Rob, the conference operator, welcomed everyone to the Walgreens Boots Alliance Third Quarter 2023 Earnings Conference Call and placed all lines on mute to prevent background noise. Tiffany Kanaga, Vice President of Global Investor Relations, introduced the call and the participants, including Roz Brewer, Chief Executive Officer; James Kehoe, Chief Financial Officer; John Driscoll, President of US Healthcare; and Rick Gates, Senior Vice President and Chief Pharmacy Officer. Tiffany reminded everyone that they should be aware of the potential risks and forward-looking statements outlined in their SEC filings. Roz Brewer then took over the call.

In the third quarter, Walgreens' performance did not meet expectations and they have adjusted their fiscal 2023 guidance accordingly. This is due to changing market trends where consumers prioritize value, a decrease in COVID vaccines and testing, and slower profit ramp in US healthcare. Walgreens is taking immediate actions to accelerate their path to profitability and unlock long-term value, such as partnering with TelePharm to expand telepharmacy services, and building their next growth engine in healthcare with acquisitions such as VillageMD and Shield.

Walgreens has seen significant growth in the past two years, with a run rate of $8 billion in the third quarter of 2023. To fund this transformation, they have sold ABC shares and exited their Option Care Health position, and have invested in strategic talent and capabilities. In the third quarter, adjusted EPS grew nearly 4%, and sales grew almost 9% in constant currency. U.S. comp sales were up 7%, and U.S. retail digital sales were up 19%. However, Walgreens has been impacted by lower-than-expected COVID-related demand, a softening macro environment, and a more cautious consumer, and they are now projecting to administer 9-10 million COVID vaccines next year.

This paragraph discusses the financial effects of higher inflation and interest rates, lower SNAP benefits and tax refunds, and an uncertain economic outlook on the customer. It mentions the increase in promotional activity and decrease in non-promotional units, as well as a decline in script volume and front of store sales. The paragraph also mentions the 4.7% adverse net impact to adjusted EPS from COVID the sale of ABC shares, sell in leaseback, incentive accruals, and tax. Finally, updated guidance of $4.00 to $4.05 is given, representing core earnings to be flat to up 1%, excluding COVID and currency.

The company is providing preliminary fiscal 2024 commentary, noting that there are certain factors that will be continuing from 2023 into 2024 such as macroeconomic-driven consumer pressure and COVID headwinds. They are expecting low-to-mid-single-digit adjusted operating growth in fiscal 2024 and are taking immediate actions to enhance profitability and accelerate their journey, such as raising their transformational cost management program savings goal to $4.1 billion, implementing capital and project spend reductions, launching a working capital optimization program, and pursuing portfolio simplification. They are also taking specific actions to accelerate the U.S. Healthcare's path to profitability.

Walgreens is leveraging its trusted brand and national footprint to improve local healthcare and wellbeing in the US. 58% of Americans visit their local pharmacy first when faced with a non-emergency medical issue, and Walgreens is taking advantage of this by partnering with VillageMD and building digital connections, standalone clinics, and healthcare concierge programs. The integrated pharmacist ambulatory care model pilot has seen a 40% reduction in hospital readmissions and a material A1C reduction in diabetic patients, and 50% of patients with co-located VillageMD clinics opt to get their prescription filled at Walgreens.

VillageMD, CareCentrix, and Walgreens are partnering to offer a turnkey durable medical equipment benefit management solution and point-of-care platform for health plans. Walgreens is also converting existing specialty pharmacy locations to Shield partners to increase access to specialty drugs and services, and exploring new healthcare service lines such as additional diagnostic services and data analytics and insights. An at-home testing program with Blue Shield of California had a high test completion rate, and Walgreens is launching similar programs with other payer partners. Walgreens is committed to providing sustainable value to consumers, partners, and shareholders, and is taking appropriate measures to account for recent macroeconomic challenges and uncertainty.

In the third quarter, Walgreens Boots Alliance delivered 8.9% sales growth on a constant currency basis, with the U.S. pharmacy business, Boots U.K. retail business, and healthcare business leading the way. Adjusted EPS increased 3.6% on a constant currency basis, despite a 19 percentage point headwind due to a lower COVID-19 contribution and 8 percentage points from reduced ownership of AmerisourceBergen. Walgreens Boots Alliance is lowering its fiscal '23 adjusted EPS guidance to $4.00 to $4.05 due to consumer and category trends, a lower contribution from COVID, and macroeconomic uncertainty. Adjusted operating income increased 0.6% on a constant currency basis, despite a 22 percentage point headwind from COVID-19 and a 7% drag from reduced AmerisourceBergen ownership.

In the third quarter, AOI growth was 6% lower due to a $323 million after-tax impairment charge and a $5.5 billion after-tax charge for opioid related claims and lawsuits. U.S. Retail Pharmacy saw sales increase 4.4% with comp sales up 7%, however, adjusted gross profit declined 3.2%. U.S. Pharmacy sales increased 6.3%, driven by script growth and brand inflation, but adjusted gross profit declined due to reimbursement pressure. The retail business encountered some headwinds due to a difficult macroeconomic backdrop.

The International segment performed well in the third quarter, with sales increasing 7%. Boots U.K. had a 10% increase in sales, pharmacy comp sales increased 6%, and comp retail sales grew 13%. Walgreens recently launched Future Renew, an innovative new skincare line, which had positive consumer response. Boots.com sales grew 25% year-on-year, and have more than doubled since the pre-COVID quarter. Despite this success, gross margin came under modest pressure due to increased promotional units.

Boots.com has seen strong retail sales growth, while U.S. Healthcare business has rapidly scaled with sales reaching $2 billion, more than doubling from the prior year. VillageMD sales were up 22%, while Summit Health was impacted by a weaker respiratory season and Shields delivered a strong quarter with 35% growth. CareCentrix sales were approximately $360 million with pro forma sales growth of 15%. VillageMD managed 850,000 value based lives, with eight contracts signed for clinical trials and $1.2 billion of operating cash flow generated.

The year-over-year decline in earnings reflects the impacts of COVID-19, lower working capital contribution, and increased capital expenditures. The company is updating its full-year adjusted EPS guidance to $4.00 to $4.05, a constant currency decline of around 20%. This includes a $0.23 lower impact from COVID-19 and a $0.05 headwind from reducing its ownership stake in AmerisourceBergen. In the U.S. Retail Pharmacy segment, sales are projected to be around $110 billion, up low-single-digits year-on-year, with AOI projected at $3.8 billion to $3.9 billion, a decline of 22% to 24%. The International segment is performing well this year, with sales projected to grow 6% to 8% on a constant currency basis.

Summit Healthcare is expecting sales of $6.3 to $6.8 billion, an increase of $4.8 billion compared to the prior year, and an adjusted EBITDA loss of $340 million to $380 million. The full-year tax rate is expected to be around 12%, with a fourth quarter tax rate of 23%. This will result in fourth quarter EPS of $0.70 to $0.75. When taking into account the higher tax rate and seasonality, the annual adjusted EPS is expected to be around $4 per share.

In 2024, the company expects long-term tailwinds to outweigh near-term pressures, such as weak consumer spending and increased labor costs. Reimbursement pressure will remain, but there are multiple profit drivers that will drive sustainable growth, including the U.S. Healthcare business, script volume growth, own brand penetration gains, and a cost management program. The U.S. Healthcare segment is expected to be the largest driver of total company AOI growth and the company will accelerate the path to profitability.

Retail Pharmacy AOI is expected to be flat to slightly down due to lower COVID contributions and a step down in sale and leaseback gains. Core profit growth is expected to be flat due to high levels of cost and labor inflation. In the U.S., pharmacy gross profit is expected to grow excluding COVID, while the U.S. Retail business is expected to see low-single-digit comp growth and margin improvement. Category performance management is expected to create $200 million of savings in fiscal 2024.

The company is taking steps to increase their brand penetration through innovation and increased points of distribution. They are also creating more value for consumers through their e-commerce platform and new store concepts. John Driscoll then discussed the underperformance of their U.S. Healthcare business due to the reduced COVID, cold and flu season and softer market demand. They are taking immediate action to drive improved profitability and are rightsizing their cost structure, raising and accelerating synergy capture goals, and focusing on gaining density in existing markets. They have also recruited a seasoned healthcare CFO and are implementing a three-year plan to improve performance through operational excellence and cost optimization.

Walgreens is investing in value-based care delivery models, clinical trials recruiting, and Summit Health to increase the value of healthcare assets and drive meaningful AOI in the U.S. Healthcare market. They are also investing in targeted marketing campaigns and operational excellence to improve growth and synergy capture goals. VillageMD is slowing the pace of clinic openings in new markets and focusing on regional density to support more profitable growth. They are also launching virtual and asset light models and expanding marketing efforts to support patient panel growth.

VillageMD has demonstrated the ability to reduce costs in their more mature Medicare Advantage markets, and Walgreens is well-positioned to meet the demands of the healthcare market's shift from fee-for-service to fee-for-value. Walgreens will prioritize their capital allocation to core business investments, debt pay down, and their dividend.

James discussed the company's cost management program, which has increased its savings target to $4.1 billion. He explained the organization restructuring which has led to the elimination of 500 roles, as well as the pharmacy of the future operating model which will drive significant savings. The company is also optimizing its locations and opening hours, and has exited from Option Care Health with proceeds of $1.2 billion. Finally, the company has monetized its AmerisourceBergen shares using a variable prepaid forward structure, retaining some share price upside and receiving dividends.

WBA is entering the next phase of its healthcare transformation to improve profitability, with a strategy in place to deliver long-term shareholder value. Utilization is a mixed blessing, with VillageMD consistently performing well and bending the cost curve, while CityMD is not seeing as many respiratory or COVID visits. This is part of the synergy pull forward of $200 million by 2026.

James Kehoe discussed the dividend and Rx reimbursement pressure for the upcoming year. Operating income is expected to grow low-to-mid-single-digit and there will be strong EBITDA growth. The company is also curtailing capital expenditures and building out incremental working capital programs to improve cash flow.

The company is committed to maintaining its dividend and investment grade rating, and has $5 billion in ABC stock to help with this. They are investing $1 billion in healthcare this year and are taking more aggressive actions on capital and working capital in the short-term. Reimbursement pressure on the P&L has improved over the last 18 months, and the company is in productive discussions with payers and providers due to their ability to improve outcomes. Rick Gates, the Head of Pharmacy, is in the middle of negotiations for Medicare Part D and commercial contracts for Q4 and cannot comment further.

John Driscoll notes that the company is performing in line with expectations in terms of reimbursement for the year, and that they are working to offset any reimbursement pressure by improving procurements and increasing prescriptions. He also states that they are performing better in paper performance based contracts, which are part of reimbursement. He then notes that they are encouraged by the core growth across the portfolio, and are focused on unlocking the embedded profitability of the healthcare business, with positive signs from all buyers.

Roz Brewer discussed the progress that had been made in store performance, with 1,600 locations on reduced operating hours and 500 stores recently optimized. Rick Gates then explained that there were four key drivers to the 3% growth in scripts that they were aiming for, including market growth, store hours returning to normal, market access that had been contracted, and adherence and care programs.

James Kehoe discussed the positive growth year-over-year in access and adherence, despite a 3% decrease from earlier guidance. He also discussed the $1 billion in cost optimization and savings in the U.S. business, which is offset by wages, inflation, and reimbursement pressure. He gave an example of cost reduction with the corporate and U.S. support office restructuring, which resulted in 500 job reductions and $100 million in savings.

James Kehoe explains that the company is seeing strong core growth of 30-40% in the fourth quarter despite some headwinds, such as COVID and sale leasebacks. He also notes that they are expecting low-to-mid-single-digit operating income growth over the entire course of next year, which is more like a low-teens growth in adjusted operating income when taking into account the headwinds. He also mentions that the sale leaseback gains will run out in 2024, making it the last year for such gains.

John Driscoll explains that the U.S. Healthcare Business has seen a strong appetite for taking on risk from health plans. This includes taking on risk per member per month and performance risk in order to close gaps in care and improve outcomes. The goal is to lower the cost of care and enhance the delivery of specialty pharmacy services.

James Kehoe explains that Walgreens has reduced their working capital by $2.5 billion over the past five years, but their inventory levels and front of store and pharmacy are still quite high. To address this, Walgreens has implemented micro fulfillment centers in order to reduce inventory in their 8,800 stores and centralize it into less than 20 centers.

Rick Gates explains that they are confident in their prior guidance of 340b being a slight increase year-over-year in fiscal ‘23, taking into account the latest manufacturer actions and restrictions. They are also targeting investment grade rating and working to improve their operating cash flow and pay down debt to meet the 475 metric set by Moody's. Additionally, they have huge initiatives rolling out that will drive benefits in the upcoming year, including micro fulfillment centers, new forecasting systems, and a new inventory management system.

Shields is an advantage position in the contract pharmacy business due to the strong demand and sustainability of their contracts. The U.S. Healthcare ramp is expected to move from a $350 million loss to a significant profit next year, estimated at $600 to $650 million. This is due to proactive data sharing with covered entities and working with active contract pharmacies, which is expected to offset some of the headwinds.

James Kehoe and John Driscoll discussed the fiscal year '24 outlook for businesses, noting that the base is 300 light versus original expectations six months ago due to Summit and Village's slow building of patient panels. They suggest modeling the outlook based on the original goals, expecting a year-on-year change that is intact, though six to twelve months behind. They also stated that they are not prepared to give extensive '24 guidance, but they have taken swift action to unlock the embedded profitability and will be comfortable giving more guidance in Q4. They also confirmed that the EBITDA loss in Q3 should be multiplied by 30% to estimate the improvement in Q4.

Roz Brewer concluded the conference call by expressing the company's commitment to quickly address their challenges and deliver value to shareholders and local communities. She discussed the aggressive actions taken to improve profitability and turn the inherent growth of their assets into profitable growth. She also reiterated that they have the scale and skills needed to execute their plans and drive growth.

This summary was generated with AI and may contain some inaccuracies.