Q3 2022 Walgreens Boots Alliance Inc Earnings Call
<unk> health.
Third focus the portfolio and optimize capital allocation and Ford build a high performance culture and a winning team.
We are making good progress against each initiative as we are becoming the leading partner and Reimagining local health care and well being for all.
First we are transforming and aligning the core business and building our pharmacy of the future that will enable and support our health care strategy.
U S and boots UK retail comp sales both reflected very good execution in the quarter with several of our initiatives continuing to gain traction.
U S digital sales grew 25% in the quarter on top of 95% growth a year ago.
My Walgreens membership is approaching a big milestone of 100 million customers.
We are focusing labor investments to return about 3000 stores to normal operating hours, which I expect will accelerate script volume recovery as we head into fiscal 2023.
Recently, we opened our fourth automated micro fulfillment center and are now supporting 1100 total stores.
More store locations will continue to be added as these facilities become fully operational.
These micro fulfillment centers remove routine tasks and excess inventory from the pharmacy, allowing pharmacists more time to focus on patient care and clinical services <unk>.
Expanding on the critical role they already providing communities.
The center's Phil about 20% of store scripts today heading to 40% to 50% over time.
And finally in the U S. We've expanded our partnership with Alto U S.
A provider of loss prevention and tech enabled security services.
We're now working together across more than 2200 stores, which is already having a positive impact on shrink.
At Boots, UK I want to highlight our innovative digital health care service booths online Doctor, which has already reached nearly 500000 customer orders on.
On the retail side, we are driving share gains across all major categories. Now let me take this opportunity to discuss the health of the consumer given our insights from our store network across the best Corners of America, and the U K as well as what we're all observing through macro uncertainty.
And record low consumer sentiment.
We see our customers, making deliberate choices to prioritize overall value and convenience there is a shifting calculus due to food and fuel inflation, but health and wellness will always be a priority.
Pricing is just the start of our customer set of considerations, where we are collaborating closely with suppliers and maintaining price gaps versus competitors.
Walgreens and boots are trusted brands with strong community ties established over many decades of pharmacy leadership.
Historically.
We have seen stable script trends in a downturn, which should be aided today by the ongoing return to normalized healthcare utilization levels. Additionally, we see upside at Walgreens as we address staffing challenges and stores to enable a return to normal operating hours.
Our front end momentum is bolster through our owned brand loyalty and Omnichannel initiatives.
Additionally, in this era of rising gas prices, we have leveraged our hyper local footprint and highly relevant retail offering to achieve positive comp store transaction growth.
We are seeing higher levels of traffic to our stores and our websites as consumers are looking to optimize their spending dollars across quality value and convenience.
We're meeting our customers with robust in stock levels that are slightly above last year, despite ongoing supply chain headwinds.
We've also been ahead of the curve and managing through inflation.
This is all alongside raising the target for the transformational cost management program for the fifth time.
Underpinning our efforts is our strengthened retail products and customer leadership team with three new executive.
Walgreens, Chief Marketing Officer, Len Peters joins us from Calvin Klein, where she served as their global Chief marketing officer with experience also at Starbucks target and Ulta beauty.
This <unk> is in our newly created role of Chief product Officer, having most recently been vice President of E Commerce at Walmart U S. And finally look route is our new chief merchant rejoining the merchandising organization after focusing on strategy as my chief of staff.
We have the right team in place to support our high performance culture to guide, our resilient core business and to serve our customers through these turbulent times.
Next I want to take a moment to recap Walgreens progress and providing local communities with access to COVID-19 resources as we crossover into endemic scenario.
In the U S. We administered $4 7 million COVID-19, vaccinations within the quarter and over $67 million in the program to date as of early April Walgreens has been offering additional boosters to adults, aged 50 and older and certain immuno compromised individuals.
I am pleased to add that as of Saturday Walgreens has begun administering vaccines to children, aged three years and older at select locations nationwide.
This follows our offering of boosters to children, aged five and up starting in May.
Walgreens pharmacy team members are among the most trusted health resources readily available to administered vaccines and provide education to this newly eligible population and their parents or Guardian. Our experience has established Walgreens is the largest pediatric COVID-19 vaccine provider.
In the pharmacy channel.
On the COVID-19 testing front, we completed $3 9 million in store test during the quarter and over $32 million in the program to date.
Last month, Walgreens expanded access to offering pixel by Labcorp.
At home PCR kits at no cost through curbside and in store pickup.
This initiative is important particularly for uninsured socially vulnerable and medically underserved populations, who continue to be among those most impacted by COVID-19.
Walgreens health is reimagining healthcare by making it personal.
To achieve this goal we are creating a network of industry, leading health care service providers with the experience and capabilities to help people build relationships with primary care professionals pharmacists and in home care teams in their communities.
Our largest partnership village MD continues its rollout of co located clinics with 120 now open.
On pace towards 200 by the end of 2022.
Village MD is in 22 markets today with over $1 6 million patients.
<unk> continues to rapidly expand its platform, including new deals with three significant health systems and the launch of Boston Children's pharmacy.
Together village M D and shields drove pro forma sales growth of 65% for Walgreens health in the quarter.
And our organic Walgreens health business. We are excited to have signed on our third payer partner.
Sky Health plan.
Importantly, this development brings the lives under coverage to $2 3 million exceeding our 2022 target.
Our collaboration with Buckeye also extends beyond health corners to include asthma, and COPD patients as part of a multi phased approach to support comprehensive expanded clinical services through this pilot Walgreens pharmacist counsel patients on how to use their inhalers provide pro.
<unk> outreach to non adherent patients and use predictive modeling to reach out to people at high risk for becoming non adherent.
Health plan is one of the first payers to reimburse pharmacists for these services in Ohio made possible through recent state legislative changes.
With 56 health corners in operation, our health advisors logged over 60000 consumer conversations in the quarter.
It's been very inspiring to hear some specific stories.
For example, a customer who came in looking for blood pressure monitor.
Our health advisor had a conversation with him about the causes of high blood pressure and its potential complications.
As they were talking the advisor noticed the customers face was red and flushed.
To check his blood pressure and it was very high the adviser insisted that he go to the emergency room. The following week. He came in to think the advisor, saying this new service.
Saved my life.
Our consumer centric model of increased access engagement and convenience is working we.
We are tracking well against all of our key milestones for Walgreens health This year and remain very optimistic about our long term growth potential finally as part of our continued work in building health care solutions. We recently launched a comprehensive offering of clinical trial services to redefine the end to end patient experience.
And increased access and retention in drug development research.
Nearly 80% of trials fail to meet their enrollment goals and their stated timeframe.
Contributing to billions of dollars in delays every year, we believe we can increase participation, especially among diverse populations and support sponsors and meeting their trial goals by leveraging our well established presence across the nation and enterprise wide health capabilities.
The opportunity is clear.
And I look forward to sharing more with you ahead.
With that I'll hand, it over to James to provide more color on our results and our outlook.
Thank you Ross and good morning.
Adjusted EPS of <unk> 96 was broadly in line with our expectations.
On a constant currency basis.
<unk> declined 29% versus prior year levels.
As mentioned before we were lapping them, especially strong prior year quarter.
With EPS growth of over 90%.
We administered 17 million vaccinations last year.
<unk> to $4 7 million in the current quarter.
Leading to an EPS headwind of around 18 percentage points.
We also continued to invest in our fast growing Walgreens health business.
Sales for the segment grew 65% on a pro forma basis.
On the growth investments led to a negative EPS impact of six percentage points.
Our U S retail business continues to execute strongly on.
Our international markets more than doubled segment, the oi compared to the prior year quarter.
Sales grew ahead of expectations on cash flow was solid.
With year to date operating cash flow of $3 $8 billion.
On free cash flow of $2 $6 billion.
The transformational cost management program is performing ahead of expectations with an expanding funnel of initiatives and we.
We are now raising our annual cost savings goal to $3 $5 billion by fiscal year 2024.
Finally.
Our third quarter performance was broadly in line with our expectations, we are maintaining our full year outlook of low single digit growth in <unk>.
Adjusted EPS.
Let's now look at the results in more detail third quarter sales declined two 8% on a constant currency basis strong growth from Walgreens on the international segment on sales contributions from Walgreens hope were more than offset by a 720 basis points impact from the sales decline although.
<unk> Walgreens.
If you exclude the negative impact from <unk> on the positive benefit from Walgreens MMA constant currency sales growth was approximately 3%.
Adjusted operating income declined 34% on constant currency basis, driven by a decline in U S pharmacy as it lock the peak COVID-19, vaccinations in the year ago quarter.
Planned growth investments with Walgreens growth.
This was partly offset by solid gross profit performance in U S retail and continued strength in international sales and profitability.
Adjusted EPS was <unk> 96 cents in the quarter, our constant currency decrease of 28, 9%.
Driven mostly by adjusted operating income.
GAAP EPS decreased 74% to 33.
Reflecting a $683 million charge for the opioid settlement with the state of Florida.
Higher one time charges in the quarter related to the transformational cost management program.
Now, let's move to the year to date highlights year to date sales advanced two 7% on a constant currency basis, including a 500 basis point negative impact from Alliance Rx.
This negative impact and excluding the Walgreens hope MLA activity core sales growth was around 8%.
Adjusted operating income increased 13, 7% on a constant currency basis, reflecting the adjusted gross profit growth across both pharmacy and retail in the U S. On a continued rebound in international sales and profitability.
Adjusted EPS advanced 13, 9%.
GAAP EPS increased by $3 62.
To $5 49.
Reflecting a $2 5 billion after tax gain in the first quarter related to the valuation of our prior investments in village MD and shields as well as lapping a $1 2 billion charge net of tax from the company's equity earnings and Amerisourcebergen in the year ago period.
This was partially offset by the Florida opioid legal settlement in the current quarter.
Now, let's move to the U S segment.
Sales decreased 7% in the quarter, a solid performance from Walgreens up one 7%. Despite lapping peak COVID-19, Voc solutions was more than offset by an 850 basis point headwind from Alliance Rx.
Adjusted gross profit decreased nine 6% with high single digit growth at retail more than offset by a decline in pharmacy.
Procurement savings on the strong retail performance were more than offset by fewer COVID-19, vaccinations and lower reimbursement rates.
Adjusted SG&A spend decreased 0.9% lower COVID-19, vaccinations and continued cost discipline were only partly offset by higher labor costs.
Timing of marketing spend.
SG&A as a percentage of sales increased 110 basis points to 17, 9% of sales.
This was almost entirely due to an adverse mix impact as a result of the alliance Rx sales decline.
Adjusted operating income decreased 34%, mainly reflecting lower pharmacy performance, including the challenging comparison against peak COVID-19, vaccinations in the year ago quarter.
Now, let's look in more detail at the U S pharmacy pharma.
Pharmacy sales declined nine 7% negatively impacted by an 11, two percentage point impact from Alliance Rx Walgreens.
Comparable pharmacy sales were up 2% comp scripts decreased one 8%, but excluding vaccinations comp scripts increased two 1%.
We completed $4 7 million COVID-19, vaccinations in the quarter compared to 17 million vaccinations in the prior year quarter.
And we administered $3 9 million COVID-19 tests in the quarter compared with $3 4 million tests in the prior year quarter.
Pharmacy benefited in the quarter from the better trends and seasonal Scripps. However, while we did see some improvement in the quarter Scripps continued to be challenged by temporary operating hour reductions due to labor shortages.
We estimate an impact of around 190 basis points on comp scripts in the quarter.
Pharmacy, adjusted gross profit declined as procurement savings and volume growth were more than offset by reimbursement pressure and we lapped peak COVID-19 vaccinations in the prior year.
Comp retail sales increased one 4% on excluding tobacco comps were up two 4%.
We saw strong growth across health and wellness driven by at home COVID-19 tests on cough cold flu.
Personal care was up two 6%.
But the consumables and general merchandise categories were impacted by strong sales of COVID-19 related items last year on the planned decline in tobacco.
Gross margin increased strongly year on year due to effective margin management on stabilizing shrink levels, partly offset by supply chain pressures.
Turning next to the international segment and as always I'll talk to constant currency numbers.
International had a strong quarter sales increased nine 3%.
Afflicting growth across all international markets.
With boots, UK advancing 13, 5% on Germany wholesale growing six 8%.
Adjusted operating income was $174 million in the quarter more than doubling versus prior year.
Led by sales growth and tight cost control.
The integration of our Germany wholesale business is very much on track with operational and synergy benefits running ahead of schedule.
Let's now look in more detail our boots UK.
Boots UK sales grew 13, 5% in the quarter led by strong retail performance.
Comparable pharmacy sales decreased slightly as we lapped favorable NHS reimbursement timing in the year ago quarter.
Comparable NHS volume showed modest growth, while pharmacy services advanced 22% in the quarter with stronger demand for new online health care services.
Comp retail sales advanced 24%, reflecting a recovery in footfall on strong commercial execution.
Market share increased across all categories with beauty, performing particularly well.
Despite the strong performance store footfall in the quarter remains around 20% below pre COVID-19 levels Trevor.
<unk> locations are now improving but remain quite subdued.
We saw continued strength in basket size, which was up around 14% in the third quarter compared to pre COVID-19 levels.
Food stock comp sales more than doubled compared to pre COVID-19 levels more than 13% of total UK retail sales came from our digital channels in the quarter.
Up from around 6% pre COVID-19.
Turning next to Walgreens health.
Segment sales were almost $600 million in the quarter with village MD contributing $511 million on shields health contributing $85 million.
Walgreens Hof Oi was a loss of $129 million in the quarter.
Organic investments accounted for $31 million.
The investments at <unk> more than offset the profit contribution from shields hope and led to a $97 million AOE loss across our majority investments village MD sales advanced 69% on a pro forma basis, reflecting existing clinic growth.
Footprint expansion at the end of the third quarter <unk> had 315 clinics and increase of 97 clinics year over year.
Shoes delivered a strong quarter.
So pharma sales growth was 47% with improved operating margins driven by growth from recently signed contract wins on by expanding their value add proposition with existing health system partners.
Let's now look at some of the key metrics for Walgreens.
As Ross mentioned, we have already exceeded our December 22 goal of 2 million covered lives.
And we recently announced a strategic partnership with book I Hope club.
The rollout of village MD continues with 120 co located clinics opened at the end of the third quarter up from 94 at the end of the second quarter we.
We are progressing towards our goal of 200 by the end of this calendar year.
Our fiscal 'twenty two sales goal is now a $2 billion.
Reflecting the delay in the closing of the <unk> investment.
Apart from that there are no changes to our underlying sales assumptions and as you can see <unk> shields are delivering impressive growth.
With pro forma combined sales growth of 65% in the quarter.
Turning next to cash flow.
Year to date free cash flow was $2 $6 billion seven.
$737 million below the prior year as we cycled through some exceptional headwinds.
Free cash flow was adversely impacted by the working capital impact of a decline in the alliance Rx Walgreens business and the year over year impact of COVID-19 related government support.
Free cash flow also included a $240 million increase in capital expenditures behind our growth initiatives, including the village MD footprint expansion rollout of the new automated micro fulfillment centers and continued omnichannel and digital investments.
Turning now to full year guidance.
We are maintaining our full year guidance of low single digit growth in adjusted EPS.
We have raised our estimate for the base business slightly from 6% to 8% growth.
Two 7% to 9% growth to reflect strong U S front of store performance and increased testing and vaccinations.
We are now expecting 35 million vaccinations, this year compared to $31 million previously.
Investments in our healthcare business negatively impact EPS growth by around six percentage points compared to five points previously.
In summary, we are executing well performing in line with our expectations and Reconfirming, our full year EPS guidance of low single digit growth in constant currency.
I would remind you that this is better than the original guidance. We provided at the start of the year of flat EPS growth year over year.
Next I will offer some additional color on our fourth quarter outlook.
First let me remind you that we are lapping a strong year ago quarter with EPS growth of 28%.
The prior year growth was driven by strength in COVID-19, vaccinations with $13 $5 million administered last year versus an estimated $2 9 million. This year. Additionally, last year, we saw a strong front end results aided by at home COVID-19 tests.
Consistent with what we said previously we anticipate some headwinds in the fourth quarter on this chart highlights the most important ones.
Vaccinations are unexpected headwind of 15 to 17 percentage points.
Investments to build out our Walgreens health segment could result in 10% to 12% impact on fourth quarter EPS.
Other headwinds include labor investments of around five percentage points and lapping prior year, one time gains of approximately four percentage points of EPS growth.
Bind these.
These headwinds amount to an expected 34% to 38% year on year headwind.
And leads to full year EPS growth of low single digits.
I would caution against any extrapolation of these EPS impacts for example, labor costs include premiums to address short term.
Okay.
COVID-19 is the single biggest unknown.
And it is difficult to predict today, how new variance booster adoption reimbursement dynamics on underlying health policies will impact consumer behavior.
Against this backdrop.
We have a strong array of strategic growth initiatives that will drive our long term growth algorithm.
First we expect script volume to recover as we get back to normal operating hours and launched targeted patient retention programs second our U S. Retail business is demonstrating good momentum through digital and Omnichannel growth from my Walgreens loyalty program.
Brand innovation and alternative profit streams.
Fiscal 2022 was a strong year and.
And we have extensive plans on initiatives to drive continued success.
Third.
Fiscal year 2022 has been affected by elevated retail shrink.
Running at above 3% of sales year to date.
Trends in the most recent months are more promising as we rollout actions to counteract the rising shrink levels and we expect shrink to trend downwards in 2023.
Fort the.
The International segment is achieving very strong results and it is clear that next year should see continued sales and profit growth.
Fifth the Walgreens health segment with scaling up and margins will build over time.
Additionally, we are aggressively working to capture synergies across our various health care investments.
Overall, we expect the Walgreens health EPS headwind in 2023 to be much lower than this year.
Lastly, we continue to expand our save to invest to grow program.
And have raised the overall target savings for the transformational cost management program from $3 3 billion to $3 5 billion by fiscal 2024.
A majority of the increase will benefit fiscal 'twenty three.
In summary.
We are aggressively driving growth initiatives, and we remain fully committed to achieving sustainable low teens EPS growth over the long term.
With that let me now pass it back to <unk> for her closing remarks.
Thank you James.
As you have just heard we are executing very well across our business. Despite several challenges and making major progress on the goals we laid out in October .
Our transformation is very much on track and I remain excited about the future as.
As we move forward, we will continue to be laser focused on one making further improvements in our core business.
Evolving our portfolio to ensure we are dedicated to the areas, which provide the best returns.
Three building out our Walgreens health business, which is expected to be a significant percentage of our earnings growth over the long term.
Fourth managing and preserving our capital across our many assets and five recruiting and retaining a world class team of top talent I am optimistic about the opportunities ahead, and our ability to deliver strong results on each of our key strategic priorities.
We remain strongly committed to driving our long term earnings growth algorithm and look forward to keeping you updated as we achieve our vision to be the leading partner and Reimagining and local health care and well being for all.
Now I would like to open the line for questions operator.
Thank you.
If you'd like to ask a question. Please press Star then one on your telephone keypad.
Our first question is from Lisa Gill with Jpmorgan. Your line is open.
Thanks, very much and thank you for all the detail today.
My first question was just really be around.
Keeping the boot business for now and.
The announcement that you had made earlier this week around that Ross as I think about the investments that you want to make around your health care initiative.
Haynesville timeline at all I Didnt hear you talk about that today would be my first question and then secondly, as we think about.
Really reallocating some of the investments that you made this developed change the timeline of the sale of ADC I'm just curious as to how we should think about how those things play into the longer term opportunities around Walgreens health.
Lisa. Thank you for that question. So let me give you just a few highlights in terms of how we came to the decision to retain boots.
First of all you know as you can imagine we ran a highly confidential process are we.
<unk> gained early high interest at the very beginning of these just have discussions back in January .
We started off with roughly about eight to 10 interested parties in the beauty business and we had very productive discussions got into.
Detailed due diligence just as the market began to turn on and.
Such an unexpected and dramatic change.
So as a result, we made a decision to slow this this opportunity down but at the same time, the boots and number seven business continued to do well and you know our thinking is in any of these situations the business should be good enough for us to retain as well as to look at strategic opportunities for it. So the business is healthy and welcome.
To ensure that it remains healthy.
As you look at the timeline going forward.
You need to think about our fuller portfolio, when we talked about doing a strategic review of our businesses. We started off with boots, we have.
Other opportunities that we can look at in here. So in terms of the timeline. It's important to state is that we are going to stay bullish about moving forward on Walgreens health and making sure that our investments are prioritized in that direction. We've seen good success in terms of the initial investment that we've made there. So we feel like we're on a good trajectory.
<unk>. So in terms of the timeline, we still will continue to make the investments there move forward were committed to building those things.
And the most important parts of that business is to make sure that we get our commercial assets are up and running and so that's the work that we're focused on.
I will also tell you that in terms of you know our commitment to looking at the balance of our portfolio of businesses. We will continue to do that as well.
And then just a point of clarification James I. Appreciate all the comments that you made about 2023 and getting back to that double digit growth.
Is your comment that that you anticipate getting to double digit growth off of 'twenty two 'twenty three.
Or were you just making the comment that you believe longer term that that that's still on the horizon Parker Walgreens. So Lisa go ahead, James and take US through 2000, and maybe go through if you go back to the October Investor Day deck I think what we said was the next three years the compound annual growth rate with average 4%.
<unk>.
Slide 25, and beyond it would was 211% to 13%. So there was a measure of deceleration of the EPS growth over a number of years and then when we gave guidance at the beginning of this year, we said zero percent and we would have a celebration into mid single digit EPS growth.
Beyond 'twenty two year.
You could actually argue that we're ahead of where we said we would be because were at low single digit versus zero.
So we won't be getting too.
Low teens next year, because we never said, we would go to low teens next year, we said mid single digits.
I think as we look forward.
There's a lot of concerns out in the market general some participants are being taken.
<unk> Q4, and multiply by four which was just the wrong calculation Q.
Q4 is about 16% of our total full year income. So I think you have to actually do the right proportions.
We then decided to lay out these two wins that we have and I'm sure you'll agree they're substantial.
And I do want to hit those we do express expect a fairly strong rebound in Rx scripts next year, because we had some operational issues in the stores.
The front of store strength I don't think it should be lost on anybody just how well we're doing versus the overall pure set in front of store margins are up substantially year on year, and we're still doing nice same store sales growth and then you add onto we see international going from strength to strength plus.
And I do want to point to point. This out you know people are looking at the heavy investments in Walgreens health.
Spending potentially more in the second half because of timing.
But the headwind on Walgreens hopes will go from 6% this year down to very low single digits next year. So we have a lot of elements.
To get to.
An attractive growth rate that is broadly in line with the with the 4% three year compound growth rates that we laid out as we did October .
The Investor day, So what we're doing with this is to express our confidence in the long term targets.
So it was.
That's it thank you.
The next question is from George Hill with Deutsche Bank. Your line is open.
Yes.
Guys and I appreciate as well you guys, giving all the color I guess rosin, James I'd kind of like to hit on two topics number one is James I know inquiring minds want to know you brought up 340, b as a headwind.
I was wondering if you'd be willing to frame any numbers around that as to how we should think about what the earnings risk looks like or the earnings exposure to the 340 B program and then part B.
Would be I guess, you kind of called out Covid as the biggest headwind as you think about fiscal 'twenty three I guess do you have any kind of embedded assumptions thus far.
What you guys expect from the contribution of Covid as we think about kind of the jumping off point from fiscal 'twenty two to fiscal 'twenty three.
I think Georgia, I'm not sure we want to give out specific guidance because we have to go through a process with our board on this but we will expect lower levels of activity on Covid vaccinations next year and I.
Thank you can form your own assumptions on that so it does generate a sizable headwind next year.
But that's why we laid out the growth initiatives, which are equally sizable.
<unk>.
We're going to be working through this over the next few months, we'll come out with the guidance when we issue earnings but.
Overall, we see as many opportunities as we have risks right now and maybe I'll pass it to John on 340 B.
Which you know is embedded in our current year guidance and we've absorbed a fairly sizeable negative.
John sure.
Hi, George this is Jon and so as James said, we've seen some.
Continued manufacturer restrictions in the 340 <unk> space and that's reflected in our current run rate.
We've got I think a couple of things going for US one of shields, which is.
Really amazing business that we've got a majority of investment and has just.
John really well, but.
And their model the hospital was actually the covered entity and operate a specialty pharmacy. So I think thats in a very good position.
We have the opportunity to be the designated pharmacy in many instances for our three <unk> clients and then ultimately we believe 340 B is is an appropriate program that really gets.
That's money back into community health care, where it's really needed. So we strongly supported and we're working from a legislative and legal perspective to try and protect that program.
Our next question is from Michael Cherny with Bank of America. Your line is open.
Good morning, and thank you for taking the question. So maybe James I know we're not.
Talking specifically about fiscal 'twenty, three but as you think about that slide 24 that you gave us relative to the growth initiatives, where do you see the variability in particular on the growth initiatives and the comfort level you have in tying back to those numbers, whether its script volume whether it's.
Some of the international recovery.
Walgreens Health component, how do you think about the puts and takes on those items given the broader macro dynamics that could sway them, one way or the other.
I would say the only item we see is truly variable where we have lesser line of sight is on le vaccinations and has been volume.
We want to see how the next couple of months Pan out.
I would even say that even on the challenges we have fairly good line of sight.
Reimbursement pressure, we're not assuming as we're thinking through this any major change versus the current year.
We're quite happy with the current year, we had a forecast coming into the year and we're pretty much on us. So we expect while we don't expect anything to get any better and reimbursement.
Rising inflation on wages, we have a fairly good level of confidence here and I'll tell you why we have now had two quarters, where many other players in the market have called down margins we'd have.
Two quarters, where our margins are actually up on the retail business, we have a combination of mix.
That's one of the growth initiatives on the right hand side, we've got all of our Omnichannel investments coming true on brand inflation. My Walgreens is it's almost I think I'll actually pass the $100 million.
Walgreens My Walgreens members, which is tremendous and I think it's one of the biggest.
Membership programs in the U S and then alternative.
<unk> streams, and we have great line of sight to all of those so we have on our ability to offset.
Inflation in wages has been very strong in the quarter bear this in mind International freight is up 200%.
And our pricing actions overall as a business. We've I think we've got zero impact and fully on a full year basis.
All the cost increases shipping increases goods not for resale all of that effectively we've priced our way through very effective margin management.
340, <unk> John already mentioned.
Walgreens Health, we got good.
Visibility, we are investing a little bit more as we're exiting the year.
Remember, what we told you in the Investor Day, We said there would be a spending level. This year and one next year. So we will actually probably spend more money slightly more money on Walgreens homes next year.
But the headwind is significantly lower and we have good visibility to that so instead of a 6% as I said it will go down to one 2% up most so the change in message is quite visible to us.
I'm trying to cover all of these international recovery, we have good visibility to this you sold it doubled income in the quarter. It won't be at that rate next year, but there is consistent growth across all markets and we had every single international market grew revenue in the current quarter. So good visibility there as well transformational cost management with.
Called up 200 milligram all of that is next year and I'll give you a good example of it.
U S business was just formed a new entity called Walgreens business services, and we have signed a partnership with Tcs to ramp up build our own shared service center in India and it will take on we've already done financed with an H or all the traditional back office will be moving marketing merchandising and store ops back office.
To a more cost effective offshore service, but we will own and operate the service assisted by ECS and that will deliver tremendous savings for the business to really big really big deal.
Over time, we will leverage it as a growth engine to continue to drive costs out of the business. The only one that we have less visibility on on us because of the actions are helping currently that's on the script volume so.
We've had a couple of quarters, where we've been maybe two to 300 basis points.
So where we would have liked to have been and we called out specifically in Q3 of 190 basis points from the store operating hours were.
Morning.
Investments back in the market in the market now we have and we've seen that the churn has slowed down of turnover, while we still haven't flipped the switch on a more aggressive hiring in the market. So we have a couple of months of experience that we need to get behind us before where we have.
Very good line of sight. So I think it's a good question. We have good line of sight to all of the items here and the only exception as we've treated months probably ahead of us on.
The store operations and getting the script spot.
Hope that's useful as you think through this.
I appreciate that African ask one more maybe quicker one you've talked in the past about the potential for inorganic investments for Walgreens health.
Obviously, there's no proceeds coming in after the Boots review how are you thinking about that potential for further inorganic investments given also a rising rate environment and the need to fund one way or the other if you are going to go and acquire something to build out the Walgreens health capabilities.
Yes, I'll take that question. So we remain committed to looking at further opportunities on the acquisition side for Walgreens Health and I will tell you that you know we're constantly.
Looking through the marketplace, particularly in tech enablement and so as we mentioned back early in the year that we would have won additional significant advancement in Walgreens health on the acquisition side, we still remain committed to that.
In order to really bring come full circle in that space.
So we should look forward to that and also too in terms of how we prioritize that you know I just want to remind everyone that we have a portfolio that we can look at and still look at how we could find something like this we're still in the marketplace and we.
We remain committed to investments in Walgreens House.
Our next question is from Elizabeth Anderson with Evercore. Your line is open.
Hi, guys. Thanks, so much further question.
On Walgreens tell us and I appreciate what youre, saying about the Mr. Doug <unk> of investments and things next year can you just help us sort of tie together.
The performance in the quarter, particularly maybe on the gross margin line and then how we should do to think about that shifting in terms of the fourth quarter and as we move forward into next year.
Thanks, Elizabeth I'll have James answer that gross margin question on Walgreens Hell, Yes.
Especially on an investment and timing.
Issue you got we I think were 21 million negative on gross margin with shields very strong on the investments are all in village and the best way to look at that is look at the number of stores.
The total number of clinics $3 15 versus prior year, it's almost up 100 more clinics.
And we gave some indications back in January on the profitability of the clinic.
When you get to full run rate with which is euro seven I think it's like $14 million of revenue on a $2 million to $2 million Clinton contribution while year. One is the revenues $1 million and Youre, losing 600000 year or two I believe is probably two to 300000 of loss. So <unk> got two.
Years of losses right.
Brian you are only turning profitable and at the beginning of the third year. So you've got 9100, plus clinics that are unprofitable to the tune of around 600000, and you got the ones in the previous year that are unprofitable to the tune of two or 300000. So what basically is it's the and bear in mind our lives.
But when you look at our gross margin and Walgreens health. It includes the entire cost of the clinic. So it's got the rent it's got the doctors, it's got the depreciation on them.
And amortization, so it's fully loaded.
So moving forward as more and more clinics achieved profitability first hundred will turn profitable next year right. So you've got more profitable ones comment coming on.
And then I think that basically covers it so it's a temporary thing and it will turn profitable next year. This debate way to think about it got it Okay. And then I know, obviously, you said that care centre ex U.
We are expecting to close.
You got approvals by the end of the fiscal year. So then that would obviously impact the estimated annual run rate for the end of this year, but as we think about the jumping off point for a sort of 23.
And beyond to get to that $9 billion to $10 billion in FY 'twenty five you wouldn't expect that change to that broader trajectory. Obviously, there is a short term timing issue with the carrier centric steel right.
Youre right about that Elizabeth the way Youre thinking about it and we're looking forward to the closure of that deal. We are still in process with that but youre thinking about this in the right way.
Really really once <unk> closes we have strong line of sight to the 9% to 10 billion very strong.
Got it thank you.
Yes.
The next question is from Steven Valiquette with Barclays. Your line is open.
Great. Thanks, good morning, everybody so.
Two interrelated questions here I think first for the U S retail front end business and pricing strategy Youre Rajeev mentioned that Walgreens is working closely with suppliers and maintain price gaps versus competitors.
I was just curious to hear a little more detail either on the mechanics are just examples of what you are referring to with that comment and then just to check the box on a related question just for your overall set of Skus and the retail front end.
You have any approximate percent skus, where you may be witnessing supply.
Shortages and it can be a very small percent potentially even less than 1%, but just wondering if it makes sense to just to frame. It this way.
Sure. Thanks, Stephen I'm going to start off with that and then I'm going to ask John Stanley to fill in on some of the details there so.
You mentioned about you know the front end of the store in and what are we seeing in terms of our exposure. There. So first of all I want to make one clarifying point when you compare us to maybe some of the other retailers in terms of our in stock position and also too with what we're seeing from a supply state supply chain standpoint.
We have some categories in our stores that are dramatically different.
Are there other retailers that are facing long lead items like apparel kitchen furniture televisions large items in that respect.
We are working very.
Quickly strongly against moving towards our private label business and trying to get to a roughly a percentage of about 22% of our private label opportunities in our store, we run roughly about 16% to 18% right now in private labels are moving to 22% gives you an idea of some of the cost benefits that we could share les.
Ron also along with that comes some innovation and bringing in new categories. So when I think about front of store and what we're facing in terms of being a little bit more recession proof and also to looking at supply chain issues that impact our business in those kinds of things, but I'll, let John go into some detail in terms of what are you seeing in front of store.
I guess I'll just.
I'll just pick up right there as Ron said, we are working closely with all of our our major supplier partners to address issues as they arise in the kind of it moves around a little bit in the business from time to time, depending on the category, obviously were working through things like baby and.
Things like that.
But generally I think we've done a good job of staying close to our partners and.
And in getting product the best that we can I think.
Over the counter test kits is a great example, the demand on this and the supply on this have kind of bounced around pretty dramatically over the last several months and our team has just done a fantastic job of really aligning between supply chain and merchandising and operations to really be there for our patients and customers who are just kind of one example.
Talking about pricing and pricing mechanics, obviously, a lot of inflation in the marketplace. We work again really closely with our supplier partners on the <unk>.
First thing we try and do is just mitigate.
That cost increase really through the relationship the best that we can and we've had some success with that but we have seen cost increases come through like.
Our retailers have and I think we've worked hard to manage that into the marketplace. The best way, we can and as Raj said, we've really done that successfully while managing our relative price position to the market. So again I think our team's done a great job executing.
Against those pressures as they have arisen.
That will conclude our question and answer session for today, So now I'll turn it over to Roz Brewer for any closing remarks.
Thank you for joining us today I just wanted to summarize what we discuss here today and how we are looking at our business. We've delivered really strong execution across our operating segments and against a very robust growth this year.
Third quarter results were broadly in line with our expectations and I want to remind everyone of that and we've been executing well on the strategic priorities. We shared last October .
We will continue to make some improvements in our core business will evolve our portfolio, we remain committed to our Walgreens health business.
We also will manage and preserve our capital and really continue to work on this world class team I'm really proud of what this team has been able to do under some tough market conditions. They continue to outperform my personal expectations. So I remain optimistic about the opportunities ahead with.
We're strongly committed to driving our long term earnings growth algorithm and we look forward to keeping you updated as we make further progress. So thank you for joining us.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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Okay.