Q1 2023 Mckesson Corp Earnings Call
Back to serve as the centralized distributor for COVID-19 vaccines was extended through July of 2023.
Similarly, the contract for ancillary kitchen storage was extended through January of 2023.
We are well, we continue to be honored and.
And privileged.
To be able to leverage our distribution scale and expertise and to continue to support this important public health effort.
Rent will comment a little more specifically on the financial impacts of these contract extensions, but.
We continue to look forward to serving the U S government for several more months in this capacity.
Building upon the success of the core distribution businesses, we you know we.
Like I say, we're tackling some of the most complicated problems in health care through the expansion of our oncology and our Biopharma services ecosystems in the first quarter. We were really excited to announce the formation of a joint venture between Mckesson's U S oncology research and Hca's HCA healthcare sent Sarah Cannon research.
Institute.
This transaction marks a really important alliance between two two.
Between these two companies and we expect it will.
It will accelerate our strategic advancement of the oncology ecosystem by combining the resources and the expertise of these two organizations, we're creating an expanded clinical research network and that really means a broader portfolio of clinical trial offerings expanded patient reach access to a broader set of day.
Data and more advanced analytics capabilities to better match patients with clinical trials. The new joint venture will really also aimed at accelerating drug development and increasing availability and access to clinical trials for community oncology providers and patients, including those patients in underserved.
<unk> communities.
This transaction enhances our proposition to Biopharma companies and further advances our differentiated offerings across the entire pharmaceutical lifecycle. It. It is also purposeful it reinforces our commitment as a company.
To advance health outcomes for all.
We expect to close the transaction by the end of calendar year 2022, and we look forward to the partnership the collaboration and greater outcomes, we can bring to the patients we collectively serve.
We're also making meaningful progress on expanding our Biopharma services ecosystem.
Through years of intentional investment, we build a suite of innovative Biopharma solutions that supports really every phase of the medication lifecycle across nearly all therapeutic categories.
We're reinventing how biopharma companies providers and payers.
Can connect to each other.
Through technology with the ultimate goal of really helping patients access afford and adhere to their medications today I thought I might share a few examples around our affordability efforts and how these efforts fit into our biopharma ecosystem.
A key piece of our innovative medical medication affordability product suite is our automatic couponing program.
This this automatic couponing program.
Really applies co pay offset our savings for qualified medications right at the point of dispensing using our technologies it seamlessly integrated into the pharmacy workflow.
We further help patients stay on their trusted brands through multichannel support options like activity inform messaging about other discounts real time support in educational materials. We also facilitate patient assistance programs, which are a critical financial safety net for millions of patients we implement and administer.
Comprehensive patient assistant programs through program pharmacies, which enable access to free medication programs to eligible patients treated at hospitals and community care settings, and sometimes even at home.
Both of these solutions leverage the reach of our technology network and in fiscal year 2022, our solutions enabled patients to save more than $6 billion on brand and specialty medications and importantly, we prevented more than 9 million prescriptions from being abandoned by improving affordability.
Scripts in many instances these solutions also improve adherence helping patients stay on treatment longer which leads to better health outcomes.
As we look ahead, we continue to be proud of our differentiated assets and capabilities and we're excited to bring innovative solutions to more partners and patients oncology and Biopharma services, both represent large complex and growing markets for Mckesson and we're strategically positioned to continue to enhance value in these areas.
I want to talk of.
About our next priority, which is to streamline the portfolio.
It's absolutely imperative that we continue to focus our human and financial capital into the highest growth and highest margin areas of the company and part of that is a continual assessment of our portfolio for strategic alignment. This includes the progress we're making towards fully exiting the European region. We.
We recently entered into an agreement to sell Denmark and the transaction was closed on July 29 2022.
The pending transaction with the Phoenix group is progressing well I would characterize it as on track and has an expected close in the second half of our fiscal 2023.
Norway really remains the only country that we have not yet announced an agreement to sell.
So now one year after we announced Mckesson strategic intent to exit the European region, we've entered into agreements to sell while we have completed divestitures of the business operations in 11 of the 12 countries in Europe . So I'm really pleased with the execution of this important initiative I think the teams have got after it with a <unk>.
Marketable speed and efficiency.
I want to wrap up my review of our company's priorities by reaffirming our focus on people and culture and.
In fact, it's typically the first priority we mentioned, we believe that talent can truly be differentiating.
And we continue to invest in the development of our employees.
We provide our employees not only competitive compensation and competitive benefits, but also the resources and support they need to grow into the next generation of leaders for Mckesson as an organization. We are committed to advancing diversity equity and inclusion and we continue to increase leadership representation for.
Women in North America, and people of color in the U S.
Back just recently Mckesson was recognized by Forbes as one of the best employers for women, achieving an industry leading ranking.
This is a demonstration of our outstanding progress in promoting equity and diversity in the workplace and really in my view reflects our deep commitment to support all employees at Mckesson all employees at Mckesson. Additionally for the seventh consecutive year Mckesson was named the best place to work for disability.
Inclusion, which includes earning a top ranking score of 100 on the 2022 disability equality index.
Prior to the progress that we've made on all of our company's priorities and we can clearly see it helping advance our long term growth.
Before I turn it over.
Turning my attention to our first quarter results I did want to just provide everyone. A quick update on the progress of the opioid related litigation.
This past quarter, we reached agreements in principle with the state of Washington in the state of Oklahoma with the with the recent developments we have settled or we've reached agreement to settle the opioid related claims of all 50 States the district of Columbia, and all eligible territories.
The majority of the payments that will fund as part of these settlements.
We will be used on opioid relief programs, we're particularly proud of that and will support a wide variety of strategies in local communities to help fight opioid crisis.
In July after a full trial, a federal judge ruled that Mckesson, along with two other distributors could not be held liable to two west Virginia subdivisions for contributing to the opioid crisis.
This ruling is significant as the court confirm that Mckesson did not cause an oversupply of opioids in these communities as we move forward our role in combating opioid abuse is not over the cast and we will remain part of the solution when it comes to relief across the country and in preventing opioid diversion within the pharmaceutical supply chain.
Let's move on.
Business performance I want to start by just providing a few comments on the macroeconomic trends in environment.
That we're seeing and what the potential impact on our on Mckesson's business.
In the past quarter, we have observed positive prescription volumes and positive patient utilization trends.
Additionally, as the macroeconomic environment continues to evolve our business model has remained resilient to the pressures from cost inflation and supply chain disruption the impact from these macroeconomic factors was immaterial in Q1, and we do not anticipate any incremental impact in.
<unk> to what was already contemplated in our fiscal 'twenty three outlook.
We remain confident in our ability to navigate a dynamic economic environment, we have a diverse set of products and solutions that allow us to follow the market demands and capture evolving opportunities and we remain committed to supporting our customers and partners by delivering innovative products and solutions and making quality care more accessible and.
Portable.
Let me quickly summarize the first quarter performance and then I'm going to turn it over to Brett who will provide additional financial details on.
I want to start with U S pharmaceutical.
We delivered solid first quarter performance in core pharmaceutical distribution led really by our differentiated value proposition and exceptional service to our customers throughout the quarter, we saw year over year growth in prescription volume with positive trends in both branded and generic drugs are distribution expertise as reflected in the breadth of <unk>.
Product offering delivery accuracy and reliability of our service.
We also remain focused on expanding the oncology ecosystem to strengthen our already differentiated market position the.
The advancements not only reflected in financial performance and its increasing contribution to the segment growth, but also demonstrated by the research we published the insights we generated and the partnerships. We formed all focused on empowering innovation in advancing cancer care.
Our oncology business has proven to be resilient throughout the pandemic and we saw stable demand in patient visit trends within our U S oncology practices.
And prescription technology solutions were.
We're pleased with the growth momentum in the first quarter, driven by access affordability and adherence solutions the market demand for our products and solutions remains strong contributing to the organic growth in the core product categories. The.
The strong financial performance also allows us to reinvest into the business and to expand the reach of our Biopharma services ecosystem. The continued investment in innovation is critical to the long term growth of the business.
And the medical surgical solutions segment.
We again had strong performance.
Led by strength in the primary care marketplace.
The demand for Covid tests during the quarter was higher than anticipated, but I would also say generally in line with the Covid case counts, we continue to expand the breadth of our products and services to strengthen our leading capabilities in the alternate site markets.
And in the International segment, we're progressing well with the divestiture of our European assets as it relates to our Canadian business, we remain committed to our strategy in the Canadian market, where we have scale in a diverse set of assets the distribution and retail businesses remained stable and the team is doing great work driving growth through improved sourcing economics.
And expanded customer relationships.
Yeah.
Alright, let me try to pull everything together.
The cash and reported solid first quarter and fiscal 2023.
The fundamentals of our business are stable and I'm excited about the meaningful progress we've made against our company priorities our updated outlook for fiscal 2023 aligns with the long term growth targets of the business and demonstrates our commitment to deliver sustainable growth across all segments.
Last I want to be sure to thank my.
My teammates and the employees of Mckesson I'm proud to lead. This amazing team you are all innovative problem solvers that bring positive change to our customers and partners. It's the dedication and the execution from each and every one of our employees, that's driving mckesson forward and ultimately helping advanced health outcomes for all.
<unk>.
With that Britt why don't you provide some additional color and comments.
Thank you, Brian and good afternoon.
We are pleased to report June quarter financial results continue to demonstrate our ability to grow our businesses and execute effectively as a diversified healthcare services company.
Our fiscal first quarter results were 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 I want to start with Europe , and our ongoing focus to streamline our portfolio.
Over the past few years, we've taken deliberate actions to streamline the business and deploy capital more effectively.
Ensuring the organization is operationally efficient.
<unk> 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 have successfully closed the following transactions.
In the fourth quarter of fiscal 2022, 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 UK retail and wholesale operations and in July of 2022, we completed the sale of our Denmark business.
Transaction the transaction with the Phoenix group's so 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, Norway. The only country that we have not yet entered into an agreement to sell.
For fiscal 2023, we anticipate our remaining European operations will contribute adjusted operating profit of approximately 85 to $1 15 per diluted share, which includes accretion resulting from the held for sale accounting.
The transaction with the Phoenix group.
As discussed at our December Investor Day, we intend to deploy capital through share repurchases to offset 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 perform a joint venture combining mckesson's U S oncology research.
And HCA healthcare Syracuse Research Institute, including the acquisition of genome space, Sir tenants personalized medicine platform.
The combination of these assets complements our existing operations and aligned 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.
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 vaccines was recently extended through July of 2023.
And the contract for the kidney and storage of ancillary supplies was extended through January of 2023 <unk>.
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 tests and 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 review of our first quarter of 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.
We 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 and 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.
<unk> 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 onto our first quarter segment results, which can be found on slides seven through 12, and starting with U S pharmaceutical <unk>.
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 <unk>, 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 <unk> 18 per share in the quarter, which is compared to <unk> 30 per share in the first quarter of fiscal 2022.
Excluding the impact of COVID-19 vaccine distribution.
Pharmaceutical segment delivered operating profit growth of 9%.
Results in the quarter benefited from the timing of generic launches and the improved performance of Antara.
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% of 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 adherence solutions continued 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 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.
Growth in the primary care business, partially offset anticipated lower demand and sales for COVID-19 tests.
And lower contribution from kidney 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 our primary care business improve.
Improved volumes and greater incidence of respiratory illness, and the flu contributed to higher testing and patient visits and the primary care business.
The contribution from COVID-19 tests and a contract with U S government for kidding storage distribution of ancillary supplies provided a total benefit of approximately 25 per share in the quarter compared to 35 per share in the first quarter of fiscal 2022.
Excluding the impact of these COVID-19 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.
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, an Austrian businesses.
Moving on to corporate.
Corporate expenses were $145 million, a decrease of 6% year over year in.
In the quarter, we recognized a tax receivable gain related to a previous change healthcare 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 our 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.
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 and gains or losses on the Mckesson ventures portfolio companies may occur and 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.
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 ecosystems for.
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 <unk> 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 are.
Our capital deployment principles remain firmly in place.
We prioritize growth.
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 will continue to return capital to shareholders through a combination of our growing dividend and share repurchases and.
And the third piece of the framework focuses on our 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 full list, but 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 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 includes 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, 20% remains unchanged.
Based on our first quarter results. Our continued solid operating performance in each segment and the contract extensions with 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 20.
$3 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 <unk> 99 to $1 29 of contribution attributable to the following items.
35 to 45 related to the U S government's vaccine distribution in our U S pharmaceutical segment.
75% to 95 cents related to Covid, 19 tests, and the kitting storage and distribution of ancillary supplies and our medical solutions surgical solutions segment, and 11 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 for.
Both fiscal 2023 guidance in fiscal 2022 results our.
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 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 35% to 45 cents related to COVID-19 vaccine distribution.
The 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 targets.
And the prescription technology solutions segment.
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 decreased 5% to 10%.
Our outlook includes approximately 75% to 95 related to COVID-19 tests, and the kitting storage and distribution of ancillary supplies in the U S government, which incorporates the contract extension with 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 the loss of operating profit contribution from businesses and transactions, we've closed to date and those we expect to.
Closed 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 three two to 336 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 metrics can be impacted by timing.
And in fiscal 2023, our cash flows including the progression of these cash flows may be impacted by European divestiture activity.
Our fiscal 2023 outlook incorporates plans to repurchase approximately $3 5 billion of shares Cigna.
Significant portion of the share buyback assumption is associated with mitigating year over year impact 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 is diversified healthcare services company our.
Our talented associates continued to deliver exceptional performance, our first quarter financial performance reflects the dedication and their execution.
Our 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.
Thank you.
If you would like to signal with questions. Please press star one on your Touchtone telephone. If you are joining us today using a speaker phone. Please make sure. The mute function is turned off to allow your signal to reach our equipment.
Again that is star one if you'd like to ask questions.
And our first question comes from Lisa Gill with Jpmorgan.
Thanks very much.
Okay.
Thanks, very much and good afternoon, and thanks, Brett for all.
All of the color I just wanted to go back and make sure I just understand a couple of things one the comment around macro economic trends and materials I know last year, you had some wage inflation or gave people bonuses I'm curious as to what Youre seeing right now around wages and then secondly want to make sure that I understand how fuel.
All work is that just a pass through so as we've seen rising oil prices and the higher gas prices is that something that you can just pass along to your customers and Thats why its immaterial to you.
Well, so I'll start with.
The wage component and.
Youll recall last year as we track the markets both nationally and locally we decided mid year to take some wage actions. We mentioned that was probably 10 to 20 in each of the segments. We brought a perspective into our fiscal 'twenty three guide and at this point, we still think that that our views on the labor.
<unk> in the guidance are in sync, it's something that we'll continue to watch.
People are an important part of our value delivery mechanism.
Important that we stay on top of it but as we look at key metrics like turnover in service out of our doors, we're still comfortable that our assumptions for FY 'twenty three.
Are the initial outlook, we provided you for FY 'twenty three will be relevant.
As it relates to fuel specifically.
It's probably in a nuanced answer I think Britain characterized that correctly.
Been immaterial for this fiscal year in some instances, we can contractually pass it through in other instances, we have the ability to set price.
And certainly we take actions for efficiency within the operation to continually.
Offsetting expenses like that that we might have.
Next question please.
And next will be Michael Cherny with Bank of America.
Good afternoon, and congratulations on a really nice quarter.
As I think about the <unk>.
Opex management in the quarter as something that clearly stood out relative to the outperformance.
Aside from some of those dynamics and wage investments what are some of the pushes and pulls youre seeing in the Opex line relative to last year and how should we think about the trajectory of opex at least in terms of the percent of revenue in terms of what you can both manage as well as what will clearly benefit as you get more leverage from faster growth. Some of these incremental revenue upside.
Pull throughs.
Hey, Mike Thanks for the question, let me try to tackle that.
The biggest piece that we identified for our consolidated operations was the divestitures in Europe that drove a lot of the operating expense decline year over year and we also have continued to execute against a lot of our cost initiatives that we began three years ago and a lot of the efficiency that we've driven into the organization.
And continue to be focused on Hulu efficiencies, but driving automation in the company as well couple of other things that I would point out.
For sure is in our corporate line, we saw lower opioid litigation expenses as compared to the prior year now we called that out in our guidance at the beginning of the year and on a year over year basis. It was lower in the first quarter and thats going through our corporate line, but I think overall, it's a lot of the efficiencies that we've driven in the organization.
Cost programs that we've been after now for the last three to four years.
And the leverage that we're able to get as we continue to drive.
<unk> Corporation forward and gain productivity.
Next question please.
Thank you. Our next question comes from Steven Valiquette with Barclays.
Okay.
Gotcha.
Yes. Thanks. Good afternoon, everyone. So you have to go back to the analyst day back in December you guys thought about 12% to 14% EPS growth, excluding COVID-19 and some of the European dilution.
I'm trying to.
Quantify what how thats tracking in fiscal 'twenty three ex those items, so I think on slide.
Uh huh.
Slide 19, actually slide 15 apologize.
Show, the 10% to 15% growth excluding those items I'm wondering is that the closest proxy for how this fiscal year is tracking relative to that 12% to 14% metric that you talked about.
Previously thanks.
Hey, Stephen Thanks for the question. So what we tried to do with that slide is give you the progression excluding some of the things that we're working through here, obviously with Covid test kits and vaccines and so forth.
The guidance that we gave you is more on a long term basis and again, excluding some of the programs that we have in place and obviously excluding.
Caisson ventures, when you look at each of our segments.
As I talked about them here today, our segments have actually performed slightly ahead of the long true groceries that we provided at Investor day, one of the things that we're obviously working through here is the divestitures of Europe on the cadence of those divestitures and obviously, what we've talked about in the beginning here is we're going to try to Oi.
Offset that dilution with share repurchases, but if you look at our operating profit growth. Excluding the programs that we have with the U S government Covid test kits and you look at the segments that is really in line with our long term growth rates that we provided at Investor day, and on a consolidated basis, the 10% to 15%.
<unk> talked about here today again also aligns with that long term guidance, we feel very good that we're on pace.
We're tracking against what we told you at our Investor Day in December .
Next question please.
And next will be Eric Percher with Nephron research.
Okay.
Thank you question.
Question relative to the contract extension with the government.
First are there any changes in the scope of operations for Vacs, and kitting and backs would you potentially support Novavax Pfizer and then I'd be interested in your perspective on normalization of distribution of both vaccine and Coca therapies over time.
So.
In terms of the scope of the agreement that really the scope of either agreement has not really changed in terms of the services that will provide we will not we are not going to expand to do Pfizer, but we are committed to do all of the other U S government approved.
Including Novavax.
If as it as directed by the U S government and.
Our facilities are.
Capable and ready to to to support that and I would just mimic similarly for the kitting side, although it's probably a little more storage and then kidding vis a via the early phases of the program when kitting was quite intensive.
And what was the I'm sorry, Eric what was your second question.
Just your thought on the normalization of distribution into all distributors, both for Bax and Covid therapies are you seeing some of that for your channels.
Yeah.
I mean, I think as it relates to the vaccine the vaccines themselves those continue to run through the centralized government model.
To be perfectly candid, two and a half years ago. It would've been hard to imagine we'd still be in this scenario as a nation just thinking of public health and the prevalence of the disease that we still see.
As we've said all along we're committed to bring our assets and capabilities to help support the public health response in any way, we can where we're.
There I guess happy we have the facility and can continue to support the government program.
Most most of US probably will not be sad when there's no longer a need for any of this.
Next question please.
Next will be Ricky Goldwasser with Morgan Stanley .
Yeah, Hi, good afternoon, and congrats on a great quarter.
So have a follow up question on the Covid vaccine, if we think about the step up in guidance for vaccines and kitting.
How much of that and has it was already captured in the <unk> 54 cents beat in the quarter.
So is your expectation going forward. So that's question number one and then.
Secondly to follow up somewhat on.
Eric's question, England fairness it today to the extent the commercial market in 2023 for a vaccine. So just can.
Can you maybe help us frame it how should we think about it is this would this be on top of sort of the contract that you have with the U S government or would that be in the law.
You want to take the guidance question and I'll take the second part now. Thanks. Thanks for the question Ricky So again I think if you look at our slide presentation. We've tried to call out here, what the big changes in our in our guide certainly a portion of our first quarter was a result.
<unk> of the increase in both vaccine distribution and the kitting storage and Covid test kits Covid test kits as we told you in our guidance would be lower than FY 2022, and that has certainly been the case, although it was slightly ahead of our own internal expectations. We continue.
And you'd expect that.
Test kits will be significantly lower than last year. They are a little bit ahead of our expectation. So in our first quarter. Some of the COVID-19 related items and programs did drive some of the upside, but certainly our operating performance was strong you can see that from the slide that talks.
About our guidance increase that there is a significant portion of the increase is related to those COVID-19 programs, but there is also a very strong component is related to our operating performance.
And then Ricky just relative to the distribution of the vaccine itself I mean.
I guess.
Probably best to just stick to the facts I mean, we've extended the U S government agreement to July of 2023, so to the extent the U S. Government continues to acquire vaccines and make them available to the public we will be there at the centralized distributor those vaccines.
Sure another model emerge in a distributor and want to use commercial markets. Obviously mckesson continues to have incredible vaccine capabilities in the commercial market as well, we're the leading distributor of the seasonal flu we support the vaccines for children program, we've got great relationships with community providers all over the country.
And we would obviously be anxious ready and willing to support those commercial efforts as well.
Next question please.
Next is Kevin Caliendo with UBS.
Thank you thanks for taking my question.
If I'm looking at that.
The growth looking at revenue growth in the pharmaceutical segment and the meta search segment.
It back out.
With Covid.
<unk> range.
Apparently are growing faster than the market youre raising numbers.
Is it a macro thing because they're not seeing utilization necessarily at the levels that youre growing at or are you just in the right markets that you are taking share can you maybe talk about.
Whether it's the competitive dynamics is it just that you are in <unk> and all of the Utilizations moving there in the med search side, what's driving.
<unk> faster than market growth.
And those two segments.
Yes. Thanks for the question, let me parse that out because I think there are some differences between the two segments in the pharmaceutical segment, we did talk about <unk>.
Proved utilization year over year I think if you look at our <unk> numbers Youll see that first quarter versus last year. There is approximately 7% growth in prescription transaction volume. So that is significant from what we've seen over the last few years I also talked about in my remarks that within our U S. Pharmaceutical segment, we are.
Seeing faster growth in our national retail national account customers. So our largest accounts are growing faster.
Then the market and that's not something new to this quarter, we've talked about that now for the previous.
Four or five quarters, we have seen faster growth in those retail national account customers.
And our medical business, we have a very strong primary care business and we've talked about the strength that we've had across all channels and the breadth of products and services that continues what we did see in the first quarter is really what I would call an extended flu season. So we've talked about.
The higher level of illness in flu sales in the quarter that was a that was a part of the of the upside from medical in the first quarter, but overall its the primary care business continued to be quite robust and strong.
Next question please.
Next is Eric Coldwell with Baird.
Oh.
Thanks can you hear me.
Hello.
Yes, we can.
Yes, sorry.
Thank you.
Following on to an earlier question about the Opex.
SG&A control the incredible upside in that number.
My follow on her twist would be versus street gross margin was also materially lower those two were offset we see this.
Substantial variance in the P&L, each and every quarter I think where the street is just way too high on one number and way too low in the other they offset and all as well, but I was hoping to get maybe a little more color on what in your mind. If you could think about where the street was why would gross margin be.
Perhaps lower than consensus expectations.
To a lesser extent in opex was upside, but but what would be the major gross margin factors or things, we should be considering moving forward.
Well thanks for the question, Eric I don't really want to try to project, what's in the street models, but I will call out a couple of things that I did talk about in our remarks that I think could be a part of the disconnect at least for the quarter the cadence of our European divestiture activity.
Could be a big part of that we closed our U K retail and wholesale operations in April of 2022, and so when you look at the UK business in the Austrian businesses deemed divested that drove a significant delta in gross profit and in operating expenses.
And gross profit if you exclude the European divestitures, our gross profit actually increased 9% and that was in my initial remarks. The other thing that I would just go back to a prior comment in our U S. Pharmaceutical segment, we are seeing faster growth from our retail national account customers in those.
Customers as we've talked about in prior quarters.
Lower margins for us and the rest of our book as you would expect that to have so again, our retail national account customers growing a little bit faster than the rest of the book that has a mix impact, but I think the big Delta in this quarter is really the timing and the cadence of these European divestitures.
Okay next question please.
Next will be Charles <unk> with Cowen.
Yes.
Yes, thanks for taking the question.
I wanted to ask about the prescription technology solutions.
We call the the comments about.
Demand is strong and.
You continue to make investments.
I guess.
<unk>.
Looking at the guidance it looks like the revenue growth, though is a little bit down I might have missed it but can you remind just mentioned.
What's happening there obviously it looks like the op income.
The guidance is up just if you could just maybe clarify that a little bit.
Yes, Im happy to do that we're very pleased with the performance in this segment, Brian talked about some of our solutions. Our affordability solutions growth has been quite strong when you look at the revenue and margin guidance versus our first quarter that is purely a result of mix and so we would expect that our <unk>.
Mix would be better as the year goes on.
And it has a slight impact on the topline for certain products. So that is a function of mix, but overall, we're very pleased to be able to raise the guidance of profitability within that segment and that kind of fits with what we've been focused on which is these higher growth higher margin opportunities, yes, I think the key kid.
The margin profile of the products and the services themselves as very stable, if not improving but the mix, it's a pure mix effects.
And three PL tends to be a high revenue relatively low margin component of this business.
We have time for one more question. Please.
Certainly and that question will come from Brian <unk> with Jefferies.
Hey, good afternoon, guys and congrats.
Hey, good afternoon, guys and congrats on the quarter, Brian just since you touched on the Sarah Cannon partnership just curious if you can maybe walk us through how you're thinking about how thats going to drive growth and how strategically it fits going forward and maybe the opportunity to expand that relationship with Sarah cannon, given they're one of the largest.
<unk> cancer groups in the country.
Yeah sure. We're really excited about this there were.
Two parts to the acquisition and the first is the JV partnership with HCA, which bring Sarah cannon and you.
You saw our organizations together in the first instance, I'd say you know they're both.
Really very community.
Provider facing organizations both involved in clinical research and we think that <unk>.
Community pharmacy, and bringing in community oncology and bringing the community practices.
More prominently into clinical trials and the development of new medications is going to be important for all overall health outcomes. It so.
Tremendous complementarity.
The brands across the teams and really across the areas. We've each historically invested in so.
We're really excited and we're excited to be partnered with HCA. In this initiative in the second component of that was the acquisition of an asset called Gino space.
Really think about that as a complementary data and analytics.
Complement our other capabilities like on Todd, but this is going to help us do trial matching and recruiting support clinical decision support.
And really just become a another component of this oncology ecosystem that we talk about so we're really excited about this are obviously still in the phase of waiting for regulatory approvals and pending close but we're really excited about our about this end.
And as another important step in building out our community based oncology ecosystem.
Yeah.
Okay. So that was it.
Well look let me again say, thank you to everybody for taking time to join our call really appreciate the thoughtful questions I want to thank Justin for helping facilitate the call I'll just wrap by reiterating we had a really solid first quarter total company revenue and adjusted earnings per diluted share were ahead of our expectations that we laid out in may.
I remain confident I know Britt shares my confidence and our resilient business model and our ability to deliver sustainable growth and generate attractive shareholder returns in FY 'twenty, three and beyond I want to end again by thanking team Mckesson for their unwavering focus and commitment to our vision to our strategy and to each other.
The support of a strong and dedicated team is the powerful driving force that helps mckesson transform itself into a diversified health care services company and make a meaningful difference for all the patients. We serve thanks again I hope you all have a terrific evening.
Thank you for joining today's conference call you may now disconnect and have a great day.
Okay. Thanks.