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?

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. We ask that you please limit yourselves to one question and one follow-up question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Lisa Gill from JP Morgan.

Thanks for taking the question. Tim, I'm encouraged by the comments that you made around the levers to lessen reimbursement risk and the fact that contracts for 2025 are done, but can you maybe just give us a little bit more color on One, what does that new reimbursement look like? And two, when I think about contracts are generally three years in length. So should I be thinking that for calendar 25, it's roughly a third of your book of business that has some type of new reimbursement metrics that are tied to reimbursement? That would be the first thing. And then secondly, just really want to understand the script retention. You talked about script retention being better than expected. Can you maybe just give us a number around that?

Sure, thanks, Lisa. So the new reimbursement, you know, actually let me answer the other part of your question first, which is you're correct that the arrangements that we have with PBMs typically are multi-year. It doesn't mean that we don't, by the way, come back to the table and open them up in response to opportunities or changes in the market, but generally so. We haven't said exactly what percentage it is, but, you know, it was a meaningful percentage, you know, so your number broadly speaking is probably about right. And in terms of what the actual you know, arrangements themselves, how they've evolved and what they look like. You know, I think what you've seen is a couple of things. One is we've been successful in aligning with PBMs to create a category for higher cost drugs, for example, where in the past those drugs would fall into the basic reimbursements and they were massively insufficient in certain cases. We've highlighted GLP-1s as an example. And so that's one of the things that we've done in many of the contracts. In other contracts, what we've seen is rebalancing of brands and generics to more appropriately sort of reflect the environment today, both in terms of the absolute environment and how it's going to be evolving. Because if you really take a look back, and I know I've spoken about this before, what you had was essentially us performing well on generics, but it being insufficient to offset the less than our acquisition cost brand drug reimbursement and our less than cost to deliver services. And so we've been able to, in, in many of the contracts again, rebalance. And so what I'd say is, you know, each contract we've come to the table to be creative and we have found good receptivity. We still have a ton to do. Let's be very clear. Cause what you just said indirectly is we have two thirds of our contracts left. The good news is many of those are with some of the same payers that we've had success with this year, aligning on going forward, you know, in terms of the script retention, We haven't given a number on that, but we do track it internally. And again, it has been much better than our underlying assumption in those stores that we've been closing. And I would point out, we closed about 70 stores in the quarter. We have a lot left to do this year, but we have a very different process. It has been definitely pushed through our receiving stores so that the patient experience when their store is closing is meaningfully different as they come into a new store. And all of this really drives to longer term pivoting to profitability in the back of our stores. Obviously, other services such as vaccines, adherence programs, other things we may do for pharma or for payers will be incremental to that. But in the current short term, the things that we've done have put us in a position that we wanted to be in at this point.

Thank you. One moment for our next question. Our next question comes from the line of Eric Percher from Nephron Research.

I'd like to stay on the same subject, Tim. And I guess what I would ask is when you look at the type of pressure that you're facing in reimbursement in 2025, are you finding that the actions you've taken are leading to an absolute or improvement reduction in the pressure in 2025 versus what you saw the last couple of years? Or has your focus been on changing terms and contracting in a way that leads to stability today and really positions you for better visibility and the improvement comes in future years?

The answer is both. So there's no question that restructuring our contracts to be, I'll call it future-proofed, or at least more resistant to the inordinate shifting of risk to us that was simply, we had no levers to manage, to be frank, was really, really important. And again, I think the good news is that our PBM and payer partners also saw that. And in many cases, their markets are sort of looking for these same sort of changed terms in terms of unraveling the cross-subsidization that has just gotten so distorted. And so from that standpoint, the construct is important. Also though, in 2025, and of course, we're in the very early days of calendar 2025, setting aside our fiscal calendar, We are now fully in those contracts that were redone and our projections are, continue to be, that we see a reduced pressure than we have seen in the past. That is a continuation of several years and the number that we achieved in these negotiations was pretty darn close to what we had set out as our goal to experience. And again, I would remind you that's in the context of what we have said is over the next three years, this being the first of three, that we expect to reach a place where what we are taking out of the market in terms of increased value, whether that's new generics or other things, that we would not be giving more than that. And ideally, then we would be subjected to being able to collect on other services and other things that we do to improve profitability in the back of the store. So we have continued to set the stage for that. 2024 was a very important year for it. and we are very pleased with that start on the three-year process.

Thank you. One moment for our next question. Our next question comes from the line of Charles Reeve from TD Cowen.

Yeah, thanks for taking the questions. Tim, I hear everything you're saying, and it sounds like you are definitely making progress here, particularly in the contracting side. But Timothy, you know, a lot of these are 411 starts for the calendar 25 year. Given sort of the strength in the fiscal first quarter, any reason not to think that we would see then incremental, you know, sort of positive step changes as we move through the rest of this year along with the fact that we're still at the early part of the store closure cycle. And yet, you know, you still maintain guidance. Can you help us square that a little bit? I understand trying to, there's still some uncertainty here, but, you know, besides sort of the outperforming in the first quarter, I suggest particularly on the pharmacy side that, you know, things are at least moving in the right direction, you know, relative to at least where the initial guidance was set. Thanks.

Thanks, Charles. So what I point out is that the first quarter, which as you correctly say, did not, was not impacted by any of the 2025 contracts that we were able to negotiate, is it was strong for two fundamental reasons. One is we had good pharmacy volumes. And two is we had good in terms of pharmacy services, particularly vaccines, we had good reimbursement. And so those two things were strong in the quarter. And we, you know, what you've seen is part of those volumes is closing stores. We were successful in beating our own targets and moving patients into the receiving stores. So that was good. We closed stores and we didn't just give up share. And again, while the vaccine volumes haven't been quite as strong as we might have expected, the fundamental fact of the matter is that we were reimbursed pretty fairly for those vaccines, and we were very successful in getting patients who came into our store to, you know, nearly I think 40% of the time or thereabouts, actually co-administer multiple vaccines to keep themselves safe across several disease platforms. That all was what carried the quarter. Therefore, as I look at our full year 25, what we see based on the contracts results that we've had so far, and again, there'll be some perturbations because of mix of, or did you get as many patients as you thought with some new business that may have been one, but those are generally small impacts. We would expect to continue to see what we wanted to see in 2025 and nothing incremental to that. in terms of things. So we see it being better than it was in 24, but we ended 24 strong because of some things that didn't have to do with PBM reimbursement.

Thank you. One moment for our next question. Our next question comes from the line of Michael Cherney from Lyric Partners.

Good morning, and thanks for taking the question. Maybe if I can build a little bit on Charles' question there relative to the changing dynamics of the business. Tim, you spent a lot of time on the reimbursement side. Maybe if we can go back to the procurement side and the work you're doing with Sincora, what does that look like qualitatively in terms of making sure that you're maximizing your procurement, especially for a partner that you've had for more than a decade? And specifically within the guidance, are there any changes to procurement that you're that are built into your current fiscal 25 expectations?

Yeah, so we haven't, let me start with the second question, which is that, you know, we haven't broken down in our guidance what would be contributed by any improvements that we make in our process or our underlying contract with SINCORA. That said, you know, you ask about qualitative sorts of things. You know, what I would tell you is qualitatively, you know, there's a question of having a partner who sits down with us and we have made very clear what our long-term aspiration is, which is to be world-class at buying drugs. And today we're not. And so from that standpoint, they are in a position to help us and to benefit from that when our volumes increase, because we're able to be more competitive in our underlying business model. And so from that standpoint, what I would tell you is we have relationships with their team. We have spent a lot of time together. We continue to spend time together to navigate a way forward that not only helps us in the short term incrementally, but more importantly, transformationally in the long term, modernizes the way that we buy drugs in a way that keeps us very competitive and growing, which is good for both parties. And I'm pleased that we've had the discussions we've had. We have a lot more work to do.

Thank you. One moment for our next question. Our next question comes from the line of Kevin Caliendo from UBS.

Guys, thanks for taking my question. First, just on the footprint optimization, is that number going to grow over time? Like, how do we think about that as the store closings increase? Is it a forward look as to where we are? Is that, like, your projection? Is this $331 million a projection? Or is that, like, point in time and as the stores keep going, that optimization add-back grows? And then I guess my second question is, is your peer announced that they had put in their sort of cost plus model successfully across for 2025. As you see that happening, is there opportunity for you guys? Is that a pivot for the market that maybe can be advantageous to you? I know you're renegotiating all your contracts. You did that already. I'm just wondering if this changes the market in any way, shape, or form positively or negatively for you. Thanks.

Yeah, thanks. Let me take the second half of your question first, which is, you know, obviously we're always pleased when we can see the market moving in a direction that is rational for us in the role that we play. And so CVS's announcement, while I'm not going to comment specifically on, you know, details with that, really, if you think about what they announced, it's very similar, you know, it's a different way of, I guess, thinking about what we've been doing in our contracts, which is realigning brand and generic. Because if you think about a cost plus model, Cost plus model, therefore, doesn't have cross-subsidization in it. It has a service fee on top of an acquisition cost. And from our perspective, that's very much what we have been coming to the table with, willing to both work with the various payers in how they want that constructed and how they want to go to market, because not all cases will the payers necessarily go to market with that exact model. They may use it and then alter it to meet what the benefits consultants drive at the self-insured employer level, let's say. And so, and I don't want to get into sort of the real arcane details of how all that works, but suffice it to say that their announcement didn't surprise us. We haven't announced or put a brand name on our process for unwinding these things in the contracts, but we are doing exactly the same thing. And we, again, come to the table as a very willing partner to help the payers win in whatever configuration of value works for them, but also more importantly, puts us back on track to have a sustainable pharmacy model. As it relates to the store closures, which of course we mentioned 70 or thereabouts in the quarter, but for the full year, I'm track and prepared for another almost 450. I'll let Momohan speak to the underlying financial impacts of that.

So Kevin, as you think about the impact of store closure in the year, we've talked about expecting 100 million of AOI benefit in the year. We're still on track to close 500 locations during our fiscal year 25. And from a cash flow benefit perspective, you know, we believe the benefit from working capital as well as sales proceeds from some of the old locations that we're closing and we will sell is going to outpace the closure cost in the year. Now, as you think about this, these are in-year benefits. And so, yeah, as we continue down the path over a three-year plan, these benefits will scale over time.

Thank you. One moment for our next question. Our next question comes from the line of Elizabeth Anderson from Evercore ISI.

Hi, guys. Good morning. Thanks so much for the question. Two questions. You obviously had a very nice improvement in the free cash flow on a year-over-year basis, and I know, Memo, you talked about the improvement in both working capital and CapEx. Can you talk about your sort of confidence for positive free cash flow on a full-year basis? And as a follow-up, can we also talk about sort of the rollout of the micro-fulfillment centers? I know you talked about sort of from a broad level that you expect to roll them out to an increased number of stores, but how do we think about the pacing of that as we think about the rest of 2025? Thank you.

Sure. So I'll let Momoa take the free cash flow question first, since it's such a central question to what we focus on every day.

Yeah.

So Elizabeth, on the free cash flow, yes, the year-over-year cash flows were better in the quarter than A COUPLE OF ELEMENTS DRIVING IT. FIRST, THE UNDERLYING PERFORMANCE, THE ADJUSTED EBITDA WAS HIGHER YEAR OVER YEAR AS YOU EXCLUDE THE SALE LEASEBACK GAINS WHICH DOES NOT IMPACT FREE CASH FLOWS. AND SECOND IS, WE DID SEE HIGHER THAN EXPECTED REDUCTION IN THE CAPITAL EXPENDITURES. ACTUALLY, WE TALKED ABOUT AT THE BEGINNING OF THE YEAR TARGETING $150 MILLION. WE ACHIEVED MORE THAN THAT IN THE QUARTER. And in my prepared remarks, I talked about while we do see opportunities on CapEx reduction rest of the year, we also have plans to invest in stores and technology that supports them. So there is that phasing part to think about. In terms of overall free cash flows for the year, we're not sharing guidance on the free cash flows today. But I would say, you know, we're broadly in line with the commentary I provided at the beginning of the year. which had really four factors in there, which is, you know, the sale leaseback gains and SINCORA earnings reduction does not impact, CAPEX reduction, which we have achieved in the quarter, and working capital we feel good about. And so those elements were broadly in line with.

And as it relates to the multi-site, the multi-fulfillment centers, we're super pleased with where we are in the progress we've made this year on a number of levels. First is in the absolute operating, uh, operations of them and the cost to operate them. And we brought in a very, very talented, uh, very talented leader, a gentleman named John Joplin, who has just done a phenomenal job working with our team to take that to the next level in terms of operating efficiency, but also longer term in terms of the experience for our, our stores as receivers for this, as you may recall a year ago, We had slowed this way down in part because the experience at the last mile was not what we wanted it to be. It also was, was not as cost effective as we'd hoped. We have made massive improvements in both to the point where again, today we have over 4,500 of our stores that are being serviced by, uh, by the MFCs. And we believe over the next 12 months, we will get that number into closer to 6,000, uh, as we continue to again, ratchet down the cost so that it is not cost disadvantageous for us to use automation. And importantly, what we've seen in the stores that we have moved onto the platform has been a material increase in our ability to counsel patients, do adherence programs, and use our clinicians in, frankly, more higher order activities that also bring reimbursements that help sustain our model. And so we are very focused on it. As I said, we're not going to give you guidance exactly as to how many or when. We have several more that we are going to be bringing up. And I can tell you that now when I'm in the stores, it's very exciting. A year ago, they didn't want to talk about it. The bags were too big. The bottles were too big. Now we go into the stores and they're saying, when are we going to get on the platform? Because they've heard from their colleagues that we have meaningfully improved the experience. So it's a great, it's a great example of our broad theme of hopefully you're hearing today, which is execution for the customer and for the shareholder.

Thank you. One moment for our next question. Our next question comes from the line of Anne Hines from Mizuho. Good morning. Thanks.

I just want to focus on long term, just given the new speculation of a potential private equity. I really feel it's important from a stock perspective that investors have some visibility on the timing of when management thinks they can stabilize free cash flow and adjusted operating. Tim, now that you've been here for over a year, do you think you can provide more clarity in the long term? And if not today, when do you think you'll be in a position to provide more clarity or more certainty to investors? That's my first question. And my second question is healthcare obviously did better this quarter, both on the revenue and cost side. Can you talk about what subsegments did better than your expectations? That would be great. Thanks.

So, you know, we aren't going to give multi-year cash flow guidance per se. I'm going to let Maimone speak briefly to cash flow, because again, I appreciate the spirit of your question. And the fact is that, as I think we've said, our focus on our balance sheet and on a sustained positive operating cash flow and doing the things we have to do in order to achieve that are front and center for us. And it is a multi-year process to position ourselves to be able to consistently and reliably deliver that. I'll come back and let Mamone add any color to that he wants. As it relates to what drove our health care, our U.S. health care assets, you know, it was a great quarter in a number of ways. We saw VillageMD, as we said in our prepared remarks, grow. So even though we are running a sale process for VillageMD, we have new leadership there in Jim. We have a team that's really functioning very effectively and executing well on the smaller platform because we closed a lot of facilities. And we're growing off of that smaller platform. And economically, we're also seeing the benefits of that focused business. So that was a piece of the puzzle is VillageMD. The second piece of the puzzle is Shields had a terrific quarter and continues to, you know, what you would see if you were sitting in our chair is strong revenue growth that comes with strong profit growth. Also, interestingly, we don't talk a lot about it. very strong renewals. So their clients are renewing at rates that are not putting us in a position where we're essentially dropping backwards in terms of the growth platform. In fact, if anything, they are some of the most strong supporters I have ever worked with for a company. When I speak to the CEO of one of the largest health systems in the country, or I speak to the head of strategy, They tell me how important Shields is to them. So that business is terrific, and that shows through in its growth profile. You know, CareCentric's had a good quarter. They're selling through some new relationships that they have. It wasn't material to the overperformance, but we're super pleased. And again, from our perspective, longer term, we see that the opportunity to serve the B2B payers as well as pharma companies is is super interesting longer term, but it's nice to see that result this quarter, obviously. And in terms of Mamoan, anything you want to add additional to the longer term cash flow outlook and how we would want to communicate that?

Yeah, sure. So a couple of thoughts as you think about the long term from a cash flow perspective. Again, we're not providing guidance on this call, but few elements to consider. First, obviously operating performance as we think about the free cash flow generation as we improve operating performance over time. That's going to have an impact. I think from a CapEx perspective, we've made a great progress over the last year and a half, and so I think we're getting to a good place there. I believe working capital continues to be an area for us to streamline and take the benefit on the cash flow, so we'll continue to do that, including the rest of this year. The one part that is impacting our cash flow this year, as well as in fiscal 24, was the significantly higher run rate on the legal payments. And so as we're looking at, at this point, fiscal 26 onwards, we believe that, you know, we're going to come down from the run rate we have seen. And then the last thing I'd say, you know, from a cash flow perspective outside of free cash flow is we continue to look at asset monetization. We have made progress with our Sincora shareholding as well as Bright Spring in the quarter. And so, you know, those activities will continue to provide us flexibility from a cash perspective.

Thank you. One moment for our next question. Our next question comes from the line of George Hill from Deutsche Bank.

Hey, good morning, Tim and Minowen, and thanks for taking my question. Minowen, this might be one for you more from an employer perspective, and this goes back to the idea of the recontracting around pharmacy rates As a large employer, I'd be interested if you could comment on how you guys have modeled out how this will impact your pharmacy costs. We've done some calls around how the cost plus models are impacting payers, and it seems like some of them are seeing a significant cost increase as part of a model transition, regardless of who the pharmacy partner is. I'm wondering if there's anything you can tell us about what you guys are seeing as it relates to pharmacy costs for Walgreens. And just generally, Tim, maybe generally speaking, how your payer partners are telling you this will impact pharmacy costs downstream.

Actually, I'll take that. You know, what I want to point out is changing how we're reimbursed and how the industry is reimbursed is not in and of itself a cost increase or decrease. That depends on the negotiations that's underneath of that. Every payer we negotiate with starts with essentially a matrix to understand what the cost of goods is going to be to them that they take to the market. And so, again, changing how the risk is being assigned and managed and future-proofing things is different than, you know, I would not position us or our industry that the reconfiguration is necessarily a price increase. It is instead a realignment that sets a place for us to get paid over the longer term for what we do. Um, what I would say is what we've seen, I haven't looked at it directly, but in talking with Elizabeth, our head of HR, we have not seen a cost increase as a result of how pharmacy is, is, is showing through to our, uh, our patients, except I think the thing I would point to, and it's something we don't talk a lot about, and it's a really strong attribute of our longer term growth is you certainly see in specialty, uh, costs going up as new indications, new products and so forth come to market. And obviously the levers around that are very different than the levers on the small molecule pills and capsule sort of business. And so from that standpoint, we, and frankly, probably every payer in America continues to be very focused on managing specialty pharmacy to ensure that the right patient is getting the right drug, that they're staying on it because the downstream benefits you get from those particularly intense patients come not from cutting drug costs as much as from making sure that you're getting what you're paying for in terms of outcomes. And so, you know, we continue to see very strong interest in our specialty pharmacy in some carve out bids as payers begin to want the transparency that we can bring to the table as an independent specialty pharmacy and also the tools that we bring to keep patients safe and healthy and help them manage the costs.

Thank you. One moment for our next question. Our last question comes from the line of Brian Tanquillit from Jefferies.

Hey, good morning, Tim. Thanks for tweeting us in. So maybe in your prepared remarks, you talked a little bit about execution and the merchandising strategy as a way to arrest some of the pressures on the retail front end side. So maybe if you could just walk us through what those are and kind of like the success checkpoints that you need to see for that to be viewed as the right strategy going forward.

Sure. Appreciate it. So we've got a lot of things underway inside of our, our front of store envelope of, of initiatives beyond getting to the right number of stores so that we can invest in them properly for the customer experience that needs to, you know, be frankly from too many of our stores improved. And so there are shrink elements, for example, and continuing to be, I just met with our head of, of asset protection to look at some of the creative things that we are looking at both as a company and as an industry to as it relates to the customer experience on Shrink. I don't have anything magnificent to share with you today. It is a hand-to-hand combat battle still, unfortunately, but it does impact how sales work through the store. Because when you lock things up, for example, you don't sell as many of them. We've kind of proven that pretty conclusively. But we're excited about the fact that we have revamped our team. I want to point that out. Under Tracy Brown's leadership, we have revamped our team in terms of our analytics, our omni-channel and our digital experience, as well as our merchandising team. And we've got significant underway work around customer loyalty program that ties much closer to our go-forward strategy as a health and wellness provider in the marketplace. We just this quarter are in the process of launching superfoods, sports nutrition, and women's wellness, three new categories for us in our stores. And I saw some photographs of some end caps that looked phenomenal. And it's too early for me to tell you how those are doing, but that's aligned with what we're trying to do longer term, which is really, really meet the customer where they are with the things they want from us. You know, unfortunately, some of the things that we've historically done a great job of, of, of selling through, aren't the things that people today are spending money on given their, the changed mindset of our consumer. And so some of the seasonal things that have typically been strength for us are not quite as strong. And we saw in the, during the Christmas piece, that we were able to get consumers to meaningfully respond to a promotional sort of approach that acknowledged that rather than tried to fight it. And so our Christmas, we're not going to talk in detail about it today, but what we saw about our Christmas sales was it was better than our several holidays prior to that by virtue of a more targeted promotional strategy that meets our customers where they are longer term, We've got to get our pricing strategy aligned to that and our merchandising strategy, which is all things that we're doing. We also are in the back of our store because it is relevant. We are now launching in 100 stores. We had it in a couple. We thoroughly tested it. We are doing digital and virtual check-in for pharmacy patients. What does that enable? That enables you to actually know where you are, when your product's going to be available, do that without having to stand in line and you can shop the store while you're actually waiting. And you don't get angry at our employees because you've stood in line. And so these things, which by the way, the NPS for employees in those stores that we have the digital check-in and so forth is higher. And of course, for the customers, it's higher as well. And what we've learned in there is we've put in some of our stores, concierges at the front to help our patients who come in, particularly some of the older patients to access that approach for us. So again, digital and virtual loyalty program, merchandising in some new areas. Own brand is the last piece I'd point to, because again, a key part of our value strategy is a trusted provider of high quality own brand merchandise. And this quarter we said we launched 60 things. I have a daughter who's got, I've got three daughters. They have new babies. My youngest daughter has a brand new baby. She is so excited about the fact we have launched own brand diapers because she actually trusts that they're going to work and that there aren't going to be blowouts at her house. And at the same time that the price will be right. And that it will be something that she and her husband can afford. So from that standpoint, again, long answer for you, because we didn't spend any time on the front of the store. It is a longer pot for us. It requires a lot of work. It is a multi-year piece that just shrinking a footprint and improving our digital experience is not going to be sufficient. We've got to have the right stuff at the right price. And the good news is, and I think the moment spoke about it in his prepared remarks. When you look at our stores, that are the stores that were not on the closures list, we see those stores being materially stronger, still not where they need to be, but materially stronger than the stores that we're closing. And that gives us a lot of hope that as we reconfigure our consumer experience across all channels, that the consumer who millions of whom trust us every day will trust us to buy more every day.

Thank you. At this time, I would now like to turn the conference back over to Tim for closing remarks.

Great. Well, I appreciate everybody dialing in. You know, hopefully what you take away is that we are executing against both short and long-term priorities. That this turnaround, we've said it, it is going to take time. But the level of urgency, discipline, and focus that our team has throughout our team, and I want to thank all of our 300,000 plus employees. We didn't talk about it international at all today, for example. The team at Boots had a great Christmas and continues to perform well. So again, across our entire platform, we are acting with discipline and focus. And we are committed to our vision of a retail pharmacy-led organization that has a sustainable economic model and drives long-term value, not only for shareholders, but it positively impacts the health and lives of millions of Americans who trust us every day. And so we look forward to updating you on our progress next quarter. Thanks very much.

this concludes today's conference call thank you for participating you may now disconnect