Q1 2022 Walgreens Boots Alliance Inc Earnings Call

January 6, 2022

Speaker 1: Walgreens Boots Alliance Inc. first quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one again. Thank you. Tiffany, you may begin your conference.

Good morning, and welcome to the Walgreens Boots Alliance, Inc. First quarter 2022 earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

You'd like to ask a question. During this time press star followed by the number one on your telephone keypad. If you like to withdraw your question Press Star. One again. Thank you Tiffany you may begin your conference.

Speaker 2: Good morning. Thank you for joining us for the Walgreens Boots Alliance earnings call for the first quarter of fiscal year 2022.

Good morning, Thank you for joining us for the Walgreens Boots Alliance earnings call for the first quarter of fiscal year 2022.

Speaker 2: I'm Tiffany Kanega, Vice President of Global Investor Relations.

I'm Tiffany Kananga, Vice President of Global Investor Relations. Joining me on today's call are Raspberry are our Chief Executive Officer, and James Kehoe, Our Chief Financial Officer.

Speaker 2: Joining me on today's call are Roz Brewer, our Chief Executive Officer, and James Kehoe, our Chief Financial Officer. As always, during the conference call, we anticipate making projections and forth-looking statements based on our current expectations.

Always during the conference call, we anticipate making projections and forward looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on slide two and those outlined in our latest forms 10-K, and 10-Q filed with the Securities and Exchange Commission we undertook.

Speaker 2: Our actual results could differ materially due to a number of factors, including those listed on slide 2 and those outlined in our latest forms 10-K and 10-Q filed with the Securities and Exchange Commission.

Speaker 2: We undertake no obligation to publicly update any forward-looking statement after this presentation, whether as a result of new information, future events, changes in assumptions, or otherwise. You can find our press release and the slides referenced on this call in the Investor section of the Walgreens Boots Alliance website. The slides and the press release also contain further information about non-GAAP financial measures that we will discuss today during this call.

No obligation to publicly update any forward looking statement. After this presentation, whether as a result of new information future events changes in assumptions or otherwise you can find our press release and the slides referenced on this call in the investors section of the Walgreens Boots Alliance website, the slides and the press release also contained.

Further information about non-GAAP financial measures that we will discuss today during this call.

Speaker 3: I will now turn the call over to Ross. Thanks, Tiffany, and good morning, everyone. We are off to a very strong start to the fiscal year.

I will now turn the call over to Ross, Thanks, Tiffany and good morning, everyone. We're off to a very strong start to the fiscal year <unk>.

Speaker 3: First quarter sales increased 7.6% in constant currency and adjusted EPS grew 53%, well ahead of our expectations.

First quarter sales increased seven 6% in constant currency and adjusted EPS grew 63% well ahead of our expectation.

Speaker 3: This strong performance was underpinned by enhanced execution across all of our business segments and supported by ongoing contributions from vaccination and testing.

This strong performance was underpinned by enhanced execution across all of our business segments.

Supported by ongoing contributions from vaccination and testing.

Speaker 3: While testing and vaccinations are tailwinds for our business, I am very proud of the continued success of our core businesses, with strong growth in U.S. retail and robust recovery in our international market.

A press thing in vaccinations are tailwind for our business I am very proud of the continued success of our core businesses with strong growth in U S retail a robust recovery in our international markets.

Speaker 3: We are raising our full-year adjusted EPS guidance to low single-digit growth versus flat previously.

We are raising our full year adjusted EPS guidance to low single digit growth versus what previously.

Speaker 3: We are capitalizing on our first quarter performance and overall business momentum to make incremental investments of roughly $120 million in our people for two percentage points against EPS.

We are capitalizing on our first quarter performance and overall business momentum to make incremental investments of roughly $120 million and our people or two percentage point against EPS.

Speaker 3: As a reminder, building a high-performance culture and winning teams is one of our four key strategic priorities and is foundational to the other three. First, transform and align the core.

As a reminder, building a high performance culture and winning team is one of our four key strategic priorities and is foundational to the other three birds transform and align the core.

Speaker 3: Second, build our next growth engine with consumer-centric healthcare solutions. And third, focus the portfolio and optimize capital allocation.

Second build our next growth engine with consumer centric health care solutions, and third focus the portfolio and optimize capital allocation.

Speaker 3: Absent these incremental investments, a revised adjusted EPS guidance for fiscal 22 would have been 3 to 5% growth. You may recall that our original guidance already included a 4 percentage point headwind from investments to build out our healthcare growth engine. Investments that we strongly believe will position the company for attractive low-teens earnings growth over the long term.

Absent these incremental investments are.

Revised adjusted EPS guidance for fiscal 'twenty, two we'll have the 3% to 5% growth in.

You may recall that our original guidance already included a four percentage point headwind from investments to build out our health care growth engine investment that we strongly believe will position the company for attractive low teens earnings growth over the long term.

Speaker 3: As we will show you today, we are delivering well against our Investor Day commitment as laid out in October and making meaningful progress towards our strategic priority.

And we will show you today, we are delivering well against our Investor day commitment as laid out in October and making meaningful progress towards our strategic priority.

Speaker 3: While it remains early days in implementing our vision, the bold steps we are taking are clear and we are committed to creating sustainable value for our shareholders.

It remains early days in implementing our vision. The bold steps. We are taking are clear and we are committed to creating sustainable value for our shareholders.

Speaker 3: I want to take a moment to discuss our role in the fight against the pandemic, which demonstrates Walgreens' leadership in promoting the health of the consumers who live in our community.

I want to take a moment to discuss our role in the fight against the pandemic, which demonstrates Walgreens leadership in promoting the health of the consumers who live in our community.

Speaker 3: In the U.S., we administered 15.6 million COVID-19 vaccinations within the quarter. This achievement was made possible through the extraordinary work of our pharmacy team members.

In the U S. We administered $15 6 million COVID-19, vaccinations within the quarter.

This achievement was made possible through the extraordinary work of our pharmacy team members.

Speaker 3: We recognize their dedication to supporting our patients, our customers, and our community as we continue to help lead the nation's efforts in combating the pandemic.

We recognize their dedication to supporting our patients our customers and our community as we continue to help lead the nation's efforts in combating dependent.

Speaker 3: Nearly one year after we began our vaccination program with one COVID shot at a long-term care facility in Columbus, Ohio, we reached an important milestone for Walgreens at the end of the first quarter. 50 million COVID vaccinations administered to members of our community. As of Monday, we have administered over 56 million COVID vaccinations and we are not slowing down in our efforts.

Nearly one year. After we began our vaccination program with one Covid short and long term care facility in Columbus, Ohio, We reached an important milestone for Walgreens at the end of the first quarter 50 million Covid vaccinations administered to the members of our community as of Monday, we have administered over 56 million Covid back.

The nation and we are not slowing down in our efforts Walgreens began offering COVID-19 vaccine boosters in September and to date, we have administered over 9 million doses as of November we started at minutes during Covid vaccination. The children ages five to 11 <unk>.

Speaker 3: Walgreens began offering COVID vaccine boosters in September , and to date we have administered over 9 million doses.

Speaker 3: As of November , we started administering COVID vaccinations to children ages 5 to 11 in thousands of stores across the U.S. just in time as many families prepared to travel and gather for the holiday and variants continued to emerge.

The stores across the U S. Just in time as many families prepare to travel and gathered for the holiday and variance continued to emerge we are particularly proud of being the largest pediatric vaccine provider in the pharmacy channel is a powerful testament to the trust the families are placing in our Walgreens pharmacy team members.

Speaker 3: We are particularly proud of being the largest pediatric vaccine provider in the pharmacy channel as a powerful testament to the trust that families are placing in our Walgreens pharmacy team members. Importantly, about 40% of Walgreens stores offering the Pfizer COVID-19 vaccine to Children ages 5 to 11 are located in areas with a high social vulnerability index score.

Importantly, about 40% of Walgreens stores offering advisor Covid vaccine to children ages five to 11 are located in areas with a high social vulnerability index score.

Speaker 3: Our testing and diagnostic business has also accelerated with over 22.9 million COVID tests completed to date. Not only will we continue to grow this vital service as part of our pandemic effort, we are building on this platform as we are developing a wider range of testing and diagnostic solutions for our customers.

Our testing and diagnostics business has also accelerated with over $22 9 million Covid tests completed to date not only will we continue to grow this vital service as part of our pandemic effort.

We are building on this platform as we are developing a wider range of testing and diagnostic solutions for our customers.

Our execution in vaccines and testing our outperformance in first quarter and our health care investments are clear steps towards fulfilling our vision to be the leading partner and re imagining local health care and wellbeing for all.

We are making significant progress toward the broader commitments. We established in October along our four strategic priorities. Let me provide you with some details on several important initiatives.

First we are transforming and aligning our core business and building our pharmacy of the future that will enable and support our health care strategy.

We had an especially strong first quarter online, including buy online pick up in store.

Digital sales were up 88% in the U S driven by $3 6 million same day pickup orders Walgreens.

Walgreens volume biggest cyber Monday ever and importantly average order value is about $30 online versus $20 in stores.

Spanning our overall basket size as the digital channel continues to mature.

We are in the early innings of possibilities for Walgreens digital platform.

We've enrolled over $92 million my Walgreens members of $7 2 million since the fourth quarter. Additionally, our alternative profit businesses are growing nicely, including media advertising and financial services.

Second we're building a platform a consumer centric health care solution, which we expect to fuel our next phase of growth.

We closed on our shield and village and the majority of investments in October and November.

Secondly, and our care centric investment is scheduled to close by the end of the third quarter.

We have 81 village and be co located centers now opened as the rollout has accelerated to a pace of a new opening every four to five days for calendar year 2022.

Our consumer health App is live with our Blue Shield, California in Colver partners or their qualifying members.

We are operating 47 headquarters, including 10 recent openings in California.

We're looking at a rapid cadence of adding a new health corner every week on average in 2022.

Third we are refocusing our portfolio and optimizing capital allocation, we are applying a rigorous strategic lens to our equity investments and exploring all options to unlock value.

Most recently, we have agreed to acquire 100% ownership of both alliance Rx Walgreens Prime and our German wholesale J D, creating greater agility ahead.

Finally, we are building a diverse winning team that will underpin our strategic priorities, we're getting even closer to the consumer by adding Tracey Brown as our chief customer officer on the back of her innovation at the American Diabetes Association, and Sams Club, our T transformation and integration Officer Anita.

Allemande is applying her experience at Optum and Cvs to drive alignment across our initiatives.

We're forging ahead in health care with Dr. Sochi move Lee as our Chief clinical officer, and remediate Tandon as our chief clinical trials officer, drawing on their experiences and care delivery and clinical solutions, while at anthem icon and care more and Holly may as our global Chief Human Resources Officer.

<unk> our high performance culture.

I'm excited to share even more news with you in the weeks to come as we continue to round out the team.

As our results and progress demonstrate we have a deep and experienced bench in place to drive our strategic priorities today and I'm pleased to say we are in the final stages of welcoming a leader for our Walgreens health segments.

Bring a little more of what I was describing to life, let me share with you and anecdotes from one of our new health corners in California.

One just his first day of operation in November.

We saw the value proposition in action, a blue Shield, California member introduced himself and told us he's diabetic and struggled to make his visits to his primary care physician for his <unk> testing.

We're thrilled to learn he can do that here along with his family. This is just one example of how we can close care gaps through our convenience offering.

And so health corners rollout I have increased confidence that when executed at scale.

Innovative and consumer centric strategy will drive significant growth and value creation ahead.

We are connecting our physical health corners, with our digital App and our other unique complementary assets to meaningfully reduce costs and improve health outcomes and equity.

And when you factor in the continued expansion of co located clinics with diligent D. Nearly half of our footprint will be covered.

We are building community engagement today.

Walgreens can do through our trusted customer relationships, our local knowledge and our deep data insights.

That I'll hand, it over to Jim to provide more color on our results and our outlook. Thank you Ross and good morning.

In summary, we had an excellent start to the year with focused execution across all of our businesses.

Adjusted EPS was $1 68.

Well ahead of expectations and up 53% versus prior year on a constant currency basis.

We executed strongly in Covid vaccinations in testing you.

Retail comps were the highest in 20 years.

On the international markets continued to recover nicely.

Operating cash flow was $1 1 billion in the quarter with free cash flow of $645 million.

The strong first quarter performance allows us to increase our full year adjusted EPS guidance from flat to low single digit growth.

Let's now look at the results in more detail.

First quarter sales advanced seven 6% on a constant currency basis, reflecting strong comp growth in Walgreens and the international segment.

Adjusted operating income increased 48, 5% on a constant currency basis.

Driven by strong gross profit performance in both pharmacy and retail in the U S.

The continued rebound in international sales and profitability.

Adjusted EPS was $1.68 in the quarter the constant currency increase of 53% driven almost entirely by adjusted cooperating income.

The result was aided by around 10 cents for.

<unk> nine percentage points of phasing benefits or 13.

Reflecting the $2 five.

And then after tax gain in the current quarter related to the valuation of our prior investments in video.

Hello <unk>.

As well as a $1 2 billion dollar charge net of tax from the company's equity earnings at Amerisourcebergen in the year ago quarter.

Now, let's move to the U S segment.

So.

70 basis point headwind from a decline in the alliance Rx Walgreens Prime business.

Okay.

Adjusted gross profit increased 12, 3%.

With both pharmacy and retail growing nicely.

<unk> sales growth was partially offset by lower reimbursement on higher shrink costs.

Adjusted SG&A spend increased four 2% in the quarter to $17.

Points higher than last year.

The year on year increase was primarily due to investments relating to vaccinations and labor.

Partially offset by savings from the transformational customer management program on some sales.

Phasing benefits.

Adjusted operating income increased 46, 3%.

The strong gross profit growth more than compensated for higher cost associated with the COVID-19 vaccination program.

Now, let's look in more detail at U S pharmacy.

Pharmacy sales grew one 1%, including the negative impact from Alliance Rx Walgreens Prime.

Comparable pharmacy sales were up six 8% while comp scripts increased six 2%.

With vaccinations accounting for 535 basis points off the script growth.

We completed $15 6 million COVID-19, vaccinations in the quarter and administered $6 5 million COVID-19 tests.

We are now administering COVID-19 test at around 7000 stores.

Flu shots were down as we saw a return to more normalized levels compared to the record levels last year.

Additionally, <unk>.

Underlying scripts were challenged by staffing shortages on temporary operating hour reductions.

<unk> gross profit grew nicely strong sales growth at Walgreens more than offset reimbursement pressure.

Turning next to our U S retail business.

Comp retail sales increased 10, 6% on excluding tobacco comps were up 11, 7%.

Compared to pre Covid levels on a two year stacked basis comp sales were up low double digits.

We saw broad growth across all categories led by 24, 7% growth in health and wellness driven by at home COVID-19 tests.

Gulf Cold flu.

Transactions were up 9% on discretionary categories performed well with beauty comp sales growing 16, 6% on personal care up 11, 6%.

Strong sales growth drove an increase in gross profit. However, gross margin declined slightly constrained by higher shrink from organized crime theft, and the increased import freight costs.

Turning next to the international segment and as always I'll talk to constant currency numbers.

Sales increased 34, 2% in the quarter.

<unk> the 25 six percentage points of uplift from the formation of our wholesale joint venture in Germany.

We are lapping the formation of the Germany JV on November one 2020 with the prior quarter, including only one month of sales.

Excluding this impact sales were up eight 6%, reflecting the ongoing recovery and strong execution across most international markets, particularly in the U K, where sales advanced 13, 4%.

Adjusted operating income was 164 million.

$1 million in the quarter up 89% versus prior year led by higher sales and tight cost control.

Let's now look in more detail at boots UK.

Comparable pharmacy sales increased eight 8% stronger demand for services contributed to the increase with sales up more than 200% year on year benefiting from COVID-19 testing.

Flu vaccinations were also up and we recorded our largest ever season with $2 million of explanations during the first quarter up 150% compared to last year.

These positive developments were only partially offset by the non repeat of favorable prior year phasing of NHS funding.

Comparable retail sales increased 16, 3%.

Afflicting a recovery in footfall on strong commercial execution.

Market share has strengthened across all categories with beauty performing particularly well.

Despite these strong results footfall in the quarter remains around 20% below pre COVID-19 levels with particular challenges in travel locations.

We do however, see continued strength in basket size.

Which was up around 12% in the first quarter compared to pre COVID-19 levels.

Finally, foodstuffs com continued to do very well digital sales almost doubled compared to the equivalent pre COVID-19 quarter.

Now account for more than 15% of total retail sales.

Looking ahead, we are monitoring the impact of Omi chrome.

The UK government announced the move to slightly tighter restrictions, which started on December 13th.

We expect that footfall will remain sensitive to new COVID-19 variance.

Sure.

This is our first quarter reporting results for our new Walgreens Health segment.

Our majority investments in shields and village MD closed on October 29th on November 24, respectively.

Shields us immediately accretive.

Sales of $25 million and adjusted operating income of $10 billion in the quarter.

Reflecting six days of ownership village MD had sales of $26 million on an adjusted operating loss of $3 million.

For this fiscal year, we anticipate vintage MD to be dilutive to EPS.

Assistant with our October statements.

Organic investments in Walgreens health were slightly lower than expected due to the timing of expenditures.

We expect to see rising investments over the course of the year.

Let's now look at some of the key metrics around Blue Shield, we continue to work with other interested partners and we are approaching our December 2022 goal of 2 million lives.

As we scale our access to lives in partnership our Walgreens health corners.

With a goal of more than 100 by the end of 2022.

With 47 already up and running.

Ronnie.

We continue to expand the village MD footprint and will be an expansion mode for the foreseeable future.

<unk> currently has 257 locations across ethane market screen stores.

<unk> from 55 at the end of fiscal 'twenty one.

The goal is to have at least 160 co located clinics in place by the end of 'twenty two.

Both village M D and shields around a higher growth trajectory.

On a pro forma basis, they delivered strong sales growth and our most recent quarter with village in the advancing 182%.

<unk> growing 62% overall, we are very excited about our growth potential.

Turning next to cash flow.

We generated $645 million of free cash flow in the first quarter $118 million below prior year.

Strong growth.

Prior year, one time benefits associated with the passing of the cares Act.

The increased capital expenditures behind key growth initiatives.

Turning now to full year guidance.

We are raising our adjusted EPS guidance from flat to low single digit growth.

We now expect higher growth from our base business, reflecting.

A strong first quarter on higher levels of vaccinations and testing 30 million vaccinations this year.

Okay.

5 million higher than our previous guidance.

Our Walgreens health segment is tracking well against its key milestones.

Both the shields and vintage and under Walgreens health organic.

Continuing to invest in future growth.

Within this guidance.

We've reflected our decision to increase investments in our team members by an incremental $120 million.

As highlighted earlier by raws.

This investment our full year adjusted EPS growth would have been two 5%.

Let me now provide some additional color on the guidance raise including Hudson.

Additionally, our U.

Retail comps were very strong in the first quarter and we have seen this momentum continue into the second quarter.

Tight cost management across.

Balancing this we made.

The decision to increase our labor investments recent.

Recent labor script volumes in the first quarter.

And these investments should help improve the situation.

Additionally.

As with many of our.

Our peers, we are experiencing.

<unk> seeing higher rates of shrink loss due to organized crime theft arise.

And while we expect to pass through the majority of these higher costs.

In summary.

So the EPS guidance to low singles.

So digit growth driven largely by our U S segment.

And let me know.

Well update you on some of the guidance metrics, we provided during our recent Investor day.

Sales in the U S are now expected to be around two percentage points higher than previous guidance.

Even by strength in both pharmacy and front of store.

As a result, adjusted operating income is anticipated to be flat to up slightly better than our previous guidance.

Sales projections for international have also improved to 9% to 11% growth.

Mainly due to improved market growth for German wholesale business.

We still expect international adjusted operating income growth of more than 50%.

Walgreens health remains on truck sales.

Sales will be slightly lower due to the timing of regulatory approval related to care Centrex. However, this has an immaterial impact on earnings.

Finally, we expect an adjusted tax rate of around 16% consistent with prior guidance.

With that let me now pass it back to Ross for closing remarks. Thank.

Thank you James.

To summarize we are executing with a very strong start to the year and an increased fiscal 2022 outlook Doug.

<unk> transformation is underway.

I am pleased with our rapid progress along our strategic priority.

Im looking forward to continuing this dialogue with you about our execution and progress next week at the Jpmorgan Healthcare conference.

Energized and focused on re imagining health care and wellbeing for everyone with a clear path toward accelerated value creation across all our stakeholders.

Now I'd like to open the line for questions operator.

Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.

And your first question comes from Eric Coldwell from Baird. Please go ahead.

Thanks, very much and good morning.

First hoping you can provide a little more color on what's going on with alliance Rx Walgreens fiduciary breach claims.

But I guess.

Bigger picture, what's happening with that business number one number two.

Is there any impact on guidance.

We should note from taking the holding from 55% to 100% and if you don't mind that might have a follow up thanks.

Thank you Eric let me start off first by asking James to give a little bit of color on your second question and then we'll go into the alliance Rx after that thank you.

Okay.

Yes, so heidrick.

So we've taken the stake from 55% to 100%.

As you plot out your adjusted operating income there'll be no change because we already consolidate.

100% and then you have the below the line adjustment for the minority interest of 45%.

So you will recall that when we gave guidance at the beginning of the year. It was a material driver within the U S business, we called out.

There would be a 7% decline in U S revenues as a result of.

Roughly an $8 billion decline in the.

The Alliance Rx Walgreens Prime business.

So this large decline.

We kind of stared at this and looked at and said you know this business will need to be restructured its probably better under one owner to do this quicker and honestly we see.

We're formulating the news specialty strategy in the business, we see now that we have the shields assets combined with our specialty pharmacies combined with the alliance Rx Walgreens Prime business. We do believe we can formulate and integrated specialty business.

Hold on a little bit until we come out with more information on this.

You've raised some.

The legal disputes between the two parties. They have now been resolved as a result of the acquisition looking at our guidance. It is a slight negative impact because if we were declining 100 million on income year on year, we will now be declining 100% of net income on a net income basis as opposed to 55.

Percent, but honestly this is a couple of cents on the full year. So I wouldn't even worry about it in the context of guidance, but I do want to reiterate I think youll see us maybe in the next six months come out with a more energized specialty strategy, which will be more integrated.

We surround.

Potential partners with a series of integrated services. So we're pretty excited by this.

Thank you do want to emphasize yes, sorry, I just do want to ask.

Emphasize the relationship with Prime is very strong as a result of this.

Still.

Significant partners of theirs in retail and we will continue to offer specialty services to them on an ongoing basis as they require.

I actually have gone Stanley.

Respond kind of alliance Rx now James did a great job summarizing some plus dollars of specialty and we're excited to bring these assets fully back into the portfolio.

As James described so big opportunity for US we're really excited.

Hi, John you actually answered my follow up on just sizing the specialty business in total so thanks very much yes. He did the north person yes.

North north of $20 billion, so great. Thank you.

Your next question comes from Lisa Gill from Jpmorgan. Please go ahead.

Thanks, very much and good morning, <unk> I look forward to seeing you and Jean virtually next week.

So let me just start with first the clarification, James just I want to understand in the guidance when you talked about higher vaccinations.

This quarter was higher than we had anticipated obviously, we now have booster or even 12 plus in the U S. Can you talk about your expectation for vaccination.

As well as testing and the updated guidance and then secondly, I just had a broader question for you Ross as we think about the strategy and the health corners, and how do we think about I don't know if this is for you or for John Stanley, but how do we think about the profitability. There do you think that longer term you can do some kind of.

Whether it's shared savings programs or other types of programs because getting an incremental scripted great, but we're only where the opportunity is right is to lower the overall cost and potentially share in those savings. So if.

If you could help us to understand that as well.

Okay.

Great I'll, let James get started on testing.

Ya Li setup.

So Lisa and thank you.

I think five or six questions in there. The first one vaccinations. So we've increased the estimate from $25 million to $30 million.

And that's basically as a result of <unk>.

High levels of activity in the first quarter I do want to stress, though that 30 is just it's a number picked up a point in time.

And on the evolution of the <unk>.

Guidance from the CDC and others. This number could vary quite a bit.

So there could be some potential upside to this section.

Two but.

Pacifically on that we increased $5 million Thats worth about <unk> <unk>.

And then testing we had a fairly large opportunity as well because actually the biggest.

Driver in the first quarter is actually probably testing as opposed to vaccines.

And that's probably in the range of 12 to 15 kind of sense.

Just on the on the full year, so im giving you a full year number so nine cents on vaccines and testing is kind of call. It 12 to 15.

So quite a sizable contribution to the full year.

If we look at the $30 million.

You break it out on approximately $19 million or boosters.

Can figure out what the rest is pediatrics I believe is somewhere in the region of two two and a half million.

So the rest is.

People age 12, plus so much.

Much more specific than that from memory.

That is kind of our base assumptions, we're not giving profitability.

You can work it out from the cents per share that we just gave you.

<unk>.

And I'm trying to remember that I cover all your questions.

Yes, you've covered all my questions on that side. Thank you so much and I'll see you next week.

So Lisa let me talk a little bit about how we're thinking about our growth and Walgreens health and how that really leverages, our core business and Walgreens managed by John Stanley. So here's the way to think about this we are.

Creating an entity here that does much more than just dispensing of pharmaceuticals hotel and the way to think about this as the number of village Inn D units that we plan to bring together when you think about this investment of $5 2 billion.

I'll be opening at least 600 village medical clinics.

Our entity and then adding the health corners, we're trying to put the consumer in the middle of this and also giving them the visibility of what it costs to manage their health care over their lifetime.

When we think about where does the profitability comes from and if it is much beyond the prescription usage when I think about a customer coming into the village MD and actually understanding more about their health care needs. It will help them understand the spending and then also to what comes from operating in primary.

<unk> care physician practice within our within our entity and then I think it's about the work that can happen between optimizing for that patient between understanding what the pharmacist is.

Flying to that customer or patient health care needs and to get that repeat ability and also getting the customer or patient the opportunity to come into one of our units and utilize our health corner and so just managing their care over time.

For instance, looking at their <unk> levels and things like that over a period of time will hopefully bring their cost of care down and keep them out of the healthcare system and returning to emergency room and hospital settings, and so we've not really articulated.

<unk>.

Clear view on profitability going forward, but what I would tell you is that this does take us well beyond just the.

The additional script is much larger than that.

Okay great.

I'll see you next week, thanks, It sounds great.

And your next question comes from a J Rice from Credit Suisse. Please go ahead.

Thanks, Hi, everybody.

The front end store in the U S sales were really strong and I just wondered if we could delve into that a little bit as you as you look at that clearly at home testing probably had a component can you parse out how much that helped and how.

Now as you look at the rest of the year.

With the administration talking about sending out $500 million task.

Does that have implications for you in terms of.

Your ability to get those tests yourselves to sell to sell them or and your expectations around that testing and then if there is something beyond.

Testing, that's really strong can you comment on that as well on the U S front end sales.

Yes.

I'll take a shot at that.

<unk> come to it if you take the growth.

On front of store, which was.

The $10 six was the highest in 20 years.

The contribution coming from the COVID-19 screening tests was about 320 basis points. So it was about 29, 30% of the of the growth rate. So there is strong core performance in the front of store, it's not just.

At home testing.

So thats roughly in the quarter I think it's a little over $200 million of revenue in the quarter.

And I think it's around six so I might get this wrong.

Roughly <unk> <unk> contribution.

It's not a massively profitable sector, it's below the average of the health and wellness sector on a gross profit basis.

Is that what you were looking for age okay.

Areas of strength.

Yes, I think I'll just comment James we saw really strong performance in OTC beauty personal care, all very strong categories grid success with our mass personalization efforts and a little bit of Halo from the vaccine and testing. So I think those were all good contributors to <unk> to the <unk>.

Strong performance in the quarter.

Okay, great. Thanks, a lot.

Your next question comes from George Hill from Deutsche Bank. Please go ahead.

Yes.

First I'd like to welcome Tiffany aboard so Tiffany look forward to working with you.

And I guess, Jim and John I kind of have two questions around one is around what I would call underlying Rx as you talked about the comp on the front of the store.

In 2019, I guess can you talk about where you feel like the what I would call the acute care script or the regular way script comp looks like versus 2019, because there seems to be some debate about how close back to baseline we've gotten and I guess, if we could if I could just sneak in a follow on on the front of the store James.

Asked a question about the in home testing I am sorry, yes. The in home testing can you talk about the impact that that's had on the average basket size and maybe the tie rate what have you guys seen from people who've come in shopping for tests and people who've kind of bought stuff. In addition to the test.

You want to take a short term.

On the Rx sure I mean, I think I.

I would just say on Rx.

I think we saw.

<unk> count growth above and beyond what we saw in vaccinations, but we think theres more opportunity for US there just looking broadly at the marketplace.

We are as as.

James and Ross talked about making significant investments in the business.

Both from a staffing perspective, as well as with project nucleus and other capabilities, we're putting in to really drive that pharmacy experience in store. So I think we still see a ton of upside in growth opportunity just in the base pharmacy business.

To grow our market share and to push that forward.

Yes.

Yes, so George.

Got it wrong.

Q1 was <unk>.

Excluding amortization was up one 8%.

It was a little softer than where we would've liked to be.

One of the big drivers was Medicaid.

The market grew strongly in both Medicaid and discounted products.

And we like the market in Medicaid because we have a lower percentage overall.

<unk> and <unk>.

Great.

That being said.

There is a fairly strong connectivity between the scripts and the amount of explanations and testing done in the quarter because the.

Pharmacists are doing both jobs and there's been a high level of stress in the system. Hence the investments. So I think what has happened a little bit is because of staffing shortages.

We've had to reduce operating hours in some locations.

And two as some of those phone calls does happen to say.

Adherence follow ups are they taking the medication those phone calls were not priority number one during the administration of the vaccination. So we got to get a bit of a rebalancing in the euro to go and we are reasonably confident that the actions. We're taking are definitely in the right direction. So we should see an uptick in <unk>.

Scripts in the coming months.

Okay I appreciate it thanks guys.

Sure.

And your next question comes from Elizabeth Anderson from Evercore. Please go ahead.

Hi, guys. Thanks, so much for the question.

So just a follow up maybe on a J 's question. When you were talking to the at home testing contribution in this quarter that was hindered etsy.

Et cetera, how are you thinking about that in the broader context of the new guidance that you put out.

Yeah.

Well, maybe I'll tag team with.

John on this.

There is there is a fair amount of talk about free testing thats still to be determined when that will be in the market.

As far as I know there isn't the website set up and there isn't.

Defined.

Procedure of how it's all going to work. So I think it's a couple of months away.

The critical one right now is stock availability and I'll give you an interesting statistic, our health and wellness share and the market generally is around 17%, 18% our share of our surety.

At home test.

Is 40%, 45% so.

What we've superbly executed against supply chain fulfillment on partnerships with suppliers.

Right now, we're a little spotty in places on an available or see where we're at about 70%, but we clearly sold the majority of the household.

So it's been a huge success so the 200 billion didn't come.

Just magically pain because.

Because of stock availability and we had much more of we had I think we have seven different types of COVID-19 at home.

Test center stores in various places so we've executed on this one and Thats why we have such a big contribution in the first quarter.

We think we will continue to out execute we see our stock availability levels going up significantly by mid month.

So we're feeling in a pretty good place in the next three months beyond that nobody can tell it's all on what's the where are the variance at a particular point in time I think testing is here to stay for a considerable amount of time, but our full year forecast is not riding on this I can assure you of that.

That's really helpful and if we think about I think you were really helpful. Instead of giving your updated thoughts on the broader longer term picture with village MD I was wondering if you had any sort of data from the quarter.

Co located location in terms of increase in sales in the Walgreens.

Fernando pharmacy or any other data you could point to us from that perspective.

No not really I think it's a little bit soon I don't think we need another quarter behind us.

We've got I think 81 clinics open.

We still leads on those on the phone to some of the village guys yesterday, which we still need to get the same kind of starts they already have starts to prove that a pharmacist working with.

Doctor produces tremendous benefits in terms of outcomes, we need to replicate those statistics in the co located we're convinced that will happen. It's just a timing difference.

As you look forward on village sorry, if you look forward on our segment one thing I would ask you to have in mind as you know the revenue is produced.

Small in the quarter, because we're just closing the acquisitions.

A good way to think about these acquisitions as well.

<unk> closes at the beginning of the third quarter, we essentially we'll be doing a little over $1 billion a quarter in terms of revenue in the segment. So if you think about Q4 and you do a simplistic run rate by the time. We finished Q4 will have a run rate of about $4 billion, probably north of $4 billion in terms of.

I'll call. It 12 months run rates on the segment.

That's the only kind of new.

Insight, we would give because a little bit analyst models are a little bit all over the place in terms of expectations. So I don't think youre going to see stability on revenue once we get into Q3 and it all depends on closing time on cures in a quarter for the remainder of the year.

Got it that's super helpful. Thanks sure.

Your next question comes from Michael Cherny from Bank of America. Please go ahead.

Good morning, and thanks for all the color so far I apologize if I keep coming back to this but I just want to make sure I understand a lot of the moving pieces on guidance in particular.

It factors into the multi year growth that you outlined at the Investor day back in.

October it seems to me James that if im looking at the pluses and minuses that you outlined which are quite helpful, especially with some of the dynamics around the testing benefit that youre seeing that.

Plus is more than offset the minuses relative to the magnitude of the EPS guidance, and maybe I would've expected a bit more and so I guess relative.

Susan, especially given that a lot of them.

The benefits are COVID-19 oriented I know, we can't predict where COVID-19 can look like in fiscal 'twenty three but does this change anything.

For earnings growth relative to the previous outlook that you had mentioned.

I'm not sure we want to start getting into next year, but I would say the.

Let's talk about shrink for a minute because you could actually argue that shrink is somewhat correlated with COVID-19 in terms of it is.

Post COVID-19.

So what are.

I'm not trying to get a direct route.

Our relation with it but I'll give you a number of P&L the shrink issue for US. This year is in excess of 15 cents a share to play so that will continue longer terms.

So there as you said there is money Hudson takes in both directions.

So shrink.

We're going to have to redouble, our efforts on shrink to get this number in a different direction.

Honestly I think Congress.

The staff up a little bit here because the magnitude of the problem is it is.

Enormous we've had I don't know 10 years, where shrink is up.

And I'm not going to it sounds precise it's not the exact number it's a little over 2% of shrink to two five it's currently running in that three to five.

A 40, we estimate the.

Such basis than it was.

Prior to sorry bucket prior to 19, sorry prior to 'twenty. So this is over the last two years, we're absorbing a 52% increase in shrink and it's organized crime. This is not pleasant test, it's not somebody who can't afford to week Tomorrow. These are guys that actually go in and <unk>.

Our stores of beauty products.

It's a real issue referred to as well as with all of our peers, it's a real issue.

The other one is in flight.

Hi, Sean honestly I think we're doing a very good job of managing that we have some we'll have minor ups and downs quarter to quarter, but generally we're offsetting inflation.

B <unk> <unk> negative on the full year, so we're not talking about big money.

In terms of.

Explanation number a year, what's the final.

Testing and maybe I'll ask John to comment a bit because we have an intention to build a diagnostics business longer term.

So, we'll offset as we get into next year.

John or Ross on add on anything.

Yeah, absolutely I mean, I think Doug.

I think.

Where we've gone with diagnostic testing now just with Covid testing.

And over 7000 stores, we've got a a some good green shoots in ANZ and testing that are underway right now just at the very early stages, but I think that's a big.

Opportunities for us and in our Covid testing, we do CLIA waived.

Rapid testing in our stores and over 4000 locations. So as James said I think Thats. One example of some of the.

Changes to our business that will come out of out of Covid as we move forward that are big opportunities for us.

Mike. This is Raj can I just add a couple of things here just for clarity so.

You also notice that we made a significant investment in labor and as we are all involved in this uncertain labor market, we're not quite sure how much more investment will need to apply there, but what we've done so far.

Flying at very directly against <unk>.

Regaining our script business, which could.

Turning to numbers around in that area.

Also as the potential for a fourth dose to come online, we're managing through that though the uncertainty here is the other part that we need to think about and then I just wanted to mention the piece on shrink and that we're managing this on a couple of different levels.

As happening at store level, but my myself personally and our government relations team has been in.

Our national leaders on how do we.

What we're seeing is.

An online application.

And so we're working with our partners that are in the online business to make sure that we can monitor this situation for us in that level of uncertainty and the enormity and some of these issues that you have.

Look at this and say is there more to be had here, but it's the uncertainty piece that we're managing Mike if thats helpful.

Now all of that is very helpful. In terms of understanding the moving pieces. Thank you.

Thank you.

Your next question comes from Steven Valiquette from Barclays. Please go ahead.

Thanks, and good morning, everyone. So just a quick question on the quarterly cadence of earnings in the remainder of fiscal 'twenty, two and the <unk>.

Adjusted operating profit for the company has always been up sequentially in fiscal <unk> versus fiscal <unk> and each fiscal year.

<unk>. So is there any reason why that would not be up sequentially in fiscal <unk>.

Versus fiscal <unk>. This year just on the sequential adjusted operating profit.

Are your latest thoughts around the flu benefit for the company in fiscal <unk> as well.

Okay.

Sequential side.

I think we do see.

Is the Q2 will be positive quarter on EPS growth year on year, because there was low levels of vaccination in the prior quarter.

So when we have a good second quarter. The answer is yes, you are in terms of how much of the.

Into Q1.

That's what we are.

We estimate on a full year from other people.

We will get boosted pediatric number.

Quite a lot of detailed work so well we will have a good second.

Second quarter.

Okay.

The flu flu.

We had a very strong.

Strong flu season in the UK, which was up 150% and we had a fairly weak one in the U S.

Fluid incidence is generally were down compared to a record season last year.

No.

Co brilliantly the answer is no.

I think the exact number is while we were I think it was an 80 basis points headwind.

The first quarter was 80 basis points negative due to a weaker flu season.

Okay got it okay. Thanks.

Your next question comes from John Ransom from Raymond James. Please go ahead.

Hey, good morning.

You guys have called out $3 40, b as a risk and we've noticed that the.

The manufacturers.

Manufacturers have won a couple of rounds and of course and that Theres reduced support for this program for the contract pharmacies.

Is that what kind of headwind is that this year versus last year, how should we think about this longer.

Ken. Thank you for that question I'm going to ask John.

John Stanley to talk a little bit about the impact of 340, B and if.

There is any other numbers janesville close out the question John.

I don't think its a hugely material issue for us at the moment, we're obviously watching the situation. So the administration's Ashton are supportive.

Idea here is obviously to do that.

The medications.

As many folks who should have them as possible and thats really our objective as well.

Obviously shields gives us a whole another.

Approach here as well.

As you look at the 340 <unk> space.

But it's also.

An important part of our specialty business and again, just making sure that we can get.

Patients access to the medications that they should I would just summarize.

I think it is tracking slightly behind these budget Bob.

It's not material enough to talk about and then.

Year on year I'd call it kind of neutral.

Q1 2022 Walgreens Boots Alliance Inc Earnings Call

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