Walgreens Boots Alliance, Inc.

while cost to fill is down by 13%. These improvements allow our pharmacists to spend more time on patient care and clinical services, expanding the critical role they provide. For example, stores supported by MFCs were able to administer more vaccines and complete more medication therapy management for our patients, payers, and B2B customers. Looking forward, there's still more work to do to expand this across our national footprint, and further lower our operating costs on a per-script basis. In addition to improving our pharmacy operating model, a key priority has been to reframe the reimbursement discussion with our partners to focus on fair value for our services. As an update to last quarter, we have now completed all of the contract negotiations for calendar 2025 and the nature of these conversations has evolved. We've had success in adjusting contract dynamics in our negotiations with our commercial, Medicare, and Medicaid plans, such as rebalancing brands and generics and carving out new categories for high-cost drugs, all in response to the evolving needs of customers and to better align reimbursement with our cost of goods. We are also expanding discussions about being compensated for additional services beyond dispensing and promoting alternative payment models. Notwithstanding our progress, there's still much more that needs to be done over the next several years. Our goal is to serve as many patients and communities as possible, but this is dependent on being reimbursed fairly so that we can maintain our presence as a healthcare provider across the country. It is also our goal to become a market leader in drug procurement. We are working to ensure that we are procuring drugs at the most competitive price and continue to engage with our partners at SYNCORA. We are making incremental progress in these discussions as we work towards a more acceptable long-term solution. Turning now to our third priority, the turnaround of our consumer retail business. This has been made more challenging by the persistent deterioration in consumer discretionary spending. Our consumer remains under pressure from accumulated inflation and higher interest rates, and we are seeing continued value seeking and channel shifting behavior. Additionally, The warmer season impacted our first quarter results with reduced respiratory incidences and the associated baskets with those trips, contributing to about half of our retail decline versus last year. As we look to effectuate a broader repositioning of our retail business, we're responding to these conditions in real time. Some of our actions, like recent changes in our targeted approach to managing store inventory, have been successful and our in-stock rate is the highest it's been in over four years. We are also modernizing the tools we use for assortment optimization to have the right item in the right store to create a customer-centric assortment. We began to introduce new products as a part of our health and well-being focused growth strategy, specifically in categories such as women's wellness, superfoods, and sports nutrition. We also continue to pursue own brand penetration, which is up 75 basis points in the first quarter to 17.8%. Coming into this year, we targeted introducing about 300 new own brand products and have introduced approximately 60 in the first quarter. As it relates to the evolution of our consumer experience, we are further leveraging our omni-channel capabilities such as home delivery and virtual care to meet evolving consumer preferences. Walgreens has offered same day prescription delivery nationwide for more than three years and delivery within two hours from approximately 800 stores. We also offer virtual care in 30 states, available to nearly 90% of the US population. While we expect home delivery to continue to grow across retail and healthcare, we view it as one component of many touch points with our customers, including in-store, drive-through, and online. In summary, we are progressing a number of elements of our retail strategy. While we are seeing early green shoots, we still have substantial work to do here. Turning to our non-core assets, we are underway with a sale process for Village Medical while continuing to evaluate the best options for Summit CityMD. We are encouraged by the leadership of new CEO, healthcare veteran Jim Murray. To be clear, our ultimate intent to exit is unchanged, and we remain committed to redeploying any proceeds to reduce our net debt and improve the health of our balance sheet. Importantly, we improved free cash flow this quarter with decreased capital expenditures and higher adjusted operating income, excluding the non-cash impact of sale leasebacks. Longer-term generation of positive cash flow remains a key priority for us in the context of litigation, opioid payments, debt, and our current dividend. Continued progress on cash flow will require meaningful action and focus. In conclusion, we've shown progress on our priorities over the past quarter. And while we have a lot of work ahead of us, this progress underpins our belief in delivering a successful turnaround. I will now turn it over to Manmohan to review our financial results.

Thank you, Tim, and good morning, everyone. Overall, first quarter results were better than our expectations. Sales increased 6.9% on a constant currency basis with growth across all segments. Adjusted EPS of 51 cents declined 23% year over year, and on a constant currency basis. This decline was entirely driven by prior year sale-leaseback gains and lower Sancora equity income. Absent these two factors, continued cost discipline in U.S. retail pharmacy and growth across U.S. healthcare and international businesses were partly offset by challenging U.S. retail market trends. Gap net earnings for the first quarter included after-tax charges of $252 million related to footprint optimization program and $152 million non-cash charge related to fair value adjustments on variable prepaid forward derivatives related to monetization of Sincora shares. Now, let me cover U.S. retail pharmacy segment. Comparable sales grew 8.5%. driven by pharmacy, and partly offset by decline in retail sales. The footprint optimization program negatively impacted total sales during the quarter. KOI decreased 36% versus the prior year quarter, including a $184 million headwind related to prior year sale leaseback gains and lower SINCORA equity income. Absent these impacts, AOI declined due to lower retail sales, partly offset by continued cost discipline. Despite the $160 million headwind from prior year sale-lease-back gains, adjusted SG&A was flat last year. This cost improvement was largely driven by our initiatives to modernize our store-level demand forecasting and labor deployment tools. Let me now cover U.S. pharmacy. Pharmacy comp sales increased 12.7%, driven by brand inflation and script volume, partly offset by lower vaccine volume. Comp scripts excluding immunizations grew 3.5% in the quarter, and we held script market share. Pharmacy services performed better than our expectations during the quarter, as higher margin for COVID-19 vaccines was offset by the lower overall vaccine market volume due to the weaker cough, cold and flu season. Pharmacy adjusted gross margin declined versus the prior year quarter, negatively impacted by brand inflation and mix impacts and net reimbursement pressure. NEDAC changes in November did not have any material impact to the gross profit in the quarter. Turning next to our US retail business. Compatible retail sales declined 4.6% in the quarter, which was lower than our expectations. There are two key drivers. Third party data shows flu, cold, and respiratory activity over 40% lower compared to the prior year, which, paired with the warm weather through November, led to a much softer cough, cold, and flu season. This dynamic negatively impacted comparable retail sales by approximately 270 bps in the quarter, including the impact from the attached basket, which was about half of the comp sales decline. Second, the consumer backdrop also remains difficult, with the promotional environment and continued channel shift impacting our discretionary categories. Retail adjusted gross margin declined year over year, negatively impacted by pricing and promotions, as well as lower sales related to cough, cold, and flu. Turning next to international segment, and as always, I will talk in constant currency numbers. Total sales grew 6.5% with Germany wholesale increasing 11.3% and Boots UK up 4.5%. Segment adjusted gross profit increased 3% with growth across all businesses. Adjusted operating income was up 16%, led by a strong retail performance in Boots UK and growth in Germany, partly offset by cost inflation and technology investments. Let's now cover Boots UK in detail. Boots UK continues to perform well. Comp retail sales increased 8.1%, with gains across all categories. Boots.com sales increased 23% year on year, aided by a strong Black Friday performance and represented 22% of our UK retail sales, turning next to US healthcare. Sales of $2.2 billion increased 12% compared to the prior year quarter. Village MD sales of $1.6 billion grew 9% year on year, despite the impact of clinic closures. The increase was driven by growth in full risk lives and fee for service revenue. Shield sales were up 30%, driven by growth within existing partnerships. Adjusted EBITDA for the first quarter was $70 million, up sequentially, and an improvement of $109 million compared to last year, reflecting the growth at VillageMD and Shields. Turning next to cash flow. Operating cash flow in the quarter was negatively impacted by the seasonal inventory build in the US, UK, and Germany, and legal payments of $137 million. Year-over-year free cash flow improvement benefited from decreased capital expenditures and higher adjusted operating income, excluding sale-leaseback, which does not impact free cash flow. We remain on track to achieve $500 million in working capital initiatives and are currently ahead of our target for a $150 million reduction in capital expenditures. While we do see opportunity for further reduction in capex, we have plans for investment later this year in our stores and technology to support them. During the first quarter, we reduced our lease obligations by $652 million. We remain committed to improving our cash flow generation and net debt position through a combination of operational actions and asset monetization activities. As Tim alluded to, We also continue to evaluate the appropriateness and size of our dividend as part of our capital allocation policy. Our priority for fiscal 2025 is to stabilize our core performance while we make progress on the longer term strategic and operational turnaround. Our progress to date is reflected in our reaffirmed adjusted EPS guidance of $1.40 to $1.80. We continue to execute on cost savings, inclusive of our footprint optimization program. We continue to expect $100 million in AOI benefit from footprint optimization program with working capital benefits and sale proceeds from own locations significantly higher than cash closure costs. We are also encouraged by pharmacy services results to date. We believe the impact of lower than originally expected vaccines volume to be offset by higher margin on COVID vaccines. The recently announced NADAC changes are expected to be less than a $50 million negative impact on pharmacy margin for the remainder of the year versus our original expectations. However, as we think about rest of the year, there remain certain risks to our outlook as well. The weaker cough cold flu season and continued challenging consumer discretionary spending are impacting our retail sales in the U.S. We now expect retail comp sales for fiscal 25 to decline approximately 4 to 5 percent compared to our prior outlook of down 2 to 3 percent. While the first quarter results are encouraging, we are maintaining our guidance range considering the challenging U.S. retail environment. With that, let me pass it back to Tim.

Thanks, Memnohan. Before I open the call up for Q&A, let me leave you with a few closing thoughts. Our first quarter results demonstrate that we are executing against our long-term strategic priorities. Importantly, we believe our approach to 2025 payer contracting supports our expectation for future stabilization in our pharmacy business, and we're still in the early stages of getting to a better outcome on our drug procurement costs. We're also executing on items that are in our control. Our initial wave of store closures has performed better than expected on multiple facets, including script retention and employee engagement. This gives us increased confidence in our centralized, deliberate approach to this process. Also fundamental to our turnaround is financial discipline. While we are pleased with our first quarter results, there is more work to be done as we aim to strengthen our balance sheet and to ensure longer-term positive cash flow generations. We remain committed to achieving a retail pharmacy-led turnaround underpinned by a sustainable economic model. Our turnaround will take time, but as the quarter's results demonstrate, we are executing with urgency and believe the actions we're taking will be the basis for sustained value creation over the long term. With that, let's take questions. Operator?