McKesson Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 1, 2022

There are 12 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to McKesson's Third Quarter Fiscal 2022 Earnings Conference Call. Please be advised today's conference is being recorded. At this time, I'd like to turn the call over to Rachel Rodriguez, VP of Investor Relations. Please go ahead.

Speaker 1

Thank you, Keith. Good afternoon, and welcome, everyone, to McKesson's Q3 fiscal 2022 earnings call. Today, I'm joined by Brian Tyler, our Chief Executive Officer and Britt Vitilone, our Chief Financial Officer. Brian will lead off, followed by Britt, and then we will move to a question and answer session. Today's discussion will include forward looking statements, such as forecasts about McKesson's operations and future results.

Speaker 1

Please refer to the cautionary statements in today's earnings release and presentation slides available on our website at investor. Mckesson.com and the Risk Factors section of our periodic SEC filings for additional information concerning risk factors that could cause our actual results to materially differ from those in our forward looking statements. Information about non GAAP financial measures that we will discuss during this webcast, including a reconciliation of these measures to GAAP results, can be found in today's earnings release and presentation slides. The presentation slides also include a summary of our results for the quarter and updated guidance assumptions. With that, let me turn it over to Brian.

Speaker 2

Thank you, Rachel, and Thank you, everyone, for joining us on our call today. Today, we reported Q3 fiscal 2022 results, another quarter with double digit adjusted operating profit growth in all four segments, reflecting strength in the fundamentals across our businesses. Our focus and execution against our company priorities positions us to consistently generate strong financial results despite fluidity we continue to see in the macroeconomic environment. Before I discuss the business performance, I would like to just quickly remind everyone of our company priorities. We have been sharing with you our strategic transformation to a diversified healthcare services company centered around a set of 4 enterprise priorities.

Speaker 2

We believe the execution against these priorities is critical to our ability to generate long term sustainable growth, and we want to reiterate our focus and commitment to each one of them. Our first priority is our people, our teams and our culture. Through our diversified portfolio of assets and operations, we as a company touch and impact many aspects of health and the healthcare system, including patients. Embedded in our daily operations is our purpose, advancing health outcomes for all and our mission of building an impact driven organization. We have been focused on enabling change in 3 areas: Improving access to healthcare, advancing health equity and protecting our environment.

Speaker 2

In the past year, our employees came together and shared 1500 volunteer hours and supported nearly 1500 charities. I couldn't be more proud of what we have achieved so far and I'm Confident in our ability to build a brighter future that in fact offers greater health outcomes for all.

Speaker 1

Part of

Speaker 2

our focus on culture is our continued improvement in diversity and inclusion. We put a particular focus on hiring, developing and promoting what we call a best talent strategy at McKesson. Recently, we were recognized as one of the best places to work for LGBTQ of quality, the 9th year in a row we've received this honor. Our commitment to diversity and refreshment includes our Board of Directors. In January, we welcomed James Hinton and Kathleen Wilson Thompson as new independent directors to our Board of Directors.

Speaker 2

Both James and Kathleen have served in multiple senior leadership roles within the healthcare industry. Currently, Jim serves as an Creating partner for the private equity firm, Welsh, Carson, Anderson and Stone. And prior to that, he held the role of Chief Executive Officer at Baylor Scott and White Health. And Kathleen most recently held the role of Executive Vice President and Global Chief Human Resource Officer at Walgreens Boots Alliance, where she led the human capital strategy, including merger integration and HR transformation through digitization. Their decades of healthcare experience and proven record leading complicated organizations in executive leadership roles will be instrumental to McKesson, and we are excited to welcome them to our Board.

Speaker 2

Additionally, we announced today that Don Knauss Has been elected as the next Independent Chairman of our Board, which will go into effect on April 1, following a planned transition led by our current Independent Chair, Edward Miller. I want to thank Ed for his years of steady leadership and invaluable contributions as the independent Chair of McKesson's Board of Directors. And I also want to welcome Don to his new role. He brings deep leadership expertise and shares McKesson's values, culture, strategy and vision, including his commitment to Board diversity. We look forward to his leadership and stewardship.

Speaker 2

Our next priority is to drive sustainable growth in our core pharmaceutical and medical distribution businesses. We have a vast scale distribution network in global supply chain management, which have been a critical and foundational part of our long history. We're proud of our operational excellence and our ability to capture efficiency and deliver consistent and high quality service to our customers while optimizing operating margin. Building off of this core capability, we've been very successful in expanding into new product categories and new adjacent markets like our lab solutions and our government partnership strategies. Our scaled assets and capabilities also enable us to play an integral role in the response to the COVID-nineteen pandemic.

Speaker 2

We're proud to serve as the centralized distributor of vaccines and ancillary supplies for the U. S. Government. We have also been working closely with our partners, suppliers and manufacturers to navigate the complex These relationships have allowed us to continue to provide stability of supply and low cost for our customers. And as a result, we have been able to manage through some of the challenges that the market has been seeing.

Speaker 2

Our third priority is to streamline the business, which includes initiatives like the split off of Change Healthcare and our strategic intent to fully exit the European region. We recently announced the sale of our Austrian business, which was completed on January 31, and we have agreements to sell 10 of 12 countries where we operate. As a reminder, Norway and Denmark remain the only countries that we have not entered into an agreement to sell. We continue to work towards the closing of the other pending divestitures. These transactions are the result of our intentional effort to evaluate and Oncology and Biopharma Services.

Speaker 2

Over the past few years, we set out to accelerate the growth in these two areas and build out what we refer to as ecosystems. As we shared at our Investor Day in December, these are both large and growing markets that have with the goal to bring efficiency and benefits to all stakeholders across these ecosystems. In the oncology ecosystem, our growth strategy is centered around Our support for the large growing and diversified U. S. Oncology network.

Speaker 2

With the reach of over 1400 physicians, the U. S. Oncology network treats 15% of all new cancer patients in the U. S. At one of its 500 sites of service.

Speaker 2

1 of the U. S. Oncology network's important initiatives is its participation in the oncology care model, which is a 5 year experimental payment model with the goal of bringing down the cost of cancer. Based on the latest results, the U. S.

Speaker 2

Oncology network practices participating in the program achieved high marks on quality metrics and provided significant cost savings to Medicare. By representing approximately 1 fourth of all providers participating in the program, the U. S. Oncology Network demonstrated its leadership role in transitioning healthcare to a more value based approach. Building upon our deep reach in the community oncology space, we're creating an oncology ecosystem with multifaceted service offerings that are all interconnected.

Speaker 2

At the center of this connectivity is ONTADA, an oncology, technology and insights business dedicated to help advance cancer research and advanced patient care. We recently highlighted this business at our Investor Day. Since its launch in December of 2020, The team has made great progress transforming ideas into realities. ONTADA signed 2 agreements with strategic partners to improve patient outcome and quality of patient care, and it was instrumental in the launch of the My Lung Consortium, which through real world research and study provides clinical information to improve the patient's journey. Within our biopharma ecosystem, we've built a set of differentiated assets and capabilities including businesses like RelayHealth Pharmacy, CoverMyMeds and Rx Crossroads.

Speaker 2

They're combined under the prescription solutions business with a shared goal to improve access, adherence and affordability of medicines. 1 of the key customers of our business is biopharma companies. Through our scaled and interconnected technology network, we provide biopharma a range of commercialization services. And by automating In simplifying the process of prior authorization, we reduced prescription abandonment and provide biopharma access to new patients. Our unique technology capabilities also generate insights into patients' needs and challenges, enabling greater ability to impact patient actions and get And we're connected to all the major insurance companies and most of the regional payers in the United States.

Speaker 2

The reach of our network is deep and broad, which which is why it's the foundation of our biopharma ecosystem and we are incredibly excited about the market opportunities it brings. Our progress with each of the company priorities has been truly outstanding and we see the strategies working. The strong conviction in these priorities will be our North Star as we seek to advance and win in the marketplaces as a diversified healthcare service company and to drive long term sustainable growth for our shareholders. Now before I turn to our Q3 results, I want to provide a brief update on the progress made for the broad resolution of governmental opioid related claims. To date, 46 states, all 5 U.

Speaker 2

Territories and Washington, D. C. Have joined the proposed settlement. The sign on period for political subdivisions in participating states to join the previous We announced proposed opioid settlement agreement ended on January 26. We have now entered into the evaluation period.

Speaker 2

The deadline for our decision is February 25, 2022. We continue to work with all parties to bring meaningful relief to affected communities and towards resolutions which will allow us to further focus on the strategic priorities of our business. Now let me get to the results. We're pleased to report a strong 3rd quarter with total company revenues of $68,600,000,000 and an adjusted earnings per diluted share of $6.15 ahead of our expectations. As a result of our performance in the underlying business and the contribution from COVID-nineteen related items, we are raising our adjusted earnings per diluted share guidance to $23.55 to $23.95 This is from the previous range of $22.35 to 22.95 of the nonlinear nature of the recovery from the pandemic.

Speaker 2

At the beginning of the quarter, volume and utilization Trends were recovering as COVID-nineteen cases continue to decline across the country. Although we expected a nonlinear recovery trend, The emergence in the spread of the Omicron variant in December was unexpected. Since then, we've been closely monitoring its impact. One thing we've learned in the past 2 years is the resilience of our business and our communities. Regardless of the trajectory of the pandemic, we're confident about our ability to adjust and adapt to support our customers and their patients in these challenging times.

Speaker 2

Let's turn to the U. S. Pharmaceuticals segment. US Pharmaceutical segment saw 12% adjusted operating profit growth, which was underpinned by the contribution from COVID-nineteen vaccine distribution and increased specialty volume. Through the Q3 and into January, branded pharmaceutical pricing has tracked in line with our original expectations and consistent with our experience over the past several years.

Speaker 2

For generics, we continue to benefit from the success and strength of our sourcing operation with ClarusONE. We have not only the scale, but the procurement expertise to consistently source products at low cost while protecting the integrity and the safety of the supply chain. We are also proud of our role in supporting the U. S. Government's pandemic response effort as the vaccine and booster recommendations for various age groups continues to expand and evolve.

Speaker 2

Through January 31, Our U. S. Pharmaceutical business has successfully distributed over 370,000,000 Moderna and Johnson and Johnson COVID-nineteen vaccines to administration sites all across the United States and in support of the U. S. Government's international donation In January, the U.

Speaker 2

S. Government extended the existing COVID-nineteen vaccine distribution contract through July of 2022, which is roughly in line with the Q1 of our fiscal 2023. In prescription technology solutions, The segment had excellent momentum and delivered an 11% increase to segment adjusted operating profit in the 3rd quarter. As I mentioned earlier, we offer a range of commercial services primarily to biopharma companies. And this quarter, the growth was led by 3rd party logistics Services and our access, adherence and affordability solutions, including our access for more patients product.

Speaker 2

This segment aligns with our focus on developing the biopharma services ecosystem. The market that we're focused on presents Many exciting opportunities and we estimate the total addressable market to be around $15,000,000,000 with good growth potential and an attractive margin profile. We are pleased with the financial performance and expect to continue to drive growth and innovation for McKesson. In medical surgical, We are navigating a dynamic market while growing the business. With surging demand and a complex supply chain, our employees are working tirelessly to secure and deliver key products playing an important role in the fight against the pandemic.

Speaker 2

The dedicated team in MedSurg is the is the foundation to our business growth and we continue to invest to ensure operational continuity and excellence. As it relates to our International segment, We continue to benefit from COVID-nineteen related programs in our European operations in Canada. Through December, we've distributed over 81,000,000 vaccines to administration sites In select markets across our international geographies. As we look forward to fiscal 2023, I am most excited about progress on the 4 company priorities. Since the rollout of these multi year strategic initiatives in our fiscal 2019, we have been very focused on execution, Making impact and delivering results.

Speaker 2

While the pandemic continues to present unknowns, what is certain is that We continue to focus on the things that matter most, most to our customers, to our patients, to our employees and to our shareholders. In closing, we continue to be excited about our future growth As we meet the opportunity as a diversified healthcare services company, we have unique and differentiated assets in oncology and biopharma services with Unmatched scale and connectivity and we're strategically positioned to win in these growing markets. And lastly, before I conclude, I We share a mission to improve healthcare in every setting and that will be achieved only with the dedication and the commitment from our people and for the opportunity to work alongside this amazing team, I continue to be humbled and deeply grateful. Thank you for your time this afternoon. Britt, I

Speaker 3

will toss it to you. Thank you, Brian, and good afternoon, everyone. I am pleased to be here today to discuss our fiscal 3rd quarter results, which reflect another quarter of strong performance across the business, driven by operational execution against our growth strategies. In the Q3, we delivered overall growth compared to the prior year results across each of our segments, including growth over the prior year when Let me start with an update on Europe. We remain committed to fully exit the European region And the progress of our exit activities are on track.

Speaker 3

Today, we announced that the transactions to sell our Austrian business to Quadrifolia Management and the sale of McKesson's remaining share of our German joint ventures to Walgreens Boots Alliance closed on January 31, 2022. The assets involved in the Austrian transaction contributed approximately $1,500,000,000 in revenue $50,000,000 in adjusted operating profit in fiscal 2021. The earnings related to our German joint venture were immaterial. Next, pursuant to the satisfaction With customary closing conditions, including receipt of regulatory approvals, we anticipate the pending divestiture to sell McKesson's U. K.

Speaker 3

Retail and distribution will close in the Q4 of fiscal 2022 and the transaction to sell certain European assets to the Phoenix Group will close in the first half of fiscal twenty twenty three. The net assets included in these transactions are classified as held for sale. Our fiscal 2022 guidance includes approximately $0.49 of adjusted earnings per diluted share accretion related to these pending transactions, which is recorded within our international segment. This $0.49 of accretion resulting from the held for sale accounting will conclude once each transaction is closed. For fiscal 2023, we currently anticipate approximately $0.10 of adjusted earnings per diluted share accretion related to the held for sale accounting based on the current estimated close date for the Phoenix Group transaction.

Speaker 3

Norway and Denmark remain the only countries We have not entered into an agreement to sell. As previously discussed, we anticipate we will deploy capital to offset dilution resulting from all European divestitures, principally through share repurchases. Before I provide more details on our 3rd quarter adjusted I want to point out one additional item that impacted our GAAP only results in the quarter. We reported a GAAP only after tax Charge of $829,000,000 related to the sale of retail and distribution businesses in the UK. To account for the remeasurement of the net assets to the lower carrying amount or fair value, less cost to sell.

Speaker 3

These charges were largely driven by declines in the British pound sterling. Moving now to our adjusted results for the 3rd quarter, beginning with our consolidated results, which can be found on slide 7. As discussed at our Investor Day event in December, We manage the business for the long term and our financial and strategic framework is focused on shareholder value creation. Our financial framework combines 3 key elements to generate sustainable adjusted EPS growth, organic growth, operating leverage And capital allocation. This framework is once again demonstrated by our strong Q3 fiscal 2022 results.

Speaker 3

Additionally, our leadership supporting the U. S. Government's COVID-nineteen domestic and international vaccine and kitting efforts continues to contribute to growth and the momentum we have built across the business. 3rd quarter adjusted earnings per diluted share was 6.15 COVID-nineteen related items, which include the contribution from COVID-nineteen vaccine distribution, kitting and storage programs COVID-nineteen tests in fiscal 2021 impairments for personal protective equipment and related products and a lower share count. Consolidated revenues of $68,600,000,000 increased 10% above the prior year, primarily driven by growth in the U.

Speaker 3

S. Pharmaceuticals segment, largely due to higher volumes from our retail national account customers and branded pharmaceutical price increases, which were in line with our initial guidance, partially offset by branded to generic conversions. Adjusted gross profit was $3,400,000,000 for the quarter, an increase of 8% compared to the prior year, which benefited Adjusted operating expenses in the quarter increased 1% year over year. Excluding the impact of held for sale accounting On announced divestitures in the international segment, adjusted operating expenses increased 2% year over year. Adjusted operating profit was $1,300,000,000 for the quarter, an increase of 19% compared to the prior year, led by strong operational performance Moving below the line, interest expense was $41,000,000 in the quarter, an improvement of 25% compared to the prior year.

Speaker 3

Our adjusted tax rate was 19.6% for the quarter and wrapping up our consolidated results, 3rd quarter diluted weighted average shares were $153,500,000 a decrease of 5% year over year. Moving now to our 3rd quarter segment results, which can be found on slides 8 through 13, starting with U. S. Pharmaceutical. Revenues were $55,000,000,000 an increase of 11% year over year, driven by higher volumes from our retail national account customers and branded pharmaceutical price increases, partially offset by branded to generic conversions.

Speaker 3

Adjusted operating profit increased 12% to $735,000,000 driven by the contribution from COVID-nineteen vaccine distribution and growth The contribution from our contract with the U. S. Government with Distribution of COVID-nineteen vaccines provided a benefit of approximately $0.26 per share in the quarter, which was in line with our expectations. In the prescription technology solutions segment, revenues were $1,000,000,000 an increase of 33%, driven by higher volume growth related to biopharma services, including third party logistics services and increased technology service revenue, partially resulting from the growth of prescription volumes. Adjusted operating profit increased 11% to $145,000,000 driven by growth from Access and Terrance Solutions.

Speaker 3

We continue to experience growth across our broad spectrum, higher margin capabilities and offerings in this segment. We are pleased with the increased transaction volumes related to our access interference solutions and the increasing number of brands that joined our platforms this year. We also experienced increased volumes in our logistics and hub services due to the continued recovery of prescription volumes. Moving now to Medical Surgical Solutions. Revenues were $3,100,000,000 an increase of 1% driven by growth in the primary care business and the contribution from hitting storage and distribution of ancillary supplies for COVID-nineteen vaccines, partially offset by lower revenue from COVID-nineteen tests in our primary care and extended care businesses as compared to the prior year.

Speaker 3

Adjusted operating profit increased 18% to $330,000,000 driven by the contribution from kitting, storage and distribution of ancillary supplies The U. S. Government's COVID-nineteen vaccine program, the prior year impact of an inventory impairment charge related to PPE that incurred in the Q3 of fiscal 2021 and growth in the primary care business. The contribution from our contract with the U. S.

Speaker 3

Government related to the kitting, distribution and storage of ancillary supplies for COVID-nineteen vaccines provided a benefit of approximately $0.31 per share in the quarter, which was above our original expectations. Next, let me address our international results. Revenues in the quarter were $9,500,000,000 an increase of 2% driven by new customer growth in our Canadian business and volume increases in the pharmaceutical distribution and retail businesses across the segment, which were partially offset by the contribution of McKesson's German wholesale business to a joint venture with Walgreens Boots Alliance. On an FX adjusted basis, adjusted operating profit increased 41 percent to $223,000,000 driven by the reduction as Compared to the prior year of depreciation and amortization on certain European assets classified as held for sale. The distribution of COVID-nineteen vaccines and tests in Europe and strong distribution results in our Canadian business.

Speaker 3

The held for sale accounting in the international segment contributed $0.18 to adjusted earnings in the quarter. Moving on to corporate. Adjusted corporate expenses were $159,000,000 an increase of 1% year over year. We incurred opioid related litigation expenses of $33,000,000 for the 3rd quarter and we anticipate that fiscal 20 22 opioid related litigation expenses will be approximately $135,000,000 Let Let me now turn to our cash position, which can be found on slide 14. We ended the quarter with a cash balance of $2,800,000,000 For the 1st 9 months of Fiscal year, we generated free cash flow of $1,200,000,000 Year to date, we made $380,000,000 of capital expenditures, which included investments to support our strategic pillars of oncology and biopharma services.

Speaker 3

For the 1st 9 months of the fiscal year, We returned $2,200,000,000 of cash to our shareholders, which included $2,000,000,000 of share repurchases and the payment of $206,000,000 in dividends. At our Investor Day event in December, we announced that our Board of Directors approved an increase of $4,000,000,000 to our existing share repurchase program. At the end of our Q3, dollars 4,800,000,000 remains on our share repurchase authorization. With this increased authorization, The completed sales of the Austrian business and remaining share in the German joint venture and the anticipated fiscal 4th quarter closure of the sale of the U. K.

Speaker 3

Business. We anticipate executing share repurchases of up to $1,500,000,000 in the 4th quarter. As a result, we now anticipate returning approximately $3,500,000,000 to shareholders through share repurchases in fiscal 2022. Our strong operating performance combined with our return of capital to shareholders reinforces our commitment to driving shareholder value. Let me transition and speak to our outlook for the remainder of fiscal 2022.

Speaker 3

A full list of our fiscal 2022 assumptions can be found on Slide 16 through 18. We continue to anticipate a full recovery of prescription volumes. However, the persistence of COVID-nineteen and its variants such as Omicron is leading to a non linear trajectory. In the U. S.

Speaker 3

Pharmaceuticals segment, we anticipate revenue to increase 8% to 11% and adjusted operating profit delivered 8% to 10% growth over the prior year. We continue to see stable fundamentals in our U. S. Pharmaceutical business. Specifically, Our outlook for branded pharmaceutical pricing of mid single digits increases in fiscal 2022 remains consistent with both our original guidance and prior year.

Speaker 3

And our view of the generics environment remains competitive yet stable. Our guidance remains aligned to the volume distribution schedule provided by the CDC and U. S. Government and includes the contribution related to our role as a centralized distributor to the US government's COVID-nineteen vaccine distribution program. We'll continue to update you on the progress and contribution from this program.

Speaker 3

When excluding COVID-nineteen vaccine distribution in this segment, we anticipate approximately 3% to 6% adjusted operating profit growth. And as a reminder, our investments in our leading and differentiated position in oncology will continue to represent an approximate $0.20 headwind in fiscal 2022. In our Prescription Technology Solutions segment, we anticipate revenue growth 32% to 36% and adjusted operating profit growth of 24% to 28%. This growth reflects the strong momentum in the business as we project increased volumes across new and existing biopharma solutions and customers. Transitioning to Medical Surgical, our outlook assumes 15% to 19% revenue growth and adjusted operating profit Growth 51% to 55% over the prior year.

Speaker 3

Our outlook includes $0.85 to 1.05 related to the contribution from the U. S. Government's distribution of ancillary supply kits and storage programs and $0.75 to $0.95 related to the net impact of COVID-nineteen tests and PPE impairments and related products. When excluding the impacts of these items in this segment, we anticipate 22% to 26% growth over the prior year. One additional reminder related to our U.

Speaker 3

S. Distribution businesses. On our earnings call in November, we discussed the highly continued service continuity through the second half of our fiscal year. Based on labor market trends experienced in the 3rd quarter and our expectations for remainder of the fiscal year, we continue to anticipate approximately $0.10 to $0.20 of adjusted operating expense impact In our U. S.

Speaker 3

Distribution businesses in the second half of the year weighted slightly higher in our medical segment. Finally, in the International segment, our revenue guidance is 2% decline to 1% growth as compared to the prior year. And as a reminder, this reflects the impact from the contribution of our German wholesale business to a joint venture with Walgreens Boots Alliance in the Q3 of fiscal 2021. For adjusted operating profit, our guidance reflects growth in the segment of 43% to 47%. This includes approximately $0.49 of adjusted earnings accretion in fiscal 2022 resulting from held for sale accounting related to our agreement to sell certain European assets.

Speaker 3

Turning now to the consolidated view. Our increased guidance assumes 8% to 11% revenue growth and 24% to 27% adjusted operating profit growth compared to fiscal 2021. Our full year adjusted effective tax rate guidance of 18% to 19% remains unchanged and we anticipate corporate expenses in the range of $570,000,000 to $620,000,000 an improvement from the previous range of $610,000,000 to $660,000,000 related to our focus on operating leverage, which we highlighted at our recent Investor Day event. Let me now turn to cash flow and capital deployment. We expect our businesses to continue to drive strong free cash flows and returns on capital, even as we continue reinvesting to support sustainable long term growth.

Speaker 3

This strong free cash flow generation provides financial flexibility to execute a balanced capital allocation approach, including investing in our strategic growth pillars of oncology and biopharma services, while remaining committed to returning capital to shareholders through our growing dividend and share repurchases. Our investment grade credit rating remains a priority and it underpins our financial flexibility. For fiscal 2022, we continue to Free cash flow of approximately $3,500,000,000 to $3,900,000,000 which is net of property acquisitions and capitalized software expenses. As a reminder, historically, we generate a larger portion of our cash flows in the Q4 of our fiscal year. Our working capital metrics and resulting cash flows vary from quarter to quarter, impacted by timing, which could include the timing of planned European divestiture We also now anticipate diluted weighted shares outstanding to range from 154,000,000 to 100 $55,000,000 for fiscal 2022.

Speaker 3

This includes the impact of the anticipated $1,500,000,000 of 4th quarter Share repurchases mentioned earlier. As a result of our strong year to date performance and our outlook for the remainder of the fiscal year, We are raising and narrowing our previous adjusted earnings per share guidance range to $23.55 to $23.95 which is above our previous range of $22.35 to $22.95 Our updated outlook for adjusted earnings per diluted share reflects 37% to 39% growth compared to the prior year. Fiscal 2022 adjusted earnings per diluted share Guidance also includes $2.99 to $3.59 of contribution attributable to the following items: $0.90 to $1.10 related to the U. S. Government's COVID-nineteen vaccine distribution, dollars 0.85 to 1 $0.05 related to the kitting, storage and distribution of ancillary supplies, dollars 0.75 to $0.95 related to COVID-nineteen tests and the fiscal 2021 impairments for PPE and related products, which is an increase from the previous range of $0.50 to $0.75 and approximately $0.49 From gains and losses associated with McKesson Venture's equity investments, which are within our corporate segment.

Speaker 3

Excluding the impacts of these items from both fiscal 2022 guidance and fiscal 2021 results, this indicates 27% to 33 When you pull it all together, our strong performance and our outlook equates to an adjusted earnings per diluted share guidance increase of $1.10 compared to our previous fiscal 2022 outlook provided at Investor Day. The $1.10 adjusted earnings per diluted share increase includes the following: approximately $0.45 driven by strong underlying business performance and operating leverage, approximately 0 point $0.22 related to held for sale accounting and reduced opioid litigation expenses and approximately $0.20 related to NCI interest expense And lower weighted average shares outstanding. Let me spend just a minute providing some initial thoughts on fiscal 2023. I want to point out that we are not providing fiscal 2023 guidance at this time. However, I thought it would be instructive to walk Some of the items that could impact fiscal 2023 as we sit here today.

Speaker 3

First, the COVID-nineteen Pandemic continues to present many unknowns. We continue to expect a full recovery. However, it is likely to continue to be nonlinear into fiscal 2023 and it could impact the quarterly cadence. In the U. S.

Speaker 3

Pharmaceutical and Medical Surgical Solutions segment, Our contracts with the U. S. Government to serve as a centralized distributor of COVID-nineteen vaccines and to assist with the kitting, storage and distribution of ancillary supplies are scheduled to expire in July of 2022. Outside of the contract with the U. S.

Speaker 3

Government for COVID-nineteen vaccine distribution, We anticipate normal customer renewal activity in the U. S. Pharmaceuticals segment. As it relates to COVID-nineteen tests, We continue to anticipate that demand will be closely associated with the rate of COVID case levels and impact from variance will moderate from prior year levels. For the International segment, we anticipate $0.10 of adjusted earnings per diluted share accretion in the first Half of fiscal 2023 related to the held for sale accounting based on the current estimated close date for the Phoenix Group transaction.

Speaker 3

We will no longer report revenue, adjusted operating profit or held for sale accounting benefits related to these transactions once the transactions close. We anticipate that opioid litigation expenses will remain relatively in line with our fiscal 2022 guidance Until we have a completed assessment of government entity participation in the proposed settlement and a final determination regarding that We'll continue to update you on the outcome of that determination and remaining opioid litigation expenses. We anticipate further investments to support the growth of our 2 key strategies of oncology and biopharma services. Overall, we continue to see We will share more details with you about our fiscal 2023 outlook and our 4th quarter earnings call in May. In closing, we are pleased with the results of our fiscal Q3 and we have a strong financial outlook.

Speaker 3

McKesson continues to deliver strong results as we successfully execute against our strategic and financial framework. We continue to focus on the things that matter most to Our customers, patients and shareholders as a diversified healthcare services company. I want to thank you and thank all of our employees for all their hard work and dedication. Now I will turn the call over to the operator for your questions.

Speaker 2

Thank

Operator

Our first question will come from Eric Percher with Nephron Research.

Speaker 4

Thank you and appreciate the commentary on fiscal year 'twenty three at this point. One thing I want to 0 in on relative to the EU, So you'll remove most of the factors, dollars 0.10 of benefit continuing to flow through. As you speak to offsetting with repurchase, is that part of what the repo that you suggested for Q4 is getting in front of? And do you expect you'll be how will you judge that? Will you judge it over the full fiscal year given that the timing is still variable?

Speaker 3

Thanks, Eric, for that question. As I talked about in my remarks, we do anticipate The Austrian transaction, the German transaction, which have already closed, we anticipate that the UK transaction We'll also close in the Q4. So consistent with our comments, we do intend to offset the dilution and that is one of the reasons why we intended to do some 4th quarter share repurchases. We will continue to apply the principles of our share repurchase activity And certainly we'll look at cash that is in excess of what we need to operate the business as well as Other opportunities that we have to deploy that capital, whether that be additional share repurchases for our shareholders or if we have M and A transaction. So certainly, we told you we would offset the dilution.

Speaker 3

We're closing transactions now and anticipate more in the Q4. And So that was one of the reasons why we wanted to begin the share repurchase activity in addition to being very consistent with our share repurchase principles.

Speaker 1

Next question please.

Operator

And our next will be from Lisa Gill with JPMorgan.

Speaker 5

Thanks very much. Good afternoon and thanks for all the detail. Britt, I just want to go back and talk about inflation. You talked a little bit about labor and I know you and Brian talked last Quarter about some special bonuses and increasing wages. But how do we think about wages going forward as we continue to have wage inflation And then secondly, as we think about product inflation or transportation, I know generally speaking it's a pass through on the Pharmaceutical side of things, but how do we think about any PPE on your medical side of your business?

Speaker 3

Lisa, thanks for that question. Maybe I'll just step back for a minute and just address labor and inflation separately and Maybe just start with inflation. Our business model has a normal component that's built into it that relates to pricing. You have a model like we do that's founded on both supply and service stability and consistency that solves problems in a better way for customers and patients We're able to incorporate some of these higher input costs through pricing. Our organization, as Brian has talked about, Continues to do really a tremendous job on productivity efforts, and those productivity efforts enable us to offset some of this cost.

Speaker 3

And then of course there is a pricing component. And just finally, we have an organization of really smart people that are continuously working to Find better solutions, greater efficiencies in leveraging the scale and the product expertise that we have to provide quality and reliability That our customers have come to expect from McKesson. So that's maybe just answering some of the questions on the inflation front. On the labor front, Brian has talked about talent being one of our key components of our strategy and it will remain that. And of course, this is a very challenging Market, we're seeing pressures in the labor market.

Speaker 3

And so we've talked about the fact that we expect some of these labor pressures to find their way into operating In the second half of the year, dollars 0.10 to $0.20 We've not guided beyond FY 'twenty two. We'll obviously If we think that those costs are going to be sustained in any way at this point, we just see a $0.10 to $0.20 impact in our U. S. Distribution businesses in the second half and what we've seen so far in the Q3, it's tracking right in line with that.

Speaker 2

We'll stay on top of Market will be responsive to it. We've got a lot of confidence in our team's ability to adjust. And we actually think we've got an Asset in terms of the company culture, our purpose, our mission, the investments we make in our teams. We

Operator

And next will be Charles Rhyee with Cowen. Please go ahead.

Speaker 6

Yes. Hey, thanks for taking the question. Britt, You talked earlier in your prepared comments about in the Pharma Technology Solutions segment about Access to medications and you highlighted a couple of businesses. You mentioned a $15,000,000,000 market opportunity here. Maybe if you can just give us a little more details around sort of your position in the market, in this part of the market particularly, and what is the Competitive landscape and do you see an opportunity here for McKesson to consolidate this industry?

Speaker 2

Thank you for the question. I think you addressed it to Britt, but I'll jump in and start with my thoughts. I mean, So this we think we're extremely well positioned in this marketplace. And one of the things when we're anchoring our growth strategies, we try The anchor around is making sure we have differentiation, that we have things that are difficult to replicate. And the reason we've brought these businesses Together as a segment is because we think individually they all had their strengths and were winning in their market, but collectively together, Accessing the reach of our network, utilizing the advanced technologies we have in CoverMyMeds and The clinical expertise and the biopharma relationships we had in Rx Crossroads that they kind of reinforce and compound each other.

Speaker 2

So when we think about the access is a distinct market, adherence is a distinct market, a better solution for a market that existed. That's sort of what we did with AMP. We brought an infusion of technology to really redesign and Greatly enhanced the value we deliver to manufacturers, giving us what we think is significant competitive advantage. We will continue to do those kinds of innovations as we grow into I mean it is a pretty fragmented landscape. There are some competitors' names you know.

Speaker 2

There's frankly lots of little ones. This is an area that we would like to use the strength of our balance sheet to be acquisitive, to be additive to that ecosystem through additional capability or additional scale As long as we find that strategically aligned asset and it can meet our financial hurdles and stand up well to other means we have to deploy capital, we will certainly look to execute

Speaker 1

Matt? Next question please.

Operator

And the next one will be from Jalinder Singh with Credit Suisse. Please go ahead.

Speaker 7

Thank you and hello everyone. So with respect to $0.45 core business outperformance you called out, This is now captured in your fiscal 2022 outlook. How do you think about the sustainability of some of those drivers behind that outperformance? And related to that, how should we think about the fiscal 'twenty two baseline EPS of $17.50 to $18 a share that you have invested in?

Speaker 3

Let me take those in 2 pieces. We're pleased with another quarter of strong operating performance and obviously you saw growth Across each of our segments. So as we look at the outlook for the remainder of the year, we expect that the momentum in our business is going to continue. We haven't provided any guidance as it relates to FY 'twenty three, but at our Investor Day, we did provide long term targets where we Suggested and felt very confident that we'll continue to see growth in each of those segments for the long term. So we feel Very good about the performance that we're seeing in our business and consistent with our Investor Day, we expect that to continue.

Speaker 3

So I think that is really the point that you should see here is just continued strong performance for several years now across all of our segments. The fundamentals of our businesses are strong. We're investing in these businesses for future growth and we're In markets that we think are going to continue to grow and we're in very good positions to take advantage of that with some differentiated capabilities.

Speaker 1

Next question please.

Operator

And next will be Michael Cherny

Speaker 2

with Bank of America.

Speaker 3

Afternoon and thanks for all

Speaker 8

the color so far. I want to talk a little bit about the U. S. Pharma segment. As you think about into next year and thinking more Qualitatively as much as anything else, but how do you think about outside of the COVID related script and volume recovery, the other moving pieces?

Speaker 8

You did comment on A normalized renewal year, so are there any things you're seeing that are big renewals and how do you think about the areas of growth that have remained steady maybe with Specialty and the potential for biosimilars and how that should factor into that long term growth trajectory and where that falls relative to 'twenty three broadly.

Speaker 3

Mike, thanks for the question. Maybe I'll start and then I'll let Brian jump in here. Again, as we think about it and some of the things that I mentioned here, We do expect a full recovery of prescription transaction volumes and we're certainly pleased that Transaction volumes have continued to increase throughout the year. It has not been in a straight line, but we do expect that full recovery To continue, we're very well positioned in specialty clinic space as well as oncology. We're making investments in those areas that we think are going to continue to pay off over the long term and biosimilars is one of those areas that given our position, particularly in oncology, We believe that it's going to be a growth driver for us over the long term.

Speaker 3

We're pleased with the development of biosimilars to this point. We think that they offer Better returns than branded and specialty products, not at the same level as generics from a margin perspective, But still we believe and are optimistic that they're going to continue to add value to the segment over time. So the position that we have, The strength that we have across segments, particularly our differentiated capabilities in oncology, positions us very well for further growth.

Speaker 1

Next question please.

Operator

And next will be Brian Tanquilut with Jefferies.

Speaker 9

Hey, good afternoon, guys. Congrats on the quarter. I guess, Britt, my question is, the Medical segment operating income raise was pretty significant even if you back Got it.

Speaker 2

COVID. Can you just dissect for us that outperformance and how should we be thinking about the sustainability of earnings in that segment past 2022?

Speaker 3

Yes. Thanks for the question, Brian. Maybe I'll just start just to remind you since fiscal 2019, this business has grown at 10% From an adjusted operating profit perspective, on the core basis outside of COVID programs. So we've seen strong growth in this business now for a number of years. It's one of our higher margin segments.

Speaker 3

We have very strong positions across The primary care segment of the business and across all alternate sites, our extended care business has grown nicely over time as well. We've added a lot of capabilities and investment over time, whether that be acquisitions to position us well in lab. We've seen private brand be an important component and we've seen growth in Rx as well. So we've got a lot of capabilities across the entire alternate site. We've invested in these capabilities over time.

Speaker 3

It's positioned us well, Not only from a core perspective, but certainly now as COVID has taken on, we've been in a really good position to handle the kitting and the storage programs as well.

Speaker 1

Next question please.

Operator

And next will be Ricky Goldwasser with Morgan Stanley.

Speaker 10

Yes. Hi. Good evening and thanks for very comprehensive details. So Two follow ups here. One, just to clarify, as you think about 2023, should we assume that all the buyback activity is going to be Offsetting the dilution from the European divestitures?

Speaker 10

That's the first. And then secondly, as we think about the COVID impact, I mean, Clearly, nice contribution in the last couple of years. How do you think the economics of vaccine and testing Will evolve as sort of COVID becomes more of an annuity. Should we think about it as flu type economics?

Speaker 3

Ricky, let me take the first one and then I'll let Brian comment on the second, just because it's more mechanical question. As I mentioned in my comments, we do expect to offset any dilution from the European divestitures through capital And that could be share repurchase activity like we're doing in the Q4. So just to reaffirm that we will be We do plan on offsetting that dilution.

Speaker 2

Ricky, relative to, I guess, let's call it the future of Testing, that's a little bit, I think, difficult to forecast. A lot of it will depend on the science, the development. A lot of it will depend on Does the current testing hold up to current and future potential variance? What will be the mix between in a medical setting versus over the counter, do those become more reliable? I think there's a lot of questions that still have to resolve What I would say though is that regardless of how that evolves, we think McKesson is in an excellent position to capitalize on that.

Speaker 2

We are currently The largest distributor, we distribute more flu vaccine than anyone. We have a great franchise in the physician alternate site setting. We distribute to pharmacies because of our presence in the communities in both our medical and pharmaceutical business, Our relationships with the labs and I think the real credibility we've built up over the last couple of years, I think we're extremely well positioned to capture that opportunity however it unfolds.

Speaker 1

We have time for one more question.

Operator

Most certainly. This question will come from Steve Letty with Barclays.

Speaker 11

Thanks. Good afternoon. I also had a question just around the your comment around the Normal customer renewal activity in fiscal 'twenty three. I guess I just wanted to make sure and confirm the messaging around that. So I guess first, can you remind us how customer renewal activity and any related pricing step downs trended for fiscal 2022?

Speaker 11

And thus, if that activity is going to be normal in 'twenty three, is that net positive, net negative or net neutral as you think about the how all that flows year over year? Hopefully that question makes sense. Thanks.

Speaker 3

Yes. Thanks, Steve. That's a good question. I'm happy to answer that Yes, I'm happy to clarify. When I speak of normal, what I mean by that is in any year, we typically see about a third of our As we have seen over the last few years, there have been no Material impacts to that.

Speaker 3

Certainly, we've been able to renew all of our customers successfully within our guidance. I would not anticipate that we would see anything material from our renewal next year. It's early, obviously, if there's Update to that information will provide it on our May earnings call. But normal, what I was referring to is that about a third of our book renews every year. We would not anticipate anything that would be a material driver from that activity.

Speaker 2

Great. Well, thanks again everyone for joining us on this call and thank you for the insightful and the very thoughtful questions. Keith, thank you for help facilitating the call. I want to just conclude by reiterating McKesson executed Really well in the Q3 with double digit adjusted operating profit growth in all segments. I continue to be excited About the focus on our company priorities and the contributions we can see that making the strong financial results.

Speaker 2

It's really the driver between the driver of our shareholder value creation. So none of that happens without the team that makes up McKesson. So To everyone in McKesson, no matter what your role, no matter what geography you work in, whether you're on the front line or elsewhere in the business, I'm so appreciative of their hard work, their dedication to our purpose and our mission, their commitment to our customers. They really are what makes this a special place. So thanks to them.

Speaker 2

Again, thank you everyone. I hope you have a terrific evening. Be safe and stay healthy.

Operator

Thank you for joining today's conference call. You may now disconnect.

Speaker 2

And have a great day.

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Earnings Conference Call
McKesson Q3 2022
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