Walgreens Boots Alliance, Inc.

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Walgreens Boots Alliance Fiscal Year 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 would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again press the star one. Thank you. Tiffany Kanega, Vice President, Global Investor Relations. You may begin your conference.

Good morning. Thank you for joining us for the Walgreens Boots Alliance earnings call for the fourth 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 Kehoe, our Chief Financial Officer, and John Driscoll. President of our U.S. Healthcare segment. Rick Gates, Senior Vice President of Pharmacy and Healthcare at Walgreens, will participate in Q&A. Today's call will be approximately two hours in length, including Q&A. Let me note that we will be referring to our segments by their new names, U.S. Retail Pharmacy, International, and U.S. Healthcare. The renaming did not result in any change to the composition of the segments. Additionally, all references to the COVID-19 headwind include U.S. vaccines, drive-through tests, and OTC tests. 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.

Thanks, Tiffany, and good morning, everyone. It's great to be with all of you today, and it's hard to believe a whole year has gone by since our Investor Day last October. As I said to you then, and I'm deeply committed to being as open and transparent as possible about our business, we have scheduled a longer call this morning to provide a more in-depth update and also to spend additional time on Q&A to hear from you. I'm looking forward to reviewing our execution over the past year. We've delivered ahead of our expectations in fiscal year 22 and are well underway in our transformation to a consumer-centric healthcare company. Today, we'll also provide much greater visibility to the road ahead. Our fiscal year 23 adjusted EPF guidance of $4.45 to $4.65 is down year over year, largely due to lapping COVID-19 execution. However, we expect strong 8% to 10% core growth to underpin our results. We are rapidly scaling US health care, already raising long-term sales targets with a clear path to achieve profitability starting in fiscal year 24. It's early, but our strategy is working. We're making good progress on each of our four priorities. We're simplifying and strengthening the company. Our numerous accomplishments this year, despite a difficult operating climate, bolster our confidence in accelerating to our long-term algorithm of low teens adjusted EPS growth. We have a winning team and winning assets to unlock sustainable shareholder value as we reimagine local health care and wellness for all. As you'll remember from last October, we introduced four strategic priorities. First, Transform and align the core business. Second, build our next growth engine, U.S. healthcare. Third, focus a portfolio and optimize capital allocation. And fourth, build a high-performance culture and a winning team. Our four key priorities capture value across both core retail pharmacy and growth spaces in healthcare. We are already delivering consumer-centric primary care services. improving the patient experience and health outcomes while lowering costs, and leveraging our assets across the care continuum to treat the whole person. We are executing through our unique strengths and our hyper-local footprint and trusted, iconic Walgreens brand. At the same time, we're reinforcing our capabilities for the journey. We have and will continue to take measured and strategic actions to optimize our portfolio. We are also evolving our team with new talent, new skills, and fresh ideas, but with a singular focus on driving real value for our patients and for our communities, our people, and our shareholders. Let me review fiscal year 22 progress against each strategic priority. First, I'm pleased to say that we broadly exceeded our strategic goals across the core retail pharmacy business, despite a challenging macro environment. Our script count is the one soft spot for the year to call out. I'll talk more about how we're addressing that in a moment. However, we still surpassed our US and international adjusted operating income targets with very good execution in the front end. US and Boots UK retail comp sales were both strong, with the US up 6% and Boots up 19%. Several of our initiatives are continuing to gain traction. U.S. digital sales grew 37% for the year, on top of 74% growth in 2021. My Walgreens membership surge passed a big milestone, reaching 102 million customers, and I'm encouraged by the innovation and growth happening at our Owned Brands program. I am also proud of our significant U.S. retail margin expansion, up over 100 basis points, while many other companies, like big box retailers, are under pressure because they are more dependent on big ticket items. We are seeing meaningful contributions from alternative profit streams at $125 million in income for the year, including Walgreens advertising group with 35% growth. And you remember that we raised the target for our transformational cost management program last quarter to $3.5 billion with an expanding funnel of cost savings initiatives. In the pharmacy, Walgreens team members have proven that they are highly trusted healthcare resources. We administered 35 million vaccinations in fiscal 2022, well beyond our expectations. With demand for pharmacy services at an all-time high due to COVID-19, we have seen a tightening in the labor market for pharmacists and pharmacy technicians. This has unfortunately led to staffing shortages in some of our markets, in turn creating a headwind for prescription growth. Scripps were up a softer than expected 1.4% in fiscal year 22. We are focusing investments to return about 3,000 stores to normal operating hours, which I expect will drive Scripps volume recovery as we move through fiscal year 23. We're seeing positive staffing trends with 11 straight weeks of net pharmacist headcount increases. We have also opened our eighth automated micro fulfillment center, and are now supporting 1,800 total stores. Our pace is somewhat slower than expected, in part due to supply site construction delays, but I'm pleased with the performance of the centers we do have up and running. These facilities remove routine tasks and excess inventory from the pharmacy, which is expected to reduce working capital by over a billion dollars over time. Let me take a moment to address the historic macro challenges that are affecting our customer. With inflation at four decade highs, consumers are expressing uncertainty about the future and seeking value. At the same time, we know that health and wellness will always be a priority, and increasingly so after COVID-19. A McKinsey study from last month shows that around 50% of U.S. consumers now report wellness as a top priority in their day-to-day lives, a significant rise. from 42% just two years ago. We're leveraging our footprint, our digital capabilities, our consumer insights, and our essential services to drive overall retail pharmacy growth. We have a resilient core business with a mix that over-indexes to need-now categories, and we are better positioned now than we were in prior periods of economic turbulence. Our execution during the pandemic is just one example of our pharmacy services at the center of our communities and is part of an integrated healthcare experience. In the U.S., we have administered nearly 72 million COVID-19 vaccinations and completed over 34 million PCR and antigen tests to date. Second, we've improved the customer experience and it's showing every day through offering strong value, better in-stock conditions, and increased service levels. We've been managing inflation and collaborating closely with suppliers. We're maintaining price versus competitors and meeting our customers with robust in-stock levels that are above last year despite supply chain constraints. The products we sell are sourced from a wide variety of domestic and international vendors. The team is also deploying advanced forecasting and replenishment technology, including AI. The outcome is a better, more dependable shopping experience for our customer during these turbulent times and stronger results for our retail business. Finally, we expect reimbursement pressure on payer contracts to be predictable, as fiscal year 22 was in line with plan. We've already locked in 95% of payer contracts through calendar year 23. Turning to our next strategic priority, we're making important strides and consistent progress in building our next growth engine, the U.S. healthcare segment. Let me start with CareCentrics. With our announcement on Tuesday that we are accelerating full ownership, we are very well positioned in the home care market. And if the initial acquisition of a 55% stake had closed in line with our original timeframe, we would have achieved our $3 to $3.2 billion sales goal in fiscal year 22. Next, VillageMD and Shield continue to realize tremendous top-line growth, driving pro forma total growth of 75% for the year. We've added three strategic partners for Walgreens Health, Blue Shield of California, Clover, and Buckeye, bringing the number of lives covered above our calendar 22 year-end target of 2 million. VillageMD is leading the way in value-based care for the nation with over 340 clinics now open, including about 150 co-located with Walgreens, on pace towards 200 by the end of calendar year 22. Remember that we raised the target from 160 back in January. We're also adding health corners on schedule with 70 now on the way to 100 by the end of 22. Through our accelerated rollout, VillageMD already covers 433,000 lives under value-based arrangements, including 161,000 Medicare and MA value-based lives. At the same time, CareCentrics has 19 million total contracted lives, and SHIELDS has partnered with 75 health systems. Our healthcare strategy is now coming to life, and far from just being in the planning stages, It is well underway and can be seen in our best-in-class assets. We are moving swiftly to implement our vision of consumer-centric tech-enabled healthcare solutions that improve outcomes and lower costs for patients, providers, and payers. Over the course of the past year, we also took several actions to better align our investment portfolio with our strategy. These decisions will fund our continued growth and simplify the business. In addition to building our partnerships with VillageMD, Shields, and CareCentrics, we also completed a thorough review of the Boots business. Our decision to pause the process was a reflection of challenging financial market conditions, and the Board and I remain confident that the business carries strong fundamental value. We continue to have sufficient access to capital to accomplish all that we need to do, as demonstrated by our ability to opportunistically monetize portions of our portfolio. Recent transactions involve Amerisource Bergen unlocking $900 million, OptionCare Health with $360 million in proceeds, and GPC at $150 million. There is good financial flexibility through our total portfolio. and we are entering fiscal year 23 on a clear trajectory to a simpler, more streamlined company. Additionally, we increased the dividend for the 47th consecutive year in July, and we remain committed to growing the dividend over time. Finally, I want to cover our progress on our fourth strategic priority. We have evolved our operating model, expanded expertise on our board, hired new leaders, and made critical investments in our winning team. We have restructured our executive committee to align with best practices in healthcare. In recognition of the central role of technology in healthcare, we have taken several actions. We reconstituted our board's finance committee as the finance and technology committee, appointed IBM's global chief data officer, Inderpal Bhandari, to the board, and named our next chief information officer. Beyond that, we have named over 10 senior executives since the start of fiscal 22, including a new structure for U.S. retail pharmacy. It's always been important to me to prioritize our most meaningful asset, which is our team members. I have no doubt that investments in our people will yield large rewards as we recruit and retain the very best talent, which will allow us to recover our script count growth and enhance our customer experience. At the support office level, we're pleased to announce incremental measures to align compensation with our strategic ambitions and shareholder interests by adopting a relative TSR metric in our long-term incentive plan for fiscal year 23. We are all invested in and accountable for the success of our company. At our stores, we invested in incremental $190 million dedicated to our pharmacy staff in fiscal year 22. primarily in premium pay and bonuses. Fiscal year 23 will include further investments in our pharmacy team of $265 million as we make good progress in returning stores to normal operating hours. As a reminder, this is in addition to the minimum wage increases we announced last year, which, consistent with prior guidance, represent a year-over-year impact of $260 million in fiscal year 23, building to $450 million over the three-year period. As we discuss these investments and our team members, let me take a moment here to stop and fully appreciate how important their work is. Just as the crisis-level impact of the pandemic has started to subside, we've seen tragedy strike with the hurricanes in Florida and Puerto Rico. Our teams, as they always do, responded decisively on behalf of their communities and really rose to the occasion. My message to our colleagues on the front lines is thank you once again from all of us at WBA, and we're so very proud of your leadership. Now, let me go into more detail on the deep and talented bench of leaders at WBA. Most recently, we were excited to announce on Tuesday that John Driscoll has joined our team as president of our U.S. healthcare segment. Our U.S. business is now organized under three leaders, healthcare under John Driscoll, pharmacy under Lee Cooper from Shields, and retail under Tracy Brown. John has more than 25 years of expertise, including as president of Cast Light Health, a healthcare tech company, group president for New Markets at Medco, a $70 billion PBM that spun out of Merck, and founder and chair of the SureScripts e-prescribing network, the first cross-industry collaborative with competing retail, PBM, and health plans. Lee previously served as CEO of GE Healthcare in the U.S. and Canada before leading Shields through rapid expansion. He has demonstrated proven success in driving growth, creating omnichannel customer experiences, establishing high-performance cultures, and executing with excellence. And already in just one year at WBA, Tracy has made major strides in our customer experience. Tracy's team is creating highly personalized offerings for our consumers across our digital and physical assets. We are confident in the road ahead, with the right team leading us through hard decisions today. We exceeded expectations in fiscal year 22, successfully managing our resilient core business. While there are macroeconomic challenges, we are executing well and expecting strong core growth of 8 to 10% in the year ahead. We are scaling our winning assets to accelerate growth and profitability of our U.S. healthcare business. We are investing in strategic talent and capabilities, and we're taking strong action to simplify our portfolio. Our strategy is working to strengthen the business and build a solid foundation for sustainable shareholder value creation. With that, I'll hand it over to James to provide more color on our results and our outlook.