Q4 2020 Walgreens Boots Alliance Inc Earnings Call
Okay.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Walgreens Boots Alliance Inc. fourth quarter earnings 2020 conference call. At this time all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session you will need to press star.
Our one on your telephone please limit questions to one question only if you require any further assistance. Please press star zero I would 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 Sir.
Good morning, ladies and gentlemen, and welcome to our fourth quarter in fiscal year 2020 learning tool.
On the call with me today, Stefano Pessina, our executive Vice Chairman and Chief Executive Officer of Walgreens Boots alone.
Our global Chief Financial Officer.
Good.
Operating officer, Walgreens Boots Alliance.
Before I hand, you over to Stefano for make some opening comments I will as usual take you through the legal safe Harbor in Coolsmooth declarations.
Certain statements and projections of future results made in this presentation constitute forward looking statements that are based on our current market competitive unregulated expectations and are subject to risks and uncertainties that could cause actual results to vary materially we are.
We undertake no obligation to update publicly any forward looking statement. After this presentation, whether as a result of new information future events changes in assumptions or otherwise.
Please see our latest form 10-K, and 10-Q for a discussion of risk factors as they relate to forward looking statements. A note in particular that these forward looking statements may be affected by risks relating to the spread and impact of the corona virus coated pandemic.
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 you will find a link to the webcast on our Investor Relations web.
Upside at Investor Dot Walgreens Boots Alliance Dot com.
After the call this presentation and webcast will be archived on the website for 12 months I will now.
Ill now hand, you over to Stefano.
In Canada, and good morning, everyone.
I am pleased to say that the fourth quarter earnings that we have announced today.
And at the upper end of the guidance that we provided for the quarter.
Income when we set many other bdcs.
Coffee that had a material impact on the year.
Most notably in the second half.
And as a consequence this pulled down our results for the quarter.
This has been a very difficult time.
But if you would expect.
We are proving to be very resilient.
We are financially robust, we strong and reliable cash flow.
Driven in part by our brand and customer loyalty.
And this has allowed us to continue to invest in modernizing our company we've.
We are confident we will come out of this in better shape as an organization. These.
There is nothing the truth surprising in war two years as reported today James Index that will take you through the quarter in detail in a moment and provide our initial thoughts on what you should expect for the year high.
Clearly there are still remaining uncertainties around coverage in terms of the development of the funding and our governments are worldwide. We continue to respond.
However, in the last quarter, we have seen signs of improvement in customer pay.
And as a result, the decline of our business and not terribly flowed in.
In addition, there is.
There is clear evidence that as and when the restriction Heidi.
Customers do come back to us both physical in store and poor omni channel.
And derive some elements of our business that may be changed forever.
Our positioning with the communities we serve remains strong.
As we look at our business going forward, we see.
We see opportunities as well as brief.
And we are making every effort to ensure we are well placed to maximize the opportunity.
It is clear however.
The pharmacy will continue to play an ever greater role in local community healthcare management.
Two testing.
And potentially to vaccination.
For some time, so we have to.
Of our work to accelerate the digitalization of our company.
Actually match of the work of what's going on behind the scenes.
Moving to a more cloud based data factor.
And putting in place the systems and structure to use these data more effectively as you will hear from Alex in a moment.
The benefits of these work are now becoming more evident.
With notable improvements to our customers stevia.
At the time when demand for Omni channel solutions has never been quicker.
So I would describe it.
The vital role that pharmacy place for the customers, we serve as being comprehensively proving it.
It is a great tribute to our teams that we have continued to service our pharmacy patients.
Without major disruption for two drug availability or to our high standards of care.
Looking forward to 2021 and beyond.
We have initiatives underway to further strengthen the bond we have with our customers.
Whether they chose to DAC without physically obviously.
Driving volume in both pharmacy and retail.
There is no doubt that all markets and many businesses, we continue to face that the negative impacts of calling it in fiscal year 21.
And it is expected that the next two quarters, we see difficult trading conditions.
However, we.
We are optimistic that we will see a market discovery as the year progresses.
In our own businesses.
We expect to see a significant improvement in our performance in the second after the year.
The work we are doing to address the challenges.
Keith asked confidence that we will come out of the economy and.
And consistently deliver long term sustainable growth.
I will hand, you over to James now to grow.
To go to the results, we have announced today in detail.
Thank you Stephanie and good morning.
Full year adjusted EPS was $4 74 sales.
A decrease of 20.6% in constant currency, mostly due to an estimated cover the impact of approximately one dollar and six cents.
This result was at the upper end of our guidance range, we provided at our third quarter earnings call.
Adjusted EPS was one dollar into sales in the fourth quarter compared to $1.43 sales in the prior year for the call.
A decline of 27.9% on a constant currency basis.
The estimated cover the impact was approximately 46 cents.
Our transformational cost management program remains on track to deliver at least $2 billion of annual cost savings by 2022.
And cash generation was strong.
Operating cash flow was $5.5 billion with free cash flow growing 5.6% to four.
Two $4.1 billion.
Looking ahead, we are introducing guidance for fiscal year 21 of low single digit growth in adjusted EPS at constant currencies.
While we expect the first half to be impacted by continued covert pressures.
We expect strong growth in the second half of the year.
Now lets look in more detail at the full year results.
Full year sales increased 2% versus prior year on a constant currency basis sales increased 2.5% with solid growth in retail pharmacy, USA and pharmaceutical wholesale only partly offset by a decline in sales in retail pharmacy international.
Overall COVID-19 reduced sales growth by approximately 100 basis points.
With over 80% of the input in the retail pharmacy International segment.
Adjusted operating income declined 24.8% on a constant currency basis.
Mainly due to the adverse impact of COVID-19, which accounted for over 70% of the year on year decline.
Adjusted EPS was $4.74.
Down 20.6% on a constant currency basis.
Around the 18 percentage points of the decline was related to COVID-19 impacts that.
That predominantly impacted the second half of the year.
GAAP EPS declined 88%, including the third quarter impairment charge of two turning next to the fourth quarter performance.
Sales were up 2.3% on a reported and.
And only partly offset by retailers.
Pharmacy International.
Adjusted operating income declined 27.4% on a constant currency basis, reflecting an estimated $520 million adverse impact.
Q to COVID-19.
Over 60% of the impact was in international markets.
Adjusted EPS was one dollar into sales the constant currency decline of 27.9%.
On the call with impact of 46 cents was significant it was an improvement compared to the 63 cents impact than the third quarter.
Let's now look at the performance of our divisions.
Our focus primarily on our fourth quarter performance.
Let's start with retail pharmacy USA.
Sales increased 3.6% in the fourth quarter, including the.
Total comp sales grew 3.6% with pharmacy growing 3.2% and retail 4.7%.
Adjusted gross profit declined 4.5% and adjusted gross margin declined 170 basis points, but.
A sequential improvement of 85 basis points compared to the third quarter.
We estimate that the result includes COVID-19 related margin impacts of approximately 50 basis points most.
Mostly due to continued adverse product mix and higher supply chain costs.
The remaining margin variation was due to ongoing pharmacy reimbursement pressure and the impact of specialty mix of around 60 basis points.
Adjusted SGN, they spend declined 0.1% from the quarter balanced DNA as a percentage of sales improved 60 basis points year on year.
Savings from the transformational cost management program, offset inflation and volume impacts higher investments yes.
Year on year, boneless changes and covered related.
We are in dollars.
Adjusted operating income declined 22.2%, including an estimated adverse cover the impact of approximately $200 million or 17.5% now let's.
Now lets look in more detail afirma sales.
Total pharmacy sales increased 4.2% in the quarter, reflecting script growth.
Brandon Flaishon and central specialty growth of 12.5%.
Some pharmacy sales increased 3.2%.
Comp prescriptions grew 3.6% in the quarter slightly better than the growth rate, we predicted on the third quarter earnings call while.
While the comp growth has recovered nicely from the third quarter. It is still below the pre covert growth rate of 4.9%.
As expected the prescription market as a whole is down versus print covertly.
New to therapy scripts improve.
We have now tested over 1 million people for coal but.
Across 444 sites with an average turnaround time of 24 to 72 hours.
Turning next to our us retail business, which.
Which delivered sequential improvement in both sales growth.
Retail sales increased.
Including negative him.
Fox from our store optimization programs come.
Comp sales increased 4.7%.
Quite a bit above the 2% to 3% growth expectation.
We highlighted on the third quarter call.
On a sequential improve.
Compared to the third quarter.
Correct.
Excluding tobacco comp sales were up 6.5.
Performance was boosted by our successful execution across all PE categories.
The boosted our comps by around 4.6 percentage points.
And our mass personalization marketing program drove another 140 basis points of growth.
We saw strong comp growth in health and wellness and personal care up 15, and 8% respectively.
This was partly offset by declines in the more discretionary beauty and photo categories, which were down three and 4% respectively.
While foot traffic improved gradually.
Overall traffic was down a little bit more than 10% led by.
Led by sharp declines in larger cities and travel destinations, which were down around 39%.
That said consumer and basket size increased in the high teens.
Store gross margin declined 10 basis points in the quarter versus prior year.
You most.
Slate to adverse sales mix away from higher margin discretionary categories.
However.
This was a sequential improvement of 70 basis points compared to the third quarter.
As we saw in turning next to retail pharmacy international hundreds.
And as usual I'll talk to constant currency.
The covert pandemic continues to cause notable disruption across many of our international markets and particularly in the <unk>.
UK.
Sales declined 15.4% in the quarter, but this was a big improvement on the third quarter decline of 26%.
Overall.
The estimated corporate impact on adjusted operating income was around $300 million in the quarter.
And this led to an adjusted operating loss of $3 million in the fourth quarter down $196 million versus prior year.
Now lets look in more detail at boots, UK, which delivered better sales growth than we expected.
Footfall remains well below last year, particularly in the major high Street and travel locations for boots as a prominent store presence.
Footfall continues to be impacted by government travel restrictions increased working from home.
Localized takedowns.
Comparable pharmacy sales increased 0.4% in the fourth quarter lower.
Lower demand for Scripps and services, reflecting reduced footfall, especially in city centers was offset by favorable phasing of NHS funding.
Retail comp sales declined 29.2%.
Better than our prior expectations.
Our targeted marketing activities were implemented and we saw some recovery in footfall to our flagship and destination stores.
Overall, the performance was much better than last quarter when comp retail sales were down 48%.
Foodstar com had a great quarter, which.
With sales growth accelerating to 155%.
Up from 78% growth in the third quarter.
Retail gross margin was lower in the quarter, primarily due to higher fulfillment costs due to the substantial growth of stock comp.
And marketing programs to drive traffic.
Now I'll make a few comments about our international retail business.
One of our top priorities is to turnaround boots, UK and return us to profitable growth.
The UK team has taken swift actions on both sales growth and cost reduction.
As mentioned earlier targeted marketing activity is driving better sales performance than we had anticipated.
And Foodstar comp sales growth was exceptional and we further extended our fulfillment capabilities with in store picking now operational and over 90% of our stores.
Together with our hybrid stores. This gives us much greater flexibility and capacity as we head into our peak trading sales.
And online new product launches included popular beauty brands, such as Mark on Mars.
We are investing in our leading number seven beauty brand.
New counters and fixtures and almost 300 stores.
With plans to extend to a third of our stores by the end of February.
We continue to play a key role in the community with over a million covered test completed for the NHS.
And finally, an update on our retail joint venture in China. The store count is now more than 7500, roughly doubling since our original investment in 2018.
Turning now to our pharmaceutical wholesale division, which I will also discuss in constant currency.
Pharmaceutical wholesale delivered another good performance for the quarter with sales up 4.3% versus prior year led by emerging markets, Germany and France.
Adjusted operating income increased 8.3%, mainly reflecting sales growth and cost management.
Turning next to cash flow.
Full year operating cash flow was $5.5 billion and free cash flow was $4.1 billion.
Strong cash flow generation was mainly driven by working capital initiatives.
Included in the results for one time costs that related government contributions, but these were fully offset by higher safety stock.
Capital expenditures were $328 million lower than prior year, mainly due to project deferrals as a result of the covered pandemic.
Free cash flow increased $219 million or 5.6% versus prior year. Despite an estimated cold weather impacts on adjusted operating income of around $1.2 billion.
The growth in free cash flow was driven by a 1.4 billion dollar improvement in working capital loss.
Largely due to optimization programs across both inventory and accounts payable.
So overall it was a very good year for cash flow and looking forward, we remain highly focused on cash generation and have a.
And have a strong pipeline of working capital initiatives.
I'll now update you on the transformational cost management program, which is very much on track.
Last quarter, we increased our savings target to in excess of $2 billion in annual cost savings by fiscal 22.
In the US our store operating model transformation is well underway and we continued our store optimization program in the quarter and.
In the UK, we are restructuring the boots business model.
Last quarter, we announced plans to reduce the workforce in boots UK on boots opticians by approximately 7% but.
The program is on track with end to end process optimization, driving enhanced efficiency and effectiveness.
We have completed the transition of the majority of our IP run on operational services two Ccs ahead of plan and.
And we are now starting to unlock the strategic benefits.
And we recently announced a restructuring of our global brands organization to drive efficiency and speed to market.
But let me emphasize one thing there.
This is more than the cost transformation added.
At its core is safe to invest to grow.
We are aggressively tackling our cost structure and now.
And our free up the funds needed to invest in future growth at the same time. We are also reinventing how we do business redesign in end to end processes upgrading operating models and creating new capabilities that will drive long term growth.
Next let's turn to guidance now.
Let me first layout some of the key assumptions underpinning our fiscal 21 guidance.
We expect an adjusted effective tax rate of around 15.5%.
And this creates an EPS headwind of approximately 1%.
As announced earlier, we have halted our share repurchase program.
And with the exception of anti dilutive share repurchases, we are not planning share repurchases in fiscal 21.
Based on current exchange rates, we expect the impact of currencies to be broadly neutral to operating income.
We are increasing our digital development on omni channel investments by $400 million to a total of $1 billion in fiscal 21.
Of this year on year increase 106.
$165 million is higher operating expenses leading.
Leading to an approximate three percentage point impact on adjusted EPS.
Finally, we are confirming our long term goal of in excess of $2 billion of savings from the transformation and cost management program by 2022.
Turning now to our adjusted EPS guidance.
We estimate low single digit growth in adjusted EPS on a constant currency basis.
And we are expecting a very different profile in the first half of the year compares to the second half of the year.
While we assume continued gradual improvements quarter by quarter. It is realistic to assume continued negative COVID-19 impacts in the first two quarters of the year.
As such we are assuming a first half decline in adjusted EPS of 17% to 23%.
Please note that we will be lapping a prior year discrete tax benefit in the first quarter of fiscal 20.
Now this results in an adjusted EPS headwind of approximately six percentage points.
We do expect COVID-19 impacts to subside in the second half of the year.
As more and more people are vaccinated and foot traffic gradually recovers that.
As such we expect a much stronger second half.
And our assuming adjusted EPS growth of 30% to 40%.
Thats growth initiatives take hold the impact of coal that tails off and we lap of weak prior year.
Obviously.
The evolution of the pandemic is uncertain.
Uncoated 19 could present, both incremental risks as well as opportunities. For example, we have not assumed significant new government restrictions or extensive stay at home orders.
And that could present, a risk to our projections.
On the other hand, we have.
We have not taken into consideration the opportunity from the role we may play in the widespread distribution of vaccines because.
Because those programs and are timing are still being finalized.
In summary.
The fourth quarter results were at the high end of our guidance range.
We are in a strong financial position.
Finished the year with free cash flow of $4.1 billion up 5.6% versus prior year.
We are introducing fiscal 21 guidance of low single digit growth in adjusted EPS at constant currencies, and we expect to exit fiscal 21 strongly with.
With double digit growth in adjusted EPS in the second half of the year.
At the same time, we are investing to accelerate our enterprise digitalization with us.
With a specific focus on transforming our omnichannel capabilities and developing new healthcare opportunities.
I'll now hand over to Alec.
Thank you James.
During these challenging times, we continue to safely deliver essential services, while accelerating our digital transformation, our healthcare platform is delivering a passionate lines experience to millions of customers every day.
On a timely many Americans face on employment and potential loss of health insurance, we can help patients maintain access to affordable medicines as an example.
As an example, we have relaunched have to skip to savings club offering lower prices in hundreds of medications.
Average weekly enrollment in the savings club has increased by over 400% since the June relaunch with members saving over $164 million of the cash retail price on your discussions also last week, we launched find Rx coverage advisor and use those providing customers with.
Personalized guidance on health and prescription drug coverage options.
Our final year platform, which connects paces detailing health providers has also grown significantly since the start of the pandemic in the quarter sharply to the site increased 36 times versus last year to over 8.5 million visits.
We continue to make excellent progress signing the rollover village and the partnership working closely with our partners on physical locations digital presence and healthcare services.
Alongside healthcare, we are accelerating our retail offering in store and through our omni channel infrastructure.
Partnership with Kroger continues to progress well with positive results from Kroger Express and the continued development of a GPU.
Sales and while these are calmer up 39% versus prior year and digitally initiated sales were up 7% in the quarter.
Our mass personalization program boosted retail sales by 140 basis points in the quarter, a significant increase from the 95 basis points impact last quarter.
And we also saw a significant increase in customers ordering online and collecting a drive throughs and that the club side not available nationwide.
Versus last quarter. These sales grew by 2.7 times.
We are also accelerating the pace of our technology transformation with a further 1145 stores converted to retail Sep and the quarter, taking the total to over 3500 stores.
The rollout of Sep at a store level provides a wide range of benefits as a management and operational to gain is real time information store operations.
Stock levels and movement that also gives us far greater detail and timely visibility on our business.
More importantly, however, as implementation, we joined up our operations with a reliable and proven cloud platform, which will significantly enhance local fulfillment of omnichannel offering in the past few quarters, you've heard us refer to a walk to digitalize the company and build a truly omni channel interface with our cost.
Yes.
The foundation of this were put in place through a partnership with Microsoft billions to primarily cloud based data infrastructure, and then working jointly with Microsoft and Adobe to build a mass personalization engine.
Accessories, and enriches, but existing data.
The results of a mass customization work has been driving a new and much more targeted interaction with our customers over recent months delay.
The nature of the personalization engine means that it lends more about our customers preferences and refines its outputs that more is used so with time, we are seeing it get better and more effective quarter by quarter. We are now beginning to roll out. The next elements of this customer facing initiatives progress.
Progress with building and enhancing the customer Spi industry content engagement and rewards for use on loyalty in.
In November we are Relaunching, our customer loyalty program of my Walgreens. This.
This goes well beyond updating the look and feel of our up to create a seamless retail and pharmacy experience. The new program will greatly simplify a customer's accumulate and use their rewards and will create a much more engaging health oriented its relationship.
Members will and 5%, we'll use cash and all of our all new brand products and 1% on all other core find purchases or.
August cash can be applied to future transactions all used to support their chosen causes Mike Wiggins will be heavily focused on health and well being with content services and offers specifically Chile to each member all.
All of our 100 million existing loyalty members will have the opportunity to convert their turning points pollens toward these cash while seamlessly switching to the new program as a result passionately innovation programs and my will gains will evolve and develop as members use it and we plan to announce significant developments.
To the membership in the months ahead.
Supporting this we have made considerable enhancements to our fulfillment abilities as you've heard we have significantly increased our online capacity in response to the heightened demand in recent months.
Starting this Friday, we will be rolling out a significantly improved convenience customer offering this will.
This rollout online are up orders to be ready for collection.
In as little as 30 minutes in store.
Hi, two windows or cup side, all available nationwide.
This level of responsiveness is unprecedented in our sector and a redefined customer continues.
A real differentiator for us this year.
This demonstrate in a very practical way some of the benefits of our walk to update our infrastructure and to digitalize. Our business. There is a warm water companys initiatives as we look ahead over the coming months.
I'm very excited to be able to share some of the forced more customer focused initiatives.
Of this in men's program to modernize our company and we think so many elements of our business.
Let me now pass it back to Stefano for his closing comments. Thank you Alex.
We have come to unprecedented market conditions.
But we are on our way to putting that behind us and the war coal we are doing gives us down for our team.
If you go ahead.
We expect the first half of the will be challenging.
But we are optimistic of any company in the second half.
You have a Fairfax county.
About a day exciting changes underway in our omni channel and often.
There is much more to come as the war on each of our key strategic priorities.
Increasingly based food and revitalizing descent our business.
We look forward to being able to share more about the DC initiatives in demand to come.
Why do we need a leader on our strategic priorities we.
We are also constantly interviewing vishay Benstock chart of the company to ensure we are best positioned to E Commerce company and return to stable and reliable growth.
The changes in management responsibility for Alex and Atlanta.
Our core fee or announced last quarter.
Allowing us a renewed focus and clarity on our business.
And our LP believes these changes.
Yes, our intent on just Tony as President of Walgreens.
Well again, Hello, Alex to focus more service attention on DDG television work entitled Initiative.
Now.
I know there is matching guide in the work we are doing to identify and you feel is a move to the executive chairman.
All I can say.
Is that the war and the board is due to we didn't decline that right and is well underway and we will update you when we have something to report.
The sales.
As I hope you can see the she's not delaying our progress.
Hi.
And the entire team at as committed as ever to driving these company from one.
We will continue to strive to deliver high service level for our customer innovative and relevant product and the communities we serve.
And to value for our shareholders.
We are navigating to a global funding.
But the war credit we have done and.
And the trends we are seeing in the market.
Gives us confidence and from our future. Thank you.
We will now take your questions.
As a reminder to ask a question you unleash press star one on your telephone to withdraw your question press the pound or hash key please limit to one question only.
Our first question comes from the line of Justin Lake from Wolfe Research. Your line is open.
Thanks, Good morning.
Wanted to get a couple of numbers questions. Here first I was hoping you could share with us what action that you've built in further kogut impact.
21 earnings guidance versus the power cost that you estimated for 2014 and then given all the discussion on 340 degrees.
Hoping you could share any thoughts on the contribution to revenue and earnings for the property for this program and any early impact or seeing from the pharma manufacturer.
Thanks.
Okay, well, we we.
We're not providing specific info.
Information on the impact of coal that year on year first of all because it's just too complex. The further you move on through the crisis to further the more difficult it becomes to this market moves versus market share moves versus margin moves while we would sales you build out your scenarios is you have to get.
You have to get comfortable with the quarterly progression.
If we were to give a ballpark estimate you could look at.
Probably the best analog is.
In Q3, we have six cents impact.
In Q4, we had a 46 cents impact.
If you were to pump product the first two quarters, you're probably looking at something between 35, sorry between 25, and 30 cents of covert in each quarter.
That part we can still follow the logic of the calculation. We did in the second half of the year. So we have about 20 percentage points of EPS pressure from covered in the first half.
And then it becomes a much more complicated discussion on what comes back from the prior year impacts new recall some of our comments on the last call. We believes the recovery will span a multiyear period and at least two years, especially in the UK.
So factors that come into this for example is we were very successful in the Q4 in the UK in regaining some foothold into the stores, but on the flip side is or shares with the exception of beauty remains significantly down because most shopping is occurring in grocery stores. So the key question becomes is how long.
Does it take to recover the share from the grocers and Thats like you need a crystal ball. So we.
So we've as we've built together our forecast we went through a business by business, what's a reasonable set of assumptions for each quarter and as we went through that become more and more difficult to assess our what's called on what is encoded.
The other side of it is that we wanted to make a strong statement, though only recovery. So I'm sure. You'll appreciate the 30% to 40% EPS growth in the second half clearly assumes recover.
Recovery from cold weather impacts in the prior period. The question is what happens in the successive years and as I said, we don't have a crystal ball. So the key message we gave as though we were so thats.
Thats simply green shoots, particularly on the topline in the us and in the UK in Q4.
We expect continued impacts in Q1, but we expect to exit the year with quite a bit of strength as the EPS guidance would suggest.
Yes, Hi, Justin and I'll, maybe I don't have entitled James You said on the call. The 21 via 20 megawatts.
20 megawatt hour maybe deal with is the fee 40 bps the question.
No. We've we things obviously, we think that it's been overstated the number should be overstated, it's been quoted the marketplace clear.
Clearly in orders our challenge here, but there is also a legal challenge coming back.
In terms of the hospital systems, there's significant bipartisan support for the currency 40, B program, which allows access to required medications and hospitals.
And you know we feel good.
Good that we are well positioned whenever hard in this marketplace, who will provide an essential service at two two thousands and millions of customers and with these drugs in partnership with our hospital partners. So Thats, where we are and of course I will wait for the legal legal case in particular to be to be to be settled.
Thank you.
Our next question comes from the line of Michael Cherny from Bank of America. Your line is open.
Thanks for the color. Thanks for taking the question I want to build on Justin's question, a little bit in terms of thinking about the pathway forward in the puts and takes on fiscal 21. It clearly there are some dynamics in place that were positive for the beneficiaries looking at particularly the PB growth as you think about some of the puts and takes.
Into the 21 guidance what else is built in there how much of that structural cost dynamic I'm still remains in place and the potential benefit that you have some items are in increased demand and just alongside that just maybe a little bit separate follow up question on any update on your relationship with Prime therapeutics and what's going on there to conserve our partnership.
Okay.
I think if you if you look at structural costs as well as a result of covert I believe.
I believe the impact in what in the 2020 was 105.
$50 million kind of number of which there was about 50 in the fourth quarter. So.
So if you were looking forward.
Others, even if you had the same cost for the entire year, its 200 million, but we won't have the same cost for the entire year.
We'll continue to have sanitation.
I don't see that going down in the first time CEVA plot out 50, each quarter for the first half.
But thereafter once vaccinations become.
More prevalent.
We would expect in a lesser ongoing costs.
You asked for headwinds pluses and minuses.
One is we did call out acts as a headwind.
It's not significant at one point.
We also called out.
We've got significant investments behind the ITM digital agenda, and that's about that's a headwind of about 3% on EPS.
And I really wanted to be clear. They are we are stepping up our game in terms of what we're going to we will surround the consumer with.
A massive set of choices on how they want to interact quarter, it be physical or online or E commerce, and I will be a totally omnichannel approach, both pharmacy and retail.
This will be going on the entire year of 2021, then we will have successes.
Streams of new news over the coming quarters on us.
So that is a headwind the other one is we obviously won't pay out a full bonus this year and next year, we will have a bonus headwind I can't give you the precise numbers.
So we've incorporated all these headwinds we also on the tree 40 B. question for you know based on our inter in the scenario planning wouldn't have any material impact on the guidance. We just gave.
When you look forward that uncovered given the numbers roughly if you think about next year for the coming year. The first half, it's 250 to 300 per quarter for two quarters and that's a rough number so it's a $500 million.
600 million negative impact in the first half.
And it's very hard to dissect how much of the prior year impact is coming back in the second half and we can't give any more than what we.
We'll update as the quarters as we go through the quarters and as I said, we were pleasantly surprised in Q4.
We continue to see decent progress in the month in September.
You know it doesn't indicate opportunity, but neither does that indicate risk so were feeling fairly comfortable about the guidance. We just gave.
Yes, I think just one thing to onto James said, which is almost 70 Threerd remarks, we brought new technologies and data and we spoke about at Sep system is one example, coming forward is really driving operational efficiency along of course with our ongoing successful at.
Cost management program for these things you intertwined with the cost question is all Michael on that on pricing and we continue to have a great relationship with prime.
We reset the the contract with them as you are aware and the net walk can be contained to be really pleased with the growth that we're getting with prime and our contract we continue to partly JV for specialty.
And you can do to work constructively to make stock, but that particular offering even more relevant in the marketplace of course, the marketplace is changing as we all know on specialty is a big focus for for many many people in the marketplace. We continue to be very positive new issue going forward and the opportunities to grow with pain therapeutics.
Our next question comes from the line of George Hill from Deutsche Bank. Your line is open.
Hi, Good morning, guys. Thanks for taking the question, there's clearly a lot along with Covance business transformation. This business going on the fiscal 21, clearly has some capital constraints. So I would ask how are you thinking about the portfolio I think particularly in big Chinese TV. Clearly you guys are marketing paid for these and is not reflected in the valuation. So I guess, how do you think about some of the JV.
Relationships and can you use these to de lever maybe focus on the core us new business with their contribution either synergies or kind of maybe something that we can't seems like you're getting diaper.
Yes, I'll just give maybe into perspective on capital and then I'll pass it over to Stefano for some comments.
Now if you look back over time, we have spent capital over the last five years it averages about $1.4 billion a year.
We did call out that in the course of Twentytwenty, we deferred expenditure of about $300 million on we just actually couldn't execute the programs. The Great example is the CP program will defer to for a couple of months at the peak of coal that because it was too complex for the in store employees to know.
Managed covered under systems and implementation at the same time so.
So we ended out a $1.4 billion, we expected to spend 1.7 hundred 2020.
This money will slide into 2021, so we would expect the capital.
Allocation in Twentytwenty, one probably to be in the region of somewhere between 1618, depending on various investments we make it.
We're quite comfortable with that level and we have the funding to do that so maybe I'll pass over to Stefano for his comments.
Hey, Jamie said.
And they really do cash flow through we are not too worried about the future and we believe that we can fund all the initiatives that we had.
And about our joint venture.
Joint venture outside the U.S. and.
Clearly most of them and be very promising and.
And it would be a BT not too.
Exploit the situation and.
Wait for them to mature before that kinda also divesting them.
In reality.
We are always open as you as we have said many times and as you know.
Any kind indeed combined this creates value and so we are not.
Really.
Sales Bailey.
The.
Of course, the keeping and all the whole day participation sales the joint venture equity yet if we were offering.
All the opportunities we wouldn't.
And then Matt we are not under pressure.
We believe that we can manage our financeability very well.
As a sales because remember that.
This company, maybe can suffer from time to time, but there is always that impala.
Very busy really strong cash flow DCF. It has been really difficult year, Lisa Cohn ended cash and free cash flow DCH better than last year, but George I will agree with one thing and the China JV is is not adequately valued in our portfolio.
What's what's really happened is we've done.
We doubled the size of the store portfolio up to 7500 stores, we have a significant position now in China and over 40% stake in a very collaborative partnership.
We believe the business, we would prefer to let it grow on their current path for.
12 to 24 months, but it is significantly undervalued in terms of the future potential.
I'd say I fully agree with what you just said.
And by the way by the way we.
We we have just made the initial investment there and all the growth up to now and being Santander.
In China.
Perfect. Okay. Thank you.
Our next question comes from the line Apple its Beth Anderson from Evercore. Your line is open.
Hi, Good morning, guys. Thanks for the question and I appreciate that Capex panic, Okay Justine.
Thanks Keith.
My question is why not to the extent the impact Heartland IDR cash flow expectations for acquired 21, and then also can you talk about.
Yeah, and then tied to that I say about favorable NHL side then.
For the quarter, Kevin can you provide any more color there on the size of the data and how sustainable that is and that fly 21. Thanks.
I'll just give you a we're not going to give free cash flow guidance.
Because it's quite volatile how it comes out what our give me though is.
Two things one is we have this slippage between the two years of $300 million of Capex that will materialize.
I do want to call out one point happened in 2020.
The we actually the biggest single driver has been working capital improvement year on year and its 1.4 billion.
And Weve estimated that of that about $850 million is actually coming from working capital initiatives.
All I would say at this stage as we have a similar if not bigger number of comment on 2021, So we expect a very big.
Sort of coming from working capital in 21 offset to some extent by dish. The slippage slippage of 300 million of Capex between two years. So we are very very.
Confident on the long term ability to drive.
Substantial cash flow in the business, but each we don't want to give guidance because it's quite volatile depending on investment decisions were taken year.
And those that on the on the initial funding piece I mean, we're really aware of the government proposal there and therefore, you can you should expect our all to be in our guidance into the ebbs and flows of our working capital between between the two years.
Okay. Thanks.
Our next question comes from the line of Ricky Goldwasser from Morgan Stanley. Your line is open.
Good morning so.
And one follow up question on on the earnings impact.
You talked about 225 to 30 cents EPS per quarter, and first half versus the 26 in the fourth quarter.
Yeah.
Seems to be on September 2nd liens, and some new construction Stan.
During any day today.
Asking about potential.
Drastically section.
In London and also.
And also in Europe.
So is that.
Is that included.
In there in your.
$600 million headroom in the first half just kind of like trying to understand.
There's kind of like a second wave, including and Dennis and then secondly debt.
Turning back to the CEO search.
If you can give us some color on what.
What type of expansion team.
In EMEA second another 2%.
Thanks, Healtheintent Accenture sales tax.
Or capex, given kind of the transformation effort underway to market.
On his seems to be heading thank you.
Well, let me just over the.
Over the Gan such 20, as I said 25 to 30 cents. So call. It 250 to 300 in each quarter.
So a total of 500 to 600 in the first half that would assume that.
The best way to think about this is in the UK specifically.
It would assume maybe a five percentage point improvement in comp sales versus the Q4. So it does.
Not substantially improve on the profile versus Q4, and as we said on the comments gradual improvement if there was a significant lockdown.
It would have a negative impact versus what we just provided as guidance on the call.
The question is we don't believe we probably think the UK is the one countries over multi lockdowns, it's quite unpredictable.
We don't see a major risk of slowdowns in the us that might be the local lockdowns whatnot nationwide. So the UK you're right to ask the question.
So it could present.
As to the projections.
Well, we clearly said in the remarks, though there is two pieces of the remarks, we said as we didn't assume large scale lockdowns, but we also didnt approve them assume any contributions from vaccinations and our way of looking at this is lei risk of large scale lockdowns has a lower probability volatile.
Larger number and then Lee the likely upside coming from vaccinations is medium to high probability, but it's a lower number and we would see both of those factors being somewhat balance, but I fully agree. What your question is if there is going to be a tighter lockdown, it's going to be in the UK.
Okay.
Our issue if you think about it isn't across the entire store portfolio our issue in the us and our issue in the EU and the UK is the exact same it's the big cities and.
And as that are that are dependent on tourism as well and as anything we have in tourist destination. So as airports train stations. Our UK business has a significance predominant skew two large cities and tourist locations and land.
And then the biggest shortfalls were seen in the US are in New York, Chicago, San Francisco again, large cities, but concentrated groups of people and large amounts of tourism. So what we actually gave them the point in the script. If you take these larger than destination is down.
9%.
In terms of foot traffic is less in terms of revenue, it's about 24%, but if you actually take the flip side of that our rural stores in the us are up 12%.
So there is a it's a tale of two cities. If you like so the locked down our concern was most in the UK is around the London area in the big cities.
I don't know how widespread lockdown as a much lesser impact so I hope that's helpful. As you think through your model.
Ill just add one thing Rick you on this point in the UK as Jim said in prepared comments that the growth online in the UK has been great. The capacity has been expanded so we're in a much better position to manage that risk and we were at the start the pandemic.
Under this brand continues to be very strong in health and beauty. So again I think we can manage that last mile nematode emerging settled on discrepant.
For the future to include the soon to be.
CEO of course the border.
Instead of going to a total amount.
Analysis.
And they have created a community.
And.
Uh huh.
We cannot Andy the information on what is happening.
As you as you understand.
Clearly if you look at what we have been told you in the last two quarters.
So we see that we are doing it be aircraft sales in a modern design and modernizing our company indeed, utilizing our company, even though it's not.
Evident that we have.
Really changing entity in the in our company and.
And so the new Chief Executive Mark.
Must be some land.
We need to continue DSS, where mission, therefore should not be someone who understands their care for sure, but I cannot even further details now.
Thank you.
Our next question comes from the line of Robert Jones from Goldman Sachs. Your line is open.
Great. Thanks for taking the question James analogy discussed a few the investments you're expecting to make next year I was wondering and energy and you help size the number of the headwinds and Tailwinds, but I was wondering if you could maybe just give us a little bit more detail on how significant you're envisioning those investments to be in maybe.
Anything around timing would be helpful. And then just unrelated lead to thinking about next year I know last quarter, you called out a fairly significant headwinds from reimbursement rate pressure I was just wondering what you're anticipating on the reimbursement rate front in 2001 relative to what we saw this year. Thanks so much.
Yes, I live in Libya in general comment on the.
Investments I think you can generally.
Assumed equal phasing across the year.
This is a combination of about seven or eight different largish investments across pharmacy and.
Retail.
So its generally.
It's a billion dollars audits.
It's 60% Capex and 40% expense.
If you then get into reimbursement on on the 100 of Dallas. After this is if you think true as your product your income statement for by quarter for the first half of the year, we're still working on the older. The prior year contracts because they run on a calendar year. So we will have we.
Reimbursement pressure in the first half.
Coal that will be pressure in the first half on front of store margins because the mix isn't very good.
Millennial club for the second half of the year.
You will have more favorable reimbursement on a year on year basis basis, as a new set of contract commitments.
And then in the second half as Youre recovering from covered margins will start coming back on the retail business and in particular in the UK that goes as we lost sales we lost a lot of discretionary category sales with much higher margins. So if as you as you pointed out the year I would say the biggest pressure is not an overhead press.
Sure. The biggest pressure is actually it's the change in the trajectory on gross margin.
I don't know Alex you have a point on this year or maybe speak.
Speak to the investment 0.1st of all in terms of rental customer seed investment plan for when it will impact our business I think what today, we've announced the board is really significant it really is the re platforming of our loyalty card under my Walgreens, you're going to see this happen in November 1st of all digitally than physically.
And you'll see us talking directly to 100 million of our loyal customers about the additional benefits are going to get from the bill.
The business with Walgreens.
And I think it's going to have elements for example, a digital wallet digital receipts is going at a lot of health information coming through as well and that's the start of the transformation of.
Of this approach and will be core customer engagement platform and its all bill and personalization as I described in prepared comments, we should feel really good about as weve invested already with Microsoft and moving our data to the cloud has already really invested at understanding you know what different ways to talk to customers in a more personalized way.
Your mass customization you saw the numbers in the prepared remarks.
Secondly, which we think is really differentiating you always spoken about the positioning of our last mile was up.
Pharmacies being within 10 minutes of 75% of Americans suicide.
So this idea of and as little as 30 minutes offering a pickup we think redefined committees for us.
Also for the marketplace Sonastar slight tomorrow and will be complete across America by late mid to late November and every single store. So.
So these are real impacts on our customers will experience a walgreens brand both in the front end and pharmacy and really continue to build on that as well. So you can tell my excitement I hope. This is a long time building is a big organization to build this out and then we've had some great support from the town Weve taken to business.
Also from a great partners like Microsoft Adobe mandate Sep. So we're getting going on there of course, we're going to see the impact on our business and particularly.
Particularly in the second half of 21.
Great. Thanks, so much.
And we have time for one more question today. Our final question will come from the line of Lisa Gill from JP Morgan Your line is open.
So much for taking my question good morning.
I just want to understand your expectations around economic downturn, we talked a lot about how bad but you know we can have a stimulus here any last it's anticipated that maybe it does come after the election, we don't know what that looks like.
About unemployment trends going into 2021 can you maybe just talk about what your expectations are about an economic downturn and then as we think about data lack said it can scale as well as anticipated and Biden has talked about expansion as the Sta and Bailey.
Extending it maybe perhaps through Medicaid programs, our EBITDA states that didn't have EBITDA can just remind us of the impact that you had back in 2009 2010 with the Bath expansion.
Thank you, Matt it's understandable that thanks.
Yep.
Thats a tough question on the economic one because it actually completely mergers which are assessment on the impacts of coal that but I think it's a fair question. If you go back a year ago. We would have said that the model of the company was to grow script.
Scripts at 4% to 5% range.
We've assumed in general and economic impact and Thats mix with Covance of about one percentage point.
In general across both retail and Polk and pharmacy in the U.S.
So we've looked at the economics, we've actually seen that play out in the most recent quarter. So we had quite.
Quite a strong June July and some slowdown was evident in August and a slight slowdown in September as well later those less stimulus money out there and you can actually see the impacts so I think you'll see it across retail in general So a lot does depend the forecast to depend on the system.
Just as a point in the market, particularly in the US which is very sensitive for this but as I said as you know I think if you were to plot out a pharmacy business you'd have to assume that theres, probably a 1% loss.
Headwind in 2021.
Essentially coming from the fact that in the earlier part of the year you have.
You have less new Scripps Institute, the scripts and you do have some economic impacts and then you have an economic impact on the front of store probably the same percentage point.
Bear in mind, the Xenosure process out we did a comp in the us business of 1.6 in.
The full year of 2020.
It's unlikely to be in excess of 1.6 and 21, because if you follow what I just said, we've got a negative economic impact on the front of store did benefit from over.
Related stock building on the PPD category.
During the course of 2020, so I think the the growth rate in reach.
Retail will moderate year on year and the growth rate in the script growth will probably go up slightly because we have a very poor on Q3 and more 2020. So it's really hard to dissect out the economics, but as we put our plans together, we had like a point to a point and a half and overhead as economic impact.
We've built in an assumption of a second stimulus of $600, which didnt happen largely there's only select states for them will be $300. So, but this process of minus seasonality photos.
The sales.
I'm going to do they see so I think.
No no our strategy has always been to take care of customers and be very customer focused size I've explained in our hands. So.
To see before when.
When you think of it.
This will effect to the pharmacy business for for example, within our core business you know, we have underrepresentation into Medicaid space today in Walgreens.
The majority of that is managed Medicaid and we've not been particularly successful are going in these narrow networks, because we don't have that relationship with the key PBM.
That we will be happy with what we're going to have to be honest and I think that's pretty clear.
However, due to the lower.
A lot of movement in a space for example, California and New York are talking about going back to fee for service.
And five the Governor's Anastase already authorized five and it's likely to happen and next year. So.
So as you think of the Affordable Care Act as you think of Ics access.
Getting more access to more patients to more healthcare services, including including pharmacies. We think our strategy is well positioned and we continue to work very very hard to make sure we get our cost right, we get our care right and we in particular focus on our key strength of pharmacy and healthcare services.
Especially when it comes online we think if things go glue in America, we'd be Medicaid and how these networks may change in the future.
Okay. Thank you very much indeed, all the last question. We have time for I know there were plenty of you want to ask other questions. The IR team are available over the next days and weeks and we look forward to speaking to you on answering your questions. Thank you and with that I'll hand over to these are operators trying to end the call. Thank you.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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