Walgreens Boots Alliance, Inc.

Hello, everyone, and welcome to our virtual investor conference. I'm Jay Spitzer, Vice President of Investor Relations at Walgreens Boots Alliance. Before we start, I'd like to quickly run through the customary, regulatory, and safe harbor statements before I hand it over to Roz. Certain statements and projections of future results made in this presentation constitute as forward-looking statements that are based on our current market, competitive, and regulatory expectations and are subject to the risks and uncertainties that could cause actual results to vary materially. We undertake no obligation to update publicly any forward-looking statement after this presentation, whether a result of new information, future events, changes in assumptions, or otherwise. Please see our latest Forms 10-K and 10-Q for discussion of risk factors as they relate to forward-looking statements. During the course of today's events, in our remarks and in the related presentation, we lose certain non-GAAP financial measures. We refer you to the appendices in the presentation materials available on our Investor Relations website for reconciliations where applicable to the most directly comparable GAAP financial measures and related information. You will find a link to the webcast on our Investor Relations website at investor.walgreensbootsalliance.com. After the event, the presentation and the webcast will will be archived on the website for 12 months. In addition to our earnings announcement this morning, we will be issuing a form 8K that contains forward-looking guidance and other relevant information provided during today's event. Please be aware that we may during this presentation and in answers to questions make references to the information contained in the form 8K. The form 8K along with the earnings announcement and the presentation materials from this event are available on our website. With that, I'll now hand it over to Roz. Roz?

Thank you, Jay. Hello, everyone, and thank you for joining us today. It's really great to be with you. I have to say I'm definitely looking forward to sharing what we have in store for you in the next two and a half hours. As you know, I recently passed my first six months at WBA, and I'm even more excited about this company's potential than when I first joined. I took this job based on some deeply personal reasons. At the time, I was really enjoying selling coffee out in Seattle, so it was a big decision to leave that gig. But honestly, like many of us during the pandemic, I was thinking a lot about how I could contribute even more to the world. So when I was approached about the CEO role at WBA, I thought, here's a chance to join a company right in the center of fighting COVID-19 and bringing hope, and a helping hand to do so in many different communities. I also saw how we can make meaningful progress on addressing some of the social determinants that lead to disparities in health among different racial and socioeconomic groups, resulting in food deserts and care gaps. And frankly, now that I'm at WBA, There's so much more promise ahead than I could have ever anticipated. The pandemic definitely gave WBA a chance to step up like never before. And we've delivered in so many ways. But we're absolutely just getting started in terms of how we can mobilize to solve big, complex problems. And we definitely believe that this momentum will accelerate our path to sustainable, profitable growth moving forward. So during my entire life, I've been an avid learner. Some of you may remember that my undergraduate degree is in chemistry, and I've applied what I've studied then throughout my entire career. That discipline is about hands-on investigation and rigorous research. So it will come as no surprise that since I've been at WBA, I've been taking a deep dive to really understand the business and speaking with our leaders and team members in all corners of the company. as well as many outside experts. I conducted listening sessions and spent time in our stores, vaccine clinics, and back office operations. I've identified many gifts that were waiting for me when I arrived, based on some strong work that had already been done. And I've pinpointed where we've taken some wrong turns and haven't executed as well as we could have. I've also been very glad to see the many new ways we can capitalize on our core strengths. I believe we have some tremendous underlying momentum within this business, and the pandemic has further proven the importance of pharmacies in local communities around the world. I promise to you that after an extensive study, I wouldn't waste any time getting back to you about my assessment and where we're heading next. During this time, we'll clearly articulate the direction of our company, and we'll provide what we hope leaves you feeling a greater sense of understanding in terms of our strategic direction. We'll share our learnings, present our opportunities, and lay out our path forward. So let me start by saying that we just announced positive fourth quarter results this morning. We exceeded expectations across all of our business segments. reflecting strong operational performance and surpassing our vaccination goals. James will be going into much greater detail with you on that soon, including our guidance for this year. So hopefully you see these earnings as an indication, among many others today, of a renewed, revitalized, and re-energized company. Also, I'm very excited to share some important strategic investments later in today's sessions. will tell you more throughout the course of our time together this morning. Today, I'm going to make good on my commitment to you. And we're going to take you on a journey that includes three things. Transparency, accountability, and an extremely well thought out strategy. But let me be clear. This isn't our everyday Walgreens strategy. Instead, it's about acceleration, execution, accountability, and long-term growth. Strategy is also about mobilizing across the organization, uniting behind values-based culture, enabling strong alignment, leveraging momentum, and having clarity on the end game. And it's also not just what you plan to do, but it's also what you plan not to do. We will make trade-offs and eliminate some work to focus on what matters most. And we're going to hit on these same points again and again and again to hammer home just how much we've internalized this into our mindset. So on that note, here's our agenda for today. First, I'll go into detail on our strategic priorities with a particular emphasis on the role we believe we are rightfully positioned to play within the healthcare ecosystem. Our CFO, James Kehoe, and President of Walgreens, John Stanley, will join me during these portions of the meeting. James will discuss the financials, both the numbers reported today and also our immediate and long-term growth model and fiscal year 22 guidance. Finally, we will end with a Q&A session where we will look forward to engaging directly with you on our strategy and performance. And again, We hope this will signal the change to come, more of an ongoing dialogue with our investor community and more visibility into what we're doing and how we're performing against our most important KPIs. So to lead us more into that discussion, I thought I'd share a brief video highlighting who we are.

What is a company's history? It's legacy. For most, it marks where you've been. For Walgreens Boots Alliance, our history is more than that. It's the strength and resilience that allow us to meet any challenge, to be there, to be ready. It's our 170-year history of helping and healing, day in and day out, year after year, that enabled us to be there for our communities during a time like no other. A time that challenged us to do our very best. A time when we needed to step up in even more ways. To reach out and lend a hand. To go beyond. To connect in new ways to tens of millions of customers every single day. And whenever possible, to simply bring a bit of joy into people's lives. Now, as the world begins to turn a corner and turn a page, Walgreens Boots Alliance is ready to deliver more. With the combined talents of all of our team members, we're ready as people around the world reimagine health care. We're ready as people make well-being central to their own lives and their families. We are already there for our customers. Around the clock. Around the corner. around the world. We're ready to bring about health care that means lower costs for our customers, better outcomes, more convenience, equitable access for all. We're ready to lead because we'll never be outpaced or outworked. Because after 170 years, we've learned a thing or two about health care and being there for the communities where we live and serve. Because we've invested in our future and partnered with others who share our values and our commitment to doing what's right. Walgreens Boots Alliance, a health care company from the start. Now we're reimagining health care for our customers for the next era.

That, of course, was just a brief snapshot of WBA and the vital work we do. With that in mind, I want to tell you a little bit about what we've been working on and why I am so optimistic about the opportunities ahead. These opportunities have everything to do with what you see on the screen right now. As we move forward, we plan to be customer-centric with a relentless focus on what they need and what they want. Hyper-localized, knowing that the best healthcare is deeply rooted in local communities. Improving outcomes, since we're absolutely convinced we can further improve the health of our patients. Scale and momentum, which we've seen most prominently during our response to the pandemic. Lowering the cost of healthcare, since there are enormous inefficiencies in the healthcare system today. Delightful customer experiences. so that our brands exceed expectations and leave lasting positive impressions. Transformational partnerships, which will allow us to achieve the quality and speed we want. And pharmacy, pharmacy at the center, since this has always been and will continue to be our foundation and our key differentiator. These things will appear throughout the presentation today, and we hope that you will see how these strategies interconnect. and how we intend to leverage our strengths to build our future. As I mentioned, I came to this role with a very open mind about what the company needed and what it needed from me. Of course, based on my direct experience as a customer, a patient, a parent, and a caregiver, I already had a view. And the reactions of others when they heard I was joining the company. gave me an additional insight into the deep emotional connections our brands have. What has impressed me most are the genuine areas of strengths we have. Anyone who has had recent experience with our services will understand. They will understand it when I say that our greatest strengths are our people and our presence in local communities across the world. We have deep relationships with our customers and patients including chronic patients who are most in need and struggle managing the complexity of their conditions. And we are often the first place people turn for their well-being. So the scale, the reach, the ambition of this company is extraordinary. And the skills, the experience, and the commitment of our people is even more extraordinary. I think it's fair to say I have never seen anything like it. These are truly powerful brands that resonate around the world. But to survive and thrive, we need to be able to show we are more and more relevant. And we must be able to deliver what our customers and our patients need, how and when they need it. The company is making significant progress in this respect. We have already achieved a lot recently, which is both driving change internally and being recognized externally. But we have a lot more work to do. We also, of course, have a phenomenal history and legacy. That gives us a strong foundation on which to build and rebuild. And our expertise sits squarely in one of the most important and expanding industries out there right now. But I also can't deny that we face stiff challenges. We operate in a highly competitive arena and the scale of our markets and nature of our business means it's very cost sensitive. And we continue to need to manage margin pressure in our core pharmacy business. In many areas we have little room for error as we're dealing with people's health and in many cases their very lives. We are operating in markets that can and do change rapidly. through regulation, innovation, or just simply necessity. And we need to be on top of our game to meet those challenges and deliver on the opportunities they bring. On balance, however, I see more opportunity for us than headwinds. And we have tremendous momentum and future potential. I hope that by the end of our event today, you will understand why. and see how we're pursuing a strategy to deliver our very best. So as I mentioned before, nothing demonstrates us at our peak performance more than our response to the pandemic. As you know, we've played a key role in testing and vaccine administration, both across the U.S. and around the world. We acted swiftly to ensure those programs reached every part of our communities. We reached out into the most remote, underserved, and reluctant communities to administer vaccinations, to educate, and to support. We changed our pharmacy and retail model to offer new services, new ways to access advice, medicines, and provisions safely and conveniently. We worked tirelessly as not just a service provider or retailer, but as an advocate, a comforter, an advisor, a friend to those who needed us. We rerouted our resources, financial, technological, and people, to the things that mattered most. And we did this all the way from the White House and Capitol Hill right to long-term care homes, schools, and community centers. As you can see here, The statistics of what we've delivered are truly impressive. They show how quickly and effectively we can act when we need to. And they demonstrate how we deliver expanded health care services into the very heart of the community. This was a great lesson for us. Historically, we would have had the tendency to move a little slowly. We've proven that our pace can change and can be rapid. And much of this infrastructure, momentum, and mindset will be preserved in our new operating model. We should not forget that it's the size and underlying strength of our business that allowed us, at very short notice, to deploy the training, supplies, and some $500 million in funding to support our people in the field in fulfilling their mission. I could spend hours with stories of great work of our team, But let me just give you a quick window onto that world.

Walgreens partnered with the federal government, the White House, HHS, and CMS to set up drive-through testing.

It's never too late to get involved if you really want to make a difference. As far as giving back to your patients, you're already doing that. You're on the front lines talking to them, trying to keep them calm, and just keep doing that. That makes a huge difference in their communities.

WBA, we started with providing COVID testing. And this was before vaccines were even available. But then we took it upon ourselves to create the best model to deliver vaccines to our communities.

Following the approval from the FDA, obviously when states have it, we'll be in long-term care facilities within one to two days tops to start vaccinating those that are in need, obviously.

We need to be patient. We know that there's only limited vaccine. And it's going to be really important that those that are at highest risk get the vaccine.

We've finally arrived at the distribution and administration phase, which is what Walgreens will do. We're going to bring this across the finish line.

This is the first time Walgreens is administering the vaccine to a nursing home resident.

And at this long-term care facility, it happened to be that his grandmother was at the facility.

It was very beautiful. It was a very touching scene. Sorry. But thank you so much for this.

My family and I cannot thank you enough. This doesn't feel like work to me. It's wonderful that we're able to help these people.

As Walgreens Boots Alliance, we thought it was our commitment to get into these communities to make sure that they had access to the vaccine and understood the importance of taking the vaccine.

Getting everybody vaccinated against COVID-19 means getting back together. This is our shot to return to the faces and the places we love.

We've contacted our vulnerable patients and we're making sure that they're getting their medication, whether it's through the books delivery service or I take it right to them at lunchtime. We're providing a reassuring message to our community.

You must return when called for your second jab for even better and long-lasting protection that comes from that second dose.

My philosophy with giving the shots for the pandemic, I'm thankful that I'm able to be part of something bigger and to actually be able to give back and hopefully help end this very soon.

I was really hoping today to try to get my first dose. I've been wanting to get it for a while now since it opened up for teens. And I was just really glad that this was right here when I needed it.

This is one of my most wonderful experiences of being a pharmacist over the past 23 years where we are really helping one-on-one with the community.

Walgreens is doing some of the most important work they could possibly do. But what we really should do is take a deep breath and think about the path ahead. and how much more we can be of service to our customers. I just feel safe now.

Happy tears. Happy tears.

A key element of our response to the pandemic was to respond rapidly to changing customer behavior, driven by the restrictions that COVID protections placed on people. One key enabler here was the deployment of a personalization engine at the heart of an entire ecosystem. It was designed to deliver an elevated customer experience, revolutionize our customer interactions, drive improved pharmacy outcomes, deploy our vast resources more effectively, and integrate our omnichannel retail experience. At the same time, this ecosystem rapidly builds on our existing data resources and customer understanding to help drive further growth across the business. We've made tremendous progress scaling our technological and customer assets. And we've announced previously we have partnered with the absolute best technology innovators across the industry to accelerate our ambitions. The early impact of this work has been seen throughout the year. But in recent quarters, we really began to see the flywheel effect kick in, as the number of people using our customer engagement platform became significant. This cycle of delivering growth from insight-driven personalization, in turn, provides even more insight, forming a core element of our customer-focused future strategy. In the U.S. alone, we have one of the largest and farthest reaching physical networks in the country. with a huge body of highly trained and capable staff. Our team includes over 26,000 licensed pharmacists with regular and frequent interactions with some of the highest cost and highest dependency patients in the country. We have relationships with all the main payers across all the areas of pharmacy, and we operate on most of the best corners of America. We also have over a century of experience as a credible, independent expert when it comes to health and well-being products, services, and advice. Our neutrality in the broader healthcare ecosystem is a tremendous asset, and it's one we intend to deploy going forward. In the past few years, we've invested to develop our capabilities in healthcare services, both within the company and through strategic investments. This allows us to offer a range of services in a variety of ways that simply could not be provided through the pharmacy alone. Now, of course, it's important to ensure that our offering and strategy are relevant and move with the needs of the market. So the skills and experience we need to drive the company must also change over time. We're working hard to complement the huge range of experience and expertise we have in our management and our executive team by infusing new talent, new skills, and fresh ideas. And I guess I'm a prime example of that. And this combination of existing and new will form a key part of the real magic that will deliver the transformation of our business and our business model. Additionally, we have a strong understanding of our customers, the challenges they face, and the hopes, the fears, the passions, and the problems and those problems that influence their healthcare and lifestyle decisions. In fact, I'm confident that this is the secret sauce which will allow us to elevate all of our other strengths and assets to the next level of delivery and operational excellence. It's the deep relationships that we have with our patients, whether they're looking for help in managing complex and awful, debilitating health conditions. or seeking advice and resources to help them effectively manage their well-being, or trying to balance their own health with those they love and care for. These people turn to us week after week, year after year, and we know that we can profoundly change their lives for the better by integrating their care, improving health outcomes, providing lower costs than the existing health system, We're uniquely positioned to play a larger role in the healthcare ecosystem, something I'll talk to you about a little bit later this morning. So, to summarize what we've covered so far, as we head into our new fiscal year, we're going to focus on cultivating our strengths, sharpening our execution, and investing in our future. And of course, today, our aim is to give you a view of how we see our business developing and growing this year. But we'll also go well beyond that with our long-term growth algorithm, which James will cover more with you later. And how we're going to get there has everything to do with the purpose and vision that unite us, which we're going to speak a little bit more about now and then go into our strategic ambitions, fiscal year 21 earnings, fiscal year 22 guidance, and future growth. I believe this will be the first time we've given this level of insight into our longer-term thinking. But I believe it reflects the extraordinary level of detail we've gone into with our review, with our planning and our analysis, and the confidence we have in the strategy we're pursuing. It also shows our ability to transform this business and deliver sustainable growth. We have an overall plan that will deliver sustained growth and profit based on robust, prudent, and perhaps most importantly, integrated healthcare, pharmacy, and retail strategies. We've been actively working on our new healthcare initiative, and we are well on our way to delivering on our ambitions for this new business area. We are actively putting in place the capabilities we need to deliver on our new operating model and to drive growth in our business. We are committed to enhancing communication and transparency to all our stakeholders, including you, our investors, and the financial community overall. And all of this will be delivered through a revitalized strategy, underpinned by an intensified focus on outstanding execution to drive strong growth and economic returns. So, let's turn now to talk briefly about the work we've done on the culture at our company. And what do I mean by that? Basically, I mean, how does it feel to work here? How do we interact with each other and with our stakeholders? And what are the principles that unite us and inform our actions? I am a firm believer that every truly great company understands that culture needs to be at the center of their success. The legendary management consultant Peter Drucker once famously said, culture eats strategy for breakfast. And what he means by this is you can have the best laid plans in the world, but if you can't retain and recruit high caliber talent, and if they're not motivated to work hard and together as a team towards shared goals, you'll never accomplish much. Years ago, company culture was once sometimes viewed as the light and fluffy stuff. But when done right, we know now that it can drive so much more than that. Strong cultures drive performance. Performance since companies that are united by purpose have been proven to outperform the general market 15 to 1. And with recruitment, with 52% of job candidates saying that they will only accept a job offer if they know and agree with the company's purpose, vision, and values. Employee satisfaction, because 9 out of 10 people are willing to trade a percentage of their lifetime earnings for greater meaning at work. Customer retention, which is proven by the fact that 87% of consumers would purchase a product based on values and because the company advocated for an issue they cared about. With this in mind, one of my first goals when I joined WBA was ensuring that we are known among the world's best companies for our culture. So in the last six months, we brought in some leading experts in this field to assess where we are today and where we need to be. We implemented initiatives where we listened closely to team members at all levels and in all corners of the company, all around the world. As a result, we evolved and updated our company's purpose, vision, and values to be our guiding light as we move forward and to influence our decisions, both big and small. As you see here, our new purpose statement, more joyful lives through better health. We're referring here to physical, mental, and emotional health. And that can come in the form of a life-saving vaccination, or can just be as simple as providing a great shade of lipstick that lifts someone's spirits. Our purpose is our why, our enduring reason for being, and the difference we want to make in the world. Next, our vision. and that is to be the leading partner and well-being for all. This is the what? A company-wide aspiration over the long term that is measurable, unifying, and delivers on our purpose. Our vision is designed to be built on our core strengths as a company and expand on what we can offer our patients and customers in the future. And when we say all here, That means across every neighborhood, among every community. As you can see, we looked at this statement word by word to make sure this is something simple, tangible, and most importantly, relevant. Relevant for our colleagues every day. It allows them to measure their work against an overarching company target. And of course, our purpose and vision are also the foundation that we've built our core strategy on. We've distilled our strategy into four priorities, all of which work together toward one central aim to deliver advantage growth in community healthcare while transforming our core business. We have defined the four strategic priorities as you can see here. First, we will transform and align the core businesses. John Stanley is going to take you through this in detail. And while our international leaders, Seb James and Annie Murphy, will be joining us remotely for the Q&A, in the interest of time, I've asked John to talk you through the transformation work in the international businesses, as well as his own business areas. James will then give an update on the Transformational Cost Management Program as part of this element of the strategy. We've seen tremendous success and momentum within that program, and it will be critical as we continue to fund our journey. The second strategic pillar is our ambition to build a range of consumer-centric healthcare solutions, which will form the engine for our next phase of growth. I'm excited to take you through our plans, including some of the latest news on investments, partnerships, and the work we've done internally to build out our healthcare strategy. We'll also cover the evolution of the business model, of these services and how we will see them developing in the coming months and years. We have a strong view on how our assets can help connect this ecosystem together, creating a unique position for Walgreens and helping to demystify healthcare for consumers. Next, given the amount we have to do and the need to focus our resources, our third strategic priority is to refocus our portfolio of business interests. This will help us optimize the use of our resources, most notably our management and executive time and our financial assets. It's absolutely critical that our portfolio of assets strongly connect back to our overall strategy. I spoke with you earlier about focus. Focusing how and where we spend our time and resources is a critical enabler of our strategy. James is going to take us through the work already underway on this. We've made some tremendous progress already, but more work remains. I've already touched on our final core strategic priority, to build a high performance culture and a winning diverse team within the company. I'm very excited to share with you several key hires that I believe will help us build upon our momentum and accelerate our growth ambitions. So let's ask John now to take us through the first strategic priority to transform and align the core businesses. John?

Thank you, Roz. I'm really excited about the new direction of the company and the strong pivot into healthcare. The strategic investments we are making will enable Walgreens retail pharmacy business to create coordinated care models that will help our customers and patients successfully manage their chronic disease and realize better health outcomes, and ultimately make Walgreens a more valued member of the healthcare ecosystem. The strong pivot into healthcare, combined with the investments and improvements that we are making in the core business, will not only allow Walgreens to capture more share of the close to $1 trillion in the integrated pharmacy-led health and well-being market, but also grow our presence in the $1 trillion healthcare services market. And Walgreens is well positioned to do this with our national network of approximately 9,000 convenient locations, our 26,000 pharmacists, and our 54,000 pharmacy technicians, combined with the transformation of our core business to better help chronic patients successfully manage their conditions. Chronic patients make up 60% of the adult U.S. population, but incur 90% of U.S. health care costs. And we have more access to those patients than any other provider in the care continuum. When we attract new chronic patients, they become our best patients. Today, we care for 35 million chronic patients, contributing 84% of our revenues. And there's much more we can do to help these patients have better outcomes. To complete our transformation, we're focusing in four key areas. Building the pharmacy of the future to support and enable our health strategy. Reimagining retail through expanded health and wellness offerings and mass personalization. Accelerating our brands and digital offerings and expanding our transformational cost management program. As we think about how we will build the pharmacy of the future to enable our healthcare strategy, our pharmacists and technicians are foundational to everything we do. They've always played an important role in the communities we serve. But the trust and relationships our pharmacists and technicians have with our patients have deepened over the last 18 months as they have delivered critical medications and vital vaccines and testing during the pandemic. And looking forward, the investments we are making in central fill, digital capabilities, and new roles will allow our pharmacy teams to have an even bigger impact on the communities we serve. To deliver the pharmacy of the future, we're working in four key areas. Reducing the time required and cost to fill prescriptions. Reinventing the omnichannel experience. accelerating growth, and expanding our care model to provide additional clinical services. To free up capacity, reduce both our cost to fill existing prescriptions and our incremental cost to fill new prescriptions, and also reduce inventory, we are building a nationwide network of micro-fulfillment sites using cutting-edge automation technology from IA, a company we recently made a majority investment in. that will leverage our existing Amerisource Bergen distribution network to efficiently fill prescriptions and quickly get them to our pharmacies. Today, we have two micro-fulfillment centers that are operational, serving over 1,000 pharmacies in the Phoenix and Dallas areas. We'll have an additional nine centers to go live by the end of fiscal year 22, bringing the number of pharmacies served to around 3,900. And by 2024, we will have 22 facilities serving over 8,500 pharmacies, and we expect to achieve a $1.1 billion working capital reduction by 2025. In addition to our investment in the micro-fulfillment sites, we are also expanding our centralized services capabilities to free up even more time for our pharmacy teams. Further, we are building a new pharmacy dispensing platform that will make it easier for our pharmacists to fill prescriptions, manage inventory, and provide additional clinical interactions. Components of the new dispensing platform have already begun rolling out to stores, with additional components being released in phases through fiscal 24. These investments are critical because they provide us the capacity and clinical tools we need to grow our prescription business, as well as provide additional health care services. I have a short video that shows how the impressive new micro-fulfillment sites operate, and we'll let you hear from the team bringing this to life.

We're in the Tolleson Fulfillment Center for Nucleus, or our central fill organization. Well, this facility is 68,000 square feet. And in that 68,000 square feet, we utilize a lot of automation, robotic technology. And with that, we have the capability to fill 50,000 prescriptions a day out of this building. And by doing that, we have the ability to offload volume out of the store so they can spend time with patients on clinical services, delivering immunizations, health testing, pay performance metrics, things like that. Customers today are looking for options. They're looking for delivery options, direct to home. They're looking for curbside pickup, all these different types of service channels that they can access care through. We've talked for years about taking work and tasks out of our store. This is a great example of how this is actually coming to life now.

Other key components of the pharmacy of the future are our health system collaborations and specialty pharmacy. Specialty pharmacy is the fastest growing segment of pharmacy from a cost perspective and now makes up more than 50% of the total U.S. pharmacy spend. 75% of all specialty pharmacy prescriptions originate in health systems, which is why our majority investments in Shields make so much sense. Shields extends Walgreens' leadership position as a specialty pharmacy integrator to complement our existing on-site, community, and central fill assets and will create ongoing synergies. We have a long history of working with health systems, with 175 Walgreens pharmacies on-site at Health Systems and 211 Health System clinics on-site at Walgreens. In addition, as value-based care plays a bigger role in health system economics, we have the opportunity to help them reduce costs and drive better outcomes through collaborative care models. As we think about the renewed role and relevance of community pharmacy, We see great opportunity to expand the scope of practice of our pharmacists to deliver additional services and grow revenues. COVID-19 sparked care site migration from primary care physicians, hospitals, and even workplaces to pharmacies. We've administered more than 40 million COVID vaccines to date and have achieved 21% share of all COVID vaccinations administered in the fourth quarter. and we believe the transition of services from traditional health care settings will continue beyond the pandemic. Sixty-one percent of health care leaders expect care delivery in non-clinical settings to accelerate post-COVID, and 60 percent of patients receiving care in hospitals would be willing to receive care in a lower acuity setting. While virtual care is expected to play a continued role, in particular to review test results and for follow-ups, there's still a preference for first interactions and initial diagnoses to be in person. For Walgreens, in the short term, we're focused on maximizing the administration of COVID-19 vaccinations and testing while retaining new patients. And longer term, we'll leverage their preference for in-person interactions with our deepened relationships and national footprint to accelerate our transition to becoming a broader care provider. And although we are in early days, we continue to gain traction, expanding the role of pharmacists to deliver pharmacy and healthcare services. For example, we are serving as a trusted provider of COVID-19 rapid testing, administering over 16 million tests to date. And we will leverage testing technology innovations to introduce new points of care diagnostics, including RSV, pneumonia, strep, and STIs. Additionally, we know that closing care gaps for chronic conditions will drive better outcomes, and we're already piloting this in several markets. In Idaho, we're partnering with Cambia to identify high cholesterol patients with care gaps, providing them with liver function test kits and our pharmacists can prescribe statins based on the lab results. We have A1C pilots in four states where we're partnering with three payers to provide HbA1C care gap closures for high-risk diabetic patients. We've launched pilots in two states to reach HIV PrEP patients as only 18% of the 1 million patients who are eligible are on therapy, and 13% of the 1 million people living with HIV are unaware. So we have HIV testing pilots in two states, and we estimate this could grow to $26 million in revenue by fiscal year 24. And we're also conducting hep C testing in some states. Although many of the health care services we provide today are reimbursed based on fee-for-service, we believe that growing outcomes-based health care models will allow us to participate more broadly in the value-based care marketplace. A Lancet study from October of 2020 estimated that approximately $730 billion of health care spend is attributed to modifiable risk factors such as BMI, blood pressure, A1C, diet, and smoking, and is concentrated in several key conditions led by diabetes and cardiovascular disease. Further, medication non-inherence is estimated to cost the health care system between $100 and $290 billion per year, according to NACDS. We know collaboration is key to addressing adherence and improving outcomes, so we're executing at-scale programs in P4P contracts with payers and increasing performance year over year. And we've developed a collaborative care practice agreement with VillageMD that allows our pharmacists to complete bridge refills, formulary interchange, and prior authorizations. And we're providing clinical consultations to VillageMD patients. You'll hear more about our VillageMD partnership from Roz shortly. Shifting to our second priority to support transforming the core, I'd like to talk about how we're reimagining retail through our health and wellness leadership and mass personalization. Key to enabling this reimagination is the recent launch of the MyWalgreens program, which established a powerful customer engagement platform to provide better insights to meet the needs of our customers. Given the opportunity to expand our relationships with our existing and chronic patients and attract new ones, there's meaningful headroom to grow our business. We're well positioned to capture this opportunity, and we know what we need to do to win, including... better understanding our customers to provide personalized health and wellness recommendations, ensuring our pharmacists and technicians are available to provide expert health advice, both online and in-store, and gearing our loyalty program rewards towards better health among top chronic customers. We launched our MyWalgreens program in the midst of the pandemic. Since then, we have enrolled more than 85 million members. increased the program NPS by 20 points, delivered more than a billion dollars in attributable revenue, and increased our marketing effectiveness. More importantly, we can now connect directly with customers, including nearly 53 million emails, nearly double from a year ago. We believe the key to growth is personalized offers and advice. And when we say personalized, We mean not only to what you buy, but to who you are and your specific needs, providing reliable, clinically appropriate information. That's why we're modernizing the retail health experience and developing an industry-leading omni-channel personalization engine built on cloud technology with world-class partners. Let me show you a short video that illustrates how our mass personalization approach is driving engagement.

Mass personalization is a recipe for growth, and the assets we have are unstoppable. We have brands that are beloved and synonymous for health and wellness, with help from trusted partners like Adobe, Microsoft, and WPP. We are investing and unlocking data assets and marketing technology to bring experiences to customers. The results speak for themselves. In the past fiscal year, we have seen tremendous success. Walgreens Digital Reach has grown by 100%, boosting usage 40%, Boots online sales were up 85% between March 1st, 2020 and March 1st, 2021. And the Boots app has driven a large number of online sales and continues to prove popular with customers. We continue to leverage our assets to deliver the right message to the right person in the right place and at the right time.

Our success with mass personalization has created an opportunity to expand alternative profit businesses, including media advertising and financial services. Last December, we introduced Walgreens Advertising Group to capitalize on the retail media category, which is projected to grow to a $100 billion industry. Not surprisingly, digital is driving the growth and 70% of all U.S. media is expected to be digital by 2023. With the capabilities we are building, we believe this will be a significant opportunity for us. We launched Walgreens Advertising Group in December 2020 and to date have executed more than 900 campaigns and activated with over 200 brands. More recently, in August, we launched the industry's first credit card that rewards customers for healthy choices. We're targeting to reach well over 1 million active credit cards. The third theme I want to discuss related to transforming the core is accelerating our product brands and digital offerings. The key initiatives driving this area of our transformation are building on our leading owned brands innovation through stronger brand development, expanding our omnichannel offering to meet the needs of our customers where, when, and how they want to shop, and dramatically expanding the best health and wellness assortment and offering, easy, better-for-you product options, and making health and well-being products more affordable through both pricing and value. Walgreens' own brand ambition is to reach $4.7 billion in revenue and 18% penetration by the end of fiscal 2022. We have plans for rapid innovation and continued growth to reach our longer term goal of 22% penetration by 2024. We'll also reimagine our retail offer with better-for-you products, including in underserved areas, and we're already seeing a strong customer response in our pilots. And we'll complement these offerings with our differentiated expertise, personalized support, and integrated experience. Our digital transformation was accelerated by COVID-19 as we continue to invest in omnichannel capabilities that delivered what customers needed. Last November, we launched curbside pickup in as little as 30 minutes nationwide and have completed more than 10 million same day pickups. In spring, we expanded to nationwide same day home delivery across multiple marketplace platforms. bringing our total same-day home delivery and pickup transactions to more than 23 million. The combination of these expanded digital offerings, combined with our e-commerce ship-to-home offering, grew our e-commerce revenue by over 100% in the fourth quarter of fiscal 2021. So how will we fund all of this transformation while investing in growth? It will require comprehensive retail management, So we'll do that by optimizing existing investments to improve value perception amongst our best customers. We are shifting investments from mass promotions to mass personalization. In the midst of the pandemic, we transitioned away from 18 million weekly print circulars to a digital circular that this month will be fully personalized to each individual customer. In addition, as I mentioned earlier, the new MyWalgreens credit card provides the opportunity for customers to earn even more value. And we are looking at further evolving our loyalty program to reach our best customers. We'll also review product assortment, own brand positioning, and customer preference to both better meet customer needs and improve cost of goods efficiency. We'll also continue to leverage purchasing groups to create additional customer value. At the same time we're transforming our digital platforms and product offerings, we are modernizing our store experience through our format strategy, store technology, and strategic partnerships. Walgreens historically operated mostly cookie cutter stores with similar offerings across the country. We are reinventing our customer offer and developing a portfolio and multi-format approach to our assets. We are going to expand our store program this year and transform our prototypical store of 12,000 to 14,000 square feet with multiple customer propositions, including the introduction and development of a new core health and well-being retail products offering featuring Better For You products, Extending our retail health presence with over 160 Village MD locations by the end of 2022, providing patients an integrated primary care and pharmacy experience. And continued addition of LabCorp locations for a total of 375. In addition, we will have opened nearly 100 small format stores by the end of 2022. We will wrap our physical store reinventions with digital capabilities and modern technologies to reimagine the customer experience. This will include the previously discussed digital innovation to help customers live healthier lives with personalized recommendations and advice and omnichannel fulfillment options. In summary, we have a great opportunity to grow our business by transforming the core to enable our healthcare strategy. We are building the pharmacy of the future, reimagining retail through expanded health and wellness offerings and mass personalization, and accelerating our brands and digital offerings. We are committed to being transparent regarding our progress towards this future, and James will cover the financial goals later today. In addition, we have established key KPIs to measure progress against important areas of our strategy, including our TCM cost savings, own brands penetration, and alternative profit income. Our goals are to achieve the following for these KPIs by 2024. An additional $1 billion in cost savings through our TCM program, 22% own brand penetration, and $300 million of alternative profit income. Now let me take a couple of minutes to give you an update on BootsUK. Thank you. Boots continues to accelerate its omni-channel transformation to grow its portfolio. They have the number one health and beauty website in the UK and have seen 3x growth. Online sales is approximately 20% of Boots' total retail sales, and AOI has grown 2x over fiscal year 20. Boots is also transforming healthcare through testing, vaccinations, and digital services. To date, Boots has delivered more than 3.7 million COVID-19 tests and more than 800,000 first and second COVID-19 vaccinations since January 2021. Now, Boots will support the NHS to deliver COVID-19 booster vaccinations in 55 of its stores in England. During their COVID-19 booster vaccination appointments at Boots, patients will also be offered a free NHS flu jab wherever possible if they are eligible and subject to supply in store. And Boots continues to grow its telehealth offerings, now with more than 100 healthcare and pharmacy services available to patients, including online doctor services for 45 healthcare conditions, from skin conditions to to sexual health and family planning, alongside weight loss support, diabetes testing, and menopause treatments. The Boots online doctor services can provide quick access to advice in prescription-only medicine without having to see a GP through online consultations that can take as little as five minutes to complete. Boots is also investing on the retail side of the business by strengthening its beauty offering. More than 40% of beauty products in the UK are purchased at Boots, making it the number one beauty destination in the UK. And to continue that momentum, Boots has introduced more than 60 new beauty brands in the last 18 months, including Anastasia Beauty Beverly Hills, Ama Beauty, and Bite Beauty. Boots is also investing to enhance the in-store experience with more than 100 stores completed as part of a multi-format store strategy that aims to provide customers with greater access to the world's leading beauty brands. Additionally, over 100 new beauty specialist roles will be added as part of this next phase in the beauty reinvention project. There are now over 700 Boots beauty specialists across the U.K., and their role is to provide personalized, brand-neutral beauty and skin care advice to customers for free in stores. They are fully trained by Boots, including in Empathy Training, a unique program based on brain science and human emotions, which allows them to further understand customers' needs. and additional 830 Boots Macmillan Beauty Advisors can provide support to customers going through cancer treatment with free, face-to-face beauty advice. Boots is one of several proof points of WBA's leadership in the beauty space, and we are continuing to grow our beauty brands portfolio in the U.S., the U.K., and internationally. In the U.S., No. 7 Beauty Company currently delivers sales of around $235 million dollars, with the U.S. being one of the largest growth markets, expected to grow more than $200 million over the next three years. In the U.K., our beauty brand sales are $450 million today, and we recently launched a direct-to-consumer offering to reach even more customers. In China, we're in the market with soap and glory, and we'll launch number seven there in 2023. Now let me bring up James Kehoe, our Chief Financial Officer, to talk about our Transformational Cost Management Program. James?

Thank you, John. I am delighted to report that our Transformational Cost Management Program has delivered very strong results. We have already achieved cumulative cost savings of over $2 billion, and this is one year ahead of our original goal. As a result, we are expanding the TCM program and raising the savings goal to $3.3 billion by 2024. Let me give you a little bit of history. We originally announced the program in December 2018 with a savings goal of $1 billion, and the savings were intended to offset inflation and volume impacts and to fuel long-term growth investments. we have consistently delivered strong results, raising the goal for targeted savings a number of times, with the most recent target being in excess of $2 billion of cost savings by fiscal 22. As you can see, we have already delivered savings of $2.1 billion with around $800 million of savings in the most recent fiscal year. Over the period, SG&A efficiency has improved by approximately 190 basis points to 17.7% of sales. We are now expanding the program and targeting commutative savings of over $3.3 billion by fiscal year 24. We have a number of in-flight initiatives that are showing strong momentum and we have built out a comprehensive funnel of new and innovative initiatives. We have also updated our projected implementation costs to a range of 3.6 to 3.9 billion dollars. Here you can see the broad scope of initiatives that we are driving across the business. I won't drain this slide, but I will highlight one example just to give you a sense for the evolution. We have made good progress in establishing global business services in more traditional areas such as IT, Finance and HR. And in all cases, we are delivering both cost savings and capability advancements. We are now expanding the business services concept across a wider scope of our business. We are reinventing how we operate and this will make us more effective and efficient as we build out more advanced capabilities and technology. In summary, we are raising our cost savings goal to $3.3 billion by 2024, and we have identified a comprehensive set of initiatives to deliver or exceed this goal. And with that, let me pass you back to Roz.

Thank you, James. And congratulations to you and your team on delivering such strong results on the Transformational Cost Management Program. Now, as I promised earlier, I'm going to cover in more depth our next growth engine and our future as a healthcare company. But before I go into all those details, I want to share a personal story with you about the last months of my mom's life to provide just a little bit of context. So this was 10 years ago. She had been diagnosed with several serious health issues, including diabetes, cardiovascular disease, high blood pressure, and as a result, kidney failure. While it was awful seeing her suffer from all those ailments, she was relieved to have good health insurance after 30 years of working in the auto industry. And we were fortunate to have a large family around her with the resources and the expertise to provide a high level of care. In fact, I'm very proud to say that my sister is a pharmacist, and she's married to a doctor of internal medicine. But even in our situation, we found the experience of caring for my mom to be incredibly confusing and unwieldy and burdensome. We had to navigate across several health systems and different doctor's offices, including a nephrologist, endocrinologist, and a cardiologist. And my brother had to take time off work every other day for several hours to take her to her dialysis. Even worse, the bills from all these visits kept coming in, sometimes several months after the original appointments. And it was very hard to keep track of what checks needed to be signed and when. This was a time when our family should have been able to focus mainly on just enjoying our remaining moments. But instead, we were distracted with many unnecessary tasks and details. And I know this story is one that several of you can relate to as well. And many families and patients find themselves in far worse situations than this. But I just wanted to mention this experience because what I'm about to discuss with you is deeply personal to me. And I want to help our patients avoid similar scenarios in the future. So the question is, how does our company plan to do that? As I mentioned earlier, we have momentum in our and proof that we can execute at pace. And we have demonstrated that we can provide impactful results at scale. The pandemic further affirmed that the timing is right for this new phase of our company. That consumers are embracing retail pharmacy to manage their health care more than ever. and that we're building on this renewed focus on health and well-being as we expand Walgreens presence in healthcare. We have also decided the time is right to accelerate our ambitions through some strategic investments. And I will share more with you on that in a few minutes. Living through this pandemic has taught us many lessons and has shown us more than ever that healthcare is inherently local. The needs of communities are diverse. And Walgreens has a deep understanding of the neighborhoods and communities we're in, each and every one of those corners and intersections on streets across America. Consumers are searching for ways to fit managing their health into their lives and are thinking about their health and well-being holistically. Walgreens is well-positioned to meet them where they are, be it through our stores or digital channels. As healthcare is local, our scale and reach are critical to engage consumers. And with our diverse assets, we can provide services tailored to the community. We have 9,000 of the best locations in the U.S., which gives us the big strategic advantage as we accelerate our journey. So with all that said, I'm incredibly excited to announce today the launch of Walgreens Health, This is a new segment within our business that will focus on bringing together our health care ambitions and powering up our new and existing assets to support the journey. Walgreens Health allows our patients to view us as a friend in health care. And we want to demystify health care for them. Like I talked about with my mom, it doesn't matter where you come from or what resources you have at your disposal. Health care is complex. So we plan to bring equitable, personalized, whole-person healthcare to local communities across America. We will relentlessly deliver healthier outcomes, focusing on people's holistic well-being by integrating world-class technology and an unbeatable national footprint across a connected community of payers and providers. We are creating a unified, open, and connected health experience that gives people anytime, anywhere control over the personalized care they need, wherever and however it's best for them, in store, at home, online, and via mobile app. Creating better outcomes for consumers and partners is critical to us. And we can do that through our ability to maximize Walgreens' diverse assets. This is where we get our leg up. This is where we accelerate. This is how we differentiate. As we apply our lessons learned and core principles, we realize that our healthcare strategy must be both consumer and partner-centric. And payers, providers, and patients are all part of this equation. It will be important to create value for both our consumers as well as our partners. We will engage consumers in their healthcare and leverage people and technology to address complex and chronic conditions like the ones I described earlier that my mother suffered from. And we can offer aligned payment models, which you'll remember was also an issue in my mother's case, and that can lead to better health outcomes and lower costs. First and foremost, we will focus on the consumer or patient by creating delightful and personalized experiences. Walgreens has trusted consumer relationships and a unique ability to engage them in meaningful and personal ways. Payers and providers seek a strategic partner, a partner that can engage consumers and help them improve health outcomes and lower total cost of care. With the variety of services we can offer physically, digitally, and in the home, Walgreens Health is a nationally scaled, locally delivered business with a diversified, multi-asset strategy. We will maximize all the strengths and assets that Walgreens has from our trusted consumer relationships, our community presence, our care teams, our deep partnerships with payers and providers across the country. Many patients and their caregivers are overwhelmed as they try to manage across different health conditions, providers, appointments, bills, and medications. Our new Walgreens Health greatly simplifies and improves that experience. We have established a tech-enabled care model powered by a health care platform that is omnichannel and personalized for the consumers we serve. This platform will create a pragmatic and innovative experience for consumers across their journey and then knit together the products and services from Walgreens Health and our partners. For example, imagine the day when we could offer services across the care continuum, including finding the right doctor, scheduling appointments, managing chronic conditions, obtaining insurance records, viewing health records, accessing wellness services, setting up health devices, providing nutritional and preventative information, and much more. Ultimately, our goal is to move towards value-based care and directly impacting cost and outcomes. To achieve our ambitious goal of redefining the healthcare experience across this country, we will strive to manage the total health of populations through value-based arrangements. Our go-to-market strategy starts with leveraging our strengths in delivering at the local level and addressing gaps in care through our core assets. This is a means to both directly engage consumers as well as create immediate value for our payer partners. Over time, We will then look to bring the tools and services to enable our provider partners to more effectively manage populations longitudinally and engage their patients outside the doctor's office. And as we enter into value-based and risk arrangements, we will look to bring owned and partner care delivery assets so that we can manage to clinical outcomes and take delegated risk on populations. As I mentioned earlier, I spent a great deal of time working with our team to identify our best opportunities for the future. And as a result, today, I'm extremely excited to share a couple of strategic investments with you. To show our commitment and our conviction to accelerating our strategy, we are pleased to announce that we have made strategic investments in VillageMD and CareCentrics, taking a majority ownership position with them. These assets accelerate our capabilities in the market, our impact on the care journey, and our ability to manage rising costs in high-risk patients who drive an outsized proportion of the spend. These are the same patients who frequently visit our stores and meet with our pharmacists, and we are uniquely positioned to engage and impact their care across the continuum. For us to better care for them beyond the pharmacy, our ability to deliver care through owned and partner assets is critical. We know we need to bring forward capabilities in the primary care and post-acute care spaces of their care journey. Not only does VillageMD and CareCentric complement our expertise in retail and specialty pharmacy, but they build upon our portfolio of assets across our newly launched Walgreens Health Corners. Now, I want to share a few more details about the exciting work of both of these companies. I spoke with you a moment ago about the consumer journey through healthcare. Carecentrics is focused on that final stage in the journey, post-acute, basically when the patient goes home. This is the point in the journey where many folks feel abandoned or lost. I certainly know we did when I was taking care of my mother. makes it easier for both caregivers and patients to understand their options and connect with the expertise they need, which lowers readmissions significantly, resulting in lower total cost of care. Our stake in Carecentrics really helps us as we strive to play a role across the care continuum. While we already have a fantastic partnership with VillageMD, Our ownership stake gives us a greater opportunity to expand and accelerate, while further coordinating our assets to drive better outcomes. We already know how to work with VillageMD. We know how to scale their model. We've built co-located clinics at many Walgreens locations and have continued to learn while we did. And there are great opportunities to bring the physician and pharmacist together to improve overall care. One thing that is very important about VillageMD and a primary reason we started this partnership to begin with is that they are focused on all patient populations. Medicare, Medicare Advantage, Medicaid, commercial, and the uninsured. This was a really important aspect for us since it allows us to serve patients across their life journeys. For most people, Your primary care doctor stays with you throughout your life. And we think VillageMD's model really supports this vision. I'm also very excited to share that this expanded partnership will increase the number of co-located clinics that we had originally planned, going from 600 to over 1,000. And lastly, this model is focused on value-based care, which completely aligns with the strategy for Walgreens Health that I shared with you a couple of slides ago. I'd like to take a moment to share a video of how Walgreens and VillageMD partnership is working today. This is just the beginning, but I hope you'll share my excitement about our potential here.

With Village Medical's clinic being in close proximity to our pharmacy, we're able to collaborate more effectively and help provide custom care plans for our patients, as well as address any urgent patient issues more quickly and effectively.

I was diagnosed with systemic lupus, and it changed my life. I needed to come up with a plan, one that was strategic, one that involved my pharmacist and my doctor. So they became like my family.

For a patient like Christina, who takes multiple medications with lots of different side effects, the ability to consult with her doctor and her pharmacist at the same time in the same location drives a result that I'm not sure she could have achieved in any other location.

I love the fact that I get to work closely with these patients and educate them on every aspect of their medication and addressing any barriers to adherence that they may be experiencing. I get to communicate freely with the providers here. If we have any questions in regards to a patient's medication, they're only one phone call away.

You go from the doctor's office straight next door to the pharmacy, you're out of there. They've made everything so simple. I mean, where else can you get that?

Now, I'd like to share more about the organic work we've been doing beyond CareCentric and VillageMD. Over the past year, we have developed and are bringing to market a new offering, the Walgreens Health Corner, which includes both digital and physical channels. The digital channel of the Walgreens Health Corner will empower our customers to feel more in control of their health by connecting their daily health to the accessible and high-quality services they need whenever and wherever. The physical channel of the Walgreens HealthCorner takes the digital experience to the next level by bringing to consumers in-person expertise and care from someone they trust in their community. We have started our development in the digital channel of the Walgreens HealthCorner in two key areas. The first area is the consumer and caregiver app, which one allows consumers to access the programs and services that they need digitally. Secondly, it drives engagement through simple nudges and friendly reminders to help them take the right actions to better manage their health and follow what their doctors are recommending. Thirdly, it makes caregiving less hard and emotionally taxing by enabling caregivers to manage the tasks, medications, and appointments of their loved ones. It also will provide caregivers with access to support resources for themselves to help them better manage their own needs. The second area is the health marketplace, which will curate personalized programs and services that are most relevant to a consumer and covered by their insurance. Also, it integrates back to the provider to help them select the right programs at the point of care. and to connect back to the physical channel of the Walgreens Health Corner by bringing forward guidance, coaching, and chronic condition support. Leveraging the community presence of Walgreens stores, we have already delivered into market and operationalized Walgreens Health Corners. They are in 40 locations open today. They are working, and our health plan partners love them. They provide a differentiated experience to deliver individually. clinical and non-clinical services. The physical channel of the Walgreens Health Corners are comprised of a welcoming physical space in our stores with a private health room, a technology bar that provides access to devices and technologies such as lifestyle products and remote patient monitoring devices that help consumers manage their health and chronic conditions, and the health advisors who are licensed clinicians, pharmacists or nurses, who are available to deliver health care services, provide advice and guidance, and build a local trusted relationship. So just to clarify, the difference between what we've discussed earlier, the Walgreens Health Corners are staffed by clinicians, such as pharmacists and nurses, while VillageMD clinics are even broader services and are physician-led. Next, I want to talk a bit about the strategic contracts we have in place with innovative payers across the industry. which provide Walgreens Health with access to over 2 million lives. We started with Clover Health earlier this year as our first partner in these services and are actively serving their members. In fact, as part of this program, we already have Health Corners in place today serving their patient populations. And we recently announced a strategic partnership with Blue Shield of California with a plan to launch new products and services to their members in the coming months. The potential of partnerships like these are vast. And we continue to talk with many other plans across the country that are interested in a relationship with Walgreens Health. So this is just the beginning. To bring to life the Walgreens Health Corners, I'd like to share with you a short video featuring Clover members using our services, our health advisor team, and our Clover and Blue Shield of California partners.

The HealthCorner program, we offer care gap services for patients. So these are things like blood pressure, BMI, flu shots, things that they might not get in their everyday care and things that we want to help minimize long-term complications in the future.

Patients do really enjoy the privacy that they can get in our HealthCorner. They can talk about their health in a relaxed setting and not be rushed.

I can use my license to educate people on the right products, and they love it.

I think it's perfect because a lot of people can't get to the hospital or doctor. You can get your blood pressure and stuff taken care of. So I think it's great.

Education is very important just because health literacy can be very low in certain communities. They explain to them how important it is to take their medications, to focus on their diet, their exercise. If they really understand the whole concept of this, they take it more seriously and they can really prevent things like a heart attack, a stroke in the future that would definitely cost way more for them in terms of medical care and quality of life.

Everyone deserves great health care. At Clover, at Walgreens, we both believe in equitable access and bringing care to everyone, irrespective of who their doctor is and irrespective of who their health insurer is. We're just increasing that accessibility and that convenience, which then we see leads to better outcomes at lower cost.

I just love things that are innovative and pragmatic, and I think the health corners are this. It's innovative in the sense that it's truly trying to design a system around the consumer or the patient and deliver that high-tech, high-touch experience. But it's also pragmatic. It's meeting people where they are. So anytime you can be creative, innovative, and try to move the system in a transformational way, I think you have the best chance for success, and this meets both of those parameters.

So the external partnerships are very important to the health corner. We're able to not only leverage their patient density and where we place our health corners, but able to really connect directly with their patients. By having a clinician in our stores, we're able to meet them where they are and empower them to champion their own health and wellness.

So one of the tools we actually use all the time is the Walgreens app. It has something in there called Find Care. So you can actually find providers, telehealth visits, or even COVID testing, things like that, that our customers do need, but don't really know how to find or are unsure about the cost.

We're able to help them manage and navigate through their health care, whether it's physicians, billing, and getting them the care they need. They have enough issues as it is. We want them to focus on their health, and I think that's what we're committed to, is to making this a success for our patients.

As a pharmacist, this is honestly what I've dreamed of doing, is to help our patients to make a difference in their health care journey and in their lives.

We already have 2 million lives in our ecosystem today through our existing partnerships. We expect that with over 10 million by fiscal year 25. One million of those will be in risk, and that number doesn't include the VillageMD ambitions. And to expand our access to lives, it will be important to continue building a strong ecosystem of partners. Clover and Blue Shield are just the beginning. We are already engaged with other interested partners and expect to be well over 10 by 2025. As we scale our access to lives and partnerships, we will continue to build out our very successful health corners. We will have over 100 by the end of this fiscal year and expect to reach 3,000 plus at scale. Lastly, and as I mentioned earlier, our expanded partnership with VillageMD will allow us to scale the number of co-located clinics toward 1,000 units by 2027. This will give us unprecedented reach and scale. We know that this is just the beginning, and we'll continue to share even more key metrics with you as this business gets closer to reaching scale. You have our commitment to an open dialogue as we continue to build this new healthcare segment. So to sum this all up, The launch of Walgreens Health is a big, bold move for WBA. It represents our commitment to care for communities across the country and builds off our core assets and long-established consumer relationships. We have already made major strides by making two new majority investments in care delivery with VillageMD and CareCentrics. launching and operationalizing Walgreens Health Corners, both physically and digitally, signing strategic contracts with two partners, providing access to over 1.8 million lives, and putting in place an aggressive growth plan that will be executed through a balance of organic and inorganic activities. We look forward to taking you along on this journey as we continue to rapidly grow this business. And with that, I'm now going to turn it over to James, who is going to cover a key part I know you've all been waiting for. He's going to speak about how we're going to focus our portfolio and connect our investments and capital to our strategy. James?

Thanks, Roz. Our third strategic priority is to refocus the portfolio and optimize capital allocation. Ultimately, we aim to maximize long-term shareholder returns. We have refined our capital allocation principles and approach with a much sharper focus on both the U.S. and healthcare markets. Our portfolio transformation started earlier this year with the successful divestiture of our Alliance Healthcare business for $6.5 billion, achieving an attractive 12 times EBITDA multiple. Our focus has now shifted to two key areas. Firstly, we are optimizing our portfolio of equity investments. One recent example was a decision to increase our stake in Shields Health to 71%. Secondly, acquisitions must be aligned with strategy and prioritize our healthcare ambitions. You heard earlier from Roz, that we are announcing two investments today. We have acquired an initial 55% stake in Carecentrics and we have taken a majority stake in VillageMD. Both of these investments are targeting sweet spots in care delivery and value-based care and are fully aligned with strategy. As we look at our capital allocation priorities, We expect to see a healthy balance of organic investments and strategic M&A. We remain committed to a growing dividend and returning excess cash to shareholders. And finally, we are very focused on optimizing our attractive portfolio of equity investments. We will assess M&A with an operational and financial lens. While we continue to seek attractive returns, ultimately we will prioritise quality healthcare assets that accelerate growth and enhance capabilities or talent. Nothing new on our leverage goals. We will continue to target solid investment grade. However, we may temporarily flex upwards for the right strategic acquisition. Looking forward, There is a clear opportunity to optimize our equity investments. We have already assessed each investment in terms of strategic fit, synergy with WBA, and potential for future financial returns. Obviously, we cannot share our conclusions, but our first actions do show a tendency to take majority positions when we are convinced that the investments are aligned with strategy and offer attractive long-term financial returns. In the case of Shields, we took an initial 25% stake in July 2019 for an investment of $165 million. We have now invested a further $970 million to increase our stake to 71%, with a future path to full ownership via a put-call structure. The acquisition of an initial 55% stake in Carecentrics and the $5.2 billion investment in VillageMD are key steps in bringing to life our healthcare ambitions. Looking forward, we do expect to make further changes to the equity investment portfolio, and we will communicate each strategic move as we get closer. Let me now provide a little more information on the VillageMD and CareCentrics transactions. As Ross highlighted earlier, VillageMD is an incredible opportunity. It is a leading value-based primary care provider with 230 clinics in 15 markets. It operates in a vast market with a unique operating model, and it is poised for explosive growth as it builds out 1,000 Village MD at Walgreens clinics over the next six years. WBA is investing $5.2 billion to raise its stake in Village MD to 63%. Fiscal year 2022 revenue is estimated to be around $1.3 to $1.5 billion, depending upon the transaction closing date. we expect the transaction to be dilutive, with an impact of 8 to 15 cents, depending upon closing date and the pace of their investments. Finally, we expect that VillageMD will proceed with their IPO later in calendar 22, with WBA remaining the majority shareholder. Carecentrics is an industry leader in the post-acute and home care sector, providing care coordination and outsource benefit management services. The U.S. post-acute care market represents approximately $75 billion in healthcare spend annually and is considered one of the fastest growing segments in healthcare. The $330 million investment is for an initial 55% stake with an option to acquire the remaining equity interests in the future. Fiscal year 22 revenue is estimated to be around $1.2 to $1.4 billion, and we expect the transaction to be slightly EPS dilutive in fiscal 22 and accretive thereafter. My final slide brings it all home. This lays out the tremendous value of our equity investments. we estimate a valuation range of around $21 billion, the majority of which are healthcare investments. The investments range from majority stakes in VillageMD, Shields, Carecentrics, and IA, to minority positions such as our 28.5% shareholding in AmerisourceBergen and our 21% shareholding in OptionCare. In total, This attractive healthcare portfolio is valued at around $20 billion. Given the large value of our equity investments and the launch of a new, fast-growing Walgreens health segment, moving forward, it will be increasingly important for the market to value WBA as the sum of the parts. Given the upfront healthcare investments, it may also be more appropriate to use revenue multiples to value the Walgreens health segment. And on that very positive note, let me hand it over to Roz for our fourth and final priority.

Thank you, James. And now I'm going to add a little bit more detail on our final core strategic priority to build a high performance culture and a winning diverse team within the company. You'll recall that earlier I discussed how our purpose and our vision are going to unite and propel us forward. And underpinning our purpose and vision are also our four core values, which we fondly refer to as the four C's. They are courageous, connected, committed, and curious. Courageous is about challenging the status quo, addressing conflict directly, and driving informed risk-taking. Connected is about reflecting the communities that we serve, understanding the needs of others, and innovating together. Committed is leading with integrity, building on our legacy, and striving boldly towards the future. And lastly, curious. Curious is continuously learning and adapting, following the science and the data, and creating paths where none existed. You'll be hearing a lot more about how we're carrying out our purpose, our vision, and our values to deliver even better and more meaningful results in the future. But of course, one key way we're going to supercharge our culture is with strong leadership. which is why I'm thrilled to share more about some of our most recent hires who reflect our future growth. We've added new talent and expertise across retail, healthcare, customer experience, and HR, in addition to our core business of pharmacy and healthcare. These new leaders bring a collective set of experiences across the healthcare and retail industries from organizations with strong customer-centric mindsets. This will be instrumental as we further innovate across every consumer touchpoint and work to define the future of health and well-being in the communities we serve. I'm very happy to welcome to the company Holly May, Global Chief Human Resources Officer for WBA. Anita Alamond, Chief Transformation and Integration Officer for WBA. Danielle Gray, our Global Chief Legal Officer for WBA. and Tracy Brown, President of Retail Products, Chief Customer Officer for Walgreens, and Jeff Greener, Chief Financial Officer for Walgreens. So welcome to all of our new hires. At this point, I'd like to turn it back over to James, and he will take us through our fourth quarter earnings and fiscal year 21 financial highlights.

Thank you, Roz. Before getting into our long-term growth model and guidance, let me first give you some color on the fourth quarter and full-year results. In summary, we had an excellent quarter. Adjusted EPS was $1.17, well ahead of expectations, and up 28.1% versus prior year on a constant currency basis. Full-year adjusted EPS was $4.91, an increase of 13.7% in constant currency. Overall, this result exceeded the guidance we provided at our third quarter earnings call, driven by higher COVID-19 vaccinations, strong U.S. retail performance, and good execution across most markets. We administered 34.6 million COVID-19 vaccinations in fiscal year 2021, 6.6 million doses higher than the guidance we provided at our third quarter conference call. Demand for vaccinations accelerated as the Delta variant cases spiked, and we executed strongly, achieving a four-quarter market share of around 21%. Free cash flow increased to $4.2 billion, and following the completion of the Alliance Healthcare divestiture, We delevered the balance sheet by $6.5 billion compared to last year. Strong execution was fundamental to the quarter. In the U.S., comp scripts grew 8.8%, including a 485 basis points uplift from COVID-19 vaccines. Underlying scripts grew 4%, driven by seasonal scripts. U.S. retail comps grew 6.2%, with broad-based growth across most categories, fueled by our omni-channel and mass personalization initiatives. The UK recovery is very much on track. COVID-19 restrictions were lifted in the middle of July, and we drove strong market share gains, especially in beauty, which grew sales by 24.8%. Now let's look at the fourth quarter and full year financial metrics. Fourth quarter sales advanced 11.8% on a constant currency basis, reflecting strong growth from both the international and US segments. Adjusted operating income increased 22.1% on a constant currency basis, driven by strong gross profit growth. and this led to adjusted EPS growth of 28.1% in the quarter. In summary, EPS growth was of high quality. Full-year sales increased 7.5% on a constant currency basis. Adjusted operating income increased 7.7% on a constant currency basis, again reflecting strong adjusted gross profit growth across both segments. and savings from our transformational cost management program. Fiscal year total EPS was $5.31, a constant currency increase of 11% over prior year, despite the divestment of our Alliance Healthcare business on June 1st and the loss of three months of profit contribution. On a continuing basis, adjusted EPS was $4.91, a constant currency increase of 13.7%. As a reminder, our EPS guidance at the start of the year was low single digit. Lastly, on a continuing basis, GAAP EPS increased by $2.10 to $2.30. And this also reflects a prior year impairment charge of $2 billion and investment gains this year related to our holding in option care health. Now, let's briefly look at segment financial performance in the fourth quarter. U.S. sales advanced 6.6% in the quarter, with comp sales increasing 8.1%, driven by 8.8% growth in comp scripts and 6.2% in comparable retail sales. U.S. adjusted gross profit increased 13.7%, due to strong sales growth, improved pharmacy margins due to favorable mix, and retail volume and margin growth. Adjusted operating income increased 16.4% as the strong gross profit more than compensated for costs related to the COVID-19 vaccination program and higher growth investments. Turning to the international segment, and as always, I'll talk to constant currency numbers. Sales increased 52.6% in the quarter, including higher sales from the formation of our wholesale joint venture in Germany. Excluding this tailwind, sales were up 9.3%, reflecting ongoing recovery and strong execution in the UK market. Comparable retail sales increased 15% in the UK, driven by a recovery of footfall, strong commercial execution, and a successful marketing campaign. Adjusted operating income was $140 million in the quarter, up $129 million versus prior year, reflecting 32.7% growth in adjusted gross profit. Let me now turn to our long-term growth algorithm. Before starting, please note that all references to EPS refer to adjusted EPS. And all growth rates are on a constant currency basis. Our long-term growth will be highly influenced by the pace of healthcare investments. And over the long-term horizon, we see a clear path to a growth model that aims for APS growth of 11 to 13%. Starting in fiscal 22, we will ramp up healthcare investments to build out our long-term growth engine. And over the next three years, we expect EPS growth of around 4%, with growth accelerating each year as the healthcare investments generate increasing returns. EPS will be flat in 22, rising to mid-single digit in 23, and accelerating further to mid-to-high single digit in 24. Beyond 24, the long-term growth algorithm calls for EPS growth in the low teens as the faster growing and higher margin healthcare business hits scale. Let me first bring you through some of the key assumptions. We do expect a gradual increase in our tax rate, and this is largely due to adverse mix due to a growing proportion of of higher tax rate US income. Please note that we have not considered any impacts from the current legislative proposals. While share repurchases are not a priority in the initial years, our long-term growth algorithm does assume sizeable capacity for repurchase activity. As you have heard earlier, we have very good visibility into cost savings over the coming years. Turning now to the international segment, we expect international AOI growth of more than 50% in fiscal 22, with a three-year compound annual growth rate of 25% to 30%. This will be driven by mid-single-digit sales growth, with fiscal 22 especially strong at 8% to 10% sales growth. Longer term, the growth algorithm assumes sales growth of 3% to 4% and mid-single-digit AOI growth. In the US, the long-term growth model is based on sales growth of 3.5% to 4%, with pharmacy growth of around 4.5% and front-of-store growth around 2%. Gross margins will trend slightly lower, with continued pressure from pharmacy reimbursement only partly offset by continued gross margin gains from U.S. retail and the gross margin accretion coming from new businesses. SG&A growth will trend below inflation and well below sales growth as we continue to prioritize cost optimization and reinvention. Overall, this growth model leads to AOI growth of around 3%. Fiscal 22 will be an outlier, as the U.S. business will face some unique headwinds in the short term, including lower vaccinations, minimum wage, and a loss of contracts in our Alliance RX specialty business. Fiscal 22 sales will decline by around 8%, with 7 percentage points due to AllianceRx and 60 basis points due to lower vaccinations and testing. This leads to an AOI outlook of flat to slightly down for 2022. However, we do anticipate a return to revenue and AOI growth in the following fiscal year. Let me now turn to Walgreens Health. We see considerable sales potential and we expect the segment to post strong sales growth over the short, medium and long term. In 2022, we expect sales of around $3 billion, mostly from our recent M&A activity. And we expect the acquisitions to grow very quickly and achieve sales of around $10 billion by fiscal 2015. Roz has already provided insights to our health care goals and objectives, and our organic developments are moving ahead at pace. We expect the organic revenue opportunity to build over time to at least $3.5 billion, although it will take time to achieve scale as we build out our offering and partner with more and more payers and providers. Beyond $24 billion, the long-term growth model assumes sales growth in the high teens. The margin structure will be attractive and higher than our current business, but it will take time to achieve optimal scale. Most of you will have a good understanding of the potential long-term margin levels for businesses such as VillageMD, Shields and Carecentrics. Over time, our Walgreens Health organic developments will trend to margins of over 25%. The next three years will be in investment mode, and this will drive significant revenue growth as the segment grows quickly. We are providing specific AOI investment projections for the Walgreens Health organic development. In fiscal 22, we anticipate an AOI loss of over $200 million, rising to around $300 million in 2023, before falling back to around $170 million in 2024 as investments subside and sales expand. In terms of EPS accretion, Shields is immediately accretive to the tune of around $0.03 in FY22. Carecentrics is neutral to slightly negative in fiscal 22 and EPS accretive from 23 onwards. VillageMD will continue to be in investment mode for the foreseeable future with more than 800 clinics targeted by 2025. We anticipate fiscal 22 dilution of 8 to 15 cents depending upon the closing timeline and the pace of investments. Beyond 24, the new healthcare segment should generate material sales and AOI and contribute around 7 percentage points of EPS growth. These assumptions underpin our long-term growth algorithm. So let me now summarize. Post-2024, the EPS growth potential is solidly in a range of 11 to 13%. The base business will contribute around 3%. The healthcare segment contributes 7 percentage points of growth, and share repurchases contribute around 3%. In the near term, we anticipate EPS growth of around 4%, principally coming from the base business, with the healthcare segment contributing 0.5%. Turning now to our specific guidance for fiscal year 2022. As I laid out earlier, we expect flat EPS, with the base business growth of 4%, offsetting a 4 percentage point headwind from the newly established healthcare segment. The base business growth of 4% includes headwinds of 8 percentage points, mainly from lower COVID-19 vaccinations and higher core investments. These are offset by strong growth from international, higher ABC earnings, and moderate growth in the U.S. The AOI impact of our organic healthcare business is is projected to be a loss of $200 million in fiscal 22, reducing EPS growth by 3 percentage points. And our healthcare M&A will lead to EPS dilution of 5 to 10 cents, entirely due to Village MD. Revenue is projected at $3 to $3.2 billion, but this does depend upon closing timing for the three transactions. Turning now to phasing. We are projecting a strong start to the year due to higher vaccinations in the first half of the year and a weak prior year flu season. Overall, we expect first half EPS growth of 15 to 18%. In the second half of the year, we will be facing tough prior year comps due to COVID-19 vaccinations and higher healthcare investments. This leads to a second half EPS decline of 14 to 17%. Beyond fiscal 22, we project accelerating growth. EPS will grow mid-single digit in 2023 and mid to high single digit in 2024. Beyond 2024, EPS growth will accelerate again to 11% to 13% growth, largely driven by our new Walgreens health segment. With that, let me now pass it back to Roz for her closing comments.

Thank you, James. So in conclusion of our prepared comments and presentations, You've heard a lot today and about how we're leading off of our momentum with a thoughtful long-term strategic plan that pivots our business deeper into healthcare. And James has outlined for us how that strategy impacts our expectations for earnings. Even factoring in the investments we are making in the coming months to develop our new business area, we believe we will see reasonable growth in earnings in the short term. but it will be mitigated to some degree in the immediate term given the extraordinary comparable performance from such a strong year in 2021 and the need to make some strategic investments to accelerate our strategy for the longer term. Looking forward, however, as the cost of investments give way to the returns we will get in the years to come and as our healthcare businesses grow to a degree of scale, We believe this will lead to a healthy and sustainable double-digit EPS growth. But I want to make it clear, again, that we are not asking you to just take our word for what we are doing. You can see that the work that is already underway with our partnerships with companies like Blue Shield of California and Clover, and of course through our investments in VillageMD and CareCentrics and Shields to help us accelerate our plans, This work we are doing to create a differentiated, consumer-centric healthcare business is basically the key to unlock material-enhanced long-term growth for the business while securing the future of the core business. In my opening comments today, I told you what we aim for you to take away from our event. And so I want to go back to that. We've outlined today a plan to drive sustainable growth in our business, pivoting our focus much more towards health care and delivering a strategy that brings together a truly integrated, new and revitalized initiative in health care and pharmacy and retail. Our plans in health care will be symbiotic with our pharmacy and retail businesses, building on their strengths and giving us new and a differentiated engine for growth. We're moving at pace, building out what we need to internally and complementing it with investments to bring the initiatives, additional skills and resources and to accelerate our development of this new segment to our business. We are acting quickly to build out the assets and capabilities we need to ensure success in this area and to form a platform for the new operating model. We've also developed a financial algorithm, which reflects this change in focus and business mix. We're committed to offer enhanced communication and transparency as a management team and as a business to all of our stakeholders. And we want to bring everyone along with us for this exciting journey. Finally, but perhaps most importantly, I want to mention once again our revitalized strategy. with its increased emphasis on health care. This strategy will go hand in hand with an intensified focus on execution, operational excellence, and customer experience. And it will deliver growth. It will drive operational financial performance, and it will result in strong returns going forward in the short, medium, and long term. So in closing, I'm going to end in a rather unique way. Instead of saying we're wrapping up, I'm going to say we're just starting, and we're bringing you along with us to a new beginning. Welcome to a new era for WBA, a new day, a new path forward. And now we'll take a quick break. Thank you. Thank you.

Thank you.

Welcome back. I'm excited now to open up to Q&A. Before we start taking Zoom questions, I would like to kindly ask that you keep questions to one plus a follow-up so we can get to as many as possible. With that, our first question comes from Lisa Gill of J.P. Morgan. Lisa? Lisa?

Great. Thanks very much, Jay. And good morning, Roz. I very much look forward to finally meeting you in person in January. But let me just start with a question around your portfolio. You know, we look at the companies that you've made investments in. Those are companies that we actually know pretty well and are very impressive companies. So my first question would be, why not buy them outright rather than just make the investment? And when we think about making an investment where you have a majority of holdership, How much of the strategic vision can you help to craft? How do we think about, you know, the locations that you'll pick together? And then just lastly, going to James' comment around optimizing equity investments, how do I think about your ABC investment going forward?

Yes, so Lisa, I look forward to seeing you too in January. So let me first, I'm going to start this off and then I'm going to pass it over to James. So I think it's important to think about what we announced today around Walgreens Health. You know, this is about a healthcare ecosystem, and it's customer-focused with tech enablement right in the center. And then when you think about the continuum of care and the investments that we've made, you can see that we're bringing those investments forward for a couple of reasons. First of all, it allows us to accelerate, and that is important to us. It also really concentrates on When we start with well-being all the way to post-acute care, you can see how each one of these investments play a role. The other thing I would mention to you is that we've already got a little bit of momentum in the business right now. You saw our fourth quarter results. And then I would tell you that some of the relationships we have, we know them very well. So it gives us that little bit of an edge and a way to really get this new opportunity moving forward. The other thing to think about is that think about fiscal year 22 being our year of investment. And beyond that, you've seen the numbers where we see growth coming beyond those years. So this is a year of investment. And then being very, very focused about where we will invest and what makes sense to go towards this strategic intention that we have, right? So we've been very deliberate about that, Lisa. And so when you talk about is, you know, should it be partial investment, full stake? You know, we're just being very strategic about that, and we're looking very, very, very detailed in terms of what's going to get us to that next level. I'm going to turn it over to James so he can address your question on ABC and any other financial questions.

Hi, Lisa. So first of all, I would say we have changed the M&A strategy quite a bit because you will well know many of our positions were minority positions. So the first statement I would make is we're making – majority, taken majority stakes. The reason being, and you asked why not a full acquisition, I'd point out first, Shields and Chirocentrics both have a path to 100%. And in fact, in both cases, there's an obligation for us to go to 100%. So the majorities are just, we have a rationale here. We believe we want fast-paced, agile, and motivated teams to focused on the business you're good at, and we believe if we try as a company to manage each of these companies directly, we won't do them justice. So we want skin in the game, so we want management teams that are fully incented. The last one, the one on VillageMD, is a little bit more particular. Given the tremendous opportunity we see there, we see going to 800 clinics in the next four or five years, and well beyond that in the long term, They will need considerable access to capital. In this transaction, we're putting in capital for the first five plus years, but we believe a publicly listed entity will have more access to capital and a more motivated and a very focused team. And it will be the primary vehicle we will have for primary care physicians in value-based care. So it's our primary vehicle. We haven't really taken any position on whether we ever move to full ownership, but we did make a statement in the presentation. We do see them on a path to an IPO during the course of 2022, probably sometime later in the year. You asked about locations. You know, we think we will build out by far the best primary care physician network in the U.S., We now have a commitment for 1,000. And these are fully-fledged. These are not health corners. These are fully-fledged, value-based care. They're not mini-clinics. They're not nurse-enabled clinics. They are primary care physicians, and they will be across the entire portfolio of health care. And then finally, you asked about ABC. We don't comment on the portfolio. What we will comment on it is there is tremendous value in the We call them now equity interests. We estimate about $20 billion. And some of these investments are more and less liquid. Our commitment is we're looking at the fit to the strategy, we're looking at the synergy with the base business, and we're looking at long-term financial returns. And we've made the first three statements, if you like. Well, two. Shields we've taken up to 71%. We love the asset. It has a fabulous growth trajectory. And then VillageMD, same thing. We think it is an innovative model, unique management team, highly qualified, and they're really going to drive a large business going forward.

Thank you. Thank you. Perfect. So our next question is going to come from Ricky Goldwasser of Morgan Stanley. Ricky?

Yeah, hi, good morning, and thank you for all the detail. So health care is clearly a key. component of long-term growth goals and investments, yet the leadership, Rosie and Jeff, come from a retail consumer background. So one, who would lead Walgreens Health? And second of all, maybe you can talk about the process of setting guidance and how involved was Jeff in the process? And then I do want to kind of like just bring another question because I do think it ties into sort of the healthcare focus. I mean, over the last 18 months, we are seeing a growing adoption of digital consumption of health care services, including pharmacy. So what are the key variables that you're considering when you make decisions about your retail footprint in the U.S. versus sort of kind of like more of a digital strategy or a combo?

Sure. Thank you, Ricky, for that question. So let me first start off with who will lead and how are we thinking about our new segment, Walgreens Health. And you've seen that we have added new executives to the company. If you dig a little deeper in their background, you will see that they have. We're trending a little bit more towards health care experience. We will take advantage of our internal talent and external talent to identify the new leader for Walgreens Health. So that is yet to come. When you think about my background in retail pharmacy, having run stores for Walmart and running the Sam's Club business that had pharmacies attached to them, it does give me a little bit of insight in terms of how we run the day-to-day. But your question around our retail footprint and the work that we want to do in WBA Health, they're interconnected. This venture that we are going into is about local health care. And we have 9,100 units across the U.S., and they're closely aligned to some of the most critical zip codes across the United States. When you look at VillageMD and the clinics that we plan to add, it's interesting to note that 50% of those will be aligned in medically underserved areas where we already currently have stores. So our current store footprint is critical. And not only is a store footprint critical, but we already have the digital and physical assets learning, knowing our customer. Those who will take advantage of WBA Health or Walgreens Health, our new business venture, they're already our customers. And so the customer relationships we have from our retail footing that we currently have, our physical assets that we have, our digital build is really in the center of what's in the plans for Walgreens Health.

Perfect. All right, our next question comes from the line of Michael Cherney of Bank of America. Mike?

Great, thanks, Jay, and good morning. Thanks so much for all the color. Maybe just quickly a question for James, just a technical question. Will you be reporting out Walgreens Health as a segment starting in the next fiscal quarter? And then along the lines of broader strategy, a lot of commentary today around building, growing, expanding. One of the things you didn't address as much outside of the short part of the updated transformational cost component is the future of the current store base as you have it. And in the past, I know management's talked about the potential for closing stores, co-locating, whatever it may be. How do you factor in in terms of that long-term growth algorithm what the store base is expected to look like over the next three, five, seven years?

Yeah, I'll take the first part, and then maybe I'll pass it on to John for some comments on the store base. Yeah, we will set up a new segment starting first quarter. So that'll be the first time we will issue it. We won't really have to restate the past because it didn't exist in the past. And the three recent acquisitions will be in the segment, plus the organic health care development. So that's why we gave guidance for both separately. And then TCM, we are really happy with the program. I'll just cover that for a second. We saved $800 million just in the past fiscal year, and we're looking for probably $500 million to $600 million in the one we're going into now. You know, I know there was some doubts out in the investor market as to what is the funnel longer term on cost reduction. We don't see it going down, and we see continued opportunity to optimize costs in the business over time. And, you know, one element of the guidance that's been completely factored into the guidance we provided this morning We actually went out because, and this is interesting, I actually just want to make the point, I came from a pharmaceutical company, and pharma companies do 10-year and 15-year models. So actually we've started modeling out our health care business on a 10-year horizon. So there is a big shift even within the company in how we think about financial forecasting because in many cases a three-year plan horizon doesn't even begin to show the returns in a health care investment. So with that, I'll pass it over to John. Thank you, James.

So just real quick, you know, Roz mentioned it during her talk. You know, the relevance of our physical network, I think, has really stood out here through the pandemic, through our vaccine and testing efforts. And so I think, you know, our footprint is really a key part of who we are, our national network of convenient and community-based care locations. And so as we think about the strategy going forward, those locations are really critical to where we're going and what we can do with them. Village MD is a great example of getting those into 800 locations. What we're talking about with Health Corners and Walgreens Health is another great example. So we see a lot of potential in the network we have. As part of TCM, of course, we're always looking to make the store base as efficient as we can, and we have opportunities, too, I think, to grow in smaller formats, which we've tried here. We'll have 100 of those by the end of the fiscal year, and those have done extremely well. So I think the store network will continue to play a critical role in the strategies we go forward.

Perfect. So next question is coming from Steve Valiquette of Barclays. Steve, over to you.

Great, thanks. Good morning, everyone. You showed on the slide deck that the level of COVID vaccines and testing combined will likely be about 4% diluted to the EPS growth in fiscal 22 versus fiscal 21. So I was just curious to hear more about the variables within that. Should we expect that the margins on the 25 million doses for next year would be about the same as 34.6 million doses? And also you previously increased the staffing levels to administer the vaccines. Do you have the ability to flex that down or do you have to sort of maintain those same levels? Just curious to hear more about the components of that 4% dilution. Thanks.

So I'm going to ask John to talk about some of the administration things that we've done in the stores to get vaccines and testing to our customers.

Yeah, I mean, we have, I think we've done an amazing job. I think it's not just about probably the 25 that we're going to do this year, the 25 million vaccines for fiscal year 22, but also about, you know, the opportunity in these businesses to really grow over time. So not just with vaccines, but also with testing. And I talked a little bit about in my talk how I think testing can really open some new doors for us in closing gaps in care and providing test and treat in certain markets. So I think we're starting to see our business really kind of evolve here. And I think vaccine and testing are two great ways that that's going to happen. As we think about the business model, you know, we do have the opportunity to efficiently manage, you know, labor as volume changes. But we also see opportunity to invest in some of these other areas as well to continue to try and grow the business also. So I think that's how we're kind of thinking about it. You know, in terms of margin, we'll, you know, we'll be negotiating on, you know, vaccine reimbursement and other reimbursements, you know, throughout the year. So we'll just have to see how that kind of plays out.

Yeah. You know, as we look at this, we exited the year really, really strongly. We achieved a total share of vaccines of 21 percent, which is extremely strong. And we see September and September closed very, very strongly on vaccines. And it continued into October. So while the. 25 million doses looks quite meaty as a goal. We've had a very, very strong start to the year. And as John said, we actually, year on year, the actual overheads due to COVID will be actually going down. Sorry, COVID vaccine administration will actually be decreasing.

Thanks.

Thank you. All right.

Our next question is going to be coming from the line of Elizabeth Anderson of Evercore ISI. Elizabeth, over to you.

Hi, everyone. Thanks so much for the details today. Could you talk a little bit more about the opportunities from the new segment to positively drive operating income of the core pharmacy business and how much you have of that perhaps embedded in your expectations over the next few years? Thanks.

Sure. I'm going to turn that question over to James to cover a little bit about our numbers going forward.

Yeah. You know, first of all, I think as you look at the segment itself, the one thing I'd point out to is – explosive revenue growth, the way I described it. The first year will be $3 billion, and we expect by 2025 to be in or around $10 billion. So first of all, that's the core part of it. At the same time, the health tech consumer-centric central vehicle, that will start growing revenue over that period of time. And there's a fair element of mix between the segments. You've got The inorganic development would probably 25% plus margins. Think of it more as tech margins. Then you've got VillageMD. I think you can figure that out by yourself. And KeroCentrics, they're all slightly higher than the core company. The one part we haven't really contemplated in the guidance for the U.S. business is we've assumed continued pressure from reimbursement. We're being quite realistic that gross margin over time will be slightly down because of reimbursement. The opportunity we haven't considered is there's mutual synergy in both directions between the core Walgreens pharmacy and the actual health segment itself. As we become more and more relevant in health care, there'll be a favorable reflection back on pharmacy. And over time, the discussion theoretically now with the PBM should theoretically become a discussion with the payers. because as we try to drive more and more value in the system, once it becomes recognized through health outcomes, we have a different seat at the table. However, that's really, really difficult to quantify. We've plotted forward reasonable amounts of pharmacy reimbursement. We haven't counted on this improved relationship, which we think in a logical health care system focused on the patients should occur, but right now it doesn't occur. It's a price market. I don't know, John, do you have a point of view on what I just said?

I do. I'm really excited about the opportunity. It's a great question, and I think it's going to just open a ton of doors for us in the pharmacy business to gain access to additional patients and services. So we're really excited about where we're heading and the opportunities it's going to create in the core Walgreens business.

Thank you.

Thank you so much. Thank you, Elizabeth.

Perfect. Our next question is going to be coming from Justin Lake of Wolf Research. Justin, over to you.

Thanks, good morning. Can you talk a little bit about the assumptions on the VillageMD business in terms of how, do you have any kind of script numbers, margin numbers, impact there to the pharmacy business. Is there anything you, any numbers you can put around that or give us an idea of when you think you might be able to communicate that? And then secondly, can you talk a little bit about what you expect from the international business within 2022? Thanks.

Sure. James, you want to take? Yeah, maybe I'll pass back to you for the scripts. But international, we were, you know, we're expecting a really, really strong upcoming couple of years. Particularly driven by the next year, we expect international to grow by about 50 percent. The U.K. business has been a big success over the last year when it already doubled profit once. So it was coming off a fairly low base. But what the team has done a fabulous job on is resizing the cost structure. The second big one is shifting the company online. So we have a current online penetration of about 22% of the total businesses online, and it's growing extremely quickly. So the business has been redesigned for the future. And once the sales come back next year, and the sales growth is around somewhere in the 8% to 10% kind of range in the UK, once it comes back, it's coming back on a very efficient model, very limited incremental overheads. So we have a very fit company. It's exiting prior year very, very strongly, so we did a very good fourth quarter. We had the biggest marketing campaign in many, many years in the U.K. So we have strong momentum, a resized cost structure, a really strong online presence, and foot traffic has finally come back in the U.S. Sorry, in the U.K., but it hasn't come back as quickly as we'd like. So we will see improving trends over the next 12 to 18 months. And, you know, the way we think about it is the U.K. will be fully recovered from COVID only in 2023. So if you want to think about the horizon, it gets back to pre-COVID levels by that time. So it's been a tough journey for them, much easier and not easier in the U.S. But, you know, the U.S., for us, we had a very, very buoyant Q4. I think you've seen the front of store comps up 6 percent. That's really, really strong and positive. And the pharmacy business was up 8 percent on Scripps. So, John, do you want to talk about the other piece?

Yeah, sure. You know, I think the point I would make first is just, you know, the investment's about a lot more than Scripps count, obviously. It's a pivot into primary care and taking risks. So that's the first point. The second point is we're absolutely gaining Scripps count from the relationship, and we are getting pretty decent penetration into the VMD patient base as well. We haven't disclosed specific numbers yet. But we're definitely creating value there. But in the even bigger picture, I'm really excited about the things that we can do together, like the collaborative practice agreement and other services that we can get involved in with VillageMD to manage risk and drive better outcomes. So it's just going to open a lot of exciting doors for us.

Perfect. Thank you, Justin. All right, our next question is coming from Anne Hines of Mizuho. Anne, I'll kick it over to you now.

Yeah, great. Thank you. Within your long-term guidance, please discuss how you view free cash flow and cash flow, because I don't think you discussed that. And then secondly, when you view the outlook for each segment, obviously you gave very attractive long-term growth. What do you think is the biggest risk for each segment? And within that, maybe more in the near term, how do you view inflation? Maybe what parts of your business? seeing the biggest inflationary pressures, whether it's generics, labor, things like that, that would be very helpful. Thanks.

So thank you for that question. And I'm going to start off with one part of that and then pass it on to my partners here. So first of all, just starting with inflation. So you're right, we're seeing some inflationary indications in the marketplace. In some instances, we've been passing some of our cost increases on. We'll continue to do that and look at it carefully. What we are starting from a very good point of the transformational cost management that you've seen us apply against the business, which is why we've extended that into the future years. We're seeing some success there so that we can sort of offset what we're seeing in the increased pricing. The other thing I would mention to you in terms of our labor position, I think that this team has done a fantastic job of engaging our team members at store level in addition to our fulfillment centers. And a lot of that has been the work that we've done around our labor position and increasing wages and then recognizing the hard work of our pharmacists. And John and his team has just done a fantastic job of not only engaging our own labor issues in terms of just engaging every day with our team members, providing development. And I think the most important work that we're doing in this space, Ann, is to make their jobs easier. John and his team have been working very hard in putting in some of the work that we're doing around our central fill opportunities and automating the processes behind the scenes of what one customer might see when they come into our store. So I'm encouraged that as, you know, inflation happens, we'll still continue to try and pull our costs down and deliver as best we can on behalf of the consumer. And I don't know, James, if you want to add to that.

No, maybe answer your past question more directly. We delivered $4 billion of free cash flow last year, quite strong. So that was basically in line with the previous year, but we covered the lost cash flow from the Alliance Healthcare business. We're not going to start giving guidance going forward. We will keep fairly healthy levels of capital investments, probably at similar levels to today. And as IT investments go down in the future, we'll probably shift the investment into refresh of the stores. That's a simplistic assumption. We're probably taking out over the last two years, we've taken out $800 million of capex, sorry, of working capital each year. And there's no reason why that couldn't continue for the next maybe two years. So we're in a fairly good position when it comes to cash. As you get outer in the way out in the cycle, call it five plus years out, and the healthcare investments have shifted into scale and they're thrown off cash. That's the stage when we can contemplate going back to probably fairly serious scale share repurchases if required. And then the final piece, as you asked, by segment risks, you know, maybe I'll give you my impression on John and then I'll pass to John. But international, I'd have to probably say none. I think it's, I would say if you look at a long-term growth rate of three and then a mid-single digit on AOI, that's eminently doable if you're the number one beauty specialist retailer in the U.K., and most of the other international plans are achievable. I think it's literally down to does footfall come back in line with the assumptions or not, but there's enough contingencies such that I don't see any real risk in the U.S. I think on health care, I would say there's probably upside to the theoretical numbers, but the only risk is can we hire people quickly enough? We always seem to be about three months behind. There is a war for talent. We are finding it increasingly easier to hire health care people into the company, which is quite surprising. They're believing in the vision, but we're still, as we ramp up, we've got Blue Shield California, which is a huge endeavor on top of the Clover work that's being done. We have to scale up enormously the organic team internally just to deliver the Blue Shield California, and that's a tremendous opportunity with, you know, the amount of lives we've presented. So I think it becomes a people game in health care, no risk in international. You know, my perspective on the U.S. is you never want to say too much about reimbursement. It's always a risk. But I think we've planned it relatively in the right position. I think the potential risk is we are counting on money from new businesses like vaccines, diagnostics, that kind of thing. I think we have a right to win. But, you know, we've got some decent goals in there, but at risk, I'm not sure. John, how do you feel about it?

No, I feel good about the plan and the guidance that we're giving. And you touched on reimbursement rate. We look at that pretty carefully, and we've done some modeling on it just to try and get a sense of kind of where it goes. And, you know, clearly there's going to be, you know, there's been reimbursement discussions. There's going to be ongoing reimbursement discussions. But as I kind of start, as we start to look out and do a little bit of modeling into the future, it seems to us that if, you know, if reimbursement rate trends continue kind of into the medium to long term, it probably does start to cause some contraction in terms of access in the marketplace. And so that may be, you know, potentially some issue for us kind of in the medium to long term as we kind of look out. So I think it's, you know, we just continue to work with it.

But the biggest number in the plan is actually the 25 million vaccinations.

Yeah.

And, you know, if, To be honest, it's the only thing that really keeps me awake, but we've had a really, really strong start to the year. So risks that I thought we had, you know, four weeks ago, I really have kind of dissipated, so I'm feeling in a much better position about the current year. Is that a fair statement?

Yeah, I'd agree with that, too. Thank you, Anne. Perfect. Thank you, Anne. All right, our next question is going to come from A.J. Rice of Credit Suisse. A.J.?

Thanks. Hi, everybody. Hi. Maybe just two quick questions here. One, when you think about the new health care business, I'm trying to understand how that infrastructure is going to be set up. You've got entrepreneurial companies like Shields and CareCentrics and VillageMD in there. Are you seeing those running as sort of a collection of businesses, or will there be a significant increase? Walgreens overlay of management infrastructure, and how much can you integrate those and realize synergies at the G&A level, or do they have to sort of stay separate over time? And then my follow-up question would just be we've heard a lot about supply chain lately. Are you having sort of near to intermediate term any issues around supply chain or anything worth calling out there?

Great. I'll start that response, and then I'll pass it to John for the supply chain work that his team has been doing. So when we think about Walgreens Health, this is a new segment within our company. So when you think about our business segments right now, we have our Walgreens U.S. business and then our Boots and International. So we are standing up a new segment. And so when you think about these companies and the integration of all of them, absolutely we are activating those businesses within our company. And so they won't sit on the sidelines as investments, and we will seek to create those synergies and bring those synergies to life. And we'll do that so that this whole description of how we want to wrap a health care ecosystem around our consumers, we will need to activate those companies. They will be needed. And so we'll have leadership. We are putting leadership in place as we speak to run the new segment. So you'll see likely another person on stage with us in the future. and in our conversations talking about how that business is coming forward. So we'll have a reporting structure around it. We'll have a team, an operating model around that business. But our intention is to integrate those synergies and bring it to life on behalf of the consumer. So you'll see that coming forward, absolutely.

Yeah, and just to reemphasize that, we actually have a CFO already for this segment. We have select parts of the management already in place. So we're not starting from zero. But, you know, we still have some development to do on organization. But you can be guaranteed there will be mechanisms to generate mutually beneficial synergies between all the entities in a very structured way.

Yes.

John, supply chain?

Yeah. Our team is working extremely hard with all of our supplier partners to tackle supply chain issues. So we are meeting regularly, top to tops, and having discussions to work through some of the challenges that have arisen. But I think we've generally done a very good job. But there are spots in our supply chain where there are some challenges that we're working through. We've increased lead times in terms of how we order product, particularly if it's coming from overseas. We've been creative, I think, in finding ways to tackle some of those issues with our partners. And we continue to push hard here to try and have the best experience we can in stores for our customers.

Okay, thanks.

Thank you, AJ. All right, our next question is coming from Charles Rye of Cohen. Charles?

Yeah, thanks for the questions. Just wanted to follow up maybe on to Lisa's question at the beginning. James, I understand your comments around the strategy and making investments first with a path towards 100% ownership and wanting to keep sort of the agility of those companies to really pursue the strategies, but You know, as it relates to, you know, your discussion around entering into value-based arrangements, you know, can you talk about how you, you know, think about where Walgreens will be within these type of value-based arrangements going forward? And, you know, how do you manage all these partnerships in that sense, at least over the near term before maybe full ownership to keep everyone aligned so that you can kind of, you know, progress towards your goals? And then as a follow-up, maybe on the The supply chain costs from AJ, I think in the guidance you only noted about, you know, one percentage points on labor costs as it relates to those other supply costs. You know, what are your assumptions in terms of impact to earnings? Thanks.

Yeah, I'll cover the last one first. You know, the assumption here, we are getting lots of requests from suppliers on price increases. The first part is pushback or try to mitigate those. And the second, obviously, is going to have to be we've got to raise the retail prices like most retailers are doing in the U.S. So our assumption is that over a 12-month period or an 18-month period, there's no impact on margins. And I think if you look at our results in the fourth quarter, our actual, you know, the comps are up 6% in front of store and margins are up, I think it's 20 or 30 basis points. and we finished the year up 60 basis points. Some of that is coming from mix, but there is no dilution right now, and we're not anticipating very much coming from supply. It's a little different in the U.K. They have a short-term issue. It's a lot about transportation. There's no drivers. Transport costs have skyrocketed. But you're talking about $5 or $10 million in these cases. You're not talking about $100 million. So it has absolutely no materiality on the total results of the group. Your first question, I don't know if you want to handle that, Roz, I'll take a shot, is I think the best way to think about value-based arrangements is we have WBA Health, which is the ecosystem, and it's the orchestrator, and that entity itself will take risk over time. We're setting up a consumer-centric, technology-enabled platform, and the examples right now are Clover plus Blue Shield California. So the first Simplistic step of this is we have an app that's fully developed. We've opened health corners in the Clover arrangement already. We have 40 of them. So the whole idea is you start out rather basic on a per patient per month or some kind of fee for service, and over time you evolve the relationship with the payer to more and more we take on risk. So we start engaging with the consumer and driving better health outcomes, and the overall cost of care goes down, and there will be an evolution to risk sharing over time. That was the basic premise of what we set out back in January of this year. The strategy has evolved, and I would say it's actually much, much stronger now. The second part of it is we always had this physical plus digital. We're fundamentally convinced that A digital provider by themselves without physical will ultimately not be successful in engaging consumers. Likewise, a physical only will not be successful, right? It's just not going to work. So we have this physical and digital. And previously we thought about it was just these health corners of, and, you know, we're going to open 3,000 health corners. Nobody in the U.S. is doing it at this scale. I want to be really clear on this. It's a long-term goal, and it's probably an 8- to 10-year goal, but it's 3,000 and it's 1,200 in the next five years. These are huge numbers. The second part we said, though, is these are, call it more pharmacist or nurse practitioner enabled. The second evolution of the strategy since Ros came in has been let's get deeper into the care delivery, which means we don't just have assets with care corners. We're taking primary care physician, value-based operators, And we selected a company that we believe has got the best and most innovative model. They accept all types of insurance. They get to scale far, far quicker than most of the other participants in this market. You know, we estimate they are clinics or break even in the beginning of the third year, and they're fully at scale in seven years. Very few other companies are doing that. And then finally, we said, what's one of the other? And obviously, these M&A opportunities come along. when you're least expecting it sometimes. And the other one is care-centric. You've got to stare at that and say, this is a play on home care and it's a play on post-acute. So we want to line up a series of, and I want to just pay attention to my next comment, a series of partners, and some of them are just partnerships and some of them will be owned. We don't believe we have to own all the assets, right? So we're going to have, it will vary from the health corners, which we will own 100%, to something else which we could own like VillageMD at 63%, to something else which we may have no stake in. And many of the providers we will have on a local basis when we're managing risk, we will not have a stake in. And I do want you to think about it for a minute. We are an agnostic provider. We're independent. We don't have an insurance company directing what we're going to do locally. Our only interest is consumer health, and that's why we believe our approach is unique. and differentiated in the market. And it's not a case about ownership here. It's the ability to work with other people to improve the health of consumers. And the mothership is the ability to engage with consumers and get them engaged in your health. And our premise is different from an insurance company. Our premise is unless the consumer is engaged, health outcomes are not going to improve. And the reason why we're differentiated is we're very, very good at the consumer piece.

That's exactly right. You know, starting from our core, we talked about this as being, you know, our strategy forward to start at our core. James said some very important things, and I want to remind everyone, this is about scale, and we believe we have scale. I think it's very important to remember that we have payer independence, and so we have the flexibility to make this model work, and then we have the acceleration. So moving from what we would have maybe in the past, investments that didn't look very strategic, but these are strategic investments for us. And so we're going to be deliberate. We're going to take advantage of our payer independence. And then I think our ability to scale with acceleration will be the winning ticket for us. And thank you for the question, by the way.

Thank you. Thank you, Charles. All right, our next question is coming from Jack Slevin of Jefferies. Jack, I'm going to turn it over to you.

Good morning, and thanks for taking my question. Just wanted to focus in on the accretion guidance for the healthcare investments that you're making in 2023 on. Can you just walk us through the moving parts that are underneath that assumption? I think when we look at the aggressive path with Village MD for expansion to 600 units and the profitability curve that we've observed in the marketplace. We would think that might be taking on a little bit more losses one to two years out. Should we be expecting that to improve along with further growth from the other businesses? Or can you just walk me through the pieces there? Thanks.

Yeah, OK. I'll take the easy ones first. Caricentrics is broadly neutral in the first year. So it's like half a cent and it will be. accretive from the second year. And then on Shields, Shields is immediately accretive. It's a fabulous asset. We've got visibility to, I don't know, in the first year, 95% of their revenue. By the third year, we have visibility to 85% of the revenue. So it's highly certain. And probably the accretion in three years is, I don't know, teens. It's in the teens area in terms of accretion. And then if you go to VillageMD, you make a very good observation, and you're right. It depends on the pace, and it depends on the magnitude of the investment. And frankly, we have two scenarios of investment, and that's why we gave a range of, you know, a range of, what was it we gave? I think it was 8 to 15 cents or something from VillageMD. We're still thinking through what's the pace of investment in the short term, and that will have an impact in the long term. We would expect this to start becoming, I would say, EBITDA positive probably in the year 24, 23, 24, depending on the investment profile we adopt. I think this is something we'll have to give guidance on probably going forward as we build out the segment. Immediately, you're right, the business we're buying loses money on an EBITDA basis because they're opening clinics at an aggressive pace. And we've given you the end point. So the end point is 1,000 clinics in Walgreens in 2027. You can divide that by we've opened up what? We've opened up 80 by the end of this year. So 1,000 less 80 will show you how many they have to open each year. The economics, we've been through all the unit economic models. You're looking at adjusted operating income margins once they're at scale, which is seven years after opening, probably in the high single-digit kind of ranges. But that includes all the depreciation. And these are, you know, there's a fair investment up front. So we've been through the model. We're really happy with it. They'll break even after two years. Then they start scaling up. They migrate more and more patients to risk and away from commercial over time. So we're comfortable with the model. It all comes down to how many clinics we're going to open each year and whether we go for an accelerated plan or the base plan. So I think the base plan would foresee probably losses for the next three years and an accelerated plan. Actually, we may actually be able to reduce some of those losses in the 23 and 24 period. But I'm being deliberately imprecise because we have a number of options here. Perfect.

Thank you, Jack. All right, our next question. Jack, I'm sorry, were you? Yes. All right, perfect. Our next question will come from Eric Colwell at Baird. Do you want to kick it over to Eric?

Hey, am I on or is it still Jack?

Just pause with us. There we are.

There you go. We're good now.

Hi, Eric.

Okay. I think I'm up now. So three questions, three very different categories. First one, You've talked a lot about culture, customer satisfaction, employee satisfaction. We've seen a number of initiatives there. These are great qualitative goals and comments, but I'm curious if there are any quantitative metrics or benchmarks that you'll be sharing with us over time to understand the benefits of the various investments you're making in culture and customer relationship. Second question, around number seven, beauty company as well as just all of your owned brand, If I remember, you have a target of growing to nearly $5 billion in revenue next year, if I got that right. I'm curious about your moves into retail, and then more importantly, retail beyond Walgreens, the Walmart, for example. And then beyond that, if you could talk a little bit about the benefit to returns and margin from this mix shift. The third question is around deal activity. done IA, Shields, CareCentric, VillageMD investments of size this year, as well as a number of others. It does beg the question of, you know, how much is the foot on the accelerator for additional deals of size? How many holes are left to fill? Or might this be a period where you really spend your efforts integrating those businesses and focusing on what you've already bitten off here in calendar 21? Thanks so much.

Thanks, Eric, for that question. So I'll start off with the culture work that we're doing here in the company. You know, I talked about how critical it is to align culture with strategy, especially when you're making a transformation of this sort, right? You want to make sure you have the right team in place and people feel good about the work ahead of us because we've got work to do. And so you will see us put together KPIs and talk very openly about how we're moving forward in this space because it's going to be as critical as delivering the financial performance of the company. So we already track things like our team member engagement, and we talk about our customer engagement. Those two things are very much intertwined. We know when we do well with our team members and they feel satisfied about the work that they get to do in our stores and in our buildings, then that really transcends to the customer's engagement. We will track those numbers and share those kinds of metrics with you so that you can see that we're moving these things in tandem. So we will do that. The second piece around owned brands, I'm going to ask James to talk a little bit about that, but we have seen good performance between our business-to-business relationships with companies like Target and Walmart. I think our global brands team has done a fantastic job in that space. We're seeing that these retailers are making space for us, prominent space, Just recently in the Target stores redesigned, I think our products look very good and show very well and will continue in those relationships. In terms of investments and are we going to go on a pause or work on integration, we talked about being very strategic with our capital allocation. And part of that is you are exactly right. We've got integration work to do. So it may feel a little bit like slowing, but it's also going to be a little bit more about targeting. You'll see us target, it'll make sense in terms of where it fits on our strategic roadmap, and you'll say, okay, that makes sense, and then the integration would happen. The other thing is that we're going to be developing the muscle for integration, right, because in many of these, these were partial investments, and now we're, you know, large stake position, and they're going to be part of our path forward. So that integration piece is going to be really critical for us, I think you saw the announcement of Anita Aleman joining the company. She will be our transformation and integration officer for us. So we are building the muscle in that space. So stay tuned to watch us be just very strategic about what we do next and a little bit less of what looks like a side investment and more about where do we need to plot acceleration and then to close out the roadmap on our strategy. So, James, do you want to talk about the margin returns and anything about our B2B work on global brands?

Yeah, so just to clarify the numbers, the current revenue of these brands that we own, which is principally number seven but also Soap and Glory, is about $750 million. And over the next three years, it's expected to go to $1 billion, so at a fast clip. The U.S. is the growth engine right now. We wore in Walgreens Target and Ulta and doing quite well there. And the move into Walmart was a very, very big move, and they've executed very strongly behind it, but still a lot of potential in that relationship. And the final thing we've done in the U.S. is DTC, so a direct-to-consumer number seven site. I would say going forward there will be a shift as well into China, which is we have a number of, call it, retail and wholesale investments in China. but we're also present on a number of the large Internet sites in China like Tmall. Still small businesses. We're putting our foot in the water to test the receptivity to our brands, and we already have soap and glory there and expect to go in with number seven in the next couple of years. That could be a massive opportunity. And then finally, some markets around the edges like Australia, but they won't be material. This is a U.S. growth. business, and it is also China and Asia are the big opportunities. So, you know, I think it's a fabulous business, a billion dollars of own brands, so it should be attracting a valuation like a consumer products company.

James, if I could just jump in with a clarification. We were taking notes frantically without the slides at our disposal, so I apologize if I mixed up the numbers. I thought I saw a slide earlier about Something about in the ballpark of $4.7 billion.

Oh, no, that's Walgreens. That's Walgreens. That's the Walgreens brand in the U.S.

The Walgreens brand in the U.S.?

Yeah.

Okay.

It's a different number. The global brands business is basically number seven. It's all beauty brands, number seven. Yeah, got it.

Right. So is the number seven a billion on top of the 4.7 or part of that total?

Yeah, it's a billion on top. Yes.

Okay. Thank you. I appreciate it.

Good question. Thank you. Great.

Thank you, Eric. All right, our next question is coming from Ralph Giacobi from Citi. Ralph, over to you.

Great, thank you very much. I guess I just wanted to clarify some of the margin commentary specifically within the health business. I think you mentioned 25% margin. Just wanted to make sure that's sort of the ultimate goal, and then how long essentially that it takes to get there and how we think about that as you ramp revenue from that $3 billion to essentially $10 billion even in 2025. And then the second question, Roz, I think in your opening commentary, you mentioned or made comments around, you know, as you reflected on the business, wrong turns that maybe you think the business may have taken. I was hoping you could just sort of clarify, you know, what those wrong turns in your mind were and maybe how you can fix those or how to address those going forward. Thanks.

Sure. So I'll start this off and then I'll turn the margin question over to James. So when I took a look at the business in the very beginning, You know, it was interesting to me that the company had made such great strides in terms of, you know, the way it responded to the vaccine administration. And if you even go, you know, past that time in our journey, I look at the history of the company, and we've just had a very strong retail position in our stores. We've had a great response to how our pharmacists interact with the company and with the consumers. But, you know, one of the things that surprised me was, you know, a little bit of the confusion between are we a retailer, you know, are we pharmacy dispensing? And so that is what really made me think about, you know, should we have gone with this strategy maybe a little bit earlier, right? And so, but there's energy here. There's a lot of good guts in this company in terms of what we can turn towards this new healthcare ecosystem that we've been talking about. And so while there may have been some slight turns, You know, this team is ready to course correct and get energized behind the core of who we are. And so I'm excited about it. You know, those were, you know, that's history. We're on to, you know, a new opportunity. And the other thing that I would say that maybe many of you all can't feel because we're doing this virtually is that this team is really excited about now having clarity of vision and purpose. And then I will focus on one point is around execution, because I think that is an area where sometimes we could have done a better job. But now this path forward is about how well are we going to execute, how we're going to hold ourselves personally accountable, and then we're going to be accountable to people like yourself, right? We're going to get in front of you. We're going to tell you what we're going to do. We're going to give you the milestones. We're going to repeat it again and again so that you know we're committed to it. And then you'll go on the journey with us. And so it's about transparency, clarity, execution, and getting really energized about what our future has to offer. So with that, I'm going to turn it over to James to talk about a little bit on the margin piece.

Yeah, Ralph, just, you know, as you model out the segment, my advice would be take each of the acquisitions separately and model out based on the accretion I mentioned before. So Shields is immediately accretive. Carecentrics in the second year. And VillageMD will probably have losses for two to three years, even on an AOI basis. And then it dramatically scales up beyond that. On the original, the organic development, which is the $3.5 billion minimum revenue we're targeting, you know, we already gave you numbers for 22. We said we'd lose $200 million, $23 million, $300 million, then $170 million and $24 million. It actually starts hitting break-even in $25 million. So the 170 gets the break even. And then you're on a curve of pretty exponential profit growth because all of these businesses, they hit a point of scale. It really depends on how many partners you've signed up, how many lives are on the platform, how many are using the platform to actively manage their health. And once you hit a tipping point, you start getting very quickly into the 20%, 25% margin range. And I would emphasize that. If we do this well, 25 percent is the minimum. This is primarily a tech-type model, which depends on getting sufficient lives on the system. And then once you have the lives, the profit margins are extremely attractive.

Thank you. Thanks, Rob. All right, next question is coming from Eric Percher of NetFound Research. Eric, over to you.

Thank you. Roz, I wanted to come back to this concept of Walgreens as a neutral party. And when you think about the digital health care ecosystem or Walgreens Health, is the idea to really focus in on the 50 percent of lives that are at regionals and blues, is that what drives that? two million lives to ten million lives, and how do you think about the offering for the national payers? And going to John's earlier comment on reimbursement impacting access, and maybe this is question two, you come into a company and you hear every year we're faced with hundreds of millions of dollars of headwinds on reimbursement. How have you pressure tested that or thought about how to offset it?

Sure. So first of all, you hit on a very good point that there is a good opportunity here for us in that other 50, right? And when you think about taking advantage of that, which is something we haven't really played forward in our plans, but now we have the ability to do that. So there is opportunity that you've definitely shared a highlight on that, you know, being payer independent, there is a broad, open, accessible marketplace for us. And so we're looking forward to that. And one of the things I'll mention is that usually when speaking with us, we talk about our retail business. We'll talk about things like traffic in our stores. But we'll come back to you and talk about those number of lives, right, because we think now we're in a position to do that. To your second question about walking into a business and seeing what those reimbursements look like and how do we offset, I think now what this new health care strategy that we're talking about You know, we're going to be in the middle of helping to drive, you know, better costs throughout this entire system. So we hope that we now have a different relationship with our payer partners because we're both in the same game of trying to reduce the cost on even a bigger scale. We have more of an ability now to play a part in this game and to move towards value-based health care. And so I think that we're going to be viewed in a different way when we interact with our payers. And so eventually we'll see that as this model shifts, we can have a different relationship there and maybe begin to offset some of this reimbursement expense that we see right now in the business.

And, John, was that comment on access fundamentally different than you would have made in prior years?

It is. You know, I think we've been in this industry a long time. And, you know, I think we're at a point now where, We're continuing to find efficiencies in generic drugs and things like that, but it's getting to be a fairly mature business at this point. And so I think if there's an expectation that rates can go down for the next five years like they went down from the last five years, that's probably not realistic for a lot of folks in the industry. And so I think that's kind of just where we are in the cycle of the industry at this time. So I think We have a lot of great opportunities in front of us. There's a lot of things we can do. This Walgreens Health is going to be fantastic in terms of opening a lot of doors. Village MD is going to open a lot of doors, as Roz and James said. So, you know, there's always going to be some level of reimbursement pressure in the industry probably, but I do think down the line it will take its toll in terms of access.

Yeah, and, you know, bear in mind this is, you know, the way you could think about this as well, the new – segment we're setting up will generate significant and material revenue and profits well into the future. And, you know, don't let it be lost on you that the growth rate we see, even beyond 2024-25, is we called out high teens. So this is not an entity that will be growing at 5%, and, you know, the terminal value of something that's growing at 18% is quite interesting. So we see, we continue to go back to this point that, These equity investments, some of them were very, very attractive. Now we're unlocking these as part of the total WBA health. And I think our aim is that the future income coming from WBA health far exceeds any reimbursement pressure that's coming on the core business. And I stress far exceeds.

Thank you. Thank you, Eric. All right, our final question is going to come from Kevin Caliendo of UBS. Kevin, over to you.

Thanks. Thanks for sneaking me in, guys. I appreciate it. So I want to understand a little bit about the growth that you're projecting in the base business, first of all. The base business hasn't really grown. When you come off 2022, you're expecting sort of mid-single-digit growth, and you're going to have a vaccine sort of headwind, presumably. Are you assuming that the rollouts and the synergies from the health sector business are going to really be the driver of growth there, or is it more cost-cutting? Incrementally, how do you get to mid-single-digit growth with the VAX headwind for a business that hasn't grown? And then I guess the second question that I had is getting from $3 billion to $10 billion, how much of that is just the rollout of the VillageMD stores and the organic growth that you expect from the other assets? Or is there some incremental M&A built in there? I guess that leads to the final question around ultimately your free cash flow going forward. How should we think about the deployment of that post sort of 2022? How will you be using that? Historically, it's been debt and share buybacks. Is that changing now?

Yeah, I'll take your last one, which is the three to 10 billion. We're not assuming any M&A. This is the development of the organic. plus the three acquisitions we've mentioned. We don't have any go-gets or anything else. So this is $10 billion that we have, I would say, very good visibility to as well. So we know the number of clinics that will be opened. We have detailed plans from Shields and Paracentrics that we've vetted 10 times over. So we have good line of sight to all of this. 20 times over. And then the last point there is, I'd say right now we're not necessarily finished on M&A. Are there pieces of our puzzle that we'd like to build out a little bit more? The answer is yes. They're probably in the tech area and it's probably around how could we speed up the organic even more and take a year out of the journey. So that's, you know, if you ask us what are we thinking about, it's more about less maybe care delivery right now because we've just bought majorities in two assets and it's more about how do we accelerate the tech journey and we're thinking heavily of what our potential targets in this area. I'm trying to remember now what your first question was.

The base business growing from 22 on.

Yeah, I think international growth is the one I'd point out first. We're going to see very still some of this is still benefiting from recovery, but then it's good execution and operational excellence in the UK and international. And I think we called out in the next three years, That's going to develop five points of the growth that's going to come from international. And then the ABC contribution, which is fairly safe as well because they just made an acquisition, so they'll be growing above their historical pace, right? So ABC we called out as four points. And then the base business, if you take out the vaccines headwind, will be up 3%. And that's a lot of blocking and tackling in the U.S. business. I call out two items that give us a fair amount of confidence. One is... The TCM program, we control it. John and I sat on a very small steering committee of four people that basically do this stuff. It's compact. We take decisions quickly. And we have a series of initiatives that I showed you on one of the charts. There's a lot more behind that. You know, so that's one piece that we control. The other one that I'm even more excited about are new businesses that we're setting up. So one is, you know, vaccinations have validated a role in testing diagnostics. That's a big business that John spends a lot of time on. We also spend a lot of time on the credit and debit cards we've just launched. You know, take a look at the credit card. There's no competitor in the market. It's the first that's oriented to health and wellness. It's true innovation. You know, a lot of work behind it, but there's a lot of new business income coming in that's offsetting some of this reimbursement pressure, and we have a fair line of sight for these opportunities. I don't know how you feel, John.

Yeah, I'd point out a couple of things, too. You know, first thing is, you know, we had a really good year this year. And, you know, when you look at top line results, you know, we did get a nice pickup from the vaccine. But you also have to consider that we had absolutely no cough and cold season last year, which was a killer over the winter. So if you think about this year, you know, we're going to maybe have a little bit of headwind on the vaccine. But if we get a little bit of recovery and cough and cold, those things kind of washed out this last year. It'll be interesting to see how it sort of plays out, I think, for this year. The second thing is we haven't talked a lot other than my talk earlier about our customer engagement platform, and that we're really excited about, and we think that gives us an avenue to growth. We're really trying to, you know, personalize our offers and the way we go to market, and we've made some really good progress, you know, there. And, in fact, you know, coming up here like next week, our digital offers will all be customized, you know, individually to our customers. So I'm really excited about that. So I think we've got some really good growth opportunities there. Add on, you know, some things we can do in testing and, you know, where we're going with vaccine, both with flu and with COVID. And I think we've got some really good kind of growth opportunities here. In addition to the block, some of the merchandising things we're doing and other opportunities that we're working on.

Just a quick follow up for James, if I can. James, the. Did you just preempt the ABC guidance call for next year with your assumptions?

No, we actually were not. We're not that smart. Honestly, what we do is we take we take your numbers. So actually, we take the average consensus that exists for ABC and that's what we build in our plan. So we actually rely on you.

Fair enough.

Thank you very much.

All right, that's a perfect end note. Well, with that, thank you for the time today. Before we close over, I'm going to hand it back to Roz for some closing comments. Roz, over to you.

All right, Jay, thank you for everything today. First of all, I hope you take away some few key, very salient points here today. You know, we tried to express a real clarity of our vision, a clarity of our strategy, and just how excited we are about what's ahead for us. We've actually announced a completely new strategy today. This is a major pivot to U.S. healthcare. When you think about Walgreens Health, I just want to remind you, it's differentiated. And, you know, our independent offering in the local community, you know, both the physical and digital partners we have with patients and our payers, you know, we're looking at an innovative suite of services. And these assets hopefully will help us integrate into a whole new category. So with our existing position and our trusted health and well-being provider in the communities across the U.S., we really think this is going to be a step-change difference for us. So we're looking forward to keeping you all up to breast in terms of where we are, how we're moving forward. You'll see as we talk about new talent additions to the company. But remember, you know, we've got things moving in the right direction on our core U.S. business and our operations there. John and his team is doing a fantastic job. We've got our new growth engine, Walgreens Health. We're looking at our equity investments, turning those into really active parts of our business and our long-term strategy. And we're in a pretty good, strong cash flow position. So at this point, WBA has never been more vital than it is today. So we're excited about where we are. We appreciate you joining us in this virtual setting, and we look forward to seeing you guys sometime in person. Thank you.