Q1 2020 Earnings Call
Quarter 2020 earnings conference call.
At this time, all participants are in listen only mode.
After the speakers presentation there'll be a question and answer session to ask a question. During this session you'll need to press star one on your telephone if you require and further assistance. Please press star zero.
I'd now like to hand, the conference over to your Speaker today, Gerald Gradwell Senior Vice President of special projects and Investor Relations. Please go ahead.
Good morning, ladies and gentlemen, and welcome to all booked called running school, but it's a day would Stefano Pessina, our executive Vice Chairman and Chief Executive Officer, Walgreens Boots Alliance Greensky her global Chief Financial Officer, but other Girly co Chief operating Officer, Walgreens Boots Alliance and President.
Walgreens.
Before I enjoy able to Stefano to make some opening comments I read as usual take you through the legal safe Harbor and cautionary declarations.
Certain statements and projections of future results made in this presentation constitute forward looking statements, but based on all current market competitive and regulatory expectations are subject to risks and uncertainties that could cause actual results to vary materially.
Except to the extent required by the law, we undertake no obligation to update publicly any forward looking statement off this presentation, whether as a result of new information future events changes in assumptions or otherwise.
Do you see our latest Form 10-K for discussion of risk factors as they relate to forward looking statements.
In today's presentation, we will use certain non-GAAP financial measures. We refer you to the appendix in the presentation materials available on our Investor Relations website for reconciliations to the most directly comparable GAAP financial measures and related information.
We'll find a link to the webcast on our Investor Relations website at Investor Day, Walgreens Boots Alliance Dot com.
After the call this presentation or webcast will be archived on the web site for 12 months.
Oh, no hydro able to stuff.
Thank you Jay on the end to end no everyone.
And do we see from Oh fever eat there's been a slow start to their financial here.
It's a competitive U.S. pharmacy environment, and Seph trading conditions in the UK.
That said if you will hear.
Then I had not been all the items affecting day yoni a competitor.
And even they nishiwaki set we have a under way we are maintaining our full year guidance.
In the quota we continue to make progress against all four of our core strategic priority.
We are making progress moving out data they thought he said to a new and more flexible cloud Basie pets Doctor.
With a significant benefits that thing.
We have also made good progress that we used the development of new services.
To be the on these new impress tactual.
Well now so customer experience he said.
Make out team, some more efficient and effective and doping and new opportunities for our business. He said.
Clearly.
These walk on day digitalization out of our company.
Matt.
And does close in time now with our Walker to modernize our retail offering and the shape and structure of our retail food grade.
At the same time.
We are working we filed an S to redefine the delivery of health care in the community.
And they pull the time poll of pharmacy in the immediate and longer term future.
And all of these ease of coal.
To put that in fueled by our transformational cost manager program.
Which has made substantial progress said during the quota.
Finally, we have also continues to make progress on a number of significant pollination, both established a new.
And now sell offering and efficiency.
And to help drive both in our businesses.
In the quota we entered into a procurement joint venture with Kroger.
Building on day, Oh, Hey, these towns relationship, but that has been form to between Colgate and the Walgreens.
And.
We are now the joint venture with Mckesson.
To bring together, our two businesses in Germany.
Improving got reach and scale.
Yes, I focus on announcing the efficiency and performance so our combined wholesale operation.
In the significant Jerome I found myself decoder same market.
I will come back to make a few comments on the future at the end of our presentation.
And now I will ask James entirely.
To take us through the results in a little more detailed James.
Thank you Stefano and good morning.
Adjusted EPS was $1.37 cents.
5.7% lower than prior year on a constant currency basis.
The year on year comparison was impacted by around five percentage points of adverse items, including the here on your bonus and book.
In retail pharmacy, USA strong cost management and improved retail comp sales were offset by lower gross margin.
Retail pharmacy international continued to be negatively impacted by a challenging UK market.
We saw continued strong performance from pharmaceutical wholesale.
Our transformational cost management program is very much on truck.
And we expect to achieve annual cost savings in excess of $1.8 billion by 2022.
Cash generation was very strong in the quarter with free cash flow of $674 million.
$684 million better than prior year.
And finally.
We're maintaining our guidance for fiscal year 20.
Oh flat adjusted earnings per share on a constant currency basis, with a range of plus or minus 3%.
Looking forward, we see improved core business trends with however, some noise in the second quarter as we cycle through the timing of reimbursement payments on year on year bonus and Bucks.
In total.
These result in an expected EPS headwind of around 13%.
But.
Both of these items were budgeted in fiscal year 20.
I don't have no impact on full year guidance.
Lets now look in more detail out the results.
First quarter sales were up 1.6%, including the currency headwind of 0.7%.
On a constant currency basis sales were up 2.3%.
Adjusted operating income declined 15.4% on a constant currency basis.
Reflecting lower gross margin in the U.S. on a difficult UK market.
Adjusted EPS was $1.37 cents, a constant currency decline of 5.7%.
Our share repurchase program contributed four percentage points of growth.
An additional 5.7 percentage points.
Came from a favorable tax rate as we benefited from a number of discrete items.
The result included adverse items of over five percentage points, including the year on year bonus and but.
Mark to market adjustments.
Lapping prior year supplier funding.
GAAP EPS declined 19.8% to 95 cents.
And also reflected costs relating to the rite aid transaction on the implementation of the transformational cost management program.
Now, let's move to retail pharmacy USA.
Sales increased 1.6% in the quarter with 2.9% growth in pharmacy, partially offset by lower retail sales.
Note that the sales growth includes a negative impact a 50 basis points due to our store optimization programs.
Adjusted gross profit declined 4.9%.
Due to lower pharmacy and retail gross profit.
Adjusted SGN, they spend decreased 1.6% in the quarter and was 17.6% of sales an improvement of 0.6 percentage points versus prior year.
The decline in SGN, a clearly shows our strong execution against our transformational cost management program.
Savings more than offsetting incremental investments the impact of inflation.
The year on year bonus and but.
Adjusted operating income declined 16.2%.
As the S.G. and they savings or not enough to offset the decline in gross profit on the adverse items I mentioned earlier.
In total.
These adverse items accounted for over six percentage points of the decline in operating income.
Now, let's look in more detail at pharmacy.
Total pharmacy sales increased 2.9% versus prior year.
Reflecting continued brand inflation and script volume growth.
Central specialty sales continues to grow nicely up 9.3% versus prior year.
Come pharmacy sales were up 2.5% on comp scripts grew 2.8%.
While this was weaker than expected.
We have seen improve the growth in recent weeks.
Market share for the quarter was 20.9% down 55 basis points versus prior year, including the impact from our store optimization program.
Adjusted gross profit decreased mid single digit.
As the impact of procurement savings and script growth was more than offset by reimbursement pressure.
Turning next to our U.S. retail business.
Total retail sales declined 2.2% in the quarter impacted by store optimization.
Comp retail sales decline 0.5%.
And continued to show an improving trend.
Excluding tobacco and these cigarettes comp sales were up 0.8%.
As you know, we're exiting the sale of east cigarettes.
While this did not have a significant impact on comps this quarter. It will have a bigger impact from the next quarter onwards.
And we continue to anticipate a full year EPS impact of around six cents.
We saw solid comp growth in our core categories with health and wellness up 3.3% and beauty up 2.5%.
We estimate a tailwind of around 80 basis points from cough cold flu.
Retail adjusted gross profit declined low single digits.
Due to lower sales, including the impact of store optimization programs.
Higher shrink.
The timing of prior year supplier funding.
Adjusted gross margin declined slightly.
However, excluding the higher shrink.
And supplier funding timing underlying category margins were in line with prior here.
Turning next to retail pharmacy international.
And as usual I'll talk to constant currency numbers.
Sales decreased 2.7%, mainly due to the UK and Chile.
Boots UK come pharmacy sales increased 0.9% in the quarter.
Reflecting relatively higher and Hs reimbursement levels.
And the increased sales from services.
Partly offset by lower script volume.
Boots, UK comp retail sales declined 2.9%.
As the UK High Street continued to be very challenging.
However, overall, we held market share.
Adjusted operating income was down 39.1%.
Mainly due to lower UK retail sales volume and margin.
The results include an adverse impact of 13 percentage points.
From the year on year bonus impact and higher technology investments.
Turning now to the pharmaceutical wholesale division, which I'll also discuss in constant currency.
The pharmaceutical wholesale division delivered another strong quarter.
With sales up 8.3% led by emerging markets and the UK.
The change in a customer contract, which I've mentioned before helped our UK performance contributing 1.4% to the overall sales growth.
We have now lapped the impact of this contract change.
Adjusted operating income increased 4.9%.
Reflecting strong revenue performance on a higher contribution from Amerisourcebergen.
These strategic joint venture with Mckesson aims to drive sustainable profitable growth in the largest pharmaceutical drug market in Europe by leveraging scale and improving efficiency.
Mid term.
We expect the JV to be E. P S accretive onto a center radar pharmaceutical wholesale profit growth.
Turning next to cash flow.
Operating cash flow was $1.1 billion up $601 billion versus prior year.
Free cash flow was strong.
At $674 million.
Up $684 million on prior year.
Our key working capital initiatives are on track.
We're removing excess inventory from the system.
And we have started to extend payment terms to industry leading levels.
We have a strong pipeline of initiatives to fuel our cash flow generation over a multiyear period.
Let's turn now to our transformational cost management program.
In October we raised our annual cost savings target to in excess of $1.8 billion by fiscal 2022.
We now have a very robust pipeline and our savings initiatives are gaining momentum.
This gives us a much higher level of confidence that we can exceed the 1.8 billion dollar target.
Importantly.
These savings will allow us to fund the investments needed to create new and innovative business models.
Let me now give you some detailed on our activities in the quarter.
On smart span.
We are a center rate in our energy management efficiency program.
We see opportunities to ramp up our procurement activities in goods now for resale.
The energy management program is interesting.
You early de lighting saves money is environmentally friendly and improves the store experience for consumers.
This is a perfect example of safe to invest to grow.
On Smart organization, we're undertaking an end to end process review in boots, UK covering all major business processes.
With the game of transforming how we operate.
Ultimately leading to a lean on effective operating model.
We are now actively planning the implementation of global business services, and we have implemented a second wave of headquarter cost reductions in Mexico, Chile and Thailand.
On the divisional optimization.
We have completed 114 of the 200 Walgreens store closures.
And 28 of the 200 boots UK closures.
We continue to test new store formats in the U.S.
And were now operating 23 small stores with encouraging results.
Ani tea.
We have started implementation of a new operating model and our vendor optimization work is progressing well.
For example.
We recently selected Tata consulting services as our new Parker to accelerate the work on our critical pharmacy operating system.
On digitalization.
We have prioritized investments in mass personalization and reinventing the pharmacy prescription journey.
Now I'll hand over to Alec.
Thank you James I'll now update you in some of the actions we've taken in the U.S. during the quarter.
Starting with a retail offering.
Oh strategic partnership with Kroger is progressing well the initial Kroger Express pilots in northern Kentucky has been running for just over one year and the pilots in Knoxville, Tennessee for five months, we see very positive results, so far with a strong sales lift.
Building on the excess Oh. These pilots we formed the group procurement office retail procurement aligns with Kroger in December to purchase both of our private label groups.
We expect this joint venture to deliver cost savings encourage sourcing innovation and generate efficiencies across the supply chain.
Oh strategy of focusing on the higher margin health and wellness and beauty countries is living benefits and both live with solid performances in the quarter.
Our flagship number seven beauty brand performed well with sales up in the mid teens reflect a nationwide advertising campaign and a new e-commerce sites.
We have introduced an enhanced skin care or free and over 900 stores, which we expect to drive future performance.
Moving on to health care, we've opened the second to five village and the primary care locations in Houston.
On a wellness partnership with Jenny Craig is progressing well and we're on track to open approximately 100 locations by the end of January .
We're also in the process of converting are up two pilots to the four eyes brand, which offers improved insurance coverage and stronger consumer brands.
In specialty I'm delighted to see the all 300 community based specialty pharmacies I receive URAC accreditation and we continue to believe that a strong community piece presence alongside of Centerfield capability provides the best access for these important medications to treat patients on the marketplace.
In partnership with major health care, we continue to create new opportunities for growth in Medicare advantage.
We're very pleased with customer adoption of the new co branded Medicare advantage product, we started selling from October 15th 2019.
And finally, we are also opening 14, United Health care patients or centers designed to help our customers navigate their insurance and healthcare needs within Walgreens stores, turning next to digitalization or find care platform that has started to health care service providers spanning over 46 services. We contains.
Develop a patient medication adherence programs to live it better clinical outcomes are save a trip refill program now has 3 million patients signed up an increase of over 25% since last quarter. Our consumers continue to mine the convenient omni channel retail shopping experience.
I'm pleased to see Wi high record breaking sales on mortgages dot com on the Black Friday weekend up over 45% versus the prior year.
I'm, a particularly strong performance in resale products and for too.
Overall, our Omnichannel business continues to grow our Walgreens out has not been downloaded 60 million times up 12% since last year.
Our own 33% of Walgreens retail refill scripts eligible for digital refill what entered via digital channel in the quarter up almost 18% since last year.
We have increased or bounced reward members to 89.9 million.
Finally, Walgreens digitally initially sales reached over $3.7 billion in the quarter up around 9% year over year.
Next I'll update you on initiatives, we've undertaken in retail pharmacy international starting with retail.
Ambitious okay. As you know we've introduced a beauty reinvention program is 26 of our flagship beauty holes in the second half of last year I'm pleased to report that we've seen an improved performance in these stores inline with our expectations.
Building on this we rebalanced the retail space in 200 of our largest stores.
Have introduced Twentys beauty brands.
Since the quarter end, we have signed an exclusive UK franchise agreement with Mothercare, a British retailer on Brian's specializing in products for mothers babies and children.
We will be selling mothercare branded goods across the UK and online.
Moving on to health care.
Purpose built pharmacy operating system has been little though to over 1400 boots UK stores.
And your pharmacists to provide a greater level of customer service, even more efficiency and over time, a wider range of new pharmacy offerings.
And we continue to develop new healthcare services with diagnostics, where a pharmacist no have the ability to write prescriptions for certain conditions.
I mentioned last quarter that we are developing new initiatives and digital health care with plans for expanding pharmacy services to improve the customer journey and broaden access to health care.
We launched our online pharmacy in May 2019, which has made solid progress in the markets.
We made fun of good progress on the utilization our online business boost dot com deliver strong growth with sales up 12% fastest prior year in the quarter.
We also saw record breaking black Friday weekend, with resulting online sales up around 25%.
And finally, we have agreed an exclusive partnership to offer omni channel for two and personalize get things have assays in the UK and Ireland.
I'll now hand, you back to Stefano for his closing comments.
Thank you Alex.
If you have heard this year as open with a number of challenges.
The main any changes that are impacting that grow about healthcare sector.
Generating some difficult conditions for our businesses.
It said.
Change always brings opportunity.
We must the Iraq to meet the challenges that.
And to ensure we make the most of the opportunities we see.
Seeing these opportunities and mindful of the challenge is side, we are maintaining our fully our guidance for de Ya.
We continuously have you I'll go to ensure we have denied mix of business. He said.
To maximize outperformer in a dynamic facto.
Oh ceiling out strategic priority is having get real impact the in driving our business. He said.
The changes in our market obscuring gets time of the positive impact. So we are having done.
But these will not be the case for it.
I have said before and I will say again.
Hi, Tom globally, but in an expanded told for pharmacy.
And in our company's ability to play a significant pop that you shaping how healthcare is delivering.
In the community going forward.
I believe these as much today as I ever ahead.
I believe we have a cool fight access tying it to be.
As we have demonstrated this quarter, we have an extra power than any ability to generate strong and sustainable cash flow.
And we have many opportunities to deploy these cash flow to create real bye.
I mean convened that we ever in our company into our patent issue.
And that extra ordinary foundation I always to be.
The walk up that we are doing today.
Is creating guess how long have flexible engine if all goes in our businesses for many years to cap.
Thank you now we will take your questions.
At this time I'd like to remind everyone in order to ask a question. Please press star and the number one on your telephone keypad.
Your first question comes from a line of Robert Jones from Goldman Sachs. Your line is open.
Oh, great. Thanks, Thanks for taking my question, Yeah, I know, there's a lot of moving pieces and it's only the first quarter, but you know if I just take a step back you know clearly P.S. was down you know around 6% in a quarter below the full fiscal year guidance. It sounds like James If I'm hearing you correctly, you know next quarter given some of the moving pieces.
Could see an even.
Steeper decline any P. S. You know I guess, if we think about the back half could you maybe just give us a the building blocks are the things that you guys have visibility into that gives you confidence that the back half can gets you into that flat plus or minus 3% EPS for the year.
Yeah.
Unexpected question, obviously, let me get just give you a little better context on the first quarter. However, first you know the I think they the only real surprise, we had in the first quarter was on the script volume. It did come in weaker than we expected we were thinking of a number of around 4% when we came in.
The two point days, that's the they like the piece that I'm not I want to be clear our internal budget was 137 and we came in over budget. What we had was a favorability on tax offsetting script growth in Q1. So that was the one thing we were disappointed on.
We have a lot of stuff, we're very happy about so free cash flow was off the charts, we beat our internal budget by hundreds of millions.
Largely driven by programs were implemented in in the U.S.
Stefano Southern these compounds the transformational cost management program and that's key to the answer to your question is I would have a classify right now is well ahead of truck, particularly due to actions in the U.S. on the UK.
And other items I'd highlight that shouldn't be lost on you. We finally, we have nailed one of the first steps and the Kroger relationship. We think it's extremely positive that we have started up a G.P.O.
And I think it will lead to money good things in the future and then finally, a strategic deal in they gonna problematic German wholesale market, which we train think will drive tremendous value longer term. So we think there was another good things that happen I'm script broke was the one that was more challenging let me give you a perspective.
Looking forward is and actually we're we're a little bit surprised as well, we're saying I'm quite strong momentum and the current month of December . So we believe when we call out five percentage point of points of items in the first quarter were probably under upholding math works you're shifts between.
Color Thanksgiving period Christmas periods, and I I don't want to give the precise number but our script brokers in solid mid single digit growth in the month of December . So we're clearly filling that we're we're not really regain why the ships are happening not well, we know cough cold flu is driving some.
The buoyancy in December .
So we are seeing signals that but we are counting on to hit our full year guidance, we do need or script growth to be in the three and a half to for kind of person there before and a half depending on the quarter, but right now in December were seen numbers in excess of that.
So script alters the key while the other T. One is that will drive increasing performance as we exit you're obviously as you take out cost the cost takeout is over the course of the year. So you know the savings roughly in the first quarter around 15%. So all of the two.
Total goal of but we'd have we haven't given the number is a large number.
We are less than 15% in Q1, as we exit the year will be up double the run rate of savings. So overheads will become a very significant much more significant driver in the second half and I do want to point out for that for a company oversize with the amount of overheads, we have a total overheads were down one.
6% in the quarter.
On the contacts and I think it's important have the context sweetly, we did say that the combination of inflation and volume impacts is about 400 million.
You'll have the boneless year on year, that's in the region of 350 400 million.
We have incremental investments of 100 million 250 million.
Well it will give you some indication of the size of the cost management initiatives and yeah. I think we'll come back next quarter would probably more visibility on the.
On the potential further opportunity on the cost program, but I I. Just finished answering your question I think if you want to do your model again for the full year I would we will probably have a slight favorability and taxes, so called up somewhat 0.60, 0.7% on the full year.
And we will have more coming from overheads, and probably slightly less coming from gross profit because we had a miss in the first quarter on scripts.
So that's why we feel it's basically the overheads and some tax opportunities that we feel we can offset the the call script.
Under delivery in Q1.
No that's not cover does that cover what you'll know that that's tremendously helpful and I guess just one other probably anticipated question again, just around the prime relationship in the wake up to the Prime Express Cigna announcement I just wanted to get any update on how you guys are viewing the prime relationship any impact to the.
Alliance our XJ JV are just as we think about you know how that relationship played out for you. This past year relative to your expectations for how would contribute in 2020 would be would be helpful. Thank you.
Hi, Bob It sounds like you. Yeah. We are we have read we have a recon tried to the prime or in a direct relationship.
So prime is now working with express scripts I was a as a P.B. and walking with us and a direct relationship. So we anticipate to holder or market share with prime and potentially grow once it probably model will be more compared it's in a marketplace. Our relationship with prime continues to be a very strong one.
Oh, we continue to walk through very well with independent blues. So we're happy with the situation in terms of a the impact.
Obviously, we re adjusted the margin a dates but it really was and forecast and budget. So we had expected a this impact and that plan for it.
On the Alliance Rx fights Alliance Rx actually is doing okay at the moment, but again, we have a great relationship with prime you're speaking to them about how do we adopt to an ever changing specialty marketplace. We should become even more important for both of US Army expect to have conversations and.
Next year, along these lines to improve that model for the so all is always a is good from our point of view.
And we wish praying maybe success with here then you as a new model Internet walk, we feel very confident they will be will benefit from not totally shipping in future.
Thank you.
Your next question comes from the line of Iraq pressure from that never research your line itself and.
Thank you and thanks for the commentary on the cadence with respect to volume and cost maybe to hit on one other item reimbursement and the impact on one 120, I know you gave us a a 13% number that I think this reimbursement and bonus but can you provide a little bit more context on what the outlook is as we moved from Q1.
And into Q2 on one one point.
Yeah. They they 13% reference was to Q2 and were specifically highlighting two things and in the quarter and I would say, it's it's like a 7% due to reimbursement timing and they got a reserve 6% is due to bonus year on year.
And the reason we called out the.
The Q2 reimbursement is it really is a timing items to true up of prior year contracts.
Hers typically in the April May June time timeline on the year.
And it hasn't happened in the prior year, there was no true up.
So it's it's not really a reimbursement impact year on year in terms of increasing contract prices. It's a contractual true up off of the contract for prior year and it's quite a large number because it impacts seven percentage points, we didnt actually called out anything on Q1, what we said about Q1 is reimbursement.
<unk> was actually broadly in line with the plans with you know together because if you recall when we gave guidance. We said at the time that I think 58 or 60% of all of our contracts for already defined whom we gave guidance. So we have fairly decent line of sight to the full your reimbursement.
We came within 20 million of the reimbursement estimate for them to the first quarters. So we're actually quite pleased with up because it's quite difficult to forecast reimbursement.
You know we have.
Look back on some real prior guidance on the quarters and the reason for giving something on two to justice highlight this exceptional reimbursement timing true up right now as we said we have no reason to call how many different outlook on reimbursement for the full year, you should presume that means.
Plus or minus 50 million. So it's it's it's we were we were pleasantly surprised with the Q1 on that side and on I reiterate or issue and pharmacy in Q1, nothing to do with procurement got nothing to do with reimbursement they were actually.
That's probably slightly positive it was a it was probably it was all script volume. So it was just lighter than we would have planned that today.
That's really helpful and reimbursement in the UK it sounds like NHS funding did improve but we didn't hit in the revenue line was they simply the new contract or have you seen any make calls for the jetblue is that a lack of payment last year.
It was it again this is there's really two stories here <unk> dollar here. One is I'd, just say that has been a stabilization of payment or wishes in the marketplace can be seen on the NHS site.
Secondly, we have a taking some actions to reduce a loss making services that we have in the UK.
On to make them more profitable was result of out we've lost style. We've lost some volume not as much volume as we had expected to be honest, but some volume.
I'm not quite pleased that with fit attention oh affect customers specifically these actions and I suppose caused a slight for the decrease in terms of a revenue in the UK is not reimbursement is actions. We've taken three just lossmaking services to be we're offering.
Thank you.
Your next question kind of Santa line of Elizabeth Anderson from Evercore. Your line is helping.
Hi, good money Guy.
You mentioned actually didn't know minutes you potentially.
Changing competitive environment, and you guys pharmacy, or perhaps and pressure on or versus your expectations in the quarter in terms of script growth I'm could you comment more broadly on sort of what you're seeing there answering your thoughts on how that's progressing.
I was it sounds like you Yeah I think.
In August the consolidation in the market has really accelerated board theatrically and horizontally and as for example, the Prime Express steel is a good example of this.
Pbms are working more closely together are clearly putting more pressure on the marketplace for better pricing and actually but were alluding to so we we are we are working hard as James said as we always have done to mitigate our pressure through a cost programs and through a driving volume.
Hi, James Gonna say very clearly what we were disappointed with it the volume growth in Q1 part of that was timing.
Im just said in part that is because the five to 10, we lost some access to some particular some 90 Kate networks. During the summer is rolling into this this year or on a as we as we I spoke to a about I think it was a last quarter you know, we're walking investigating obviously with advanced direct Sun.
I'm centene, they know the opportunity for us to to become more efficient together and offer a new model and the Medicaid business. We recognize that there will be under share there on behalf to operate differently and not marketplace.
And Medicare or you know, we continue to do very well with United Health care, We're really pleased with a relationship and then you and me upon as we spoke to in the prepared comments. It's done has done well under we expect that will come through.
In the in the changes in January one.
Obviously, we're doing less well with the other a strong performer, which is at an insurance or the other they've done really really well and we're doing last fall within for maybe obvious reasons, but in the whole a we feel we're gonna be via the unit boats and Medicare.
Then in came actually already said to enter apply previously that we're very pleased to have renewed the contract with prime.
Which again is very important book of business for us and it came actual net walk so they're not the picture from that point of view.
And on old cuts I I don't if I hope signs. The question when is the best thought size, how do we see it and I know all underpins between after 4%.
Volume growth that we expect to see and the full year.
Okay perfect. That's very helpful. Thank you.
Your next question comes from the line of Lisa Gill from JP Morgan Your line is out.
Hi, Thanks, very much good morning, I wanted to start with just some thoughts around branded inflation as well as generic procurement and the current market.
You know I actually think about that the gross margins and how this will impact. It I'm just wondering James first can you just talk about what's in your current expectation in guidance.
HM what we saw and I'll tell you what we've seen and a Q1, we sold branded inflation of around 4%.
And we.
Most of the market read seem to be that inflation and this is on a on a constant mix basis. So like for like the SK use deflation of around 4%.
We would say that internally and Unix on generics so on generics and maybe a loss I like to weigh in and then too as we would be outperforming versus the four person would probably be a mid to higher single digit.
And we generally you're projecting that kinda number going forward somewhere in the mid to high single digit deflation mix adjusted which is it's probably you know quarters will change the versus market.
Generally that's what we're seeing in the market and we're delivering slightly better in terms of cost reduction in the piano.
I don't know Alex <unk>.
Hi, John So it's a lesser we're seeing and are we continue to two to a.
If you very good or better or Google operation and we biotech delivering just certainly beyond mark Harvey's reductions in Cogs cost of goods.
So I saw that exact who would see yeah, yeah, yeah, and and then Alex He talked about a number of health care initiatives and an update to that that you didn't touch on today would be labcorp and Humana one I'm on the Labcorp side can you just talk about where you are today are you on track.
Humana say <unk> any plans to expanding did talk about United and the Medicare advantage side I'm curious, what you're doing with Humana and then just more broadly speaking you know that strategic priority for expanding the role of pharmacy as you know I'm, a big believer in that as well, but with the reimbursement pressure do you ever see that subsiding in any way where you can actually.
I get ahead of that where you can start to change the paradigm and I know I've asked for multiple years, but do you. Finally, I think that you can start to see that I'm not the horizon as you start to have bigger and bigger relationships like you know.
North of 100 million lives now and a combination of Prime and express you think about large relationships like United.
Yeah. So I think maybe start with a the humana questions. So we've opened up our third parties and primary care.
It looks fairly Doosan is operating really well on the relationship between the pharmacists and Dr.
Doctors.
Really close so we continue to feel really good at both attack.
It is small but important test joint venture or.
And of course, we opened our path to also with clinical village and use Im sure you know I've done in Houston will be five in total by the end the end of February .
On the and again a we are we're very very pleased with Ah I saw operating already a we've taken a small stake and not company village, Andy as well, which were pleased to do you see that partnership of adult turned the pharmacy been fundamental to the future of community health care delivery going forward in court core to our model.
Or letting lots about how do we can do two things take cost out of the system together.
I can get customers to understand the two that medications better on change of lifestyles and so it's really interesting walk on it points to maybe your last question. So they're not lessening humana on lot covert buying on track.
In terms of number of service centers opened nothing will have a well over 100 and the growing by the end of this quarter I think that's really buying on track and a underperforming well you know we we are seeing you know a NPS scores on the usage of the centers on their above our expectations. So we're very pleased that without program.
I'm expect of 600, I, maybe more we don't know yet and the growing within within four years as we promised.
I find the unroll pharmacist, a we're working really hard to get our new system and.
James for spoke to in prepared remarks, you know, we're gonna be accelerating last system from the current pace.
That would be fundamental being the closed to date will be in the claims will be fundamental to taking the walk quotes and freeing up or pharmacists to really I draw your fed up that Todd you future, we're seeing increased payments from certain.
ER insurers and PBM is particularly in Medicare D, who are we really like walking with United because they are they are stretching to list in terms of getting the payment, but they're very clear on the goal posts now we have to hit to get the payment time, we've been successful and achieving not a I do believe the other insurance companies will fall.
Ill follow their lead on the government eventually will also make sure that we have clear K.P. eyes.
Going forward as well.
So yeah, it's a it's a longer play for sure, but we are really committed to I'm, we're making more progress and appears right now even their numbers.
On that we continue to keep on pushing this is fundamental to pharmacy in fundamental we believe to a more efficient health care system.
In the U.S.
And then just if I understand that none of that isn't your expectation for 2020 seat I heard you say longer term a couple of times and this conversation. So should we anticipate that that's could potentially impact fiscal 2021 or 2022, how do we just think about it you know from a timing perspective.
Yeah, we were already owning some money back as you know that into the fitness directly or indirectly basis, a debate you'll know well. So we are adding more money back from the did previously on the minute money available to us is growing and an ability to get about money grows as we get our systems and on of course, but also deploying pharmacists specific the Gulf pharmacists I come pharmacists.
I think we have up at a 150 note a internet walk who are specifically walking.
And to achieve these performance outcomes. So I think this will start to affect 21 than 22.
It's already given us some some as some relief in Twentys well, there's there's improve money in or in our forecast for performance networks.
Okay, great. Thank you for the comments.
Your next question comes on line F. C ran off from Morningstar. Your line is open.
Thank you for taking my question.
So the background he's given on a lot of initiatives spring, great, perhaps maybe specialties that kind of such a big component as here your business I mean, if that is that mix also impacting the margins as well.
Yeah, we called that out in the quarter it impacted by about 50 basis points, because it's growing up high single digit versus the pharmacy scripts or 2.8%.
It's driving adverse mix of 50 basis points.
And I guess that makes sense I mean, they see a these initiatives that you're kind of putting in place, how expand a tennis match and or or.
I'll now provide kinda that long term wellness and pilot that healthcare transformation.
Yeah, absolutely Sue I mean, we strongly believe and having a community presence and as you know we have two models, we have one which are close to or talk to sort of practicing in or in specialty for example in oncology and then we have pharmacies inside of hospitals and sort of health care systems.
We have 300 plus of these are not an under and Weve medical you recorded patient for them. All so every single pharmacy that we know run in the community, which is very unusual I believe in the foster Chivas.
Hi, Scott that accreditation not municipal more attractive to that manufacturers because they know that will take who care of the patient and more and more patients are living longer with diseases and communities. So we believe the local model that I will become important to the future of health care delivery I know always be a central so model I'm sure, but we believe a little Kumar who will become more.
More important also a we didn't we announced that are really should be shields as shields is a very interesting platform. Its walking with health care systems, and we have a lot of relationships with health care systems as you know.
To to make sure the occupations Lee hospitals, they maintain themselves on the drugs being dispensed primarily by the hospital pharmacy.
So again, we are when investing both in technology I was shields and ER come and also an online as well in terms of pizza and tracking customers and a little community pharmacies to make sure pharmacists can actually take care of these customers as the as it lifts and more often a home I'm going also of course working closely with I was pretty much.
We settle ready to be sure, though we have a really efficient and effective.
A central model and most importantly of all we have outstanding relationship side with the manufacturers really driven both relationship with a mass was broken and also the walks analogous with her team a global level to make sure that we have the very best relationships. So why these manufacturers are bringing these new and unique products to the market you know.
We feel is a global a global partner or we can apply our capabilities for them in the U.S. market to that relationship.
Your next question comes on line as Eric Coldwell from Baird Your line itself.
Thank you very much I know, it's difficult to parse this out with the store closings in the UK as well as the shift to more surfaces from from volume, perhaps but.
Did you give us a clear sense on the impact of the NHS reimbursement scheme change either quarter over quarter or year over year, and then you know how did that really stack up compared to your expectations. It sounds okay, but I'd like to get a little more detail on that in terms of not only the quarter over quarter, but also you know how that progresses through the next few quarters.
Thank you.
Sure Yeah, I know a seller here no. It was it was exactly as we expected so the corridor for pharmacy, both in volume as I said already was slightly.
Be little or no market in terms of underlying business, but we we gave up some scripts because there's some unprofitable services.
In terms of margin exactly as we had expected.
And is tracking to lines, we expect it says it's a relatively easy to track. This because the government have resigned you know the fight a five year contract with the industry see what's called a P.S. and see I wish represents all pharmacies in the UK is a one contract. So we can track this quite carefully it doesn't have any sometimes from from core to call.
So far but it's trued up in a way, which is transparent. So we feel very confident that we got good line of sight to this.
I feel very confident that the that we're walking operationally very well in.
In the UK and we have initial piece of walk there, which is called pharmacy of the future an idea here really is to transform the operating model for pharmacy in the UK. This will take some time of course.
We've already might start investment we're investing strongly on you farm system, we've rolled out to 14, hundreds which is well over half the goosey state.
And it's not surprising and all the old countries, including Scotland and more recent most recently so again, we're feeling pretty good about the visibility when our feeling is going up with the profitability or pharmacy, we believe the time that needs to improve father, so that we can reinvest back in community pharmacy properly.
In the U.S ahead, but we're very committed to getting that operating model understood and cheese overtime, you know where you would unless you want product. If you wanted to characterize the euro of prior year. There was a tough year for pharmacy or are there were a lot of downtime in bucks coming from then he just funding and they'll be a general this year a recovery.
I'm not.
It was surprising we were within $500000 of the gross profit targets for pharmacy in the UK. Yeah. It was buying on target. We are really looking up a fairly sizable improvement in gross profit in the business. This year. So it's Alex mentioned it earlier in his comments, we have some marginal profitability.
And this is on the sidelines on were aggressively driving the improvement of those so don't be surprised if you see script volumes and marketshare going down slightly we're addressing the.
Profitability of sub categories that we don't think or strategic to the company and we definitely don't want to be a marginal profitability positions. So a bit of a shift in the orientation than the business a slightly more to profitability.
So it just as you're modeling about don't don't get fixated by script declines because the core business is actually quite so all of them smaller than the cord yep.
Got it thank you very much.
Just one point just one point on on on on the UK, though as we as we go through you know we did we did of a rough corcoran retail and it really does come down to the market.
And Oh sure we held share overall I'm quite interestingly, though we've seen in the last couple of weeks, it's maybe a little bit important as you think through your modeling you know we had a rough quarter not 40% decline not it was a lot of onetime items in there probably half of that was onetime adverse items just generally.
What does your thing through this we we saw in a very very strong Christmas spurious, there's huge phasing going on in many of our primary markets. The whole December month started out extremely slow.
The second last week of the month was extremely strong with high single digit revenue growth.
On the last year, the last week as the year, we again had mid to high single digit growth across all key categories.
We're still getting enough dissecting the spot happening, but December performance is quite a bit more positive them. The quarter. We just came out of.
The double surprise was it was achieved with higher margins than prior year. So we're rebalancing they leave commercial approach in the UK, we're not chasing volume at any cost on.
Surprisingly lead the we're seeing better volumes and we're seeing better margins now it's only two weeks. So it's too early to chunks success, but we've seen them better performance across December across the entire the main two markets actually both businesses have been quite well in the Christmas period anyway.
Sure.
Your next question comes from a line of Kevin Callendar Fine Yes. Your line is open.
Hi, Thanks for taking my call.
Hey, you mentioned you had 60% of your PBM contract sat when you gave guidance and now you have renewed prime.
What remains outstanding and how much variance is there really at this point could there be in reimbursement. So you look out over the rest of the year.
Hi, Kevin It sounds like here, especially I mean, the there'll be some small networks, which can change mid year for sure but the vast majority no. This is constructed the vast majority I can give a precise number but I've always give you an estimate it'd be it'd be well over 90.
Because I go by the consolidation of Mark is very clear.
And yeah. So so that's that's where we are but it's so we feel good line of sight too and this and this fiscal year.
On a game will start renegotiating the majority off the med D contracts as we move through through the summer months, but I'll before starting January 1st 2021.
And the renewal of prime that that takes you through or is it more than a one year contract, meaning like the express relationship won't have any impact on that at all going forward as criteria. I mean, we are we don't disclose the landfill their contracts, but this is a a multiyear multiyear deal typical typical typically.
Although our longest commercial contract.
Got it and one last one have you guys looked at the OE C.D. proposals around multinational corporation tax rules.
There are obviously still just proposals, but wondering if they were implemented it would put it in any way impact walgreens or we bad or anything like that.
You know where we have.
I would say quite expert tax group, they're extremely I because they're all over this you know.
Thank you have to wait till dust settles on these things, but inner we what we would obviously realign the corporate structure. According to new legislation as it comes along we think the we buy doesn't isn't the right location it delivers attractive.
Tax positions, but it's all that and approved by all jurisdictions globally and it's in line with current honestly as policies change globally will adapt to the policies well you know we have an attractive.
Tax rate compared to our peer set my quite a number of percentage points and you know we will find maintain that as much as possible, but you can be sure. The teams all over this.
Great. We don't apparently we don't see any short term breast.
Great. Thanks, so much that's really helpful.
Our last question comes from Michael a share any fine Bank of America. Your line is nothing.
Thanks for squeezing me in here, so I want to tie back I guess, a big picture question you know at the beginning you talked about you know the broader strategy, you're taking I know you mentioned the role of pharmacy going forward, you've highlighted a number the various different partnerships I guess as you think about the next caller rest of this fiscal year two.
Two three years, what are some of the checkpoint you're looking for relative to the partnership model relative to the strategy relative to the EBIT contribution from all of these two essentially declare success or if some of them are going to kind of cut bait and how does that play into the broader thought process around the organization and the roll in.
Where you sit in the market you want to go forward basis, given as well that you're also going through a pretty broad restructuring on both the cost base and the store footprint.
Thanks, Michael Yeah. It sounds like here, so I think a if we if we start with a a C priorities and and they know the start with the re imagining that the drugstore into a a renewed its offerings what Paul the more advanced or with the Cougar relationship on the reason why it's quite important just because it allows us to do.
Two things that allows us to walk with fan.
On the convenience model, a which is really important to dri fit for a into a physical stores and also really important from a consumer point of view read the definition of conveniences, such a big or change in the marketplace. So we're feeling really good it but I, we set a said in my prepared remarks.
We are seeing a substantial sales growth both in the box itself and also in the Kartik is supporting we've also launched our own products.
We got them, we're gonna have them in a very tough just over 15 15 16 17.
Kroger stores are set up for this gives an opportunity to put our health and beauty.
Composition, I'm I'm private label on on on brands into their customers views as well.
Then lastly, when you put together the two customer sets you know we set of together roundabout 20 million customers I D. Between us. So we have Oh, we have a strong strong that presents an American high schools and our ability therefore to work with them being that the genuine food expert of America.
And I was being you know very very confident we believe in pharmacy health and to some extent beauty Kashi is it really to health care and wellness. We believe that's going to be a strong opportunity.
The procurement.
Structure allows us to to earn money in the short to medium term.
And of course, we will be working together on other issues in the supply chain and Olson other issues and procurement, we believe as well in the future. So that's one area, where I think we helped me.
Progress poor tactically and strategically.
With health care.
We we are well into testing a quality brands on quality offers in partnership with others. You know so the acceleration of our lessons learned and optical is one example of it we're working with dry and vision, who are renewing does that quality optical retail or with a access to insurance.
And the very best brands.
We are we we really are delighted to get more opportunities to be doctors into her into a stores.
And I won't say pharmacists, and we believe that well that would be a longer term model. We know from experience in Europe . The top model can be really effective and delivering end to end primary care in communities.
And last but not at least a into the fine care platform that we built a very quietly but with an internal team its really growing and we believe that would be a digital marketplace that will become very important to us into the market in the future, but will take time to grow.
So that's really where we are in terms of out measure. So we expect some.
Some contribution overtime in the retail site faster than the contribution maybe in health care side, but the health care side will come to the here was scripts overtime and the access you know two two more to more and you know maybe one we didnt get this question, but progress on digitalization in the quarter. We've just launched two major initiatives.
Launched on funded.
I want to.
And I go back to the previous guidance, we gave we've got $500 million of capital expenditures behind digital in development costs about 102 150 of expense this year and we launched two big initiatives in the last down.
One is on mass personalization and that's how do you use your.
Marketing dollars more effectively to target a better connection with the consumer we believe it will significantly underpinned, particularly the retail revenue profile for multiyear period and these are not small investments there in the 50 to 100 million challenge.
The second one is the prescription journey and I use that one very generically, but it's it's again, it's a similar size of investment.
And it's all done to speed, we're not waiting for the core systems to be upgraded its on a parallel process and this is a a to assure journey and what's it doesn't do it's going to connect.
The consumer much more closely with the with the prescription how they want to deliver how they want to pay for the transparency of the cost of the only options, we give consumers and getting closer to consumers.
The second thing it will do it will take friction out of the system <unk> liens it will reduce the cost for the prescription. So what we're working on initiatives that don't Joe's boost well take out costs, but they actually boost revenue and the connectivity to patients and consumers longer term them in a bumper that'll be lost.
These investments are larger than or multi your they will also drive long term revenue and sustainable growth.
And I guess just quickly how do you balance all of those investments in long term initiatives against some of the quarterly volatility in reimbursement risks and the other moving pieces on the transformational cost program that you see.
It's tough yeah, it's not easy, but anyway, we have a program management approach, we have got lot of people people, but it's not easy you know, it's a new and then every Oh, we were paying a lot attention to the future on until today as you can tell but by the call Mr. James I've made well a lot of these funds go through the transformational cost management.
Hi, Matt I like myself and ornella on the head of age or sit on the yeah. We are to for people on that so it's a small team takes decisions quickly and frankly some of these are tough tradeoffs and in some quarters you theoretically can't afford it what do you have to do it or otherwise you're going to damage. The long term future as a company and this is the power.
Elements different yeah, yeah. This strategy our strategy ease as a as it is always be near and medium long term strategy.
ER and though we believe in the pharmacy, we believing the older. The pharmacies, we live in future of course, the pharmacy, we left to be.
Able to satisfy the needs of the patients and the needs of the customers.
And we are working in a in did they election.
Not all the pharmacy, so we are weak who value the future nothing to pharmacies will be important in the local economy of Oh, the C.D. so the village.
Oh, we tied to be eat or if I must see a that that can Ah hey, there a whole lot and of course, we have to invest whipping mr. now for the future or if we if we will adjust it for the next two quarter, maybe we will have a little better it as adults the better this answer.
But the idea and Oh, we will.
Probably create it probably my problem that longer.
ER, so valuable of Oh stores, so all of our pharmacy Sir.
And are now you have to take a decision a there either you or believe that in this strategy. We chase a focus the on their long term or all that you just to try to look at the next quarter and maybe you try to do deals so jazz two or two let's say.
Hey, make easier Oh, let's have you didn't see the problems and they are there to web.
We are Oh, we have decided to walk or for the long term and I hope. They today and then we would be right.
There are no further questions at this time I turn the call back over to the presenters. Thank you very much. Indeed, thank you I know that not everyone that want to ask a question got was questioning moves over the IR Timo here and we'll take your goals during the call since the end tomorrow I'm notice the week and.
ER, we look forward to speaking to you all again next quarter. Thank you very much indeed.
This concludes today's conference call you may now disconnect.