Q3 2021 Walgreens Boots Alliance Inc Earnings Call
I'll now hand, you over to Ross. Thank you Gerald and good morning, everyone. Welcome to our earnings call. Let me start by saying that we're pleased with our third quarter financial performance, which we announced earlier. This morning, our total adjusted earnings per share of $1.51 were above our expectations.
Driven by the strong execution of our vaccine administration increased mobility as restrictions were lifted in various geographies at.
The recent increases in digitally driven sales in both the Walgreens and boots businesses.
Many categories performed well, including beauty and photo and our investments in marketing technology are driving further revenues by more precisely targeting our customers.
In recent months the leadership team and I have been emphasizing across the company that we must deliver operational excellence and our teams have answered this call in many ways with our COVID-19, vaccinations being a particular highlight.
This initiative is really quite remarkable and demonstrates our ability to move at pace and deliver at scale.
We've now administered over 25 million vaccinations by quickly, creating an extensive technology and logistics infrastructure and utilizing close partnerships with public officials community and faith groups and others.
I continue to be deeply proud of our team members and their commitment to keep our communities healthy and safe, especially those communities that are the most medically underserved.
Strategically we remain committed to our previously stated priorities to create neighborhood health destinations around a more modern pharmacy.
To accelerate digital.
To transform and restructure our retail offering.
And to drive our transformational cost improvement.
All of which you'll hear more about today is James provides more insights on our results.
It's also great to observe firsthand these priorities being carried out by our teams as I continue to spend time at our stores and vaccination site during.
During these visits over and over again, the incredible strength at our company has we have deep brand trust and loyalty and extensive understanding of our millions of customers.
And an expansive store footprint in the heart of 9000 communities across the U S.
And as I mentioned to you last quarter.
I am also conducting a detailed review of our long range business plans across the company, including where we should make further investments allocate capital and deliver the best financial returns.
There are tremendous opportunities in health care right now and we are uniquely positioned to capitalize on them..1 example of our next phase of growth is our previous communicated tech enabled health care initiatives.
As we build this out further our choices will be guided by what our customers want as we continue to deliver solutions that meet their evolving needs, while leveraging our unique assets and capabilities in order to win but first and foremost we have to ensure that we continue to operate our core pharmacy and <unk>.
Tail businesses with excellence said simply.
In order to build the pharmacy of the future and new health care solutions we.
Must build upon the core assets of the pharmacy of today.
Next we need to determine where we are best positioned to offer even more to our customers. What we're hearing from them is that they are often overwhelmed trying to manage different health conditions providers appointments bills and medication.
All of which are on different platforms and channels.
And we know we can help them address these problems in a way that builds on our strength and establishes even deeper relationships with them.
But the overall healthcare space as sprawling end incredibly complicated.
The we must be laser focused on the products and services that have the most potential and value.
That can be enabled with the most innovative technology.
And that will be delivered at a level and quality that our customers expect.
Lastly, we must be mindful that speed is a priority in this rapidly changing landscape.
We will assess appropriately.
And accelerate into new categories spending just enough time getting it right and then we will deploy quickly and at scale.
I'm looking forward to sharing more with you soon about our further plans.
But again Theres fantastic potential here and we're very excited about the prospects for the future.
And with that I'll turn it over to James to take us into more depth on our results and operations James.
Rolls and good morning.
In summary, we had an excellent quarter.
Total adjusted EPS was $1 of 51 cents.
Well ahead of expectations from the 81, 4% versus prior year on a constant currency basis.
Growing basis, adjusted EPS was $1.38 9.
The 94.
Percent of above prior year.
Impacted by 2 key Covid related factors.
Firstly, we were lapping of weak year ago quarter, which was depressed by the severe restrictions associated with the COVID-19 pandemic.
Secondly.
We executed strongly in the current quarter kind of accelerate at the pace of Covid for explanations.
Thanks also to the significant investments we have made to provide vaccinations across approximately 8000 locations cash.
Cash generation was also strong with year to date free cash flow of $3.3 billion 35, 8% higher than prior year the.
The strong third quarter performance allows us the increase our full year adjusted EPS guidance from mid to high single digit growth to around 10% growth.
Let's now look in more detail at the results.
Third quarter sales advanced 10, 4% on the constant currency basis, reflecting strong double digit growth in the international on 5% growth in the U S.
The results included a 4.6 percentage point benefit from the formation of the German joint venture last November.
Adjusted operating income increased 82, 4% of a constant currency basis.
Driven by strong gross profit performance in the U S and the rebound in international sales and profitability due to less severe COVID-19 restrictions.
Total adjusted EPS was $1.51 in the quarter.
The constant currency increase of 81, 4%.
On a continuing basis.
Adjusted EPS was $1.38.
The constant currency increase of 93, 6%.
The entirely by strong growth in adjusted operating income in both operating segments.
The higher tax rate in the quarter was mostly due to a catch up adjustment in the prior year period as the initial COVID-19 impact favorably impacted the quarter's tax rate.
Finally on a continuing basis GAAP EPS increased by $3.32.
The $1.27.
Reflecting prior year impairment charges of $2 billion.
On the investment gains in the current quarter related to option care health.
Now, let's move to the year to date highlights.
Year to date sales rose 6.1% on a constant currency basis.
Adjusted operating income increased 3.9% on a constant currency basis with the U S segment up 2.3% on the end.
International almost doubling the operating income as of.
Rebounded from a very weak prior year due to COVID-19.
On a continuing basis adjusted EPS was $3.74.
The constant currency increase of 9.9%.
Reflecting the adjusted operating income growth lower interest expense kind of favorable impact from prior year of share repurchases.
Now, let's move to the U S segment.
Sales increased 5.1% in the quarter was 6.3% growth in pharmacy, and 1.4% growth in retail.
Both retail and pharmacy saw sequential improvement over the second quarter as we executed against vaccinations.
Traffic improved.
We saw notable improvement in consumer trends, especially in urban areas and across discretionary categories, such as beauty unfold.
The adjusted gross profit increased 14, 5% driven by strong sales growth kind of improved margins in both pharmacy and retail.
Adjusted SG&A spend the increased 6.5% in the quarter to 16, 8% sales 0.2 percentage points higher than the last year.
The year on year increase was primarily driven by an approximately 500 basis point impact from COVID-19 related costs.
Mainly the cost of rolling out flex of nations.
Adjusted operating income increased 53% of.
The strong gross profit growth more than compensated for the fast growing the investments behind both the COVID-19, vaccinations and growth initiatives.
Now, let's look in more detail at U S pharmacy.
Comparable pharmacy sales were up 8.4% while comp scripts increased 9.8%.
We completed $17 million of COVID-19, vaccinations in the quarter and this boosted comparable script growth by around 600 basis points.
Solid underlying results were also bolstered by improved the market trends has lower patients returned to the doctors' offices and the seasonal script headwinds softened.
The adjusted gross profit grew nicely, reflecting strong sales growth and improved gross margin as a result of favorable mix from vaccinations.
Turning next to our U S retail business total.
Retail sales increased 1.4% in the quarter, including a 50 basis points adverse impact from our store optimization programs.
Comp retail sales increased 1.7% on the excluding tobacco and E cigarettes comps were up 2.6%.
Performance improved sequentially as the negative impacts from cough cold flu subsided and mass personalization boosted results by around 100 basis points.
Store traffic improved, especially in urban areas kind of discretionary categories came back nicely with beauty sales growing at 14, 9% and photo of advancing 54%.
Gross margin increased 100 basis points year on year, largely due to favorable mix as a result of stronger growth across discretionary categories.
Turning next to the international segment at all.
Hope to constant currency numbers.
Our international segment continued to be negatively impacted by COVID-19 with continued weak footfall on the U K High Street.
That said as we lap at the start of the pandemic. We are encouraged by the rebound in sales and profitability due to focused execution across boots, UK boots, Ireland and the opticians sales.
Sales increased 58, 7% in the quarter, including the 46.6 percentage point contribution from the formation of our wholesale of joint venture in Germany.
Excluding this benefit sales were up 12, 1%, reflecting ongoing recovery across most international markets.
Adjusted operating income was $94 million in the quarter of $222 million versus prior year sale.
Sales rebounded from prior year lows and the <unk>.
Costs were tightly controlled.
Let's now look in more detail at boots UK.
Comparable pharmacy sales increased 3.7% stronger demand for services and favorable phasing of NHS funding more of the lower script volume.
Comparable retail sales increased 38, 7%.
Continued to recover and we lap the start of the prior year of COVID-19 restrictions how.
However.
Footfall in the quarter was around 45% below pre COVID-19 levels.
Compared to the 70% to 75% declines that we saw at the peak of the pandemic in April and May last year.
Nevertheless, we are encouraged by continued strength in basket size, which was up over 20% in the third quarter compared to pre COVID-19 levels. We are rapidly regaining the market share loss of the grocers at the height of the pandemic.
The discretionary categories are performing strongly.
On boots Dot com delivered strong sales growth of 42% and accounted for 20% of total retail sales in the quarter.
Overall, while there was the strong quarter for the international segment. The recovery is more gradual than we originally anticipated.
Turning next to cash flow.
Free cash flow was strong with $3.3 billion delivered in the first 9 months of the year of $873 million year on year, reflecting the strong profit results and successful working capital initiatives.
Working capital initiatives of driving sizable cash flow benefits as we eliminate excess inventory kind of extend payment terms to more optimal levels.
We have benefited from some onetime cost favorability, including timing benefits associated with the Destocking of COVID-19 related save for the inventory.
The benefits associated with the cares Act.
Looking forward cash.
Generation in the fourth quarter will be adversely impacted by the divestiture of the alliance healthcare business.
Historically, the fourth quarter was the strongest cash flow quarter for this business.
Turning now to full year guidance, our third quarter performance was clearly very strong.
We were lapping the peak of the pandemic restrictions last year and less severe restrictions in the current year led to improved footfall in the U S kind of.
Rebound across most international markets. Additionally.
Additionally, this quarter was the peak quarter for of explanations and we successfully completed 17 million of explanations at <unk>.
Testament to our strong execution capabilities.
We are expecting solid year on year EPS growth in the fourth quarter all of it.
Though at a slower rate than the third quarter.
The prior year of comps are a little tougher we will administer less vaccinations in the fourth quarter compared to the third quarter and we are ramping up our growth investments as we accelerate our digital and healthcare plans.
Turning now to EPS guidance.
We are raising our continuing basis adjusted EPS from mid to high single digits to around 10% growth the fee.
Full year guidance is based on true potential swing factors.
Firstly, our full year forecast now assumes 28 million vaccinations at around $7 million of explanations in the fourth quarter compared to $17 million in the third quarter.
Secondly.
COVID-19 has resulted in many changes business.
And we should expect some continued volatility as markets reopen and foot traffic returns to more normal patterns.
And finally, we are increasing the investments to reposition the company for continued success.
On an annualized basis, our transformation on growth investments are in the earnings drag of approximately 3% to 4%.
At a fourth quarter impact of around 7% to 9%.
In summary, we have raised our adjusted EPS guidance to around 10% growth to reflect strong operational performance.
Of the improved visibility around fourth quarter adjusted EPS growth drivers.
Let me now cover our key strategic initiatives.
We continued to make progress in transforming our pharmacy business and the ways in which we delivered healthcare bode true our physical stores and true our digital channels.
1 of our core objectives is to simplify the pharmacist role and free up more of the time to spend on the adherence and health care services.
This will be the foundation for improved health outcomes through a more integrated care model.
1 of the key steps as the modernize and automate our pharmacies.
Our recent investment IAA Rx plays an important role as the brings together automated pharmacy solutions.
Enhanced workflow capabilities.
2 micro fulfillment centers are now operational in Phoenix and Dallas.
Supporting around 550 Walgreens pharmacies.
Over time these 2 locations will support of around 1000 pharmacies.
We have also decided at the next 9 markets for micro fulfillment centers and we expect the deploy completed by the end of calendar year 2022.
We are also accelerating our rollout plans with village in the following continued positive patient response.
We have already opened 46 sites and we have identified a further 35 locations to be opened by the end of this calendar year.
This will bring the number of co located sites to approximately 80 by the end of this calendar year.
In addition to these physical co locations, we formed an integrated virtual health care of collaboration with village MD and an additional 9 Walgreens locations.
This will give patients access for the same expanded pharmacy services that are available at the co locations.
Finally building.
Building on our success in Covid testing, we are developing our testing and diagnostics business to provide a wider range of solutions for our customers going forward.
Now turning to retail.
We are evolving our U S retail model across consumer value services and convenience of.
Customer engagement platform is progressing nicely and building momentum.
We are currently refining of our personalized offerings as we gain additional consumer insights.
Membership of my Walgreens was up 34% over the prior quarter to 75 million members and mass personalization boost of retail sales by around 100 basis points in the quarter.
Secondly.
The work we've undertaken throughout the pandemic to improve our omni channel experience on the offer convenience options is resonating with consumers. We have now completed 6 million curbside drive true and last mile delivery orders.
The alternative profit streams, we've mentioned in the past are quickly taking shape of.
Walgreens advertising group is expanding its offerings and is now working with third party brand providers across digital and video.
Helping them better connect with customers based on our uniquely scale of the first party data set at.
Additionally, early in the fall we plan to launch a series of exciting debit and credit card products.
Finally behind the scenes, we've completed the rollout of SAP 4.
For Hana.
This will unlock significant operational efficiencies and working capital improvements.
And from a customer of point of view, it will improve product availability and speed of delivery turning next door international initiatives during the quarter, we made excellent progress in developing our digital health care offering.
<unk> health hub now offers an online marketplace for boots, and third party providers with almost 100 health care services now available at.
Part of the health hub, we recently launched boots online Doctor of new innovative end market, leading service, which connects physicians and patients online.
Patients can seek advice from doctors on over 40 conditions with more to follow in the future.
On the retail side, we delivered strong market share gains in the quarter, particularly in discretionary categories.
And as life gradually returns to normal customers are increasing their spend on beauty products with sales of advancing 85% in the quarter.
We now have over 500 beauty brands available in our stores and the online with 34, new brands introduced this year.
And we recently launched a major marketing campaign designed to capitalize on the gradual lifting of UK restrictions.
We continued to play a major role in Covid testing in the quarter and are well positioned support vaccination booster of programs.
Boots is 1 of the UK is leading the Covid test providers with over 3 million tests completed to date, mostly undertaken in partnership with the NHS.
We also have of growing private test offerings with several of at home and the in store tests available. In addition to testing partnerships with several major airlines and the.
Finally, a quick call out to China, we now have almost 8300 stores of 2500 stores compared to the same period last year.
I'll now hand, it back to Ross for closing comments.
Thank you James So as you've heard we have delivered a good financial quarter and have the prospect of a very solid financial performance for the year at home.
Therefore, we are raising our guidance for the full year accordingly.
As we continue to focus on ensuring the success of our business of today, while at the same time investing in our future.
Look forward to sharing in the fall more of my learnings and our path forward.
Currently I am examining and challenging all parts of our enterprise strategy.
And there will be some key principles guiding our work ahead and leveraging our right to win including.
Applying a disciplined approach to capital allocation and performance metrics.
Driving innovation to be built into our core <unk>.
And into our culture.
Performing as a best in class operator at all time.
Allocating our focus and the right amount by balancing our immediate needs with our mid and long term growth plans over the next 2 to 3 years.
Maximizing the value of our existing assets, particularly our pharmacy as the centerpiece of what we do moving forward.
And leaning into the key tailwind such as the localization and consumer renovation of health care.
Let me close by once again thanking our team members from the resilience empathy and care that they have shown from both our customers and fellow team members as they administered more than $25 million vaccination and many other accomplishments around the world.
Our success over the last year shows the power of a unified focus.
Coupled with the exception of capabilities and highly trusted brands that represent the communities we serve.
This focus and purpose will be the root of our success for years to come.
Now I'd like to open the lines.
Operator.
If you would like to ask an audio question. Please press star 1 on your telephone keypad.
Again, Thats star 1 to ask an audio question.
Your first question comes from the line of a J rice with credit Suisse.
Thanks, Hi, everybody.
Rod if you don't mind I might just I know the details on your results of your strategic review.
We're still months away, but I would ask about key parts of your comments.
1 it sounds like Theres, a lot of U S focused effort around that strategic review I Wonder if.
If your review of strategy also includes the U K and the international operations and any comments or any comment about your thoughts there and then the second aspect is that equal Walgreens boots over the last year done a lot of interesting things almost of our collaborator of choice type of approach with a lot of providers of vendors.
The the opportunity to take a few of those relationships, obviously things like the village in the relationship and really exploit that is at 1 of the areas of growth.
Zero debt living 1, but the type of thing the greatest opportunity or is most of the opportunity youre seeing.
Retooling and journal ads.
Thanks.
Walgreens going forward.
Hey, Jay. Thank you for that question, let me start with your first question about the looked at where cross the entire business. So the evaluations were doing right now they are global.
They may sell U S based and because of the size of that business and the total WNBA contract, but this is the global look at the business. The 1 thing I would say about our business in the U K in other geographies is we're seeing a slower recovery in some of those areas. So we are looking at a full enterprise look at Lee.
Valuate, what's next in the company and the second part of your question is around the <unk>.
The collaborations I believe your debt and partnerships that we had and what portion of that will.
We will be in balance with just looking at our base business and I will tell you that it's a bit of both.
1 thing that I would tell you that as I analyze the company and see where they are this team has done some tremendous work in building partnerships of partnerships will be key to us going forward. There is an opportunity to innovate with our partners and really grow some of these collaborate.
And then as I mentioned, it's also about making sure that our base business is very strong. So it is both of those end Jan. Thank you for that question.
Okay. Thanks.
Your next question comes from the line of Stephens, Inc.
With Barclays.
Thanks, and good morning, everyone.
That was good to hear some of the updates in your prepared remarks around the tech enabled health care startup operation that's embedded within Walgreens and I'm curious if the digital asset is something that Walgreens could still separate and potentially monetize some time in the next 18 months or so or is this just a embedded within walgreens.
For the for Seeable future of just drive the overall enterprise results. Thanks.
Steven.
Question.
And in terms of how we're looking at tech enabled health care.
When we look at the long term enterprise vision of the company that is 1 of the things that we are looking at is that how do we address what's so important for the customer and what we embed within the company and what we partner with and what the beef and alone. So that will be part of the work that we do so we will share more about.
Note that in the fall.
Got it okay. Thanks.
Your next question comes from the line of Lisa Gill with Jpmorgan.
Good morning, Thanks for taking my question.
And the I just had a couple of questions..1 I wanted to understand the prescription lift youre seeing in co location and then.
<unk> you made the comment about simplifying the role of the pharmacist at.
You and Raj do you of any comments around changing reimbursement day with your freeing up the time of the pharmacists are we actually seeing where youre getting paid for consultation versus cash debt.
Of the film at at the script end do you have any relationship for example, with Philips empty or anyone else, where you're getting paid for those kinds of consultation services.
Lisa Let me have both James and John respond to that question.
Yes, I guess I'll.
Hi lease then I'll jump in this is John I'll jump in first so yes village M D.
Is the great partnership for us in the pharmacy, because we can do a collaborative.
Care model for chronic patients.
With village MD end of kind of breaks down a bunch of the barriers that you might have.
Isn't that kind of relationship so I think theres a lot of learnings for us and the <unk> experience and there is definitely at a script the uplift in the store from.
From the relationship that's going to develop over time as we have opportunities to continue to advance the model as.
As we rollout of additional <unk>.
Ross the chain here.
So I think thats the piece of the question as it relates to.
The various programs that we have today to drive adherence and provide other services with pharmacists.
A lot of our focus has been around piece.
For key programs in Medicare part D and.
And other opportunities like that to work with a lot of our partners and that's where a lot of our effort has gone, but I think it's really the future of that we're talking about here and so the investments that we're making nia to free up our pharmacist really create I think future rent.
Avenues for growth of revenue as we kind of look down the line. That's how we're thinking about it and we think theres a lot of opportunity there.
As we as we move forward.
Now if I could just if I could just add 1 thing Lisa.
Because you are correct the micro fulfillment centers will be rolled out over an approximate 24 month 36 month period the <unk>.
2 we're up and running and we've already released funding for the next 9 and that'll be completed within the course of 'twenty 2.
I think at is the simple part of this is how do you free up time, so that the pharmacy itself, we're right at the top of the profession.
The key question and I guess, that's why you're asking the question is how do you get paid for that sort.
Of the simplistic 1 is pay for performance the <unk>.
Stuff that's in development of internally, but I think we'll give more visibility on the.
In the fall 1 is testing on the diagnostics, we did mention that it is.
Clear now in the U S. The pharmacists of played a huge role in the pandemic.
The question is how do we expand the testing and diagnostics rule. So that we're providing value added services and then the the key to all of this is the payers hopefully are now recognizing the critical role of it is being played during the pandemic.
And the fact that less people end up in the hospitals reduces overall medical schools in the U S system, which means at our medical loss ratios are going down. So this has to become at some stage of win win for everybody.
We are free.
Freeing up resources, they are spending time on improving health outcomes on wheels and closely with the figures the shoe.
And the improved health outcome environment. Thus the simple version, but it's it's a 2 to 3 year journey here and get into the centers.
Just going back to my answer the question around the the lift in end.
The prescription they can have a co location with the attendee is there anything that you can give us. So we can kind of think about as you rollout incremental relationships then incremental co location space there.
Okay.
We're getting towards 46 of these things up and running some of its a little early for US. The guide you on that Lisa we definitely see a benefit there, but I think it will continue to develop over time and they give us a little along the room here.
Hey, great. Thanks, Dan I appreciate it.
Your next question comes from the line of George Hill with Deutsche Bank.
Yes.
And thanks for taking the questions I guess, Jim 1.1 and 1 and a half for you.
Could you be a little bit more explicit about the contribution from the COVID-19 vaccine to the U S business.
During the quarter and then you guys kind of noted in the press release at the improved pharmacy margin.
Due entirely to product mix from Covid vaccine could you talk about with pharmacy margin looks like ex the vaccine.
Yes. This is Paul I'll take those as we move forward, it's getting increasingly tough to track substitute the COVID-19 and what's now due to Covid, obviously with the results Thats up 95% EPS of 95% from the quarter on at thank.
Thank you can assume the impact of Covid was in the region of the 80% to 85%. So we saw solid growth on the core in conjunction with a nice recovery from Covid.
1 of them when I use the word recovery. There is 2 aspects..1 is we had a weak last year and we're recovering from that and then we had 17 million vaccinations in the quarter.
And then the vaccination is the key driver of the margin in the quarter you saw the spectacular gross margin growth in the use of.
<unk>, 14% and it's not a 1 shot wonder here of this is actually very much sales driven we are of great front of store performance.
And then secondly, the scripts were at the high single digit.
So we were on all cylinders on that.
I will point out the retail margins were up 100 basis points again, it's coming from mix is coming from more photo is up 50% PBT was up 15%.
And then turning to the vaccination question of essentially at a pretty decent quarter on margins the Fei.
<unk> business was based on the flattish versus prior year.
The vaccinations drove all of the upside on margins.
We expect something similar in Q4, but at a lesser extent, we've been quite transparent on the amount of explanation from the year.
The $28 million 7.
The $7 million in the quarter, but of for you to get too excited on the margin builders. We estimate just on a full year basis that we invested in SG&A just for the rollout of the vaccinations half a billion dollars of incremental SG&A.
I think you have to look at the explanation on the net basis because the you are seeing that we point to 6 and half of increase in the overheads and 6.5% in the quarter, we actually of the estimate there will be higher in the fourth quarter. So we're 1 of a fair amount of pressure on the overheads, mostly it's all spending against the vaccination effort.
Yeah.
So I hope that covers your question.
That's good color thanks, guys.
Yeah.
Okay.
Your next question comes from the line of Brian.
<unk> with Jefferies.
Hey, good morning, guys. Congrats on the quarter James just to follow up on your in your last few comments there.
Just thinking about the guidance that you gave I mean, it implies something for Q4 under the dollar.
Comp is about 91 sales from last year, when you still had some pretty big Covid headwinds there.
I know you called out of vaccination fewer vaccinations in Q4, but the sequential basis of it.
How should we be thinking about this if I'm thinking about at end of year over year basis and is this just conservatism or is there anything else that we should be considering as we look at your guidance.
Yes, it's a good question and I know, we spent a fair amount of time on this.
So the full year of 10% of our back into the numbers of 10% or 11% and the.
In the Q4 leads to a 11% to 13 kind of range on the Q4 EPS growth. So there are 7 million vaccinations in there. The 1 comment I would add too as we've called it out in the prepared remarks, we expect SG&A to be up significantly in the fourth quarter.
And it will have an EPS impact of 7 to 9 percentage points.
So in the 11% to 12% kind of range of growth on EPS, it's absorbing 7 of the mine on projects.
A number a couple of onetime items were facing we theres a shift on impairment between 2 quarters plus bonus payouts, that's probably another 9 points of growth. So as we dissect of this as we work through it we were looking at the core growth of somewhere in the region of 2017.
We're doing heavy end.
Both for future innovation, but also for vaccination.
Absorbing the 7% to 9% so from.
Fairly comfortable at the core was performing.
If you go back to the original part of the original guidance of at the beginning of the year and I do feel.
It's quite important.
We gave guidance at the beginning of the year of low single digit.
And we're now at 10% so I think we executed on all cylinders here.
When we gave the guidance we said the first half were declined 17% to 23% and the actual decline was down 12%. So a good first half.
In the second half and I think.
People total was at Crazy aggressive goal of at least internally, we said 30 to 40, 40% growth.
If you take our full year of 10% that comes out of the 47% growth in the second half. So we're actually quite happy with the projection.
I think.
If we go back end compared to what we said in March there has been a shift of about 3 to 4 million vaccines from Q4 into Q3, So I would say.
In general at Q3 came in stronger than we thought in March of Q4, it's essentially lighter just because we're shifting.
As into Q3, and this was very much in line with.
The more recent request from the buyer and the administration to get people vaccinated as quickly as possible. We put a lot more expense in the system. We've hired more people than we originally anticipated and we ramped up opening hours for thousands of stores.
This is part of the Q3 is proportionately stronger than Q4, but we are quite happy with the Q4 of profile in terms of quality of earnings.
Alright.
Thanks.
Your next question comes from the line of Elizabeth Anderson with Evercore.
Hi, guys. Thanks, so much for the question.
Your line is really helpful commentary about that piece of debt.
Covid vaccine I was wondering if you could comment about your assumptions for at the core.
Script growth in the fourth quarter end sort of any early comments you can talk to from from June in terms of how you.
At the reopening of a script cross selling.
John the right in Hungary, where maybe.
I can at least talk about the trends a little bit.
I think.
What we saw really kind of started in the third quarter and has continued into June as at some of the underlying headwinds than we were facing in the business have abated a little bit here. So we saw.
The new to therapy improve which has continued in June.
We had some heavy early headwinds on seasonal and anti infective prescriptions, but again as we came through the quarter those debates and have now turned positive in June as well. So we've seen a decent amount of business in decent amount of momentum in the underlying prescription business as we head into the fourth quarter.
<unk>.
And so I think that's really positive and some of that is.
Also of kind of happening in the front end as well.
Okay.
Yeah, So bear in mind that what we said in Q3 of the.
Of the 986 hundred basis points are coming from.
From vaccines.
But that's on 17 billion of vaccines. So if you fast forward to Q4, youre going to have less than the 600 basis points coming from vaccines. So the rate won't be high single digit is probably going to.
And maybe kind of single digit growth in <unk>.
In the scripts.
Because it's quite the influence now buybacks physicians in the short term, but as John said, we at a very strong start to <unk>.
For the quarter.
Thank you.
Your next question comes from the line of Ricky Goldwasser with Morgan Stanley.
1 of our own good morning.
Can you talk about.
<unk> 2000, total calling out of tearing.
They're in our guidance, but should we look at.
The fiscal year 'twenty 1 of the implied.
1 of them.
Is that adding to 2022.
So and understanding there's no covenants.
This all sort of the data points of too hard to go get it.
Should we think about kind of at its fair to assume scenario.
2022.
Guidance from second half of year or are there any.
Key channel even ahead of them.
Factoring from.
Thank you I'm really sorry, you're not coming through very clearly and I asked of you maybe just repeat that.
Yeah can you hear me better now.
A little bit maybe just the vivid zone I'm sorry, it's just the bottom line.
Yeah. So when we think about the implied fiscal year 'twenty 1 EPS at 471 should we use cases, the starting point for 2022.
And if that's the number.
How should we think of Bob with all of the data points that you have now is it fair for us to think about similar gross in 2022 to 'twenty 'twenty 1 to 'twenty 2 similar growth as what youre seeing in the second half.
Of this year.
Im just trying to expand sales.
I think first of all of we don't give guidance so anything I am saying it was just at.
Stream of.
Comments I guess, so you're right for 2008.
1 time debt to the 471, that's the starting base.
The key thing.
Money market participants will have struggled with is the lift into the next year is what will at least the continuation of vaccinations and to make sure because <unk> got $28 million of explanations in your base here will there be booster of explanations 1 will.
When will the pediatrics come on there is there is as many questions as the answers obviously everybody has a strong desire in the U S to get back some volume.
The other thing is I think slight pricing that is we still have some adverse COVID-19 impacts in the base here and some of those will improve over time.
Ross did say earlier on we are seeing.
<unk> seen somewhat of a more gradual recovery than we would've anticipated onto the U K. So we're watching that quite closely but I think that's the big question for the next year.
1 is what's the pace of investments as we modernize and getting back to Roswell Colin says.
We want this company the speed more innovative end to drive long term shareholder value and what's the pace of investments over time.
That's exactly what the team is working true over the coming months and there'll be a comprehensive.
The lay out the comprehensive strategy later in the fall so.
But I think it's the Covid number we have the Russell group going forward, mostly the vaccination number.
So there is nothing else unusual in the base I think if you look to the 2 halves of the next year.
The half cough cold flu, which there was a big headwind at the beginning at <unk>.
But Q3 Q4 of the mixture will be pretty tough because youre lumping 17 million vaccinations in Q3. So I think it's I think it's I wouldn't get the lost in any weeds here I would just think about what are the hey, guys of the zone vaccination of Covid.
Great. Thank you very much thank you.
Your next question comes from the line of Eric Coldwell.
Thanks, guys I appreciate it so you've got a really strong cash flow and balance sheet profile building with the alliance proceeds as well as the.
The working capital improvements and the strength from from Covid as well.
I'm just curious if you give us a little more color on your thought process around capital deployment priorities over the next 12 months at.
Including share repurchases that something that you might get back get back involved with us as we look forward.
And then if I might add to the follow up just theres been a lot of rancor recently about staffing levels across most industries in the country wage inflation et cetera. So hoping you could give us an update on your thoughts around wage inflation staffing ability to attract and retain staff that would be great. Thanks. So much. Thank you Eric I'll take.
The first part of that question and then I'll ask John to talk about wages. So first of all with capital.
You probably are aware that we spend roughly about $1 billion for year on capital expenditures and we don't see that changing.
Too much in the future what I will say is that how and where we deploy that and being very disciplined about that I will tell you that there is an energy on my part end this leadership team arent to really accelerate the.
A lot of the work that's already underway in this company and I will tell you that there is innovation that we will put on.
A lot of focus on.
We will continue to invest that youll see capital going in those areas in the past you've seen us I will build out stores, but in addition, the work they were doing and investing in digital and so that will continue just to give you a little bit of insight of what we will do in terms of how we will deploy the capital, but we really say at sea.
At staying in line around that 1 point at $1.5 billion range on capital expenditures.
John you want to talk about wages.
And just more generally I think about I think the questions about the employment market as well and so yes. It is.
Non heating up out there.
But it's really I think what we've seen is probably been more.
Kind of in regional instances and we've been able kind of work through those with the various levers that we have available to us to operate. The business example is we were able to meet all of our needs to really get through a very busy third quarter with our 17 million vaccinations and really didn't have a problem. So we continue to watch the situation and kind of deal with it.
On an area by area basis as issues arise.
Ricky can I add 1 more part of your question on capital I also want to mention around the work that we've already invested in the Rx renewal is part of our investments that we've had the work around our store level investments and our partnerships. There also to I don't want to overlook the work that we're doing around that person.
Amortization as I mentioned digital more specifically in that area and then the work at we've been speaking about in terms of the micro fulfillment hub and spoke rollout that we had planned so you'll see us continue that kind of work around where we.
<unk> capital in the future.
Thank you.
Your next question comes from the line of Charles <unk> with.
With Cowen.
Yes, thanks for taking the question.
Maybe a question for James.
Sure.
Arrives here I think starting in July.
The existing child tax credit is being converted to the direct payments.
And I think it's going to hit.
Something like 39 million households.
It will represent a pretty sizable increase in disposal income from those households can you talk about how much of your customer base indexes to household debt will receive payments and have you guys thought through what.
The potential.
Impact positively that could be for your front end, thanks, Charles actually I'm gonna of John respond to that enhance the that 1 yes. Thanks.
Thanks for the question, yes. So this is the monthly credit I guess at starts here and we have looked at at a bit it doesn't look probably at the material as maybe some of the stimulus money that came out earlier.
In terms of impact on the business. So at this 1 it doesn't feel like it's going to be hugely material to us of obviously, we'll get into at here a little bit of <unk> and see how it plays.
Is that because from a prescription side a lot of ex.
<unk> will be half of insurance covers maybe at 2 of Medicaid. So a lot of the purchasing is just not us.
Impacted or is it at the front end items that you would expect.
The disposable income with the increased with non doesn't go to items in the front end no I think it was more just the relative size of it is the kind of filtered into if we kind of look at how we performed on the other type of incentives. Its stimulus money that was just I think in times of relative size. That's all.
Thank you.
Thanks.
Your next question comes from the line of Glen Santangelo with Guggenheim.
Yes, thanks for taking my question.
Just wanted to follow up on some of your prepared comments you made with respect to the gross profit margin. If I heard you correctly I think you seem to suggest that ex COVID-19 vaccines. Your gross profit margins might of been flat year over year, So while I'm not sure. If that's correct can you confirm.
Firm that and then secondly last quarter on the call you discussed maybe some favorable generic pricing trends that may be aided the margin and so I'm just kind of curious could you maybe just unpack that gross profit margin ex COVID-19 vaccines, a little bit more to help us think about the current trend and how we should think about that going forward.
Thanks.
Yes.
<unk>.
It is broadly correct. What you said so if you take out the benefit of favorable mix from <unk> solutions for this quarter the margin was.
Broadly flat so we had a decent month in terms of generic.
Decent quarter in terms of generic procurement.
The model is is the scale model the more volume you. So on the more generic procurement you get the better the margins in the quarter. So it's significantly helped by the fact the script growth was 9.8%. So it's not a sustainable position in general.
As we've said on many occasions, we start the year with the significant amount of reimbursement pressure only.
Yeah.
Which is also true generic procurement on the rest of us come from volume. So the margin is highly variable with the volume delivered and the specific corp, and the <unk>.
Watch out is I wouldn't take 1 quarter and extrapolate in the pharmacy business.
The timing of accruals and payments is quite volatile.
<unk> significantly so my advice to you is always look at the year to date as the best proxy for the forward projections don't pick a quarter an anchor on that because youre likely to get the wrong because of the volume leverage plus.
Point in time, there is not a good way to look at the pharmacy business. So we do expect fairly continued pressure from reimbursement over a fairly long term horizon, that's not going to change the business model is not changing because of 1 quarter, but that being said, we the fabulous quarter, that's driven by the rules of trade in the community.
We did 17 million vaccinations, and we invested significant dollars to get the return of in gross profit.
Quite happy with the base margin, especially from the stores as well as very positive for the.
Number of quarters, none of that we've seen favorable margin. So we had a very good quarter all of them.
Okay. Thanks from the tunnels.
Your next question comes from the line of Eric Percher with Nephron research.
Thank you you've spoken about by FERC in the performance of suburban versus the 4 large urban markets.
Interested to hear if there has been a real difference from this.
Maybe the gross margin question as well.
The overall margin performance that Youre seeing and also of what of the patterns band at this point does the Las Vegas market with different maybe than New Yorker, Chicago and the cities any perspective there.
We had a fabulous time of with the in urban markets because as you know we have a.
The <unk> SKU.
Both in the U K actually under in the U S. So 1 interesting statistic is the.
And in the previous quarter and it shows actually the power of the U S economy as well once people went back on the streets and started spending again transactions prior to in the third quarter for urban stores were down 37% and in Q3 transactions were up 10% so footfall in the.
The us is very consumer driven the people, but people are traveling again and cities are filling up again. So we saw a major SKU every 1 of the core.
4 months. So if you look at rural transactions were up suburban was up.
Less dense urban was up both of the actual biggest transaction gain was in the urban area. The.
Same played true on sales, where urban is still down year on year slightly.
But we see we will see an ongoing recovery there.
Yes, I think that's the big opportunity I think so.
It's Ben.
We've seen like tourist stores really sort of take off here I think that as things have opened up the chain said.
The suburban and rural but I think our urban stores are present of real.
Upside opportunities from a opportunity you have there at all about arena.
Particularly as you looked at March April May.
It was.
The transactions and in.
In March were down 21% of nerve.
By the time, we got into April the were up 42%. So there is a market difference between March April may and we see that continuation into June as well. So we're very happy with the recovery that we're seeing particularly in the U S. However, I would counter balanced up with the U K, where there has been the longer lockdown than we anticipated.
And there is still not fully out of lockdown and where some lack of clarity as to when people will be encouraged to go back to work.
Very helpful. Thank you. Okay. Thank you very much of the vessel we have time for on the call today.
As of the IR team running the <unk>, but we didn't get.
You had a chance to get to I know, we did have some additional questions.
And in the event that we don't get to speak to you before the holiday weekend I Hope you won't.
On top of the holiday weekend, and we are of next week as well. Thank you very much. Indeed, we will speak to you again next quarter to the next earnings call.
Thank you for participating in today's conference call. You May now disconnect your lines at this time.
Okay.
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