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spk06: Good day, ladies and gentlemen. Thank you for standing by. Welcome to Walgreens Boost Alliance fourth quarter 2024 results earnings conference call. At this time, all participants are on a listen-only mode. After this speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automatic message advising your hand is raised. Please note that today's conference is being recorded. I will now hand the conference over to speaker host, Tiffany Kanega, Vice President of Global Investor Relations. Please go ahead.
spk00: Good morning. Thank you for joining us for the Walgreens Boots Alliance earnings call for the fourth quarter of fiscal year 2024. I'm Tiffany Kanega, Vice President of Global Investor Relations. Joining me on today's call are Tim Wentworth, our Chief Executive Officer, and Manmohan Mahajan, Global Chief Financial Officer. In addition, Mary Lungowski, President of U.S. Healthcare, Rick Gates, Senior Vice President and Walgreens Chief Pharmacy Officer, and Tracy Brown, President of Walgreens Retail and Chief Customer Officer, will participate in Q&A. Also in the room this morning is Eric Wasserstrom, Senior Vice President of Investor Relations. 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 Form 10-K 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 Investors section of the Walgreens Boots Alliance website. During this call, we will discuss certain non-GAAP financial measures. These measures are reconciled to the most directly comparable GAAP financial measures, and the reconciliations are set forth in the press release. You may also refer to the slides posted in the investor section of our website for reconciliations of non-GAAP measures to the most comparable GAAP measures discussed during this earnings call. We encourage you to review the comparable GAAP measures and reconciliation to non-GAAP values in the other earnings materials we provided. I will now turn the call over to Tim.
spk14: Thanks, Tiffany, and good morning, everyone. Our fourth quarter and fiscal full year results reflected our focused execution on several critical initiatives against a challenging backdrop for our consumer. When I joined, I had three immediate priorities. First, build a new management team. Second, address items within our control that could improve our financial condition within the year. And third, undertake a strategic review of our collection of valuable assets to lay the groundwork for our longer term turnaround. With respect to the short-term actions, we successfully hit our three declared goals, cutting costs by over $1 billion, reducing capex by over $700 million, and realizing over $600 million in benefits from working capital initiatives. These factors contributed to our positive cash flow in the fourth quarter and helped achieve full-year cash flow that was also positive. Building on this momentum is critical as we turn our executional focus to stabilizing our core economics improving our operating cash flow, and strengthening our balance sheet beyond the $1.9 billion net debt reduction achieved in fiscal 2024. Equally important, we have conducted a thorough strategic review. Coming out of this work, we are an organization focused on two guiding principles with clear operational and financial priorities. The first guiding principle relates to our operating model. WBA is reorienting to its legacy strength as a retail pharmacy-led company. This reorientation allows us to leverage our key strategic assets of consumer trust, convenience, and relevance. Our position of trust stems from the millions of face-to-face interactions our consumers have with our pharmacy personnel every day. And we will continue to take actions now and for the long term to be the first choice for retail pharmacy and health services. Having earned our consumers' trust, indeed our reason to exist, we also want to be accessible and convenient, but we need to be appropriately sized. Consequently, we are announcing an expanded footprint optimization program. We have over 8,000 stores of which the majority, approximately 6,000, are profitable. This solid base supports our conviction in a retail pharmacy-led model that is relevant to our consumers and we intend to invest in these stores over the next several years. Part of the funding for this investment will come from accelerating the closure of underperforming stores. We expect to close approximately 1,200 of those over the next three years and reduce the fixed costs associated with them. Executing on this program will realign our footprint to a healthier store base that we believe will enable us to respond more dynamically to shifts in consumer behavior and buying preferences. Our ability to respond to a changing environment needs to improve and was a critical objective of our strategic review. We intend to close this competitive gap with some of our peers who have invested in similar capabilities over the past several years. While the decision to close the store is never an easy one, We feel confident in our ability to continue to serve our customers. And we intend to follow our historic practice to redeploy the majority of the workforce in those stores that we close. In addition to being trusted and convenient, we must be relevant to today's consumer. To this end, we are reevaluating our merchandising strategy to offer a refreshed assortment of products, including our own brands. By being more selective with national brands and expanding our own brands, We are sharpening our focus as a destination for categories for which we believe we are uniquely positioned to lead like health and wellness and specifically women's health. We launched over 300 new own brand SKUs this year focused in key categories and we expect to launch another 300 plus in fiscal 2025. Our second guiding principle is a disciplined financial model which targets strong free cash flow generation and appropriate leverage. Our focus in the near term is on improving our operating cash flows through cost and working capital management, while establishing the baseline for AOI growth. In fiscal 2025, we expect to realize $500 million in working capital initiatives and $150 million in further capex reduction. In addition, we are focused on monetizing non-core assets to generate cash. Chief among these is VillageMD. While our plans with this investment may take several different forms, in all scenarios related to VillageMD, we are committed to redeploying any proceeds to reduce our net debt and improve the health of our balance sheet. Our efforts around VillageMD are just one example of how, on a go forward basis, we are maximizing optionality around our portfolio of assets. As we consider if and when to appropriately monetize these assets, We will continue to harvest gains from our portfolio of public equities, Sikora, and Bright Spring to generate cash and further enable debt reduction. As we go forward, we have three priorities. To stabilize pharmacy margin, advance the execution of our retail strategy, and improve our net debt position. This emphasis on improving the strength and quality of our balance sheet underscores Momohan's leadership in establishing our financial priorities to which he will speak in a few moments. Let me now bring some visibility to the status of our discussions surrounding pharmacy margin and reimbursement rates. We continue to be confident that we are in a multi-year process to reframe our relationship with PBMs on reimbursement. We are changing the dialogue to ensure we both procure drugs at a fair price and that we are paid fairly for the value that we provide. As part of our efforts, we have worked with some PBMs to bring more stability and predictability to our reimbursement while maintaining broad network access. It continues to be our goal to serve as many patients and communities as possible. However, going forward, Walgreens will make difficult decisions if a PBM will not provide reasonable reimbursement for our services in order to maintain our presence in communities across America. Today, we have a high level of visibility. into reimbursement for approximately 80% of the anticipated script volume in fiscal 2025. We are pleased with the willingness that some of our PBM partners have shown to consider current trends and adjust reimbursement, such as rebalancing brands and generics, and we look forward to working with those partners on how we can grow together. Several significant contracts are in the process of being negotiated over the next year, and we will pursue rational reimbursement that ensures we are paid fairly. Turning to NADAC, based on the latest data, we have seen it begin to stabilize. However, it is critical that regulators work alongside us and industry groups to implement a solution that reduces future instability and ensures that NADAC is a predictable product benchmark for pharmacy reimbursement. Finally, outside of working with PBMs and payers to evolve reimbursement, we continue to progress our efforts to broaden and deepen the services we get paid for. Provider status and other new payment arrangements remain a key opportunity for us to fully deploy our pharmacist capabilities lighten the burden on the broader healthcare system and further stabilize and improve our overall pharmacy economics. Many of our actions across this turnaround will take time, but I am confident that we have the right team, the right focus and the right strategy. Manmohan will detail our expectations for fiscal 2025 in a moment. Our most recent quarterly results underscore the importance of executing with intent to stabilize the core business, irrespective of the macro economic backdrop. We have a lot of work to do and 2025 will be an important rebasing year to drive longer term value creation. And before I conclude, I wanted to say a few things about how we're supporting the communities recently impacted by hurricanes Helene and Milton. Of course, our thoughts are with all our patients, customers, team members, and everyone else that's been impacted by these terrible natural disasters. In times of crisis, it is always heartening to see the generosity of America's response. At Walgreens, we've leveraged our public private partnerships to implement a national pin pad program with the American Red Cross to raise over $5 million, which has been used to donate water and other urgent supplies for the communities in need. Tim Stenzel, Walgreens has also made a donation to the American Red Cross hurricane Helene fund. Tim Stenzel, In terms of the impact to us about 1050 of our stores were brought offline by the storms or in preparation for them, but we have restored all but 16 of them. Tim Stenzel, we're working to make sure we continue to provide essential services to these impacted communities, I will now turn it over to mom on to review our financial results, thank you, Tim and good morning everyone.
spk15: Overall, four quarter results were in line with our expectations. Thematically, the quarter reflected the same trends that characterized our full-year results, with pressure on U.S. retail pharmacy partly offset by growth in our U.S. healthcare segment, while our international business continues to perform in line with our expectations. Adjusted EPS of 39 cents decreased 41% year-over-year on a constant currency basis. Approximately 70% of this decline relates to lower sale-leaseback gains, lapping the reversal of incentive accruals in the prior year and lower SINCORA equity income. Headwinds in the U.S. retail pharmacy businesses were partly offset by cost-savings initiatives and growth in U.S. healthcare business. Gap results for the quarter included certain non-cash charges. We recognize the $2.3 billion charge for valuation allowance on deferred tax assets. These deferred tax assets were primarily related to opioid liabilities recognized in prior periods, and they remain available for the company to offset potential future income, including gains from monetizing assets. We also recognize $696 million in impairment charges for CareCentric's Goodwill and our equity investment in Chinese pharma company, Goda. As a reminder, last year's GAAP results included certain charges related to opioid claims and lawsuits. Let's move on to the full year highlights. Adjusted EPS of $2.88 declined 28% on a constant currency basis due to the softer U.S. retail pharmacy performance and significantly lower sale leaseback gains. This was partly offset by cost savings initiatives and improved profitability in U.S. healthcare. GAAP net loss was $8.6 billion compared to a loss of $3.1 billion in fiscal 23. Gap results included certain non-cash impairment charges related to Village MD Goodwill in the second quarter. The prior year period included $5.5 billion after-tax charge for opioid-related claims and lawsuits, partly offset by a $1.7 billion after-tax gain on sale of Sincora and option care health shares. Now, let me cover U.S. retail pharmacy segment. Comparable sales grew 8.3% year-on-year. driven by pharmacy and partly offset by decline in retail sales. AOI decreased 60% versus the prior year quarter. Approximately two-thirds of this decline relates to lower sale leaseback gains, lapping the reversal of incentive accruals in the prior year and lower Sankora equity income. Headwinds in the retail and pharmacy businesses were partly offset by cost-saving initiatives. We exceeded our goal of $1 billion in cost savings for the year with most of the benefit recognized in the U.S. retail pharmacy segment. Let me now turn to U.S. pharmacy. Pharmacy comp sales increased 11.7% driven by brand inflation and mixed impacts. Comp scripts excluding immunizations grew 2.6% in the quarter. We continue to track in line with the overall prescription market year to date. Pharmacy adjusted gross margin declined versus the prior year quarter, negatively impacted by net reimbursement pressure, brand inflation, and mixed impacts. Recent fluctuations in NADAC resulted in $17 million of impact in the quarter versus the prior year, turning next to U.S. retail business. Compatible retail sales declined 1.7% in the quarter. As Tim mentioned, the consumer backdrop remains a challenge. We see this with our customer as sales pressure in the quarter was almost entirely driven by non-essential categories. We continue to refine our pricing and promotion strategy, which helped to improve gross profit margin in the quarter. At the same time, value seeking behavior and new product launches during the year have driven our own brand penetration up 70 basis points in the quarter, finishing at over 17% of sales to end the year. Retail adjusted gross margin improved year over year, positively impacted by category mix towards health and wellness products, partly offset by higher shrink levels. Turning next to the international segment, and as always, I will talk in constant currency numbers. Total sales grew 3.7%, with Germany wholesale increasing 8.2% and Boots UK up 2.3%. Segment adjusted gross profit increased 2% with growth across all businesses. Adjusted operating income was down 11%, primarily due to lapping real estate gains in the year-ago period. Let's now cover Boots UK in detail. Boots UK continues to perform well. Comp retail sales increased 6%, with continued market share gains in all categories showing growth. Boots.com sales increased 19% year-on-year, and represented 15% of our UK retail sales. Turning next to US healthcare. The US healthcare segment finished ahead of expectations for the year, delivering $66 million in adjusted EBITDA. Sales of $2.1 billion increased 7% compared to the prior year quarter. VillageMD sales of $1.5 billion grew 7% year on year. The increase was driven by growth in full risk lives and fee-for-service revenue, partly offset by the impact of clinic closures. Shield sales were up 28%, driven by growth within existing partnerships. Adjusted EBITDA for the fourth quarter was $65 million, an improvement of $94 million compared to last year, driven by cost discipline at VillageMD and growth from Shields, turning next to cash flow. Operating cash flow of $1 billion for fiscal 24 was negatively impacted by $934 million in payments related to legal matters and $386 million in energy premium contributions related to the Booth's pension plan. We exceeded our target of $600 million in capital expenditure reductions in fiscal 24, delivering $736 million in savings versus fiscal 23. Similarly, We also exceeded our target of $500 million of benefits from working capital initiatives in fiscal 24. Free cash flow of $23 million declined by $642 million versus the prior year due to lower earnings, higher payments related to legal matters, and phasing of working capital, partly offset by lower capital expenditures. Looking at the fourth quarter, free cash flow of $1.1 billion increased 98% compared to the prior year period. The increase was driven by benefits from working capital initiatives, lower legal payments, and lower capital expenditures. Over the course of fiscal 24, we reduced our net debt by nearly $2 billion and our lease obligations by over $1 billion. And our liquidity position is healthy. We ended the year with $3.2 billion in cash and cash equivalents and $5.8 billion of revolver capacity. Looking ahead, one of our key priorities is to strengthen the balance sheet condition of the company. We are focused on improving our cash flow generation and net debt position through a combination of operational actions and asset monetization activities. These priorities have significant influence on our expectations for this upcoming fiscal year, which I will detail now. As Tim underscored, our priorities for fiscal 2025 is to stabilize our core operations while we make progress on the longer-term strategic and operational turnaround. This view is reflected in our adjusted EPS guidance of $1.40 to $1.80. This guidance is based on three central assumptions. First, in U.S. pharmacy, we anticipate continued pressure on reimbursement rates. we have negotiated approximately 80% of the contract volume for calendar year 2025. Due to the multi-year nature of these contracts, there is still more progress to be made, but believe we are taking incremental steps towards our goal of reducing the impact of reimbursement pressure on pharmacy margin. The second major assumption is that our customer is likely to remain under pressure and continue to demonstrate the same price sensitive shopping behavior that we experienced in fiscal 24. In response to this dynamic, we're executing on a number of retail initiatives over multiple periods. In the near term, we're taking cost actions to improve our operating leverage, including the accelerated optimization of our fiscal footprint. We expect these closures to be accretive to our cash flows in fiscal 2025. Lastly, we expect growth in our healthcare segment and in the international segment. Let's cover the footprint optimization program next. We expect to close approximately 1,200 stores over the next three years, with about 500 targeted to close in fiscal 2025. Within fiscal 2025, we expect this activity to be weighted towards the back half of the year. We are prioritizing closing locations that are cash flow negative, underperforming stores where we own the locations, and ones where the lease expirations are coming due in the next few years. This focus is expected to partially mitigate the incremental burden of dark rent. The economic benefits of this approach should begin to be tangible in fiscal 25. By accelerating the scope of our footprint optimization program and focusing on stores with weakest cash generation, we expect to reduce our working capital needs and improve our cash flows over the next 12 months. We expect the in-year benefit from footprint optimization program to be approximately $100 million of AOI, with positive cash contributions, including the cash benefits from working capital and sales of owned stores, net of closure costs. Over time, these actions should also enable us to fund the investments we plan to make in higher-performing stores as we look to improve our customers' in-store experience. For this year, we're prioritizing investment in those stores that should be the recipient of the scripts, merchandise and the foot traffic from the stores we're closing. In our discussions with the investment community last quarter, we highlighted that we were evaluating 2,000 stores as part of our optimization efforts. Net of the 1,200 that we have identified for closure This indicates that there are another 800 stores for which we are focused on improving their operating performance and cash flows. However, as has always been the case, we will continuously evaluate this group and all our stores to ensure we ultimately operate with the best possible footprint. Let's now turn to additional guidance line items. We are providing additional guidance on certain enterprise and segment level line items for modeling purposes. At the midpoint of our guidance range for adjusted EPS, about 60% of the year-over-year decline reflects the impact of higher tax rate and lower contributions from sale-leaseback and SINCORA earnings. On a corporate level, we're anticipating higher interest expense due to lapping prior year gains on bonds. Let me cover segment level details next. For the U.S. retail pharmacy segment, At the midpoint of the range, we expect a year-over-year decline in AOI of $1.1 billion. Approximately 40% of this decline is driven by headwinds from sale-leaseback gains and prior SINCORA share sales. We anticipate that fiscal 25 will be the last year of headwinds from sale-leaseback gains. Excluding these impacts, we expect headwinds from net reimbursement pressure and retail to drive the remaining year-over-year declines. partially offset by the impact of footprint optimization program. Let me share some additional KPI information. We expect the overall market growth for script volume to be between 2.5% to 3%, with our total prescription growth impacted by store closures. We expect vaccinations to be slightly lower compared to fiscal year 24. Guidance assumes no significant changes to the recent trends impacting pharmacy margin, including brand inflation, mix, authorized generics, and continuation of most recent trends in NADAC. We expect retail comparable sales of negative 2 to negative 3%, and cough, cold, and flu season incidences are expected to be slightly down versus last year. We expect international segment profitability to grow in fiscal year 25, led by Booth Retail Business in Germany. We expect adjusted EBITDA for the U.S. healthcare segment to improve by $250 million at the midpoint compared to the fiscal year 24 to a range of $280 to $350 million. Let's conclude the guidance discussion with cash flow and capital allocation. We expect our efforts to stabilize retail sales and pharmacy margin to take hold over time. In the near term, we will continue to bolster our free cash flows through working capital optimization initiatives, as well as right-sizing our capital expenditures. In fiscal 25, We expect working capital initiatives to generate approximately $500 million of free cash flows and capital expenditure reductions of approximately $150 million. We anticipate an AOI headwind of approximately $400 million from lower sale-leaseback gains and SINCORA equity earnings. This will not have any impact on free cash flow. In fiscal 2024, we began to refocus our financial philosophy. This includes decisions to simplify our financial reporting, such as wind down of the sale-leaseback program and SINCORA share sales, but also in terms of capital allocation priorities. As we monetize assets in fiscal 24, we reduce our net debt position by $1.9 billion. This is a good start, but there is still much more work to be done to continue to strengthen our balance sheet in the coming years. Given this imperative, we intend to further monetize non-core assets. Additionally, we expect our lease liabilities to decline further due to the conclusion of our sale lease pack program and as we execute against our footprint optimization program. We believe these actions will improve our cash position and financial flexibility as we focus on reducing net debt while supporting the successful execution of our turnaround over the next few years. With that, let me pass it back to Tim.
spk14: Thanks, Mimawan. Before opening the call up for Q&A, let me leave you with a few closing thoughts. We are confident that we have the right team and the right strategy, and we are laser focused on two principles. That we are a retail pharmacy led organization, and that the economics of this model must be disciplined and sustainable. To this end, we intend to meaningfully strengthen our balance sheet over the next few years, and there is a clear path to doing so. As we work to stabilize our financial performance, monetize non-strategic assets, reduce our lease exposure, and address our net debt position. As part of this approach, we intend to adopt a flexible and pragmatic capital allocation strategy. To be clear, we believe our reorientation to retail pharmacy has a bright future. We're engaging in a multi-year program with a long-term goal of appropriately sized and well-positioned fleet of stores and an industry-leading customer experience in both retail and pharmacy across consumer channels. And we continue to believe that the adjacent strategic businesses in which we've invested can incrementally contribute to value creation over the longer term. We are in the early stages of a turnaround that will take time, but the fiscal fourth quarter was an important building block in the foundation of this turnaround, and we expect further progress in fiscal 2025. With that, let's take questions. Operator?
spk06: Thank you. Ladies and gentlemen, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. And our first question coming from the line of Lisa Gill with JP Morgan.
spk03: Good morning, and thanks for taking my question. Tim, I just want to focus on a couple of things. One would just be some of the comments that were made early on around the restructuring of the reimbursement. When you talk about 80% visibility, you also talked about, you know, very difficult decisions around maybe contracting going forward. So how do we, one, balance that when I think about improving rates? Do we expect improving rates in 2025? Is this more of like a three-year plan? And then secondly, when you think about those difficult decisions, are you thinking about leaving some networks? Like, how do I put all those pieces together?
spk13: Sure.
spk14: Thanks, and good morning, Lisa. So, first of all, just to answer directly, as it relates to 2025, we have a lessening of the reimbursement pressure, if you looked at a trend line, which, by the way, continues a couple-of-year dynamic, which I've talked about before, where coming in, I was – fairly confident that we had seen the payers becoming more understanding and realistic about what we could give. And at the end of the day, if all of the retailers are showing up with less being taken out of the market to then share, it begins to support that dynamic. And so in 25, we do see less. Let me start with that. Number two, there's no question that there is a recognition by all parties, PBMs, payers, and our peers, that the dynamics have changed. And we see that clearly reflected in the conversations, very constructive conversations we have had, both in the 80% where we have actually landed the contracts and we have seen different sorts of mechanisms put in the contracts. There's not a one size fits all. We've seen some cost plus. We've seen carve outs for new brand drugs or existing brands that are at high prices. We've seen rebalancing of brand and generic. And we're showing up open-minded to how we reconfigure the risk and also protect our ability to not see unmanageable reimbursement pressures that frankly aren't economic for us and not frankly market required. All of that said, the 20% that are left, what I would say is those are constructive conversations. I don't want to portray them as something different, but in all of our conversations, not just the 20%, We showed up willing to make a difficult decision if we weren't going to be in a range of being compensated fairly. And it doesn't mean we're raising prices. Let me be clear about that. It means that we are arresting the downward pressure because we are not taking money out of the market, either through purchasing or through the dynamics of generics, generic inflation, new generics, and so forth, to underpin what would otherwise be our ability to increase the reimbursement that we give. All of that to say, because I know this is a very important topic to our investors and to the market, even the 20% constructive conversations, let me be clear, we're willing to walk away from a line of business if it doesn't make sense. I've said that there are examples where we would rather have 5% of a cash-paying cadre than 100% of a reimbursed cadre. And so from that standpoint, again, we know that. I believe the payers are very clear about it. And I'm very confident that over a two- to three-year period, we will have reset the framework for reimbursement discussions and, frankly, be talking more about other value creation that we can do together than simply unit cost reductions.
spk03: That's very helpful. And just one follow-on. That would be, you know, as we think about the cadence of 25, you know, I know Momoa talked about, you know, the store closings impacting more the back half of the year. Anything else you would call out as I think about, you know, how earnings will develop in 25?
spk15: From a cadence perspective, Lisa, you ought to think about maybe the same trend as we have seen in the last couple of years. We do have roughly around 500 closures, which are back half weighted. But then we also had closures in the second half of fiscal 24. So, you know, we're going to see the benefit from store closure continue to scale within 25 and then beyond over the next three years as well.
spk06: Thank you.
spk12: Operator, next question.
spk06: Thank you. And our next question coming from the lineup. And Heinz Whitman, Zoho Group, your line is open.
spk02: Hi, good morning. Thank you. Thanks for all the details on free cash flow. I just have a question on timing. I know, Tim, in your prepared remarks, you talked about fiscal 2025 is a rebasing year. You want to get AOI to a point where you can grow. Is that is that fiscal 2025 or do we really have to wait until you're able to stabilize these PBM contracts and grow from there? So any timing that you can provide on when you think would be a base to grow from. And then secondly, I think last conference call you talked about we're going to go negotiate in some vendor contracts. Can you provide any update on that progress? That would be great. Thank you.
spk12: Yeah, I'm sorry. Could you just repeat your second question? Which contract?
spk02: Oh, I think some supplier contracts, whether it's drug distribution or anything in the front store, I think the company has talked about maybe the potential of being able to renegotiate some contracts. So any progress on that would be great.
spk14: Sure. Thanks. So, you know, first from a timing standpoint, as you can appreciate, we've said all along, this is a multi-year turnaround. This is a rebasing year in 25. We're not giving three-year guidance at this point. other than to say that we believe this replatforming of the company and the things that we've said we are going to do and are already doing are meaningfully positioning us for growth in the longer term, both in terms of pharmacy services, U.S. healthcare, and the front of the store. I'll let Memoan give you any additional color as it relates to the longer term perspective that we have. Coming back to the second part of your question, and then I'll turn it over to Memoan. As it relates to Sincora, because I guess that is your question, You know, as you know, we, we do have a longer term arrangement with them that goes until 29. Uh, we re meet with them regularly to, uh, make sure that they understand sort of where we sit and we evaluate together, how they can help us both in terms of our cost of acquisition, as well as frankly, operationally, because they're a crucial part of our underlying operating model. And we're not going to give any updates at this time, but there is a meaningful dialogue that we're having. Um, it is very constructive and we believe that there are ways that we can together. inclusive of inventory, working capital, micro-fulfillment-related activities, and indeed purchasing, you know, acquisition costs, that there are things we can do together to allow for the one thing we both want, which is us to grow, because that's good for both us and them. Now I'll turn it over to Momohan to just give you any additional color as it relates to the longer-term outlook that your first question asks about.
spk15: Sure. So not providing long-term guidance today, but as Tim mentioned, goal is to grow AOI and free cash flows over the next three years. Maybe a couple of themes for fiscal 25 first. The guidance we shared today, it reflects roughly around 80 to 85 cents, roughly around 60% headwinds from higher tax rate, CLOS and CORA shares recently, as well as lower sale-leaseback contribution. And so 25 is a better base when you think from a quality perspective. We do have roughly around 250 million of equity earnings expected in fiscal 25 from SINCORA. Now those will, we will lap those in fiscal 26 as our existing variable prepaid forward contracts comes to maturity in late fiscal 25 and early 26. From a business core underlying business performance perspective, we do expect U.S. healthcare to continue to grow and we expect international to grow. in fiscal 25. As Tim mentioned in his prepared remarks, from a USRP perspective, from a longer-term growth perspective, we're very focused both on pharmacy margin as well as retail sales in the U.S. Those benefits from those initiatives we expect to scale over the next three years. And so in the meantime, you know, from a fiscal 25 perspective, we're going to be very focused on cost discipline including the footprint optimization program that we announced today, which we expect to be accretive in the year. And as I said earlier, the benefit from the optimization program, we expect it to continue to scale as we close locations over the next three years. And the benefit in the year is roughly around $100 million. So that, I think, gives you a shape of, you know, 25 and, you know, getting out of 25, what are going to be some of the factors we're looking at longer term.
spk06: Thank you. And our next question, coming from the lineup, George Hill with Deutsche Bank. Your line is now open.
spk10: Yeah. Good morning, guys. And, Manon, maybe I'd missed this, but are you able to talk about, like, what is the discrete impact of the store closures in fiscal 2025 and maybe from a run rate basis to the U.S. pharmacy business? And then my quick follow-up question would be, are you able to provide any color on earnings cadence in the U.S. pharmacy segment as we think about the The progression of fiscal 25, just kind of give them the slope of how earnings have progressed recently. I think that would be helpful. Thank you.
spk15: Sure. So far, store closure benefits in the year, we expect roughly around $100 million contribution to AOI in fiscal 25. And that will then continue to scale into 26 and 7 as we close more locations over time. So that's kind of the run rate. From a cash perspective, we expect footprint optimization to be accretive in the year as well. And I think the simple way to think about this is the benefit from working capital as we close locations, as well as there are certain owned locations that we're going to be closing and monetizing in the year. That significantly outweighs the closure cost in the year. So that's on the store closure side. On the cadence side, look, I think we're going to be pretty much in line with how the cadence has played out over the last couple of years, so don't expect significant changes there. First half versus second half.
spk10: Thank you.
spk06: Thank you. And our next question coming from the line of Charles Reagan with TD Securities. Your line is open. Thank you.
spk07: Yeah, thanks for taking the question. Hey, just to follow up on Lisa's question, Tim, I think you said that with the 80% renegotiated in terms of the contract volume, that is lower, but is that then stable going forward? So this is sort of at least where 80% is setting a new baseline. And then secondly, appreciate all the comments around free cash flow, but Can you give us a sense for where free cash flow will be for fiscal 25? I mean, there's a lot of moving parts here. But if I kind of look at some of these pieces, we're still coming out negative free cash flow for the year. Just maybe give us a sense for where that kind of sits when we think about the high end and low end of the EPS guide. Thanks.
spk14: Sure, thanks. And I'll let Momoa take the second question. As it relates to the contracts, again, what I reinforce is it is an ongoing and dynamic process. When I call it a reset, It's more a structural reset than it is we're going to do something that then just stands still. And so those contracts typically are multi-year contracts, which is why it's going to take us a few years to actually work through all of the contracts that we have, which in many cases have us taking more risk or less reimbursement than we believe is ultimately appropriate and sustainable. And so it is an ongoing dynamic. And furthermore, in my background, probably this won't surprise you to hear, I don't view them even when they're done that we're done. There are opportunities to sit back down based on dynamics that occur, whether it's the pipeline, new indications, new products, trying to win a new client. And we work with those PBMs and payers to help them with that. So from that standpoint, the 80% is sort of a, it's not an abstract number, it's an actual number. It says we had 100% of a group of contracts that would have been renegotiated for the 2025 plan year. We have 80% along in that, which is by itself not shocking because, as you can imagine, PBMs actually operate on a January year for plan design. So we're actually right where I would expect us to be, and I'm not surprised that the remaining contracts are, again, the ones that probably require a bit more work by both parties at the table to reach a better place, and I think we'll get there. And, Mamon, do you want to take the second question?
spk15: Sure. So from a free cash flow perspective, 25, a couple of themes for you to consider. First is we expect adjusted operating income to decline in 25. Now, roughly around $400 million of that is due to the lower, say, leaseback contribution as well as lower earnings from SINCORA. Those items do not impact free cash flow, so we just wanted to flag that. Outside of that, the legal payments in the fiscal year 25 expected to slightly increase as well, roughly around $1.5 billion total. And then before they go down in 26, we expect them to decline over 26. And so what we're working to is, you know, partly offsetting these headwinds from, A, working capital optimization of roughly around $500 million in the year, And then B, on the CapEx side, we expect our CapEx to be declining roughly around 150 million in the year. Those kind of are the building blocks from a free cash flow perspective. Lastly, I'd say this, and look, we'll continue to have a pragmatic approach to capital allocation going forward. As you've seen in Q4, we were able to monetize our non-core assets. We do have some flexibility in our portfolio, and so we will continue to tap into that as needed.
spk07: Great, thank you.
spk06: And our next question coming from the lineup, Eric Berger with Newfound Research. He'll end this open.
spk01: Thank you. A question on U.S. health care, given the guiding principles you laid out, Tim. I guess question one is, is there any component here that's key to the strategy of rebasing around the retail pharmacy customer? And then, Mo, maybe I'll ask you on VillageMD. Is the focus here, you mentioned, you know, profitability or profitable growth from the other elements of the business, is there a reduction in investment or stabilization in the underlying village MD operation?
spk13: Sure. Thanks for that, Eric. I'll take the first part. And as you directed the second to my mom, I'll let him take it.
spk14: You know, in terms of what's core, you know, first of all, it starts with, frankly, our clinicians and our team, which is the, you know, the underlying asset that enables us to look at other services, whether it's for payers or for pharma, in the back of our stores. And so our U.S. retail strategy is a healthcare strategy. I would start with that. And it's a crucial, that's why we've re-centered on the pharmacy as a core to our strategy. I would then say inside of that, what's probably not as well appreciated as will be over time is our specialty pharmacy, which is really when you look at where the growth of patient need is, payer need is, being the largest independent specialty pharmacy and having the assets that we have and the team that we have is a tremendous starting point to envisioning doing more, whether that's for the pharma companies that actually originate the products, the biosimilar companies that make biosimilars, or indeed the payers who want to have their patients have access to a highly reliable, clinically focused, trusted company. And so from that standpoint, we see that as a critical asset You know, other things are very complementary to that, such as Shields and Carecentrics to providing a broader set of ecosystem services or services to a unique set of payers in the case of Shields being health systems. And so those are really important assets for us incrementally to the core asset that we have, which is being a retail pharmacy. Do you want to take the second question, Momohan?
spk15: Yeah, sure. So let me start Q4, U.S. healthcare segment performance. A couple of things there. Common theme throughout the year, has been Shields continues to grow expansion within the existing partnership. And then we have seen improvement within VillageMDA as well, driven by a significant cost reduction program that they've gone through. Now in Q4, we also experienced slightly higher contribution from their risk-based book. And so that's driving a little bit of over performance in the quarter. As you look out to 25, we expect these teams to continue to play. We expect Shields to continue to grow. within their existing partnership, just continue to expand. And then on the village side, there is benefit of costs in fiscal 25, including the wraparound benefits from cleaning closures that they have executed in fiscal 24. Outside of that, we do expect their contribution margin to also improve slightly year over year, driven by higher fee-for-service volume and a little bit growth on the risk-based side.
spk06: Thank you. And our next question, coming from the line of Kevin Calando with UBS. The line is open.
spk11: Thanks. Thanks for taking my question. From the store closures, just within the guide, I'm trying to understand, what do you anticipate over time you're going to retain in terms of RX and foot traffic? Is there sort of a magic number as you go through this analysis? Is it used to be 70%? Is it 50%? Like, how do you think about that in terms of what you're guiding for or what's implied in the guidance for that?
spk14: Yeah, thanks for the question. That's an important dimension, one of a number of dimensions, that as we've evaluated the 2,000 stores we spoke about last quarter and now the 1,200 that we've announced that will be actually closing, and as we continue to evaluate the 800, The recapture rate is critical and it's something that we're very, very precise about as it relates to store level dynamics. And so there is no one number. There is an aggregating number that I suppose that if we added up to 1200 times the store level assumptions that we are able to make based on a number of dynamics related to how many other stores are there nearby that are ours, how many are competitive, what's the profile of the patients that we're caring for today, et cetera. And there's a number of dynamics. So it's not as simple as a number. but it is very much a piece that we look at and challenge ourselves. We obviously have a lot of experience, both buying files and moving patients, but also moving patients as we've closed this year, we closed a couple of hundred stores. So we know how to do this. We've gotten very good at predicting. We've also gotten obviously very good at engaging our patients. And so we've got a number and we will, that is a key assumption. What I would say though, is as part of our broader retail reconfiguration and strategy, our loyalty program, digital interfacing with our customers and so forth, we believe will enable additional touch points with these customers to both serve them potentially, whether that's a home delivery and other things, if they're not as close to a store, or indeed engage them in other ways. We are not basing any upside assumption in our underlying model for those things, but we believe it will be meaningfully contributory to bringing most of the patients in many of the stores and some of the patients from other stores along with us. And again, we want to serve every patient and that is the goal, but we're realistic in terms of that number when we look at these closures particularly.
spk11: Thanks. If I can ask a quick follow-up. You talk a lot about the leveraging and getting your net debt down and improving free cash flow. I didn't necessarily hear full endorsement of the current dividend, and I'd just love to understand how you think about it. It's obviously at a pretty elevated level here. Is the dividend as is part of the strategy for shareholders going forward as far as you think about it, or is it something that you're going to keep an eye on? for lack of a better way to describe it.
spk14: You know, what you heard Momohan say is that we have adopted a flexible and pragmatic capital allocation strategy, and we are going to continually evaluate our situation broadly. We are highly committed to being efficient with our capital and to doing the things that you've already heard us talk about. And we will absolutely continue to monitor and make changes to our capital allocation, including better aligning our dividend with our long-term earnings power, if we believe that that's the appropriate thing to do. And again, that requires meaningful discussion with our board on both our long-term plan, as well as the dividend that we're paying right now. And those conversations, as you saw early in my tenure here, are continual. And so I don't have any news for you today. We, in fact, believe in the near term, we can continue to monetize these non-strategic assets that Momohan spoke about earlier, to improve our balance sheet over time. But, you know, everything's on the table.
spk06: Thank you. And our next question coming from the lineup, Elizabeth Anderson with Evercore. I saw you on this open.
spk04: Hey, guys. Thanks so much for the commentary and additional color. I have a question on the working capital improvements. Can you help me parse out sort of how you were thinking? I mean, obviously those come from a variety of different things. You talked about suppliers, store closures. Can you help us think through sort of the buckets of that and how to think about that so we can think about it sort of on a multi-year basis, like how much is coming from stores versus supplier agreements and other factors?
spk14: Sure. I'm going to let Mamoan take it other than to just say at the front because I feel I have to. It's the result of a lot of things being very well managed and executed by a team that is extraordinarily focused and aware of the opportunities that we have on working capital. I have never been proud of a team in terms of the discipline that they've brought to bear, as you heard, both in terms of CapEx expenses and working capital. And what you're going to hear is it's not just one thing. It is execution across a number of dimensions of the business. I'll let Memoan give you a bit more color.
spk15: Yeah, sure. So for us, as we work to working capital, our goal is always to look at all components of cash conversion cycle. And as you think about, you know, some of the initiatives that have played out in fiscal 24, Let me just talk about on the retail side. We've talked about assortment mix that we have at the stores today. And, you know, one of the initiatives we ran is, you know, how do we make sure that we take out unproductive inventory out of the stores and monetize that and replace it with more productive inventory. Now, on the RX side, you know, things like Nucleus, which is our micro-fulfillment centers, is also giving us ability to optimize our inventory levels within the company as well. And then, you know, there are a number of initiatives on, you know, our account receivables and, you know, improving the collectability and timing of it, as well as right-sizing the timing on our accounts as well. So all components of it being looked at. Yeah, if you think about kind of the incremental opportunities within fiscal 25, store closure is one of them. as we close these locations, gives us an opportunity to take the remaining inventory and, you know, optimize that within the remaining network, and that generates, obviously, free cash in the year.
spk04: Got it. That's very helpful. And then just as a quick follow-up, maybe on the OPEX and things, how do you feel like – I mean, you've obviously executed many years of OPEX improvement. How much more opportunity on the sort of course – corporate base, particularly in U.S. retail, do you see available? I know you're sort of talking about like on the store count adjusting that, but how do we think about that as a driver of AOI going forward?
spk14: Sure. Well, what you just said is really important, which is if we close 1,200 stores as we plan over the next two to three years, then there's no question that there are stranded costs that we will go after. And our goal is to frankly be out ahead of those store closures as it relates to managing those costs. So that's important. Um, and, and it's something that we are very committed to second. It is, it is now the culture of the company, uh, I would say, which is that it will be a way of life forever in this company to look at ways that we can get smarter about every dollar that we spend, particularly as it relates to non-direct store related pieces. I'm, we are looking, I'm looking, we are looking to be able to invest back into our stores, both in terms of capital and frankly, in terms of our associates. in terms of training and so forth. And so from that standpoint, you know, the things that I think will be different this time as we look at these is we have a management team that's really focused on this topic. We have a level of discipline that I think we've shown already and will continue to show, and we execute. And so that will continue. Is the opportunity as big as it was $4 billion ago? No, it's not. But we continue to see meaningful opportunity across our business to improve what we do and do it in a more efficient way. And so that's just going to continue. And there are assumptions in this plan for our continued optimization in advance of those store closures from, again, principally a corporate level. What you would see in our stores, and I have to say this because you can walk in the stores and see it. We don't have a lot of de-staffing left in the stores at all. Our stores are tight. And so from that standpoint, you know, that's not where you will see us making a difference. In that point, you know, from our standpoint, we know we can come back to you and talk about our strategic positioning vis-a-vis Amazon and so forth, but we think those people in our stores are the crucial touchpoint. And so there we're looking to invest, even as we right-size our support system.
spk06: Thank you. And our next question, coming from the lineup, Michael Cherny with Learing Partners, Elon is open.
spk09: Good morning. Thanks for taking the question. Maybe just diving back in on the US healthcare side, I appreciate the color you gave on the various different moving pieces, in particular on VillageMD, but also the dynamics expectations on monetization. Is there anything that's, I guess, holding you back on that front and moving faster? I know, Tim, it's something you've talked about basically since the time you started about recognizing the need to fit the business. And so as you think about the pathway for monetization, given all the dynamics around free cash that you've discussed, given the questions about flexibility and regarding the dividend, what are some of the thought process we have in terms of understanding the checkpoints you need to see to complete a process for monetization?
spk14: Well, the, you know, the key asset in the U S healthcare business where we are looking to monetize, you know, as, as you know, as village MD and our goal is to monetize it, but to do it without destroying value unnecessarily. And so from that standpoint, You know, it has been a longer process. I wish I could have wiggled my nose and just made it happen, believe me, because we've declared it's not, you know, a crucial part of our future. We also believe it's a great business and will do well on its own. But the process of getting there has been longer than we would have hoped, but we're going to be very methodical and very appropriate in trying to preserve value. There are physicians that are part of that that are outstanding and ensuring that we have thought through their situation and that we become, you know, even more of an employer of choice, for example, means that we're going to be really thoughtful about how we do it. And the good news is you saw SELF and CORA and pay down $1.9 billion in debt over the course of the year. We have ways of dealing with the short-term cash situation. We have a lot of room on the revolver. And so rushing that particular decision would have not achieved anything and would have potentially destroyed even more value. We'll keep you posted as to what happens there. We're very engaged there. Mary Langowski and our team working with both the village team and the other investors, you know, have been relentless, but it is very complicated and therefore we're going to get it right.
spk06: Thank you. And our last questioner coming from the lineup, Stephanie Davis with Barclays. Your line is open.
spk05: Hey guys, thanks for taking my question. Just going beyond into the village MD kind of topic again. You have a lot of cost reduction that's been going on, but I was hoping you could walk us through any other margin improvement initiatives beyond just cost takeout and location closures. And looking forward, you did announce a new CCO hire that has value-based experience that's very relevant to this business. How should we think about how Jason fits into this puzzle?
spk12: I'm sorry, the last pretty question, how should we think about...
spk05: Oh, Jason.
spk14: Oh, gosh.
spk05: No one mentioned him yet.
spk14: Yeah, no, he's great. I mean, listen, and Jason just sent Mary and I a note after his first week about being more excited even than he planned on being based on his conversations with payers, pharma, and his colleagues. So, you know, listen, margin expansion isn't just cost-cutting, to your point, and we have a number of growth initiatives that Mary is incubating right now And bringing Jason on should be and is, and I appreciate you recognize it, a clear signal that we believe we have services that are highly valuable to others. You know, we haven't talked today, for example, about Pharma Company and some of their Go Direct initiatives. We are a natural partner there and are, in fact, inside of one of those. And so from that standpoint, I couldn't be more excited to ultimately come and tell you more about some of those growth initiatives. That said, I want to be really clear with you. that we're in the early innings of that and so we have not baked all kinds of upside into our guidance as a result of those we believe they will take time the sales cycles particularly on a b2b are not you know short in many cases but boy we have we have built mary has built a tremendous team and i think has laser focus on a number of areas specialty pharma services data and analytics and a number of other things where we believe we can double down and having a team, including Jason, is meaningful. I'm going to let Mary just, you know, she can give a little bit more color if she wants, because certainly she has been actually very quietly building a very effective team.
spk16: Thank you, Tim. Thanks, Stephanie. You know, we've said it before that U.S. healthcare business is really focused on a disciplined growth strategy that's really focused on near-term shareholder value creation and cost discipline. And so as part of that, we spent the last six months exiting non-material programs, programs we didn't think would generate growth over the near term. And now we're focused on, you know, two primary things, growth of our current core and adjacent assets. So the things that Tim mentioned, specialty pharmacy, shields, data analytics, our pharma services. And then secondly, doing more of what we do best, which is really built on our core infrastructure and reorienting to the pharmacy business. So reaching, engaging, and activating patients. and providing services to payer and pharma. So Jason's really a part of this and a critical part of this with his CVS and Optum experience. He'll be driving a focused approach to commercialization, B2B partnerships, and services development.
spk06: Thank you. And I will now turn the call back over to Mr. Tim Letford for any closing remarks.
spk13: Great. Thank you. And I want to thank everybody for dialing in this morning. You know, I've been reflecting on my first almost year here at Walgreens.
spk14: And the first thing I would tell you is if I had it to do over again, I would have only done it more quickly getting here. It has been quite a year. And we've, in that year, built a brand new team here with six new leaders, all based in Chicago, sitting around the table every day, thinking about how to serve our patients better and at the same time grow our business. And then you just heard about Jason. We have hired a whole team. coterie of leaders at the next level who are going to enable this strategy beyond the senior leaders that sit around my table. We drove a disciplined approach to capital, and we've achieved aggressive goals for expenses, working capital, and capex, and we achieved positive cash flow for the year. We reduced our net debt by $1.9 billion, and we simplified our financial reporting, something many of you told us you wanted to see. We held market share in pharmacy for the first time in a number of years. We conducted a thorough strategic review that is driving the VillageMD process we just spoke about. It's driving a meaningful six-pillar retail modernization initiative that includes merchandising, own brand, loyalty, digital, and the footprint evaluation that we spoke about today. We additionally set a framework for multi-year reconfiguring pharmacy reimbursement. We are meeting the consumer where they are. This guidance does not assume that the consumer is magically stronger in an amazing way by the end of the year. We believe that the consumer needs to be met where they are. I have a brother-in-law, Al Miller, who's one of the experts of real estate in this country, consumer real estate. And we were talking this weekend about the fact that the consumer, you know, they may get stronger, but boy, you wouldn't count on it right now. And certainly many industry counterparts to ours are seeing that. So we've been realistic about the consumer. And as important, maybe the most important thing we've done is evolved our culture to where over 300,000 team members will be the ultimate differentiator in the lives of our patients and our customers. I look forward to updating you on our progress in upcoming quarters. Thanks very much for dialing in.
spk06: Ladies and gentlemen, that's our conference for today. Thank you for your participation, and you may now disconnect.
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