The operator introduces the Walgreens Boots Alliance Third Quarter 2024 Results Conference Call and hands it over to Tiffany Kanaga, Vice President of Investor Relations. She is joined by CEO Tim Wentworth, CFO Manmohan Mahajan, and other executives for a Q&A session. They will make projections and forward-looking statements, and discuss non-GAAP financial measures. The press release and slides can be found on the company's website.

The speaker, Tim Wentworth, reflects on his time at Walgreens and expresses his belief in the company's future. He acknowledges that the most recent quarter's results were not as expected, but emphasizes the importance of the human-to-human interaction in healthcare that Walgreens provides. He also mentions the new leadership team and the dedication of the company's 330,000 employees. Wentworth is confident that Walgreens will continue to be a leader in the future of healthcare.

The company is focused on building strong relationships with customers and acknowledges the challenges in the current operating environment. They are taking action to address these challenges and have reduced their full year outlook due to pressure on the U.S. consumer and challenges in the pharmacy industry. They are investing in targeted promotions and price decisions to drive customer loyalty and are focused on improving the omnichannel experience for customers while also facing challenges in the pharmacy industry such as pricing dynamics.

The pharmacy market continues to face challenges due to the pandemic and other factors, leading to decreased profitability. Walgreens is taking steps to address these issues by working with partners and expanding into new services. Their U.S. healthcare segment has seen growth, while their international segment is performing well. The company is focused on cost management and expects the operating environment to remain difficult for the remainder of the year.

The company is reducing its outlook for the fiscal year 2024 due to various factors, including recent trends in the pharmacy industry. They expect to deliver adjusted earnings per share of $2.80 to $2.95 and will provide their outlook for fiscal 2025 in October. The third quarter sales grew 2.5%, but overall results were below expectations. Adjusted EPS decreased by 37% due to lower sale leaseback gains, a challenging retail environment, and recent pharmacy trends. However, the U.S. healthcare and international segments performed as expected, and the company is focused on cost-saving initiatives. Year-to-date highlights show a 5.6% increase in sales and a 25% decline in adjusted EPS, mainly due to the softer U.S. retail pharmacy performance and lower sale leaseback gains. GAAP net loss for the first nine months of fiscal 2024 was $5.6 billion.

The first nine months of fiscal 2024 included non-cash impairment charges and gains from the sale of Cencora and Option Care Health shares. U.S. Retail Pharmacy segment had a 3.5% increase in comparable sales, but a 48% decrease in AOI due to various factors such as lower sale leaseback gains and challenging industry trends. U.S. Pharmacy saw a 5.7% increase in comp sales due to brand inflation and volume growth, but a decline in adjusted gross margin due to various factors including reimbursement pressure and lower COVID testing demand.

In the retail business, comparable retail sales declined due to a shift in consumer behavior and a decrease in discretionary spending. To combat this, prices were lowered in health and wellness, personal care, and seasonal categories, resulting in an increase in sales and unit lift. The company also saw growth in their own brand penetration and positive results from category performance improvement initiatives. In the international segment, total sales increased and adjusted gross profit and operating income were up, except for lapping real estate gains in the prior year period. Boots U.K. saw growth in both pharmacy and retail sales, with strong performance across formats and a significant increase in online sales. The U.S. Healthcare segment also saw an increase in sales and delivered positive adjusted EBITDA for the second consecutive quarter.

VillageMD's sales grew 7% due to an increase in full risk and fee-for-service lives, but were partially offset by clinic closures. Shields sales also increased by 24%. Adjusted EBITDA improved by $136 million, driven by cost reductions and growth at VillageMD and Shields. Operating cash flow was negatively impacted by legal payments, pension contributions, and seasonality. Capital expenditures decreased, resulting in a decline in free cash flow. The company is on track to reduce capital expenditures and working capital initiatives in fiscal 2024. Guidance for adjusted EPS has been lowered due to a weak consumer environment and continued pharmacy margin headwinds. The adjusted effective tax rate is expected to be under 5%.

The company has revised its full year guidance and expects a fourth quarter adjusted EPS of approximately $0.39. They are not providing fiscal 2025 guidance, but have listed key considerations for next year, including seasonal impacts and expected growth in certain segments. The company is winding down certain programs and expects some challenges in the retail and pharmacy sectors. They are focused on stabilizing their business and returning to longer-term growth. The company has been conducting a strategic review and has come to important conclusions.

The company has three principles to drive long-term shareholder value: simplify and focus the business, use core foundation to grow, and identify opportunities for profitable growth. The Retail Pharmacy business is important and positioned to expand. The company has a multifaceted plan to improve the customer experience and reposition stores to cater to shifting demographics and preferences. Changes are imminent for the 25% of stores that are not contributing to the long-term strategy.

The company is finalizing a plan to optimize their store locations and will be closing a significant number of underperforming stores over the next three years. They will also focus on improving the customer experience and profitability in the remaining stores. The company plans to redeploy the majority of employees from the closed stores and will make investments to enhance the customer experience, such as reevaluating their assortment and accelerating their digital offerings. They also have plans to build their loyalty program and define the future of pharmacy in the country.

Walgreens is working to change its relationship with payers and PBMs to ensure fair payment for their services. They are also investing in top talent and partnering with stakeholders to improve their work environment and attract more pharmacy professionals. They are enhancing their pharmacy services and improving the patient experience to increase retention. The company is committed to continuous improvement and is restructuring to streamline operations and better align with the market. Mary Langowski will now oversee operations related to specialty pharmacy, pharma and manufacturer relations, supply chain, and service development and deployment.

The company is making changes to its leadership team and evaluating its non-retail pharmacy assets to prioritize long-term shareholder value. They plan to continue investing in their UK business, but are looking for ways to unlock value and create growth. They also plan to remain an investor in VillageMD and make changes to enhance liquidity and growth. They will not take action on their specialty business at this time. The company is focused on maximizing shareholder value and adapting their core retail pharmacy business to stay relevant.

The speaker discusses four main points: the company's team and strategy for improving performance, the market need for their services, the challenges in their business model, and their progress in executing their strategic review. They then answer a question about the future of pharmacy and their conversations with payers, as well as addressing the impact of NADAC pricing on their finances.

The speaker discusses the future of retail pharmacy and how they are adapting to meet the changing needs of consumers. This includes improving the store experience, optimizing product selection, and implementing new technologies such as automation. They also mention plans to revamp their loyalty program and incentivize store managers to act as owners. The focus is on improving efficiency and customer satisfaction in both the front and back of the store.

The company is working on improving its community pharmacy services and building relationships with patients. They are also focusing on the supply chain of labor and expanding pharmaceutical services. The CEO received an email from a major vaccine manufacturer and believes that they have a clear plan for their stores. The company is also having constructive conversations with payers to ensure fair payment for the value they provide. The current playbook is outdated and does not adequately compensate for the role of pharmacists or the complexity of the healthcare system.

The speaker discusses their strategy to improve the performance of underperforming stores. They mention that they are collaborating with their PBM partners to make changes. They also talk about the impact of NADAC on their performance. They mention that they have a prudent approach for Q4 and the fiscal year guidance. The speaker also discusses the possibility of getting out of long-term leases and the potential reasons for underperformance in these stores.

The company is implementing a new strategy for handling store closures and leases, with the goal of minimizing any negative impacts on their balance sheet. They are also conducting a detailed analysis of various factors, including shrink, consumer behavior, and market trends, to determine which stores to close. The President of Stores, Tracey Brown, will provide more information on this multi-factored approach.

The speaker discusses four factors that contribute to underperformance in certain markets. They mention leveraging assortment, taking a focused approach on underperforming stores, partnering with local officials and law enforcement, and being the last company standing in some communities. They also mention their goal of finding new ways to work together with these players to continue providing care in these areas. The speaker also addresses concerns about low gross margins in the pharmacy and mentions efforts to address this issue.

The company discussed their discounting strategy and expectations for the fourth quarter. They also mentioned the impact of NADAC on their commercial contracts. The gross margin in pharmacy is affected by not only discounting, but also mix and shrink. The environment did not improve as expected, leading to a focus on investing in price and promotion, resulting in a decrease in gross margin. Shrink also had an impact on gross margin.

The company has seen an increase in trends and is taking actions to bring it back to historical norms. There are a few factors affecting the pharmacy side, including significant fluctuations in NADAC and market dynamics such as generic launches and negative impact on margins from branded products. The company is also seeing a decline in prescriptions, which may be due to market share or pharmacist issues. The stock is down in premarket trading following the company's announcement of a strategic review.

The speaker shares the same goal as the investor, which is to stabilize and grow the core business of Walgreens. They have a strong conviction in the business and see a clear path to growth, but it will take time to demonstrate to investors and consumers. The slower growth in market share is not just a Walgreens issue, but a market dynamic, with factors such as Medicaid reenrollment playing a role. States have been moving patients out of Medicaid coverage, leading to slower growth in market share.

The speaker discusses the impact of the pandemic on Medicaid coverage and utilization, noting a decrease in market growth. They also address the closure of 25% of their stores and the expected retention of employees and prescription volume.

The company has been closing many stores over the years and has become efficient at moving customers and prescriptions to other locations. They retain most of the customers and make sure the overall economics of closing the store make sense. They are currently evaluating which stores to close and are considering factors such as cash flow and potential earnings. The decision to close a store is based on whether it is more profitable to keep it open or to close it. The company has already closed 2,000 locations in the past 10 years.

Tim Wentworth discusses the strategic review of stores and how they plan to reduce fixed costs. He mentions that they have evaluated 25% of the stores and have used outside firms to challenge their thinking. The exact number of stores to close is not certain, but they are focused on reducing costs and retaining scripts. A question is asked about the process for determining the right number of stores to close.

The speaker discusses the reduction in capacity in the retail pharmacy industry and how it is not a bad thing. They mention that technology and home delivery have played a role in this reduction. They also mention that their company is well-positioned to serve payers effectively with their current footprint. In terms of free cash flow, they saw improvement in the third quarter and cannot comment on future expectations. They are currently having discussions with payers about stabilizing terms for the future, but it is a longer-term conversation.

Tim Wentworth and Manmohan Mahajan discuss the positive free cash flow in the third quarter and their expectations for the fourth quarter. Mary Langowski mentions the need for changes in reimbursement models and a collaborative understanding with payers.

The speaker responds to a question about the expected earnings contribution in fiscal 2024 and potential challenges in fiscal 2025. They note that they are not ready to give full year 2025 guidance yet, but offer some factors to consider, such as seasonality and expected profitability growth, while also acknowledging potential headwinds.

The speaker discusses the decision to wind down the sale-leaseback program and the sale of Cencora shares, which will result in a $0.75 headwind in fiscal 2025. They also mention the challenging consumer environment in 2025 and the continuation of headwinds in the pharmacy side. The question is then posed about the future of the U.S. Healthcare strategy, with the speaker emphasizing their belief in value-based healthcare and the importance of pharmacy in the ecosystem. The speaker introduces Mary, who joined three months ago and brings experience and relationships in this space. They clarify that they are big believers in value-based healthcare and that pharmacy is the most valuable and accessible part of the healthcare ecosystem.

The company is focused on being disciplined and strategic in its U.S. Healthcare business, with a focus on high-growth areas that align with its core business. They will also stop investing in certain areas that do not fit this lens. While they will not continue investing in brick-and-mortar primary care practices, they believe in value-based care and will continue to be a partner and investor in VillageMD.

The speaker discusses their company's plans to invest in capital-light services in order to become a broader partner in the industry. They believe they are well positioned for this based on previous conversations and their ability to reach people, engage them, and create interventions. The team is committed to a turnaround and believes in the future of their business, with retail pharmacy being central to their growth. They plan to show and tell how retail pharmacy will be different and achieve results in a more capital-friendly way in the coming quarters.

The speaker emphasizes their responsibility as stewards of capital and making wise investments. They mention their current assets and their plans to improve their value or make other strategic moves. They thank the participants and look forward to sharing more in the future. The conference call is now over.

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