 2022. Excluding the impact of COVID-19 vaccine distribution, the US Pharmaceutical segment delivered operating profit growth of 5%.
In the Prescription Technology Solutions segment, revenues were $1 billion, an increase of 9% year-over-year, driven by growth in prescription volumes in our third-party logistics business and technology service revenues. Compared to Q1, revenues were lower due in part to the timing of customer-driven promotional activity recognized in the first quarter in our third-party logistics business.
Operating profit decreased 2% to $141 million driven by higher operating expenses resulting from the timing of increased headcount to support customer annual verification activities, which include hub and patient support programs.
Moving now to Medical Surgical Solutions. Revenues were $2.8 billion, a decrease of 9%, as growth in the primary care business was offset by lower sales for COVID-19 tests year-over-year. Operating profit decreased 4% to $307 million driven by lower sales of COVID-19 tests, partially mitigated by performance within primary care distribution. Within our Primary Care business, we continue to see the effect of a stronger flu season when compared to the prior year.
The contribution from COVID-19 tests and our contract with the US government for the kitting storage and distribution of ancillary supplies provided a total benefit of approximately $0.33 per share in the quarter compared to $0.44 per share in the second quarter of fiscal 2022. Excluding the impact of COVID-related items, the Medical Surgical Solutions segment delivered operating profit growth of 7%.
Next, let me address our international results. Revenues were $6.2 billion and operating profit was $137 million, a decrease of 16%. On an FX-adjusted basis, revenues were $6.9 billion, a decrease of 25% and operating profit was $151 million, a decrease of 7%. Second quarter results reflect the year-over-year effect from the divestitures of McKesson's UK and Austrian businesses.
Moving on to Corporate. Corporate expenses were $144 million, an increase of 73% year-over-year. During the quarter, we had net losses of $3 million related to equity investments within the McKesson Ventures portfolio compared to net gains of approximately $97 million in the second quarter of fiscal 2022. As a reminder, the impacts on consolidated results can be influenced by the performance of each individual investment quarter-to-quarter. As a result, McKesson's investments may result in gains or losses, the timing and magnitude of which can vary for each investment.
The year-over-year impact from our McKesson Ventures portfolio was partially offset by lower opioid-related litigation expenses in the quarter. We incurred opioid-related litigation expenses of $9 million in the second quarter, and we anticipate that fiscal 2023 opioid-related litigation expenses will be approximately $50 million.
Turning now to our cash position, which can be found on Slide 13. As a reminder, our cash position, working capital metrics, and resulting cash flows can each be impacted by timing and vary from quarter to quarter. We ended the quarter with $2.9 billion in cash and cash equivalents.
During the first six months of the fiscal year, we made $222 million of capital expenditures, which include investment in distribution center capacity and automation and investments in technology, data and analytics to support growth priorities, including our oncology and biopharma services ecosystems. For the first six months of fiscal 2023 and 2022, we had negative free cash flow of $56 million and $109 million, respectively.
Year-to-date, we returned $1.6 billion of cash to our shareholders, which included $1.5 billion of share repurchases and $139 million in dividend payments. And we have $5.8 billion remaining on our share repurchase authorization.
Let me turn now to our fiscal 2023 outlook. A full list of our assumptions can be found on Slides 15 through 18 in our supplemental slide presentation. And I'll begin with our consolidated outlook. Our fiscal 2023 guidance assumes 3% to 7% revenue growth and 4% decline to 2% growth for operating profit compared to fiscal 2022.
Let me provide updated guidance for contribution from COVID-19 programs. Our revised guidance includes $1.45 to $1.65 of contribution attributable to the following items: $0.60 to $0.70 related to the US government's vaccine distribution in our US Pharmaceutical segment; $1 to $1.10 related to COVID-19 tests and the kitting, storage and distribution of ancillary supplies in our Medical Surgical Solutions segment; and approximately $0.15 of net losses associated with McKesson Ventures equity investments.
We anticipate corporate expenses in the range of $580 million to $620 million, which includes net losses associated with McKesson Ventures equity investments, which we reported in the first half of the fiscal year. As you've heard me say before, it's difficult to predict when gains and losses on the McKesson Ventures portfolio companies may occur, and therefore, our practice has been and will continue to not include the McKesson Ventures portfolio estimates in our guidance.
When excluding the impacts related to the US government's centralized COVID-19 vaccine distribution, and the kitting, storage and distribution of ancillary supplies, COVID-19 tests and net gains or losses associated with McKesson Ventures equity investments, we anticipate operating profit to increase 4% to 10%.
Moving below the line, we anticipate interest expense to be in the range of $225 million to $235 million. The increase compared to the prior guidance reflects our intent to partially finance the Rx Savings Solutions acquisition with new debt.
Our anticipated full-year effective tax rate of approximately 18% to 20% remains unchanged. And based on our second quarter results and continued solid operating performance, including the contribution from COVID-19-related items, we are increasing and narrowing our guidance range for fiscal 2023 to a range of $24.45 to $24.95 from the previous range of $23.95 to $24.65.
The increased guidance also includes the reduced outlook in our International segment from the earlier-than-expected European closing of the transaction with the PHOENIX Group. Excluding the impacts of COVID-19-related items and net gains and losses from McKesson Ventures equity investments from both fiscal 2023 guidance and fiscal 2022 results, our fiscal 2023 adjusted earnings guidance indicates approximately 11% to 14% growth over the prior year. This outlook aligns with the previously communicated long-term growth targets, and it demonstrates the commitment to deliver sustainable growth.
Moving now to the segment outlook. We continue to be pleased with the growth we are seeing in the US Pharmaceutical segment. The breadth of our services and solutions continue to resonate across retail, health systems, and provider settings. The value of our core distribution platform was exemplified by the recent agreement in principle to extend our pharmaceutical distribution partnership with CVS Health through June of 2027.
We also anticipate further growth across our oncology ecosystem, including a joint venture between McKesson's US Oncology Research and HCA Sarah Cannon Research Institute. And we intend to accelerate operating expense investments in the second half of fiscal 2023 to further extend our leadership position in oncology.
Our positive outlook on the growth trajectory of this segment is reflected in our updated ranges. We anticipate reported revenue to increase 12% to 15% and operating profit to increase 3% to 6%. As I outlined earlier, our outlook includes approximately $0.60 to $0.70 related to COVID-19 vaccine distribution to the US government, a result of the previously disclosed contract extension through July of 2023. When excluding the impact of COVID-19 vaccine distribution for the US government, we anticipate 5% to 7% operating profit growth, which is above the long-term growth target.
In the Prescription Technology Solutions segment, we anticipate revenue growth of 10% to 16% and operating profit growth of 16% to 22%. We will continue to invest and build capabilities to focus on increasing access, affordability, and adherence solutions for patients. The acquisition of Rx Savings Solutions accelerates our capabilities. This segment continues to perform in line with the trajectory assumed in our long-term outlook, and its growth over the last few years reflects the ongoing investment and focus.
In the Medical Surgical Solutions segment, we anticipate reported revenues to decrease 4% to 8% and operating profit to decrease 3% to 6%. As previously mentioned, our outlook includes approximately $1 to $1.10 related to COVID-19 tests and the kitting, storage and distribution of ancillary supplies for the US government, which incorporates the contract extension with the US government to January of 2023. Excluding the impact of COVID-19-related items, we anticipate Medical Surgical operating profit to increase 11% to 15%.
Finally, in the International segment, we anticipate revenues to decline by 42% to 46% and operating profit to decline by 27% to 33%. This year-over-year decrease includes the loss of operating profit contribution from businesses and transactions we have closed to date, including the recently closed transaction with the PHOENIX Group.
For fiscal 2023, we anticipate our European operations will contribute operating profit of approximately $0.85 to $1 per diluted share, primarily in the first nine months of the fiscal year. This includes year-to-date contributions from operations prior to completed sales, our operations in Norway, and contribution related to held-for-sale accounting from transaction with the PHOENIX Group.
We are pleased to have closed the transaction with the PHOENIX Group. This transaction closed earlier than we had anticipated, negatively impacting prior operating profit guidance, and is the main driver behind the change in guidance for this segment.
Let me conclude my fiscal 2023 outlook remarks with a review of cash flow and capital deployment. In fiscal 2023, our cash flows, including the timing and progression, have been impacted by European divestiture activity and other transactions. For 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. Our free cash flow guidance includes approximately $900 million of negative impacts from our European operations and divested assets. Our North American businesses continue to generate strong free cash flow.
Our capital allocation priorities remain unchanged, and our strong balance sheet affords us the flexibility to pursue multiple capital allocation priorities concurrently. We will continue to prioritize growth, principally in the areas of oncology and biopharma services, as evidenced by our joint venture with the Sarah Canon Research Institute, the acquisition of Genospace and the acquisition of Rx Savings Solutions.
We also remain committed to returning capital to our shareholders. Our outlook incorporates plans to repurchase approximately $3.5 billion of shares in fiscal 2023, which we anticipate will be largely complete by the end of our fiscal third quarter. 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.
In summary, we are pleased with our first half fiscal 2023 performance. The strength of our business model, the value of our products and capabilities, and the execution of our proven strategies gives us the confidence and visibility to raise our earnings guidance.
We continue to create value for our shareowners through solid growth, cash flow generation, and return of capital. Our strong leadership and the tremendous ongoing commitment of our people across McKesson gives us confidence that we will continue to deliver sustainable results.
And with that, I'll turn the call back over to the operator for Q&A.