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spk00: Good morning. My name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Walgreens Boots Alliance third quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, please press star one again. Thank you. Tiffany Kanega, Vice President, Global Investor Relations. You may begin.
spk02: Good morning. Thank you for joining us for the Walgreens Boots Alliance earnings call for the third quarter of fiscal year 2022. I'm Tiffany Kanega, Vice President of Global Investor Relations. Joining me on today's call are Roz Brewer, our Chief Executive Officer, James Keogh, our Chief Financial Officer, and John Stanley, President of Walgreens. As always, during the conference call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on slide two and those outlined in our latest forms 10-K and 10-Q filed with the Securities and Exchange Commission. We undertake no obligation to publicly update any forward-looking statement after this presentation, whether as a result of new information, future events, changes in assumptions, or otherwise. You can find our press release and the slides referenced on this call in the investor section of the Walgreens Boots Alliance website. The slides in the press release also contain further information about non-GAAP financial measures that we will discuss today during this call. I will now turn the call over to Roz.
spk05: Thanks, Tiffany, and good morning, everyone. Walgreens Boots Alliance delivered consistent execution in the third quarter against very robust growth last year. Sales increased low single digits on a core basis in constant currency, excluding the negative impact of Alliance RX Walgreens and the 65% pro forma sales growth at Walgreens Health. The international business more than doubled its adjusted operating income with its retail sales recovery, and the U.S. segment achieved solid retail comp growth against challenging multi-year comparisons. with positive traffic trends as consumers continue to depend on Walgreens for their essential needs. Our business model is resilient and we are now successfully navigating a difficult operating environment that is especially impacting more discretionary retail. We have been agile and proactive in managing inflationary cost pressures and supply chain disruptions while further enhancing our relevance to consumers through our loyalty, omnichannel, and owned brand initiatives. Our commitment to serve local communities with convenience and real value is resonating well. At the same time, we're making important strides in building our next growth engine, Walgreens Health. VillageMD and Shield continue to realize tremendous top-line growth, and we've added a third strategic partner for our Walgreens Health organic venture, bringing the number of lives covered above the 2022 year-end target of 2 million. Additionally, we launched our clinical trials business to improve access and diversity. We are moving quickly to implement our vision of consumer-centric, tech-enabled healthcare solutions that improve outcomes and lower costs for patients, providers, and payers. During the quarter, we also took further action to better align our investment portfolio with our strategic priorities. The partial monetization of AmerisourceBergen shares augments our balance sheet and is consistent with our efforts to generate shareholder value. We also have now completed a thorough review of the Boots business, with the outcome reflecting rapidly evolving and challenging financial market conditions beyond our control. As recent results show, it is an exciting time for Boots in number seven, which are uniquely positioned to continue to capture future opportunities presented by the growing healthcare and beauty markets. The Board and I remain confident that they hold strong fundamental value and longer term, we will stay open to all opportunities to maximize shareholder values for these businesses and across our company. Looking ahead, given our sustained execution We are maintaining our full year adjusted EPS guidance of low single digit growth, which we raised in January. We are well positioned to drive our next stage of growth and value creation in the years ahead. In October, we introduced four strategic priorities. First, transform and align the core business. Second, build our next growth engine, Walgreens Health. Third, focus a portfolio and optimize capital allocation, and fourth, build a high-performance culture and a winning team. We are making good progress against each initiative as we are becoming the leading partner in reimagining local healthcare and well-being for all. First, we are transforming and aligning the core business and building a pharmacy of the future that will enable and support our healthcare strategy. U.S. and Boots UK retail comp sales both reflected very good execution in the quarter with several of our initiatives continuing to gain traction. U.S. digital sales grew 25% in the quarter on top of 95% growth a year ago. My Walgreens membership is approaching a big milestone of 100 million customers. We are focusing labor investments to return about 3,000 stores to normal operating hours, which I expect will accelerate script volume recovery as we head into fiscal 2023. Recently, we opened our fourth automated micro-fulfillment center and are now supporting 1,100 total stores. More store locations will continue to be added as these facilities become fully operational. These micro-fulfillment centers remove routine tasks and excess inventory from the pharmacy, allowing pharmacists more time to focus on patient care and clinical services, expanding on the critical role they already provide in communities. The centers fill about 20% of store scripts today, heading to 40 to 50% over time. And finally, in the U.S., we've expanded our partnership with Aalto U.S., a provider of loss prevention and tech-enabled security services. We're now working together across more than 2,200 stores, which is already having a positive impact on shrink. At Boots UK, I want to highlight our innovative digital healthcare service, Boots Online Doctor, which has already reached nearly 500,000 customer orders. On the retail side, we are driving share gains across all major categories. Now, let me take this opportunity to discuss the health of the consumer. given our insights from our store network across the best corners of America and the UK, as well as what we're all observing through macro uncertainty and record low consumer sentiment. We see our customers making deliberate choices to prioritize overall value and convenience. There's a shifting calculus due to food and fuel inflation, but health and wellness will always be a priority. Pricing is just the start of our customer set of considerations, where we are collaborating closely with suppliers and maintaining price gaps versus competitors. Walgreens and Boots are trusted brands with strong community ties established over many decades of pharmacy leadership. Historically, we have seen stable script trends and a downturn, which should be aided today by the ongoing return to normalized healthcare utilization levels. Additionally, we see upside at Walgreens as we address staffing challenges at stores to enable a return to normal operating hours. Our front-end momentum is bolstered through our owned brand loyalty and omnichannel initiatives. Additionally, in this era of rising gas prices, we have leveraged our hyper-local footprint and highly relevant retail offering to achieve positive comp store transaction growth. We are seeing higher levels of traffic to our stores and our websites as consumers are looking to optimize their spending dollars across quality, value, and convenience. We're meeting our customers with robust in-stock levels that are slightly above last year despite ongoing supply chain headwinds. We've also been ahead of the curve in managing through inflation. This is all alongside raising the target for the transformational cost management program for the fifth time. Underpinning our efforts is our strengthened retail products and customer leadership team with three new executives. Walgreens chief marketing officer, Lynn Peters, joins us from Calvin Klein, where she served as their global chief marketing officer with experience also at Starbucks, Target, and Ulta Beauty. This Aletha is in our newly created role of chief product officer, having most recently been vice president of e-commerce at Walmart U.S. And finally, Luke Rauch is our new chief merchant, rejoining the merchandising organization after focusing on strategy as my chief of staff. We have the right team in place to support our high-performance culture, to guide our resilient core business, and to serve our customers through these turbulent times. Next, I want to take a moment to recap Walgreens' progress in providing local communities with access to COVID-19 resources as we cross over into an endemic scenario. In the U.S., we administered 4.7 million COVID-19 vaccinations within the quarter and over 67 million in the program to date. As of early April, Walgreens has been offering additional boosters to adults age 50 and older and certain immunocompromised individuals. I am pleased to add that as of Saturday, Walgreens has begun administering vaccines to children aged three years and older at select locations nationwide. This follows our offering of boosters to children aged five and up starting in May. Walgreens pharmacy team members are among the most trusted health resources readily available to administer vaccines and provide education to this newly eligible population and their parents or guardians. Our experience has established Walgreens as the largest pediatric COVID-19 vaccine provider in the pharmacy channel. On the COVID-19 testing front, we completed 3.9 million in-store tests during the quarter and over 32 million in the program to date. Last month, Walgreens expanded access to offering PIXL by LabCorp, at-home PCR kits at no cost through curbside and in-store pickup. This initiative is important particularly for uninsured, socially vulnerable, and medically underserved populations who continue to be among those most impacted by COVID-19. Walgreens Health is reimagining healthcare by making it personal. To achieve this goal, we are creating a network of industry-leading healthcare service providers with the experience and capabilities to help people build relationships with primary care professionals, pharmacists, and in-home care teams in their communities. Our largest partnership, VillageMD, continues its rollout of co-located clinics with 120 now open, on pace towards 200 by the end of 2022. VillageMD is in 22 markets today with over 1.6 million patients. Shields continues to rapidly expand its platform, including new deals with three significant health systems and the launch of Boston Children's Pharmacy. Together, VillageMD and Shields drove pro forma sales growth of 65% for Walgreens Health in the quarter. In our organic Walgreens Health business, we are excited to have signed on our third payer partner, Buckeye Health Plan. Importantly, this development brings the lives under coverage to 2.3 million, exceeding our 2022 target. Our collaboration with Buckeye also extends beyond health corners to include asthma and COPD patients as part of a multi-phased approach to support comprehensive, expanded clinical services. Through this pilot, Walgreens pharmacists counsel patients on how to use their inhalers, provide proactive outreach to non-adherent patients, and use predictive modeling to reach out to people at high risk for becoming non-adherent. Buckeye Health Plan is one of the first payers to reimburse pharmacists for these services in Ohio, made possible through recent state legislative changes. With 56 health corners in operation, Our health advisors logged over 60,000 consumer conversations in the quarter. It's been very inspiring to hear some specific stories. For example, a customer who came in looking for a blood pressure monitor. Our health advisor had a conversation with him about the causes of high blood pressure and its potential complications. As they were talking, the advisor noticed the customer's face was red and flushed, asked to check his blood pressure, and it was very high. The advisor insisted that he go to the emergency room. The following week, he came in to thank the advisor, saying, this new service saved my life. Our consumer-centric model of increased access, engagement, and convenience is working. We are tracking well against all of our key milestones for Walgreens Health this year and remain very optimistic about our long-term growth potential. Finally, as part of our continued work in building healthcare solutions, we recently launched a comprehensive offering of clinical trial services to redefine the end-to-end patient experience and increase access and retention in drug development research. Nearly 80% of trials fail to meet their enrollment goals in their stated timeframes, contributing to billions of dollars in delays every year. We believe we can increase participation, especially among diverse populations, and support sponsors in meeting their trial goals by leveraging our well-established presence across the nation and enterprise-wide health capabilities. The opportunity is clear, and I look forward to sharing more with you ahead. With that, I'll hand it over to James to provide more color on our results and our outlook.
spk03: Thank you, Roz, and good morning. Adjusted EPS of 96 cents was broadly in line with our expectations. On a constant currency basis, EPS declined 29% versus prior year levels. As mentioned before, we were lapping an especially strong prior year quarter with EPS growth of over 90%. We administered 17 million vaccinations last year compared to 4.7 million in the current quarter. leading to an EPS headwind of around 18 percentage points. We also continued to invest in our fast-growing Walgreens health business. Sales for the segment grew 65% on a pro forma basis, and the growth investments led to a negative EPS impact of 6 percentage points. Our U.S. retail business continues to execute strongly, and our international markets more than double segment AOI compared to the prior year quarter. Sales grew ahead of expectations and cash flow was solid, with year-to-date operating cash flow of $3.8 billion and free cash flow of $2.6 billion. The Transformational Cost Management Program is performing ahead of expectations with an expanding funnel of initiatives. And we are now raising our annual cost savings goal to $3.5 billion by fiscal year 2024. Finally, with our third quarter performance that was broadly in line with our expectations, we are maintaining our full year outlook of low single digit growth in adjusted EPS. Let's now look at the results in more detail. Third quarter sales declined 2.8% on a constant currency basis. Strong growth from Walgreens and the international segment and sales contributions from Walgreens Health were more than offset by a 720 basis point impact from the sales decline at Alliance RX Walgreens. If you exclude the negative impact from Alliance RX and the positive benefit from Walgreens Health M&A, constant currency sales growth was approximately 3%. Adjusted operating income declined 34% on a constant currency basis, driven by a decline in U.S. pharmacy as it lapped the peak COVID-19 vaccinations in the year-ago quarter and planned growth investments in Walgreens Health. This was partly offset by solid gross profit performance in U.S. retail and continued strength in international sales and profitability. Adjusted EPS was 96 cents in the quarter, a constant currency decrease of 28.9%, driven mostly by adjusted operating income. GAAP EPS decreased 74% to 33 cents, reflecting a $683 million charge for the opioid settlement with the state of Florida, and higher one-time charges in the quarter related to the transformational cost management program. Now let's move to the year-to-date highlights. Year-to-date sales advanced 2.7% on a constant currency basis, including a 500 basis point negative impact from AllianceRx. Without this negative impact and excluding the Walgreens Health M&A activity, core sales growth was around 8%. Adjusted operating income increased 13.7% on a constant currency basis, reflecting adjusted gross profit growth across both pharmacy and retail in the US and a continued rebound in international sales and profitability. Adjusted EPS advanced 13.9%. Gap EPS increased by $3.60 to $5.49, reflecting a $2.5 billion after-tax gain in the first quarter related to the valuation of our prior investments in VillageMD and Shields, as well as lapping a $1.2 billion charge net of tax from the company's equity earnings in AmerisourceBergen in the year-ago period. This was partly offset by the Florida opioid legal settlement in the current quarter. Now let's move to the US segment. Sales decreased 7% in the quarter. A solid performance from Walgreens up 1.7% despite lapping peak COVID-19 vaccinations was more than offset by an 850 basis point headwind from AllianceRx. Adjusted gross profit decreased 9.6% with high single digit growth at retail more than offset by a decline in pharmacy. Procurement savings and the strong retail performance were more than offset by fewer COVID-19 vaccinations and lower reimbursement rates. Adjusted SG&A spend decreased 0.9%. Lower COVID-19 vaccinations and continued cost discipline were only partly offset by higher labor costs and the timing of marketing spend. SG&A as a percentage of sales increased 110 basis points to 17.9% of sales. and this was almost entirely due to an adverse mix impact as a result of the Alliance RX sales decline. Adjusted operating income decreased 34%, mainly reflecting lower pharmacy performance, including a challenging comparison against peak COVID-19 vaccinations in the year-ago quarter. Now let's look in more detail at U.S. pharmacy. Pharmacy sales declined 9.7%. negatively impacted by an 11.2 percentage point impact from Alliance Rx Walgreens. Comparable pharmacy sales were up 2%. Comp scripts decreased 1.8%, but excluding vaccinations, comp scripts increased 2.1%. We completed 4.7 million COVID-19 vaccinations in the quarter, compared to 17 million vaccinations in the prior year quarter. and we administered 3.9 million COVID-19 tests in the quarter, compared with 3.4 million tests in the prior year quarter. Pharmacy benefited in the quarter from better trends in seasonal Scripps. However, while we did see some improvement in the quarter, Scripps continued to be challenged by temporary operating hour reductions due to labor shortages. We estimate an impact of around 190 basis points on comp scripts in the quarter. Pharmacy adjusted gross profit declined as procurement savings and volume growth were more than offset by reimbursement pressure, and we lapped peak COVID-19 vaccinations in the prior year. Comp retail sales increased 1.4%, and excluding tobacco, comps were up 2.4%. We saw strong growth across health and wellness driven by at home COVID-19 tests and cough cold flu. Personal care was up 2.6%. But the consumables and general merchandise categories were impacted by strong sales of COVID-19 related items last year and the planned decline in tobacco. Gross margin increased strongly year on year due to effective margin management and stabilizing shrink levels. partly offset by supply chain pressures. Turning next to the international segment, and as always, I'll talk to constant currency numbers. International had a strong quarter. Sales increased 9.3%, reflecting growth across all international markets, with Boots UK advancing 13.5% and Germany Wholesale growing 6.8%. Adjusted operating income was $174 million in the quarter, more than doubling versus prior year, led by sales growth and tight cost control. The integration of our Germany wholesale business is very much on track, with operational synergy benefits running ahead of schedule. Let's now look in more detail at Boots UK. Boots UK sales grew 13.5% in the quarter. led by strong retail performance. Comparable pharmacy sales decreased slightly as we lapped favorable NHS reimbursement timing in the year-ago quarter. Comparable NHS volumes showed modest growth, while pharmacy services advanced 22% in the quarter, with stronger demand for new online health care services. Comp retail sales advanced 24%, reflecting a recovery in footfall and strong commercial execution. Market share increased across all categories, with beauty performing particularly well. Despite the strong performance, store footfall in the quarter remains around 20% below pre-COVID levels. Travel locations are now improving, but remain quite subdued. We saw continued strength in basket size, which was up around 14% in the third quarter, compared to pre-COVID levels. Boots.com sales more than doubled compared to pre-COVID levels. More than 13% of total UK retail sales came from our digital channels in the quarter, up from around 6% pre-COVID. Turning next to Walgreens Health. Segment sales were almost $600 million in the quarter, with VillageMD contributing $511 million and Shields Health contributing $85 million. Walgreens Health AOI was a loss of $129 million in the quarter. Organic investments accounted for $31 million. Investments at VillageMD more than offset the profit contribution from Shields Health and led to a $97 million AOI loss across our majority investments. VillageMD sales advanced 69% on a pro forma basis. reflecting existing clinic growth and footprint expansion. At the end of the third quarter, VillageMD had 315 clinics, an increase of 97 clinics year over year. Shields delivered a strong quarter. ProPharma sales growth was 47% with improved operating margins, driven by growth from recently signed contract wins and by expanding their value-add proposition with existing health system partners. Let's now look at some of the key metrics for Walgreens Health. As Roz mentioned, we have already exceeded our December 22 goal of 2 million covered lives. And we recently announced a strategic partnership with Buckeye Health Plan. The rollout of VillageMD continues with 120 co-located clinics open at the end of the third quarter, up from 94 at the end of the second quarter. we are progressing towards our goal of 200 by the end of this calendar year. Our fiscal 22 sales goal is now at $2 billion, reflecting a delay in the closing of the Carecentrics investment. Apart from that, there are no changes to our underlying sales assumptions. And as you can see, VillageMD and Shields are delivering impressive growth, with pro forma combined sales growth of 65% in the quarter. Turning next to cash flow, year-to-date free cash flow was $2.6 billion, $737 million below the prior year, as we cycled through some exceptional headwinds. Free cash flow was adversely impacted by the working capital impact of a decline in the Alliance RX Walgreens business and the year-over-year impact of COVID-19-related government support. Free cash flow also included a $240 million increase in capital expenditures behind our growth initiatives, including the VillageMD footprint expansion, rollout of the new automated micro-fulfillment centers, and continued omnichannel and digital investments. Turning now to full-year guidance. We are maintaining our full-year guidance of low single-digit growth in adjusted EPS. We have raised our estimate for the base business slightly from 6 to 8% growth to 7 to 9% growth to reflect strong U.S. front of store performance and increased testing and vaccinations. We are now expecting 35 million vaccinations this year compared to 31 million previously. Investments in our healthcare business negatively impact EPS growth by around six percentage points compared to five points previously. In summary, we are executing well, performing in line with our expectations and reconfirming our full year EPS guidance of low single digit growth in constant currency. I would remind you that this is better than the original guidance we provided at the start of the year of flat EPS growth year over year. Next, I will offer some additional color on our fourth quarter outlook. First, let me remind you that we are lapping a strong year ago quarter with EPS growth of 28%. The prior year growth was driven by strength in COVID-19 vaccinations with 13.5 million administered last year versus an estimated 2.9 million this year. Last year, we saw strong front-end results aided by at-home COVID-19 tests. Consistent with what we said previously, we anticipate some headwinds in the fourth quarter, and this chart highlights the most important ones. Vaccinations are an expected headwind of 15 to 17 percentage points. Investments to build out our Walgreens health segment could result in 10% to 12% impact on fourth quarter EPS. Other headwinds include labor investments of around 5 percentage points and lapping prior year one-time gains of approximately 4 percentage points of EPS growth. Combined, these headwinds amount to an expected 34% to 38% year-on-year headwind and leads to full year EPS growth of low single digits. I would caution against any extrapolation of these EPS impacts. For example, labor costs COVID-19 is the single biggest unknown, and it is difficult to predict today how new variants, booster adoption, reimbursement dynamics, and underlying health policies will impact consumer behavior. Against this backdrop, we have a strong array of strategic growth initiatives that will drive our long-term growth algorithm. First, we expect script volume to recover as we get back to normal operating hours and launch targeted patient retention programs. Second, our U.S. retail business
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