Britt Vitalone
McKesson Corp. at McKesson
Thank you, Brian, and good afternoon, everyone. I'm pleased to speak with you today about our strong first quarter results, which reflect the importance of the products and services McKesson delivers, the execution and momentum across our business, which includes supporting the US government's COVID-19 domestic and international vaccine and kitting efforts, and the recovery of prescription volumes and patient visits impacted by the COVID pandemic in the prior year. I'll begin my remarks today by sharing an update on our European businesses, followed by our first quarter results, and I'll close with an update to our fiscal 2022 outlook. The summary of our first quarter results and updated guidance assumptions can be found in our earnings slide presentation, which is posted on the Investors section of our website. In early July, we announced an agreement to sell our European businesses in France, Italy, Ireland, Portugal, Belgium and Slovenia to the PHOENIX Group. This transaction includes our German AG headquarters in Stuttgart and our European shared service center in Lithuania. The purchase price for the transaction was approximately US$1.5 billion. The ultimate proceeds for this transaction are subject to certain adjustments under the agreement. Therefore, the proceeds may differ from the purchase price.
The assets involved in this transaction contributed approximately $12 billion in revenue and $75 million in adjusted operating profit in fiscal 2021. We've determined that this transaction shall not qualify for discontinued operations. The net assets included in the transaction we've classified as held for sale. The held-for-sale accounting was effective at the start of our second quarter of this fiscal year. We will re-measure the net assets to the lower carrying amount or fair value, less cost to sell, and we estimate that this will result in a GAAP-only charge of between $500 million to $700 million in our second quarter of fiscal 2022. Due to held-for-sale accounting treatment, we'll discontinue recording depreciation and amortization on the assets involved in the transaction. As a result of the held-for-sale accounting, we would guide to approximately $0.26 adjusted earnings accretion in fiscal 2022. This will be included in our updated outlook, and I'll outline those later in my remarks. McKesson will operate these businesses and record revenue and income until the transaction is closed, which is expected to occur in fiscal 2023. We're committed to exploring strategic alternatives for our remaining European businesses, and we'll provide details on the plans for the remaining businesses as they become available.
Exiting Europe at this time is the right course of action for McKesson and our shareholders, and it will sharpen the focus on our growth strategies of oncology and biopharma services as we develop and grow our connected ecosystem. Let me now turn to our first quarter results. Before I provide more details on our first quarter adjusted results, I want to point out two items that impacted our GAAP-only results in the quarter. First, during the June quarter, we committed to donate certain personal protective equipment and related products to charitable organizations to assist in COVID-19 recovery efforts. In the quarter, we recorded $155 million of pre-tax inventory charges within our Medical Surgical Solutions segment for inventory which we no longer intend to sell and will instead direct the previously mentioned charitable organizations. And secondly, on our May six earnings call, we outlined an initiative to rationalize office space in North America to increase efficiencies and support increased employee flexibility. These actions will result in the realization of annual operating expense savings of approximately $60 million to $80 million when fully implemented. Our guidance does not assume a material benefit in fiscal 2022. In the June quarter, we reported approximately $95 million of charges associated with this initiative.
Moving now to our adjusted results for the first quarter, beginning with our consolidated results, which can be found on slide seven. First quarter adjusted earnings per diluted share was $5.56, an increase of 101% compared to the prior year. This result was driven by the recovery in prescription volumes in primary care patient visits from the COVID-19 pandemic, as we lap the most significant pandemic impacts and lockdowns in Q1 of fiscal 2021. It also included a lower tax rate and the contribution from COVID-19 vaccine distribution and kitting programs with the US government. Consolidated revenues of $62.7 billion increased 13% to the prior year, driven by growth in the US Pharmaceutical segment, largely due to higher volumes from retail national account customers and price increases on branded and specialty pharmaceuticals, which is partially offset by branded to generic conversions. Adjusted gross profit was $3.1 billion for the quarter, up 19% compared to the prior year. Adjusted operating expenses in the quarter increased 6% year-over-year, led by higher operating expenses to support growth in our core businesses and strategic investments, partially offset by the contribution of our German wholesale business to the joint venture with Walgreens Boots Alliance.
Adjusted operating profit was $1.1 billion for the quarter, an increase of 55% compared to the prior year, which reflects double-digit growth in each segment. Interest expense was $49 million in the quarter, a decline of 18% compared to the prior year, driven by the retirement of approximately $1 billion of long-term debt in fiscal 2021. Our adjusted tax rate was 11.3% for the quarter due to discrete tax items that were recorded during the quarter. Our full year adjusted effective tax rate guidance of 18% to 19% remains unchanged. And our first quarter diluted weighted average shares were 158 million, a decrease of 3% year-over-year driven by $1 billion of shares repurchased in the first quarter. Moving now to our first quarter segment results, which can be found on slides eight through 12, and I'll start with US Pharmaceutical. Revenues were $50 billion, an increase of 12% and driven by higher volumes from retail national account customers and price increases on branded and specialty pharmaceuticals, partially offset by branded to generic conversions. Adjusted operating profit in the quarter increased 16% to $682 million, driven by the contribution from COVID-19 vaccine distribution and growth in specialty products distribution, to our providers and health care systems, which was partially offset by higher operating costs in support of the company's oncology growth initiative.
Turning to Prescription Technology Solutions. We're very pleased with the strong growth and scale that we're building in this higher-margin segment. The drivers for our Prescription Technology Solutions businesses continue to move in the right direction. First, we're seeing expansion in many of our services businesses as we continue to add more manufacturing partners and programs for our existing solutions such as electronic prior authorization, our access and adherence services and 3PL. Second, our technology-based platforms, like Relay Health support, 19 billion clinical and financial transactions annually, from claims routing in the growing discount card market to alerts and edits to make the practice of pharmacy clinically safer and administratively more efficient. And we continue to invest and innovate to build a connected ecosystem of biopharma services, our next-generation access and adherence solution, AMP, is showing accelerated adoption and growth with new brands. This year, AMP is bringing its network-enabled approach to hub services to support our oncology and specialty drugs covered under the medical benefit. We also continue to expand our clinical decision support capabilities in provider office workflow across every major EHR. Our technology network spans every touch point in the patient journey, from doctor's office to benefit verification to dispensing pharmacy, which allows us to address barriers in the patient journey by adding unique automation that accelerates time to therapy and lowers patients out-of-pocket costs.
In the June quarter, revenues were $881 million, an increase of 34%. And adjusted operating profit increased 62% to $139 million, driven by higher volumes of technology and service offerings to support biopharma customers, organic growth from access and adherence solutions and recovery of prescription volumes on the COVID-19 pandemic. Moving now to Medical-Surgical Solutions. Revenues were $2.5 billion in the quarter, up 40%, driven by improvements in primary care patient visits and increased sales of COVID-19 tests. The contribution for our contract with US government to prepare and distribute ancillary supplies, related to the COVID-19 vaccine provided a benefit of approximately $0.25 in the quarter and were above our original expectations. For the quarter, adjusted operating profit increased 107% to $257 million, driven by improvements in primary care patient visits and the contribution from kitting and distribution of ancillary supplies for the US government's COVID-19 vaccine program. Next, let me speak about International. Revenues in the quarter were $9.2 billion, an increase of 8% year-over-year. Excluding the impact from the divestiture of our German wholesale business, Segment revenue increased 28% year-over-year and was up 14% on an FX-adjusted basis.
Revenue was primarily driven by the contribution of our German wholesale business to the joint venture with Walgreens Boots Alliance, which was completed during the third quarter of fiscal 2021, and the recovery of pharmaceutical distribution and retail pharmacy volumes from the COVID-19 pandemic. First quarter adjusted operating profit increased 133% year-over-year to $170 million. On an FX-adjusted basis, adjusted operating profit increased 107% to $151 million, led by the recovery of pharmaceutical distribution and retail pharmacy volumes from the COVID-19 pandemic, and distribution of COVID-19 vaccines and test kits in Europe and Canada. Moving on to Corporate. For the quarter, adjusted corporate expenses were $154 million, a decrease of 7% year-over-year, driven by decreased opioid litigation expenses. We reported opioid-related litigation expenses of $35 million for the first quarter. We continue to estimate fiscal 2022 opioid-related litigation expenses to approximate $155 million. I would remind you that, while we've negotiated a comprehensive proposed settlement agreement, until we know the scope of participation in proposed settlement, we are not in a position to revise our opioid litigation expenses outlook.
Let me now turn to our cash position, which can be found on slide 14. We ended the quarter with a cash balance of $2.4 billion. During the quarter, we had negative free cash flow of $1.8 billion. As a reminder, our working capital metrics and resulting free cash flow vary from quarter-to-quarter and are impacted by timing, including the day and the week that marks the close of a given quarter. We made $159 million of capital expenditures in the quarter, which includes investments in technology, data and analytics to support our strategic initiatives on the -- of oncology and biopharma services. As our business performed at a very high level, we were also able to return $1.1 billion of cash to our shareholders in the June quarter. This included $1 billion of share repurchases, pursuant to an accelerated share repurchase program, which resulted in an initial delivery of 4.3 million shares in the quarter. Additionally, we paid $69 million in dividends. We have $1.8 billion remaining on our share repurchase authorization, and we're updating our guidance for diluted weighted shares outstanding to range from $154 million to $156 million for fiscal 2022, which incorporates plans to repurchase an additional $1 billion of stock over the remainder of the fiscal year.
Let me transition and speak to our outlook for the balance of fiscal 2022. For a full list of fiscal 2022 assumptions, please refer to slide 16 through 19 in our supplemental slide presentation. I'll begin by reiterating a couple of key macro level assumptions that underpin our fiscal 2022 outlook. We expect prescription and patient engagement volumes will demonstrate steady improvement from the levels at the end of our fiscal 2021 through the first half of our fiscal 2022 and returned to pre-COVID levels in the second half of our fiscal 2022. For fiscal 2022, our updated guidance for adjusted earnings per diluted share is a range of $19.80 to $20.40, up from our previous range of $18.85 to $19.45, approximately equally split between our first and second half of the fiscal year. Our updated outlook for adjusted earnings per diluted share reflects 15% to 18.5% growth from the prior year, and our guidance assumes core growth across all of our segments. In the US Pharmaceutical segment, we now expect revenue to increase 5% to 8% and adjusted operating profit to deliver 4.5% to 7.5% growth over the prior year. Our US Pharmaceutical segment continues to exhibit stable fundamentals. Our outlook for branded pharmaceutical pricing remains consistent with the prior year from mid single-digit increases in fiscal 2022. And the generics market remains competitive yet stable as volumes have shown signs of recovery.
COVID-19 vaccine contribution contributed approximately $0.30 in the first quarter of fiscal 2022. We are updating our full year outlook to approximately $0.45 to $0.55. The $0.45 to $0.55 range reflects anticipated contribution of earnings for the fair value of services performed as the US government's centralized distributor of COVID-19 vaccines, including work preparing vaccines for international missions. Our current outlook remains aligned to the volume distribution schedule provided by the CDC and the US government, which excludes booster shots and vaccines for pediatrics, which have not been approved by the FDA. We will continue to invest in our leading and differentiated position in oncology. These investments will represent an approximate $0.20 headwind in fiscal 2022. Normalizing for the COVID-19 vaccine distribution and our ongoing growth investments, we continue to expect approximately 5% to 8% core adjusted operating profit growth. In our Prescription Technology Solutions segment, we see revenue growth of 20% to 25% and adjusted operating profit growth of 17% to 22%. This growth reflects the opportunities we see to accelerate service and transaction contributions benefiting from our technology platforms.
Now transitioning to Medical Surgical. We continue to partner with the US government under our contract for the kitting and distribution of ancillary supplies, and are updating our outlook to $0.35 to $0.45 of contribution in the segment related to kitting and distribution. This program's scope and duration is evolving, and our updated assumptions reflects the current outlook provided by the US government. Our revenue outlook assumes a 3% decline to 3% growth, and adjusted operating profit to deliver 6% to 12% growth over the prior year. We continue to expect year-over-year core adjusted operating profit growth of approximately 10% to 16%. Finally, in the International segment, our revenue guidance was a 1% decline to 4% growth as compared to the prior year. And as a reminder, this reflects the contribution of our German wholesale business to a joint venture with Walgreens Boots Alliance. For adjusted operating profit, our guidance has growth in the segment of 26% to 30% due to the previously mentioned benefit from the discontinuation of depreciation and amortization, which followed the announcement of our agreement to sell certain European assets. Our strong performance in the first quarter and the contribution from COVID-19 vaccine distribution in the segment.
Turning now to the consolidated view. Our guidance assumes 4% to 7% revenue growth and 7% to 10% adjusted operating profit growth compared to fiscal 2021. And we continue to expect corporate expenses in the range of $670 million to $720 million. Let me now turn to cash flow and capital deployment. We were pleased to recently announce the completion of a cash-funded upsized tender offer. This successful tender offer resulted in the early retirement of $922 million of our outstanding debt. Additionally, we announced the early retirement of a 600 million note for a total reduction in debt of approximately $1.6 billion. These actions occurred during the beginning of our second quarter. It further strengthened our balance sheet and financial position and they are in line with our previously stated intent to modestly delever. And as a result of these actions, we're updating our interest expense guidance for fiscal 2022 to $180 million to $200 million. We're also reiterating our free cash flow guidance of approximately $3.5 billion to $3.9 billion, which is net of property acquisitions and capitalized software expenses.
Last quarter, I mentioned that we anticipated a use of cash to purchase shares in McKesson, Europe through exercises of a put rate option available to non-controlling shareholders that expired in June of fiscal 2022. The remaining put rate options resulted in payments of approximately $1 billion in the quarter, which was generally in line with our expectations. As a reminder, this is reflected in the financing activity section of our cash flow statement. As a result of this activity, McKesson holds approximately 95% of McKesson Europe's outstanding common shares, and we anticipate income attributable to non-controlling interest in the range of $175 million to $195 million in fiscal 2022. Our commitment to return cash to shareholders through dividends and share repurchases was recently highlighted by our Board's approval of a 12% increase to our quarterly dividend to $0.47 per share. And our fiscal 2022 guidance continues to include share repurchases of approximately $2 billion for the full year. In closing, we're pleased with the strong results of our first quarter. We remain focused on driving growth as we invest against the strategic high-growth opportunities in oncology and biopharma services. This focus, combined with our commitment to further evolve the portfolio, will drive significant value to our customers, shareholders and patients. Our outlook for fiscal 2022 reflects this focus and execution with healthy adjusted operating profit and adjusted earnings per share growth and return of capital to our shareholders.
And with that, Holly, let me turn it back to you for Q&A.
