Q2 2021 Walgreens Boots Alliance Inc Earnings Call
Okay.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Walgreens Boots Alliance, Inc. Second quarter 2021, earning conference call at.
At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session. Bask of question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero and.
Now I'd like to hand, the conference over today to Mr. Gerald Gradwell Senior Vice President of Investor Relations and special projects. Please go ahead.
Good morning, ladies and gentlemen, and welcome to earnings call for the second quarter of fiscal year 2021 form of coal with me today are rolled through the Chief Executive Officer of Walgreens Boots Alliance, James Clear Global Chief Financial Officer, Eric <unk> Co Chief operating officer of Walgreens Boots Alliance at all form of fee.
Stefano Pessina is also there for any relevant questions this quarter of <unk>.
Transitioning fully to his executive chairman role.
Before I hand, you over to Ross to make some opening comments I will 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 that are based on our current market competitive and regulatory expectations at all subject to <unk>.
Risks and uncertainties that could cause actual results to vary materially 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.
Please see our latest form 10-K, and 10-Q for a discussion of risk factors as they relate to forward looking statements of note in particular that these forward looking statements may be affected by risks related to the spread and impact of the Covid pandemic in today's presentation, we will use certain non-GAAP financial measures.
Failure 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. In addition to our earnings announcement. This morning, we issued an 8-K, providing a recast of our historical financial statements to reflect the pending disposition of our at.
Alliance healthcare business as well as our new reportable operating segments. Please be aware that we made during this presentation and answers to questions make reference to the information contained in that 8-K youll find of linked to the webcast on our Investor Relations website at Investor Day at Walgreens Boots Alliance Dot com.
The earnings announcement the presentation materials from this call and the 8-K are all available on the website. After this call. The presentation of webcast will be archived on the website for 12 months.
I will now hand, you over at <unk>.
Thank you Gerald.
Wanted to begin by saying, how glad I am to be joining you today for my first earnings call since starting at Walgreens Boots Alliance at.
At $2 five weeks on the job Im optimistic about the future of our company.
And our ability to drive sustainable long term value for our shareholders.
I accepted this opportunity because of the vast potential that lies ahead for debt to EBITDA and my initial impressions have been confirmed even more after spending some early days in the business.
During this time of met incredible leaders partners and customers.
And I've been breathe and depth on some of our core initiatives, including our vaccine rollout.
I've also gained a greater understanding of our operations by visiting some of our stores and specialty pharmacies.
What I've learned already is that we have many incredibly passionate and talented team members who are deeply motivated by our purpose to help people across the world lead healthier and happier lives and I definitely share their passion, it's truly remarkable how W. VA is uniquely positioned with our wide global reach end.
Unmatched expertise to be a force for good in the lives of millions of people every day of course, nothing demonstrates our impact more than the leadership, we have shown during the pandemic.
Ensuring personal protective equipment is on channels.
Keeping our doors open to continue providing vital medications by setting up mobile units and neighborhoods without pharmacy access.
By launching new pickup and delivery options.
By Rolling out extensive testing and vaccination programs in record time, we've played a vital role in their health and wellness of our communities like never before we.
We now have to take some of the lessons that we've learned in the last year and build on them.
When faced with a terrible deadly virus is obvious of team moved quickly.
Thought more creatively and work together more closely and with great collaboration.
This shared experience allows the team to appreciate with WNBA provides to its customers and patients even more profoundly.
And these insights need to continue to propel us forward, along with decisive leadership and clear strategic direction at.
As a team we will be intensely focused on accelerating our growth.
Instilling a culture of agility.
Establishing new health care solutions.
And building best in class consumer engagement across all of <unk>.
Our patients and customers had deep loyalty and trust in our brands.
And we need to continue to find ways that we can serve in breach of them even better.
Our latest mass personalization programs.
Omni channel capabilities are definitely gaining traction.
But we are only just beginning to see what can be achieved particularly with more than 100 million loyalty members in the U S.
We must lead the way to the health care of the future with consumer centric tech enabled platforms that bring together the best of our physical locations and digital assets and engage with our patients and customers on a one to one level.
Of course, you'll be hearing much more for me as I continue to spend more time, assessing our strengths and our challenges.
Some of these challenges can be address more immediately and others will take more time to solve.
And there are already several major initiatives happening across the business.
Take on our most pressing challenges you will hear more about later in the call.
But with strong positions in core markets World class partnerships and unmatched asset we have all of that we need to overcome obstacles and reach new heights.
Overall, we're in a strong financial position to invest in future growth and to deliver shareholder returns.
And the earnings we are reporting today show further evidence of that.
With Q2 results ahead of expectations and.
And giving us the confidence to raise full year guidance.
Despite the significant operational impacts from Covid.
So with that I'll turn it over to Jane and then Alex to take us into more depth on both our result and operation.
<unk>.
Thank you Ross and good morning.
On the sixth of January we announced the sale of the majority of our alliance healthcare business to Amerisourcebergen for $6 $5 billion.
With the announcement the related assets and liabilities on the operating results of the business to be divested.
Being reported as discontinued operations and are reflected as such in the second quarter financial results.
As a result of the transaction the company has reorganized its continuing operations into two reporting segments, the United States and the international.
The United States segment includes our Walgreens business, and our Alliance Rx Walgreens Prime joint venture.
<unk> will be consolidated within the U S segment.
And our equity earnings in Amerisourcebergen are also included within the segment.
The International segment includes all of our operating businesses outside of the U S included share of our boots, UK Republic of Ireland and operations, our retail pharmacy operations in Mexico, Chile, Thailand.
Our franchising business and our wholesale JV in Germany.
Please note that corporate overhead costs and costs associated with development of the health care technologies for growth are reported separately outside of the two operating segments.
Please refer to our 8-K filing for further information with that out of the way, let's turn now to our results.
Adjusted EPS came in at $1 40.
Well ahead of our expectations and eight 2% lower than prior year on a constant currency basis on.
On a continuing basis adjusted EPS was $1 26, a year on year of decline of 10, 8%.
COVID-19 continues to have a material impact on our retail and pharmacy businesses.
We experienced of winter surge in COVID-19 incidents across many of our markets in the U K stricter restrictions in November which we outlined on the last earnings call eased temporarily in early December before going into a full lockdown state in January and February.
Cross the U S. Many states and local communities of bumps of renewed measures designed to stem the increases.
As we indicated on our last call restrictions and social distancing have caused few incidences to be significantly lower than prior year levels.
And this has had a significant impact on both seasonal pharmacy scripts on front of store cough cold flu categories at.
Additionally, we invested heavily in SG&A to both safeguard our store environments as well as preparing for the rollout of mass vaccinations.
Overall, we estimate of adverse COVID-19 impact of between 40 and 45 per share in the second quarter. Despite.
Despite this our second quarter performance was better than expected as we delivered improved operational performance across a number of fronts. In particular, we saw better pharmacy margins continued strong cost management increased digital participation and our international segment exceeded expectations.
In summary, we continue to actively manage true COVID-19 related headwinds and we remain confident of delivering strong growth in the second half of the fiscal year.
The flu season subsides on COVID-19 vaccinations etcetera.
Cash generation was strong with year to date free cash flow of $1 9 billion.
Four 8% higher than prior year.
Finally based on the strength of our underlying performance, we are increasing our full year adjusted EPS guidance from low single digit growth to mid to high single digit growth.
Let's now look in more detail at the results.
Second quarter sales were up four 6%, including a currency tailwind of one 1%.
COVID-19 had a negative impact of more than four percentage points in the quarter. However, this was largely offset by the formation of the Germany JV.
Adjusted operating income declined 22, 9% on a constant currency basis, reflecting higher than expected COVID-19 impacts of approximately $450 million to $500 million.
Partially offset by stronger underlying business performance and good cost management.
Total adjusted EPS includes both discontinued operations and continuing operations was $1 40 in the quarter for constant currency decline of eight 2%.
Adjusted EPS for discontinued operations was <unk> 14 in the quarter up 26% versus prior year.
The result includes a non operational benefit of approximately <unk> of.
The accounting for discontinued operations required us to stop depreciating the divested of assets.
On a continuing basis adjusted EPS was $1 26 at <unk>.
Constant currency decline of 10, 8% of <unk>.
Favorable tax rate contributed eight percentage points of growth on prior year of share repurchase activity contributed an additional two percentage points of EPS growth.
However, these were more than offset by the very significant 27% to 31 percentage points impact from COVID-19.
The lower second quarter tax rate was mostly due to discrete tax benefits on a year to date basis. The tax rate is tracking slightly better than our full year expectations.
Finally on a continuing basis GAAP EPS increased eight 7% with a gain on the partial sale of our investments in option care health and a lower effective tax rate.
Partly offset by lower operating income due to COVID-19.
Now, let's move to the year to date highlights.
Year to date sales were up four 8%, including a currency tailwind of 0.8% on a constant currency basis sales advanced 4%.
Adjusted operating income declined 17, 6% on a constant currency basis, reflecting higher than expected COVID-19 impacts of approximately 25 percentage points offset in part by favorable underlying business performance, including strong cost management across all businesses.
Yeah.
Total adjusted EPS was $2 62 at constant currency decline of nine 8% on a continuing basis adjusted EPS was $2 36.
Our constant currency decline of 12% entirely due to COVID-19 impacts.
GAAP EPS decreased 66, 7%, mainly driven by of charge within our equity earnings in Amerisourcebergen, partially offset by a gain on the partial sales of our investment in the option care health now, let's move to the U S segment.
Sales increased <unk>, 4% in the quarter with 3% growth in pharmacy, partially offset by lower retail sales and of 2020 leap year.
Both retail and pharmacy continues to be adversely impacted by COVID-19, including lower foot traffic significantly lower flu incidents down an estimated 40% and a reduction.
<unk> and new to therapy prescriptions.
Despite the benefit from COVID-19, immunizations and pressing overall the negative revenue impact was approximately 400 basis points in the quarter at.
Adjusted gross profit declined three 2%.
With lower pharmacy reimbursement script volume and retail volume, partially offset by procurement savings and higher retail gross margin.
Adjusted SG&A spend increased two 1% in the quarter to 17, 1% of sales.
0.3 percentage points higher of them last year.
The increase was mainly due to higher investments in strategic initiatives, including approximately $80 million.
To prepare and rollout of COVID-19 vaccinations at.
Adjusted operating income declined 18, 2%, excluding COVID-19 impacts.
<unk> increased low single digits.
Now, let's look in more detail at U S pharmacy.
Total pharmacy sales increased 3% versus prior year with brand inflation, partly offset by store optimization programs and the linked period comparable pharmacy sales were up four 5% while comp scripts declined one 1%.
Im exceptionally weak flu season, combined with lower Doctor visits negatively impacted script growth by around 480 basis points. They fall within the quarter also negatively impacted comp scripts by around 100 basis points well.
At this impactful wash out by the end of the year.
These factors were only partly offset by over 4 million Covid, 19, vaccinations, which boosted script growth by around 140 basis points.
Market share for the quarter was 29% down 30 basis points versus prior year, including the impact of our store optimization programs.
Adjusted gross profit, which included some favorable phasing and the lapping of onetime items from last year decreased low single digits.
Procurement savings were more than offset by reimbursement pressure and lower scripts.
Turning next to our U S retail business.
Total retail sales declined six 6% in the quarter impacted by our store optimization programs.
The leap year.
Comp retail sales decreased three 5% and excluding tobacco and E cigarettes comps were down two 7%.
Of the exceptionally low level of flu incidences led to significant declines in cough cold flu products and this negatively impacted retail comps by 350 basis points.
Excluding cough cold flu or health and wellness business fits well with sales up 9%.
However, beauty declined eight 8%, reflecting a category that is heavily impacted by COVID-19, and non comparable promotional activity.
Digitally initiated sales grew 78% in the quarter to $370 million.
Gross profit declined mid single digits with lower sales only partly offset by an increase in gross margin of 60 basis points.
Driven by reduced seasonal clearance costs and promotional optimization.
Turning next to the international segment and as usual I'll talk to constant currency numbers.
Our international segment continued to be heavily impacted by COVID-19, with higher incidence rates and additional lockdowns across a number of geographies. Despite this we are very encouraged at the business outperformed expectations due to focused execution, notably in boots, UK, Ireland and optics.
<unk> and strong growth across all of our e-commerce businesses.
Sales increased 23, 9% in the quarter, including at 34 percentage point contribution from the formation of our wholesale joint venture in Germany.
Excluding this benefit sales were down nine 9% with declines in boots, UK, partially offset by growth in our existing Germany business Latin America on boots are loans.
Gross profit declined 13, 4% due almost entirely to the decline in boots UK retail sales.
Cost management was very effective in the quarter with SG&A reduced nine 6% year on year.
This led to an adjusted operating profit of $146 million in the quarter down 31% to 8% versus prior year.
It is worth noting that the German wholesale JV is only modestly profitable region and will have a dilutive impact on the absolute margin of this segment, we anticipate ongoing Oi margin dilution in the region of two five percentage points at <unk>.
Germany wholesale as a percentage of total segment sales increases from approximately 35% prior to the JV formation to just above 50% post formation.
Let's now look in more detail at boots UK.
Comparable pharmacy sales increased three 2%.
Lower scripts reflected reduced doctor visits as well as subdued prescription demand, but this was more than offset by favorable phasing of NHS funding on stronger demand for services.
Comparable retail sales declined 17, 9% as footfall remained well below last year.
This was particularly evident in major high Street in travel locations, where our flagship health and beauty stores and convenience retail stores were down around 17% levels not seen since last night.
Overall boots UK retail store transactions were down around 50% year on year compensated in part by an average basket size that was around 30% bigger than last year.
Boots Dot com delivered yet another exceptional performance with sales growth of 105% as we continued to build out and strengthen our omni channel offering.
During the full Lockdowns in January and February boots, Dot com sales growth was closer to 180%.
The UK is one of the fastest immunized or is in the world and the government has already defined a path to a complete reopening of the country.
This will lead to improved market conditions as we exit the year.
Turning next to cash flow.
Free cash flow was strong with $1 $9 billion delivered in the first half of the year.
Up $85 million year on year, despite lapping a strong prior year cash flow performance.
We remain very focused on working capital improvement initiatives and continue to remove excess inventory and extend payment terms to more optimal levels.
Turning now to full year guidance.
Based on the first half results and the outlook for the balance of the year, we are raising our adjusted EPS guidance to mid to high single digit growth in constant currencies.
At a macro level the improved profit outlook reflects two key factors.
Firstly, we delivered stronger than expected first half performance.
And successfully managed through a much tougher of COVID-19 environment than we expected when we announced our original guidance.
Secondly, while the situation remains fluid given the ongoing COVID-19 dynamics, we remain committed to delivering strong EPS growth in the second half of the year.
As we look at the full year of headwinds, we are managing through an exceptionally weak cough cold flu season and persistent lockdowns.
And we will see some continuation into the third quarter.
We are also increasing our investments across Omnichannel, COVID-19, vaccinations, and our healthcare technology startup.
However, these will be more than offset by favorable international performance strong cost management better than expected pharmacy margins of favorable tax rate and importantly, the accelerating rollout of COVID-19 vaccinations in the U S.
Our forecast is predicated on administering around 26% to 34 million vaccinations this fiscal year.
Of that of course is very dependent upon the availability of supply.
The forecast includes a benefit from the new $40 of vaccination rates. However, it is not yet clear if the rate will be applied by all of the payers.
In summary, we are raising our full year guidance to reflect strong first half performance and improved visibility around second half EPS growth drivers.
But please recognize that there will be ongoing volatility associated with COVID-19 and of vaccine rollout.
Let me now cover our key <unk> initiatives.
First a few updates on our recent M&A activity.
Since our last call and announced in January we took a majority stake in IAA, an innovative pharmacy automation company that will underpin our future pharmacy operations.
The alliance healthcare transaction continues to be on track to close this fiscal year also within the quarter, we trimmed our ownership of option care health.
Resulting in approximately $230 million of cash proceeds.
Further we are making good progress on establishing our tech enabled health care startup.
Product development and engineering is well underway and we have also started development of the physical channel.
We recently completed a minority investment in the.
Digital provider of health care of scheduling and gaps in care management and.
And we will incorporate the Renaissance schedule, Inc capabilities, and our overall technology platform.
In summary, we are on track moving at pace I'm very focused on ensuring a successful launch.
Our transformational cost management program is also very much on plan our savings goal of in excess of $2 billion.
Included around $80 million of savings from the alliance healthcare of business, we divested.
However, we are not reducing the long term goal to exclude the divested businesses.
As we have other of cost saving opportunities to offset the lost of Alliance hotel contribution.
Now, let's turn to the international initiatives.
As I said last quarter, one of our top priorities is to turnaround boots, UK and return it to profitable growth.
The strength of the boots brand is a central pillar supporting a recovery.
Boots reputation as measured by you Gov is now at a five year high.
As of June focus on cost efficiencies and investing in our future continues at pace.
Our store based online fulfillment model is proving to be an effective way of ensuring we can flex our distribution capacity to meet online demand in fact December was our largest ever online month Android.
<unk> second quarter sales growth of 105% foodstuffs com represented 26% of our total UK retail sales.
February saw the launch of boots online hilltop conveniently connecting customers to all of boots existing health care services.
As well as an increasing range of local doctors therapists and dermatologists net.
Averaging walgreens successfully find care platform.
Hubs aim is to help people in the U K find accessible and affordable healthcare services, where and when they need them.
In store investments continue at pace.
And our targeted at enhancing the customer experience at foot traffic returns to the high Street.
During the quarter, we rolled out new number seven counters fixtures and more than 100 additional stores.
Largely completing our planned UK rollout and taking the total to over 750 stores.
Building on our success in previous quarters, we have added new on trend beauty brands, and we are attracting new customers to boots.
Building on our growing reputation for stocking Coke brands that were once only available from specialist beauty sites.
We continued to play a key role in the community with 25 major of COVID-19 vaccination hubs now operated by Boots UK.
And we have now completed over $2 6 million Covid tests for the NHS.
The formation of the wholesale JV in Germany is proceeding according to plan.
Combined annual revenues will exceed $9 billion, and we expect to unlock improved profitability over the coming years.
Finally, our joint venture in China continues to grow nicely, adding 350 stores since the beginning of the fiscal year I am taking the total to almost 7900 locations.
Now, let me hand, it over to Alec to speak to the U S initiatives.
Thank you James we've had another busy quarter as we continued to execute against our strategic priorities of more than anything of pharmacy business, transforming our retail operations and developing our digital capabilities.
In responding to COVID-19, we have accelerated the evolution of our operations across United States on Walgreens continues to play a key role on the front lines of the pandemic.
We passionately to thank each and every one of our associates to support of patients and customers.
Extremely challenging environment.
One thing that's become crystal clear during the past year of the pandemic.
The importance of the pharmacy, providing health care.
Community both of.
Physical locations and through digital platforms is greater than ever and reinforces our belief in the strategic significance of at all of the pharmacist on the Walgreens network.
Working with federal and state governments, we have accelerates at a rule in the fight against the pandemic, we've rapidly mobilized our operations to play our part and of nationwide Rollouts of the Covid vaccine program.
By the quarter end, our teams of events at approximately $4 1 million vaccines to patients in long term care facilities at.
Fox nation sites on in Walgreens pharmacies.
And importantly, we've partnered with local officials to bring vaccine administration.
Into local communities and to the most vulnerable populations at am.
March we administer at another 4 million vaccines taken a total of over $8 million to date.
At the times of loss of earnings call. We had over 30000 qualified health care associates ready to deploy to the vaccination program.
At this number is now over 59000 with capacity to administer vaccines at <unk> locations across 49 States and D C on Puerto Rico.
We're also partnering with Uber to address the problem of equal access to vaccines amongst Fundable communities Inc.
<unk> many more Americans are able to visit of vaccination location.
We are also work to improve accessibility to appointments and scheduling and all of this.
This month, we introduced Covid vaccination of booking on the mine Walgreens Op, Inc.
I am of partnering with nuance to offer voice recognition and traditional method of accessing appointments.
We've undertaken more than five moving COVID-19 tests since the pandemic began last year and today, we offer testing and find those locations.
We're working with partners to expand their testing solutions.
We've launched a new business to business side of this code test of protect allowing employees.
To provide testing and vaccination sort of emphasis to the employees.
Improving the efficiency of our pharmacies as our top priority both to manage costs, but more importantly to free up pharma at this time.
To provide valuable integrated healthcare services to our customers in the local community.
As James mentioned at all of.
Of this year, we announced a majority stake in a company, which brings automated pharmacy solutions and enhance workflow capabilities to the Walgreens network.
Together, we are establishing a force local automated pharmacy Microfilament center in Phoenix in April.
At this sensitive peers maintenance medications for qualifying patients in the area.
The end delivered to their local walgreens pharmacy or to whom depending on the patient's preferred routes.
We are now building out of second market.
Which you will start operating in the summer.
As we create a more efficient pharmacy operations in part due to the IAA enabled automated local hub and spoke model, we have exciting plans to enable our pharmacists to play a key part of it.
<unk> integrated care models, we are on track to open our next 40 village medical at Walgreens locations by the end of the summer.
You May now 14 locations up and running in Houston and Phoenix.
As I've said, many times by coordinating our pharmacists with primary care doctors weekly of more integrated and engaging patient experience and we believe this will help to lower the cost of care our village and the relationships grew beyond their physical locations by also providing an integration of telehealth offerings.
Further on the digital healthcare fund our find care platform continues to grow accelerated by the pandemic find care connect patients to telehealth providers local health care side of the seas benefits enrollment on health care educational tools, we are building, our user base and increasing the number of providers accessible on the <unk>.
<unk>.
If I end care App has now reached of white audience and is gaining traction.
As of traffic online and on the App was just below $70 million in the quarter.
While much of this traffic was driven by Covid vaccination and testing of inquiries non COVID-19 related visits increased by 92% versus the prior quarter. We now have more than 40 volume providers on the platform delivering over 65 services Inc.
50 states treating over 120 conditions.
Turning next to retail transformation.
As you know we launched our new loyalty program My Walgreens Black November preventing all members with new royalty benefits cash line of products and services.
<unk> has grown from 40 million to approximately 56 million to date, which is of 41% increase versus the prior quarter Didnt last one mobile app usage was up 37% versus prior year and most importantly, the op is resonating with our most valuable customers last month My Walgreens net promoter score was.
41% higher than the score for balance of awards, our previous loyalty program.
We are continuing to engage with our customers through of mass customization strategy, which boosted retail sales by 30 basis points in the quarter building on the 100 basis points lift in the second quarter of last year.
At the pandemic progresses, we are really focused on giving our customers access to retail products, when and where we want them.
A combination of physical stores and digital platforms with customers, having a choice of store home delivery curbside or drive thru pickup.
These enhanced retail pickup of auctions are contributing to strong digital growth.
Last november's launch over 4 million pickup orders have been completed to date.
An increase of 78% in digitally initiatives retail sales in the quarter.
We don't have one of the most convenient and quickest omni channel retail options available in the U S with pickup orders completed at just 22 minutes on average from placing the order to having net productivity year high end.
We've also continued to expand our same day last mile delivery capabilities by adding <unk> of emission might partner. In addition to the existing partnerships with force meets entourage.
As we continue to redefine of core Omnichannel convenience offerings, we're leveraging the data we generate from.
At the time in which additional products onset of disease, our customers want.
Identifying new business models and alternative income streams.
A great example of this is the development of our financial services offering which will be available later this summer.
And yesterday, we announced an agreement with income payments.
At global payments technology company to provide convenient unacceptable financial services options for our customers today.
Together, we will launch of new Bank account with a Mastercard debit card that will serve Walgreens short force both in store and online and I'll end My Walgreens cash awards in all purchases.
Overall, we are really pleased with the progress we've made on our pharmacy free.
Sales on digital priorities in the quarter.
But I assure you. This is just the beginning of our assets are uniquely positioned in the local community.
With the ever growing list of capabilities, we have the opportunity to expand and deepen our.
<unk> chips with patients and customers.
I will now hand, you back to growth.
Thank you Alex.
As you've heard a lot has been accomplished this quarter.
And while operationally our performance has been impacted by COVID-19, overall, we've had a good financial quarter and.
And as a result, we've raised our full year EPS guidance. However, acknowledging that there is still work to be done to stabilize the base business.
And on that note I want to take this moment to thank Stefano Pessina for everything that he has done to bring <unk> to the point, where it is today with the foundation.
<unk> for future growth and looking forward to working with this team and the entire board as we capitalize on the incredible opportunities in front of us at.
Again, you don't have to look any further than our response to the pandemic to understand what this company is truly capable of in the future.
As just one example of that we've already administered 8 million vaccinations in the U S and a few short months many of them to essential workers, such as health care professionals and features as well as underserved and minority communities.
And we're poised to deliver of millions more vaccinations in the day.
At.
Another opportunity that we have is how we apply the funds from the sale of our alliance healthcare assets.
Which will allow us to reinvest in health care and further focus on our core businesses.
I intend to move swiftly and decisively to lead <unk> forward.
And in order to do that I have begun a detailed review of our long range business plans across the company.
As well as how we make investments and allocate capital.
I'm, taking a close look at where we should reinvest in our business and how we drive financial returns as you know we also.
We'll have a broad range of valuable equity investment across distribution healthcare and pharmacy and I'm reviewing each of those to ensure they provide strategic benefit. In addition to financial return having been on board for only two five weeks, it's simply too early for me to discuss anything further.
At this point, but I do look forward to sharing my further perspective.
<unk> had more time to study the company from the inside.
I plan to meet with many of our shareholders in due time.
And to communicate with you regularly and with transparency.
There will be much more to discuss in later calls and meetings.
But for now.
I am energized to begin planning for the future.
And I am very excited about the opportunities ahead.
At that I will turn it over to the operator and open the call for your questions.
Thank you I'd like to ask a question at this time. Please press Star then the number one on your telephone keypad, if you'd like.
<unk> per your question press the pound key.
At yourself to one question.
First question comes from Kevin Caliendo with UBS.
Hi, Thanks for taking my call first Raj congratulations in the new role and best of luck going forward.
<unk>.
I really wanted to focus on the.
Second half guidance.
Of all trying to figure out sort of what is the jump off point for fiscal 'twenty, two and your vaccine number the guidance in terms of the number of vaccines.
It would imply a pretty big benefit given the $40 reimbursement rate.
Yes, the second half guidance number was a little bit softer than.
I think where we are and where the street was we didn't really have that baked in there or are there any additional costs.
The second half debt.
Pulling forward if you can maybe give us some explanation.
To that or anything else debt might be one time ish in the second half of the year.
And then.
How to think about what the jump off point would be for fiscal 'twenty. Two if you think about trying to grow and model beyond this fiscal year.
Yeah, Hi, Kevin James.
I'm not sure of why you believe the second half of softer.
We've given a range today of forward some loans.
9%, that's mid to high end.
On the 4% that would be 26% growth and of the 9% of it would be 39% growth.
So that's the first point to is when we originally gave guidance of at the start of the year. We said that we expect the second half to grow at 30% to 40.
So actually we see our current guidance is being solidly within the guidance, we gave more than six months ago.
Right.
I really wanted to have this one.
Because you asked what's the one time in the second half.
Overall, and you talk about the vaccine opportunities at 30 million.
Compared to our original guidance.
Unless of six months ago on compared to three months ago of Covid is actually negative.
So you probably put in the positive of vaccinations, but cough cold flu.
Areas of full of Lockdowns in the U K and.
Tight restrictions in the U S of have all completely.
The offset the vaccine opportunity so actually if we look at of compared to your original guidance.
Covid net after the benefit of vaccinations has about 13 cents negative.
And some of that will continue into the third quarter. So if you look at the dynamics going forward third quarter of the first one.
We are studying of lockdown in the U K.
And retail will reopen I think it's April 13.
All of the rest of the UK will be back for business sometime mid June so you kind of.
So effectively say that half of the third quarter of Cigna.
As the impact of any of the U K.
Look at the U S market itself right now.
Cases are at the same level as they weren't of less may 65000 per.
And one of our wireless come down we're still somewhat concerned lender that some of the negative impacts will continue into Q3.
So our view is we've done exactly what we said we would do in the second half and we're absorbing on a full year of basis about 13 cents negative. So I actually would say that the call up to mid to high single digit is actually a stronger call up when the market would have been expected.
But the.
The key the key negative in the in the second half is just continued negative COVID-19 cough cold flu lapping of negative prior year and we have the majority of the vaccination of ups.
So our most recent results in Q2, we had of $10 million benefit.
No I think that's been helpful.
Well thank you.
Next question comes from Steven Valiquette with Barclays.
Great. Thanks, Good morning, and let me offer my congrats to you at rise as well.
At this question kind of built on that.
First one of a little bit but.
You mentioned several factors leading to the increased EPS growth guidance for overall fiscal 'twenty one.
And in the first half of the year, sorry weighted into the second half of it really from the overall list of upside drivers it would be difficult.
Which is single factor you think.
I think is driving the greatest amount of EPS upside.
At overall company in fiscal 'twenty, one versus your original expectation yeah. It's a great question.
I'll start off of just repeating what I said last of Covid year on year.
Net of the.
Trillium negative so where we saw the two single biggest thought.
Five items I think I would call of.
Firstly the U K.
I would call it out of them.
And I think the ramp up and defend our position, particularly in beauty true R. e-commerce assets in the U K. So we've consistently delivered.
First.
<unk> was up 105%.
At the last two.
Two months of the quarter were up 180% of year on year. So net we're winning in beauty in the market in the UK and the competition has fallen off completely at the second thing in the U K is.
Overhead control.
At this point of the mitigation of Covid impacts so I'll call out just the number I gave on the call broker in the international segment.
Now that includes the incorporation of the German joint venture if you take out the <unk>.
M&A impact overheads in the segment were down 15% year on year that is.
And it's way ahead of what we told the team could achieve when we started out.
No.
I think there is massively massively over achieved on overheads.
And then I think at as the ecommerce assets and finally Arlen them opticians businesses are outperforming as well so it's quite of collection.
Just one of <unk>.
Performance of the UK segment of your life.
The second one is the U S segment, the big stand out there of margins and generally.
We've had a fairly dramatic impact from cough cold flu and many of our competitors have spoken about the same so flu incidents are down by.
By 40%, which is a massive number I'm not bleed straight into the seasonal scripts down 400 basis points because of that and on the front of store of 350 basis points, but overall, if you peel away the margins year on year.
The U S segment has outperformed our expectations.
Election of order margins were down year on year in the U S by 75 basis points, that's much better than the historical performance.
Retail margins were up 60 basis points, and that's been pretty consistent every quarter.
Second one is pharmacy margins come in better than we expected.
Largely due to savings out of the procurement organization on generics, but also reflecting some.
Some of accelerating deflation of generics and the more of it. So we were very happy with margins in general in the U S business and that's where we saw the biggest area of outperformance.
When you get.
The installations at thanks.
<unk> P&L as we look forward quite murky, but as you build your models vaccinations will probably be profit will be profit accretive so we should of favorable.
Origin of look for the rest of the year across the U S business as well so.
So we're feeling good about margins in the U S that was outperforming.
And then the U K segment on E Commerce on overheads.
Three big factors.
Okay, that's very helpful. Thanks.
Next question comes from Ann Hynes with Mizuho Securities.
Hi, Good morning, Thank you and congratulation Raws go ahead.
A question on the vaccine I.
<unk> per has been kind of discussion of the by administration.
They want to push more of the vaccine administration to retail settings, and I don't really think you changed your.
Our vaccine assumption in your guidance. So that's one of the case and retail finance got more allocation from the federal government what do you.
Now this walgreens at the outset capacity could be for vaccine administration, and maybe talk about any increment of cost of that were to happen. Thanks.
Hi, it's Alex here, Yeah, we were encouraged by.
Bye Bye bye announcements and the reason for that is really clear.
Alright, we're getting the vaccine in People's arms across.
Thank god he's faster in other settings.
And I think we have a highlight again the power of at Pharmacy network and the power of the pharmacist, particularly and as part of damage I think of as many federal of further closing comments.
What do you have to remember is it means more pharmacies will be involved first of all with the increased number of pharmacy.
All of us involved including more of our pharmacies for sure.
Secondly, the vaccine is coming a lot faster.
Faster than our original plans as well so we've given a range I think in Jim's prepared remarks, we said between 24 at between 26% of 34 million shots and I'll share.
And of course, depending on what we see really in the weeks ahead, we'll be able to give at.
A better internal guidance in terms of what we see thus one of the key reasons for the range of given because of that non factor. So.
Again, that's where we are we are ready we are ready with that our people are ready our network's ready of schedule.
It is ready and we are busy we're very proud of of what we're doing here and we continue also to folds of very important administration guidance, although at getting the vaccine into the underserved.
<unk> and the vulnerable communities as well because again, we're dealing with older and many other initiatives. So I think we are ready to maximize the opportunity on any.
At these sorts of People's arms as fast as we possibly can.
The forecast is predicated on around 13 million vaccinations.
The reason, we've given a relatively wide range is the availability kind of swing on the downside of that none of the upside.
And then some physically we hope to form an assumption of about $30 million.
This is higher than what we were thinking three months ago.
So it has gone up probably from 25 to 30, but at the same time.
The UK has gone into two additional months of lockdown.
And the cough cold flu has continued to be worse than we expected.
We're fairly comfortable with of $30 million.
But obviously, it's entirely dependent on the supply we receive.
We're ready to receive it.
All indications are when we get there, but there's always some risk and volatility.
Alright, thank you.
And maybe just one additional comment which I think picks up on the first question from Kevin which.
We're not gone T $40, yet for every vaccine.
Obviously, the Medicare price is being set I'm going to working with our commercial partners to make sure that we understand what we are going to pay and what im very hopeful that we'll get to that number of revenue vaccine, but that has not yet been fully confirmed either.
Next question comes from Eric Coldwell with Baird.
Hi, Thanks, Good morning Ross.
We realize it's very much too early for you to provide any specifics on numbers our questions more philosophical in nature.
I'm interested in your position on things like wages for low skilled.
Physicians as many employers of proactively moving towards of $15 minimum wage the country appears headed in that direction also your position on items like tobacco, which Walgreens has been deemphasize deemphasizing for years, but hasn't fully exited I guess in general at sort of an ESG topic.
Important.
Portance of of those kinds of initiatives to become a more ESG centric company. Thank you very much.
Eric Thanks for the question and one of the things that I've been pleasantly surprised about is the work that's happening inside the company on the ESG initiatives, particularly let me talk a little bit about wage.
Page because there is at pathway here in terms of getting there over a period of time.
Those states, where it has been of federally regulated we have match sales numbers will continue to do that and then over a period of time low.
Fly wages across the.
U S.
The second question you asked was around tobacco and whats my early read on tobacco at this company is committed to health and wellness and I think everything we've learned from the pandemic that's going to be even more of a priority. We will continue to look at tobacco, but that's one of those issues. That's really too early for me to really opine upon.
But we'll continue to look at things like that.
Yeah.
Yeah.
Next question comes from Charles <unk> with Cowen.
Yes, Thanks for taking my question and congratulations as well Ross.
A question for you obviously.
You haven't been here of that long, but.
Digital seems to be a major focus for you at <unk>.
Seemed like that was a major focus for you at Starbucks.
What do you think what do you think that that.
Of that can be for Walgreens in the future of again, what do you think that might mean in terms of.
At the digital focus as well as.
What that might result in for maybe a change of the physical store footprint for the company.
Yes. Thanks for that question Im excited about the opportunity for the digital platform here at <unk>. It was one of the pleasant surprises I received as I dug into kind of the numbers.
As to learn that we had.
Over 100 million loyalty members at this time at.
And the initial investments from the share that we've made will also enable us to accelerate in that area I'm excited at will be one of my priorities as I look at the second half end going into FY 'twenty, two I think there's a lot.
Per community that we could see in this space just to monetize first of all increased traffic in our stores as we execute vaccines and then how do we personalize what we're learning about our customers and new customers that are coming into the store and then I actually you know the 9000 stores.
Stores that we have really gives us a great and I'm talking in the U S area right now.
It gives us an opportunity to have a very strong omni channel.
Also some of the work that we're doing around of first party data set.
Really encouraging I mean, I think we all know that.
If you can target and measure.
Or that standpoint.
You can see anywhere from 50% at two times better.
Then using third party data so there's just some really.
Early signs here that there is more potential in this space and I think as we look forward at mass personalization is a growth opportunity for us and I'm excited.
At about at.
Thanks, if I could follow up anything from Starbucks that you've learned that you think is really applicable here.
Sure one of the things that I've learned is that you know.
A digital platform can't stand alone you have to have of human connection as well and so as I visited stores I'm really impressed.
In terms of what our pharmacists can deliver in terms of creating really deep personal relationships with the customer base.
I'm encouraged by the demeanor of our employees.
Employees in front of store. So I think we've got a great opportunity here just to Starbucks debt to combine of human connection with at a digital connection.
Yeah.
Thank you.
Next question comes from Eric Percher with in front of research.
Thank you a question for James on capital deployment.
So as we progress through the year, we've now moved the.
<unk> sales slowed operations to discontinued ops.
I recall that part of the initial discussion was that you will focus on offsetting dilution.
At the $6 billion, putting some of that to work. So I would love to hear your perspective on debt reduction of share repurchase and how that may play in as we get to the end of the year end sales completed.
The.
I.
I think what we've said already is we are required the use of about $2 five.
The 6 billion to pay down debt and that's basically the keep the credit metrics, where they need to be because we want to retain the triple b.
What we have said is that we're not going to pursue share buybacks in the short term.
So the concentration will be on building out.
Health care of opportunities when that could be around pharmacy.
The recent examples of the deceleration of the village M. D. The second one has been hey, let's.
That's kind of interesting because it's in the sweet space of.
Combination of the pharmacy.
Driving.
Maintenance Scripps multiple fulfillment centers all of a point on this will free up a pharmacist for work on higher value activities within the stores and drive better health care outcomes of increase our relevance overall in the market.
So that's the piece that's not exclusively on new hotel. That's also on how do you turn the pharmacy business since of the most efficient operator in the U S and that's helpful.
Pharmacy time to work on those outcomes.
And then the second part of is how do we build outs of difference.
And very innovative technology.
They used to.
Consumer centric culture of business and that's what we're going to be coming back with later this year.
Plain and showcasing what's develops a day what is the prognosis disease effectively launch the ends of it.
Although I think will be very exciting and it's premature to get into a bunch of work.
Did the same.
The common stock we have of.
Helpful In development right now.
We also are performing team were also of southern Kpis.
For the purpose of a lot of stuff the Gabon, but it's very very exciting.
Think of what comes on board and get comfortable with it.
We bring.
We're.
Launch the store extensively.
So I would expect that all of the remaining $3 5 billion, it's mostly acquisitions and if we don't come across attractive targets.
We would consider maybe of a year's time would we deploy some of them to share repurchases.
Thank you.
Next question comes from Ricky Goldwasser with Morgan Stanley.
Yeah, Hi, good morning end and Ross Congratulations I'm very excited and happy to see at another female CEO joined the held for true. So so welcome.
My My question goes back to your comments around sort of the brick and mortar strategy and sort of that combination of the human factor with digital.
The the physical footprint is being top of mind for investors.
Especially when.
When we think about sort of the new change or at all.
How consumers are accessing health care post the pandemic.
At is any early thought or at one of the things that you're looking at or are you also looking at sort of what is the ideal number of.
Border stores versus digital store.
Store fronts.
Or do you think that's sort of at 9000 a.
Footprint is the right footprint of right the base and then build of digital strategy around it.
So I'm going to kind of question over to Alex, but before that I would just just to remind.
Richard that you know, it's a combination of both and when I look at the 9100 stores in the U S.
There are in some of the most significant zip codes that they can be end right at the wide distribution at.
And that I think is attractive now do we have too many or could we create more.
Line of group them together in a broader strategy, but Alex why don't you take it and talk a little bit about store positions in the U S. Sure.
Thanks, Jonathan Hi, Ricky.
I think I've said before.
At the moment, we're comfortable with the number of stores, we have in the U S.
And what we're doing is redesigning what we actually did in the communities they serve.
And I think of the pandemic as you reported is really helps illustrate the point of how important they are moving.
At a thought there would be doing testing at no five of those locations.
And would you sort of thought that side of the number of vaccinations were doing a cost of America is so big and ease of just two examples of many other things there'll be.
This will give us a service inside of the company.
Next example from a couple of years ago is doing extremely well with pickup and also of golf financial service is coming.
And quite a different way through my won't beans.
So we are we continue to be very confident at the strip and we have the out of the best corners, we continue to.
Understood.
No.
To provide different services products and services from them I think as Raj said, so clearly.
They are local they are very human.
Service communities at a very specific health care and our job over the period ahead is to use at the end of analytics and a new at it.
Platforms of putting in place.
To provide even better solutions and services, particularly in health and wellness.
And also.
In terms of ethical positions.
Again more to come in this space, but we continue to be confident in our footprint of cosmetic yeah and one of them.
One thing to add wave of fair amount of flexibility in how we manage the footprint because as we've said before.
The story of about 2500 stores coming off lease in the next five years. So our issue is not necessarily footprint of this sometimes we're overpaying for the locations compared.
You in the market.
We will aggressively tackle that as part of the transformational cost management program of each lease comes up we will be.
Entering into negotiations as to what are the sort of right locations in the most cost effective ones, but the good news now as we're coming into a phase where fourth of 500 stores turnover every year.
True basis, giving us an opportunity to resize the cost structure of the store as opposed to change the store.
Yep.
Thank you very helpful.
Next question comes from George Hill with Deutsche Bank.
Good morning, first let me Echo of the welcome aboard for you Raj and then of IL. These are sort of getting a lot of them up at kind of a couple of short questions. They're all largely housekeeping so James on the 20.
Net sales to $34 million vaccination is that inoculations or injection. So I'm trying to figure out of one charter of the two shot count and then following that is there anything to call out for March quarter results. The increase of confidence in the guidance range or should we really think of it at all just the ramp up of the vaccine and the increase in the reimbursement rate. Thank you.
It's shots at 30 30 million shops, and then I'm not sure I got the last piece of your question maybe could you give it to me again.
Sure I'm, sorry, and that was just.
There anything that you saw in the March call or in the month of March or kind of what I would call quarter to date for fiscal third that causes the company.
<unk>, Inc.
Increases the confidence on the guidance range or is it really just largely the vaccine and the increasingly economics from the vaccine and I'm just wondering if there's anything else going on that you guys would call out.
No I don't think March necessarily impacts of it.
Still the same factors, we said before we're calling up the full year guidance on the basis of the beat in the first half of them better.
Better visibility in the second half a lot of of coming from the U K, but also pharmacy margins in the retail margins in the U S. That's the main reason for the Beach I think what we're seeing in March is at.
As we said cough cold flu continues the U K as in Lockdown, we are seeing a movie Ali cannot and here we are seeing some.
More volume for traffic numbers kind.
In fact in the last two weeks, but it's extremely hard to read March because last year was all over at a place. Each day was very very different so we got to be careful in how we interpret but nothing we see in March gives us any cause whatsoever for concern on the guidance, we're giving today.
Yes, George I think we're seeing a return to beauty, which I would expect to not be owner of expenses and other kind of quick photographic also doing better as well as people think of of travel. So these are coming back in line to what we had expected.
There's still encouraging to see that given the impact of the heart.
Of the pandemic stocks of Leds in 2020.
Nothing Thats helpful thing beyond that yes.
Thank you.
Hey, My question Ross I appreciate that you've only been on board for a couple of weeks, but maybe I could ask at a high level.
Total question, putting all of the near term transient headwinds in <unk> aside for a second longer term investors day, they seem to be very focused on the competitive landscape in the pharmacy business.
Front end and sort of given your back.
Background I think you maybe have a unique perspective and so.
So I'd be.
Kind of curious to get your thoughts on how you view of the competitive land.
Escape.
And how that may evolve over the coming years in the role of Walgreens within that competitive landscape. Thanks.
Yes, and it's one of the things that I am.
I'm sort of talking my nose end.
<unk>.
As our best viable.
And how do we remain competitive and ahead and you know I am.
I'm encouraged though by the early investments in this year.
That the company.
As Nate theme that we have investments and areas like.
Hey, you know to really work with our pharmacists to get them to have an easier job. Every day you know it's those kinds of investments that gives me encouragement secondly, the work that we're doing with village M. D to diversify who we are as not only a retail.
Company or a pharmacy company, but to look at health care overall.
This is a complex marketplace you know.
I think we're all clear about that but defining are a key differentiator is the work that we have ahead of us but these early innings that we're in right now.
I'm highly encouraged by end.
So I think there is a way for Wpa to diversify itself. It has great beginning good bones to it.
Really good partnerships and I'm encouraged that we'll define that position and really as James said, we'll come back to you to talk about the technical platform at the company has been embarking upon.
Many of you might notice horizon, three and so we are looking at those things that can differentiate us and we will come back to you on that.
Thank you.
Next question comes from Brian <unk> with Jefferies.
Hey, good morning, Rob Congratulations again I guess my question is for Alex.
So you called out.
Market share losses, as a headwind for the quarter and I think Ross mentioned at the focuses on stabilizing the base business. So what are you guys thinking in terms of strategy near term initiatives to arrest that and then I guess my follow up is just on pricing you called out pricing pressures.
As well and if I recall last quarter, we were kind of under the impression that pricing was starting to stabilize on the pharmacy side. So has at reemerged this quarter and how should we be thinking about that going forward. Thank you.
Thanks, Brian.
On the pharmacy market share first of all.
Trends pretty consistent.
Is that part of debt.
I think at.
What made the 30 basis points, a little bit stronger than the previous call I think of abused clause 20 at a loss. So it really was a we think of couple of five weeks of really bad weather you know a lot of stores in Texas, I mean, what caused for.
Part of that tell us two weeks.
We're comfortable with what we're seeing in March. So we think that we are at a steady state with with with a retail pharmacy Med D season. This was solid as expected we've lost a bit more to Medicaid and we knew that was coming of is one of our.
Our key competitors.
All of this that continues to move move volume.
I am into managed Medicaid So I think in commercial will grow at Enzo becomes of trends.
Pricing will know more as we get into the Medicare season, which is just at a store you know there'll be we'll see more of that as of year progressive. So there is nothing new.
We're feeling.
We're feeling good to be honest I think Jamie.
Good progress with my Walgreens.
Which is really the way of giving more volume to the front end customer.
Walgreens experience the NPS score at is significantly higher than the old.
Program.
We've just started to be honest to use first party data as well as also said so I think we go we're really feeling very good at the work we've done in the last period at.
Really.
Finance customers.
This is a changing marketplace.
Customer from the grocers the online marketplace continued to grow independently. So omni channel strategy is going to be really important as well and but at the early innings of volume, we're going to keep keep on pushing very hard.
Awesome. Thank you.
Thank you that's where we are.
At wind back. Thank you all for your questions.
But we didn't get to I'm sorry, we are we will reach out to you after the call.
I would just reiterate the point of the raws made in her comments.
We have had a lot of request to speak to us. He is very aware of those but she does need to take some time to understand the business faced under the desk before.
After that she has assured me she is committed to <unk>.
As many of you as you can so.
We look forward to that and we'll speak to you again in three months' time. Thank you very much indeed.
This concludes today's conference call you may now disconnect.
Okay.
So you can see.
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Sure.
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