Q4 2022 Walgreens Boots Alliance Inc Earnings Call

[music].

Good morning, My name is Rob and I'll be your conference operator today at this time I would like to welcome everyone to the Walgreens Boots Alliance fiscal year 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. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press the star one.

Thank you Tiffany Conagra, Vice President Global Investor Relations you May begin your conference.

Good morning.

Thank you for joining us for the Walgreens Boots Alliance earnings call for the fourth quarter of fiscal year 2022.

I'm, Tiffany Kananga, Vice President of Global Investor Relations Joy.

Joining me on today's call are Raspberry, our Chief Executive Officer James.

James <unk>, our Chief Financial Officer and.

And John Driscoll President of our U S Health care segment.

Rick gave senior Vice President of Pharmacy, and health care at Walgreens will participate in Q&A.

Today's call will be approximately two hours and links including Q&A let.

Let me note that we will be referring to our segments by their new name U S retail pharmacy International and U S health care.

The renaming did not result in any change to the composition of the segments.

Additionally, all references to the COVID-19 headwind, including U S vaccine drive through tests and OTC tests.

As always during the conference call, we anticipate making projections and forward looking statements based on our current expectations are.

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 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 investors section of the Walgreens Boots Alliance website.

In the press release also contain further information about non-GAAP financial measures that we will discuss today during this call.

I will now turn the call over to Rod.

Thanks, Tiffany and good morning, everyone.

It's great to be with all of you today and it's hard to believe a whole year has gone by since our Investor Day last October .

As I said to you then and I'm deeply committed to being as open and transparent as possible about our business.

We have scheduled a longer call. This morning to provide a more in depth update and also to spend additional time on Q&A to hear from you.

I'm looking forward to reviewing our execution over the past year.

We delivered ahead of our expectations in fiscal year, 'twenty, two and are well underway in our transformation to a consumer centric health care company.

Today, we will also provide much greater visibility to the road ahead.

Our fiscal year 'twenty, three adjusted EPS guidance of $4.45 to $4.65 is down year over year, largely due to lapping COVID-19 execution.

However, we expect strong 8% to 10% core growth to underpin our results.

We are rapidly scaling U S health care already raising long term sales targets with a clear path to achieve profitability starting in fiscal year 'twenty four.

It's early but our strategy is working.

We're making good progress on each of our four priorities, we're simplifying and strengthening the company.

Our numerous accomplishments this year, despite a difficult operating climate.

Bolster our confidence in accelerating to our long term algorithm of low teens adjusted EPS growth.

We have a winning team and winning assets to unlock sustainable shareholder value as we re imagine local health care and wellness for all.

As Youll remember from last October we introduced four strategic priorities.

First.

Transform and align the core business.

Second build our next growth engine U S health care.

Third focus the portfolio and optimize capital allocation and force.

Build a high performance culture, and a winning team.

Our four key priorities capture value across both core retail pharmacy and growth spaces in health care.

We are already delivering consumer centric primary care services and.

Improving the patient experience and health outcomes, while lowering costs and.

And leveraging our assets across the care continuum to treat the whole person.

We are executing through our unique strengths and our hyper local footprint and trusted iconic Walgreens brand.

At the same time, we're reinforcing our capabilities for the journey.

We have and will continue to take measured and strategic actions to optimize our portfolio.

We are also evolving our team with new talent, new skills, and fresh ideas, but with a singular focus on driving real value for our patients and for our communities our people and our shareholders.

Let me review fiscal year 'twenty, two progress against each strategic priority <unk>.

First I am pleased to say that we broadly exceeded our strategic goals across the core retail pharmacy business, despite a challenging macro environment.

Our script count is the one soft spot for the year to call out.

Talk more about how we're addressing that in a moment.

However, we still surpassed our U S and international adjusted operating income targets with very good execution in the front end.

U S and boots UK retail comp sales were both strong with the U S up 6% and boots up 19%.

Several of our initiatives are continuing to gain traction.

U S digital sales grew 37% for the year on top of 74% growth in 2021.

My Walgreens membership surge passed a big milestone, reaching 102 million customers.

And I'm encouraged by the innovation and growth happening at our owned brands program.

I am also proud of our significant U S retail margin expansion up over 100 basis points, while many other companies like big box retailers are under pressure because they are more dependent on big ticket items.

We are seeing meaningful contributions from alternative profit streams at $125 million in income for the year, including Walgreens advertising group with 35% growth.

And you'll remember that we raised the target for our transformational cost management program last quarter to $3 $5 billion with an expanding funnel of cost savings initiatives.

In the pharmacy Walgreens team members have proven that they are highly trusted health care resources, we administered 35 million vaccinations in fiscal 2022, well beyond our expectations.

With demand for pharmacy services at an all time high due to COVID-19, we have seen a tightening in the labor market for pharmacists and pharmacy technicians.

As unfortunately led to staffing shortages in some of our markets.

In turn creating a headwind for prescription growth.

Scripts were up a softer than expected one 4% in fiscal year 'twenty two.

We are focusing investments to return about 3000 stores to normal operating hours, which I expect will drive script volume recovery as we move through fiscal year 'twenty three.

We're seeing positive staffing trends with 11 straight weeks of net pharmacists head count increases.

We have also opened our eighth automated micro fulfillment center and are now supporting 1800 total stores.

Our pace is somewhat slower than expected in part due to supply side construction delays, but.

But I am pleased with the performance of the centers, we do have up and running.

These facilities remove routine tasks and excess inventory from the pharmacy, which is expected to reduce working capital by over $1 billion over time.

Let me take a moment to address the historic macro challenges that are affecting our customer.

With inflation at four decade highs consumers are expressing uncertainty about the future and seeking value.

At the same time, we know that health and wellness will always be a priority and increasingly so after COVID-19.

A mckinsey study from last month shows that around 50% of U S. Consumers now report in wellness is a top priority in their day to day lives a significant rise from 42% just two years ago.

We're leveraging our footprint, our digital capabilities, our consumer insights and our essential services to drive overall retail pharmacy growth, we have a resilient core business with the mix that over indexes to need now categories and.

And we are better positioned now than we were in prior periods of economic turbulence.

Our execution during the pandemic is just one example of our pharmacy services at the center of our communities and as part of an integrated healthcare experience.

In the U S. We Havent Minister nearly 72 million COVID-19, vaccinations and completed over 34 million PCR and antigen test to date.

Second.

We've improved the customer experience and it's showing every day through offering strong value better in stock conditions and increased service levels.

We've been managing inflation and collaborating closely with suppliers.

We're maintaining price versus competitors and meeting our customers with robust in stock levels that are above last year, despite supply chain constraints.

The products, we sell are sourced from a wide variety of domestic and international vendors. The team is also deploying advanced forecasting and replenishment technology, including AI.

The outcome is a better more dependable shopping experience for our customers. During these turbulent times and stronger results for our retail business.

Finally, we expect reimbursement pressure on payer contracts to be predictable as fiscal year 'twenty two was in line with plan.

We've already locked in 95% of payer contracts through calendar year 'twenty three.

Turning to our next strategic priority.

We're making important strides and consistent progress in building our next growth engine. The U S health care segment.

Let me start with care centrex with our announcement on Tuesday that we are accelerating full ownership, we are very well positioned in the home care market.

And if the initial acquisition of a 55% stake had closed in line with our original timeframe. We would have achieved our three to $3 $2 billion sales goal in fiscal year 'twenty two.

Next village MD and shield continue to realize tremendous top line growth driving pro forma total growth of 75% for the year.

We've added three strategic partners for Walgreens Health Blue Shield of California, Kroger and Buckeye.

The number of lives covered above our calendar 'twenty two year end target of $2 million.

Village MD is leading the way in value based care for the nation with over 340 clinics now open including about 150 co located with Walgreens on pace towards 200 by the end of calendar year 'twenty two.

Remember that we raised the target from 160 back in January we're also adding health corners on schedule with 70 now on the way to 100 by the end of 'twenty two.

Through our accelerated rollout village M. D. Already covers 433000 lives under value based arrangements, including 161000, Medicare and in MA value based lives.

At the same time care Centrex has 19 million total contracted lives and shields us partner with 75 health systems.

Our health care strategy is now coming to life and far from just being in the planning stages. It is well underway and can be seen in our best in class assets.

We are moving swiftly to implement our vision of consumer centric Tech enabled health care solutions that improve outcomes and lower costs for patients providers and payers.

Over the course of the past year. We also took several actions to better align our investment portfolio with our strategy.

These decisions will fund our continued growth and simplify the business.

In addition to building our partnerships with village MD Shields and care centric. We also completed a thorough review of the boots business.

Our decision to pause the process was a reflection of challenging financial market conditions, and the board and I remain confident that the business carry strong fundamental value.

We continue to have sufficient access to capital to accomplish although we need to do as demonstrated by our ability to opportunistically monetize portions of our portfolio.

Recent transactions involve amerisourcebergen unlocking $900 million odd.

Option care health with $360 million in proceeds and GPC at $150 million.

There is good financial flexibility.

Through our total portfolio and we are entering fiscal year 'twenty three on a clear trajectory to a simpler more streamlined company.

Additionally, we increased the dividend for the 47th consecutive year in July and we remain committed to growing the dividend over time.

Finally, I want to cover our progress on our fourth strategic priority.

We have evolved our operating model expanded expertise on our board hired new leaders and made critical investments in our winning team.

We have restructured our executive committee to align with best practices and health care.

In recognition of the central role of technology and health care, we have taken several actions we reconstituted our board Finance Committee as the Finance and Technology Committee appointed Ibm's Global Chief Data Officer, and Paul Bhandari to the board and named our next Chief Information Officer.

Beyond that we have named over 10 senior executives since the start of fiscal 'twenty, two including a new structure for U S retail pharmacy.

It's always been important to me to prioritize our most meaningful asset which is our team members.

I have no doubt that investments in our people will yield large rewards as we recruit and retain the very best talent, which will allow us to recover our script count growth and enhance our customer experience.

At the support office level, we're pleased to announce incremental measures to align compensation with our strategic ambitions and shareholder interests by adopting a relative TFR metric in our long term incentive plan for fiscal year 'twenty three.

We are all invested in and accountable for the success of our company.

At our stores, we invested an incremental $190 million dedicated to our pharmacy staff in fiscal year 'twenty, two primarily in premium pay and bonuses.

Fiscal year 'twenty three will include further investments in our pharmacy team of $265 million as we made good progress in returning stores to normal operating hours.

As a reminder, this is in addition to the minimum wage increases, we announced last year, which consistent with prior guidance represent a year over year impact of $260 million in.

In fiscal year, 'twenty, three building to $450 million over the three year period.

As we discussed these investments in our team members, let me take a moment here to stop and fully appreciate how important their work is.

Just as the crisis level impact of the pandemic has started to subside, we've seen tragedy strike with the Hurricanes in Florida, and Puerto Rico.

Our teams as they always do responded decisively on behalf of their communities and really rose to the occasion.

My message to our colleagues on the front lines is thank you once again.

All of us at Wpa and we're so very proud of your leadership.

Now, let me go into more detail on the deep and talented bench of leaders at Wpa most.

Most recently, we were excited to announce on Tuesday that John Driscoll has joined our team as president of our U S Health care segment.

Our U S business is now organized under three leaders healthcare under John Driscoll.

Pharmacy under Lee Cooper from Shield and retail under Tracey Brown.

John has more than 25 years of expertise, including as president of cast light Health and Health care Tech Company Group President for New markets had medco, a $70 billion P. B M that spun out of Merck and.

<unk> founder and chair of the <unk> scripts E prescribing network. The first cross industry collaborative with competing retail Pbms and health plans.

Lee previously served as CEO of GE healthcare in the U S and Canada before leading shields through rapid expansion.

He has demonstrated proven success in driving growth.

Creating omnichannel customer experiences, establishing high performance cultures and executing with excellence.

And already in just one year at W. B E.

Tracy has made major strides in our customer experience.

Tracy's team is creating highly personalized offerings for our consumers across our digital and physical assets.

We are confident in the road ahead with the right team, leading us through hard decisions today.

We exceeded expectations in fiscal year 'twenty to successfully managing our resilient core business.

While there are macroeconomic challenges.

We are executing well and expecting strong core growth of 8% to 10% in the year ahead.

We are scaling our winning assets to accelerate growth and profitability of our U S health care business.

We are investing in strategic talent and capabilities and we're taking strong action to simplify our portfolio.

Our strategy is working to strengthen the business and build a solid foundation for sustainable shareholder value creation.

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.

Overall, we had a good finish to the year with fourth quarter results slightly ahead of our expectations.

We continue to drive strong execution across all of our operating segments and rapidly expand our U S health care business.

As a reminder, we were lapping a very strong prior year when adjusted EPS grew 28% boosted by COVID-19 <unk> solutions.

Year over year comparisons are also impacted by higher investments in the U S health care segment.

<unk> the acquisition of a majority stake in village M D.

Sales declined three 2% on a constant currency basis.

Excluding the negative impact from <unk> on the positive contributions from healthcare M&A comps.

Constant currency sales growth was around 2%.

Adjusted EPS was <unk> <unk> in the quarter our.

Constant currency decrease of 30% entirely driven by the decline in adjusted operating income.

Partly offset by a lower tax rate.

Solid gross profit performance in U S retail and the continued rebound in international were offset by the lapping of peak COVID-19, vaccinations in the year ago quarter.

Plus growth through investments in U S health care.

GAAP earnings per share was a loss of 48, which.

Which compares to earnings per share was <unk> 41 last year, mostly due to a $780 million noncash impairment charge in boots UK.

Higher charges related to the transformational cost management program, reflecting incremental store closures.

Please note that the boots impairment charges were related to trademarks on licenses and were mostly due to the impact of higher discount rates.

Now, let's move to the full year financial highlights.

Full year sales increased one 2% bullet constant currency basis. However, if you exclude the five five percentage point negative impact from alliance Rx and positive contributions from U S health care M&A activity core sales growth was a healthy 6%.

Adjusted EPS was $5 four.

Our constant currency increase of three 4% and above our initial guidance of flat EPS.

Furthermore, the result included a five five percentage point headwind from the build out of the U S Health care segment.

In summary, full year core sales grew by 6% on adjusted EPS increased three 4%.

Now, let's look at the U S retail pharmacy segment.

Sales decreased seven 2% in the quarter as we lapped a very strong prior year comp of 8% and we face the seven eight percentage point headwind from Alliance Rx.

Adjusted operating income declined 36% lapping.

Lapping a strong prior year results when the AOE grew 16%, including significant COVID-19 vaccinations.

Strength in U S retail and continued cost savings were offset by higher labor investments and lower results in U S pharmacy.

For the full year <unk> was up slightly reflecting solid core sales growth.

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

Pharmacy sales declined eight 8% entirely due to a 10 four percentage point impact from Alliance Rx.

Comparable pharmacy sales were up 3% despite lapping a very strong eight 9% growth last year.

Comp scripts declined three 5% on excluding immunizations comp scripts were flat.

Which compares to a four 2% growth in the prior year.

We completed $2 9 million COVID-19, vaccinations in the fourth quarter.

<unk> below the $13 5 million vaccinations in the prior year quarter.

This trend was generally in line with our expectations.

Pharmacy performance in the quarter benefited from improved trends from seasonal scripts on maintenance medications.

However, scripts remained challenged by temporary reductions in store operating hours due to staffing shortages.

Operating hour limitations impacted scripts by about 270 basis points in the quarter.

With a full year impact of around 180 basis points.

As Ross mentioned actions have been taken to address the staffing challenges.

We are encouraged by the positive hiring trends over the past 11 weeks.

This gives us confidence that we can recover script volume as we move into next year.

Overall looking on a three year stack basis, which normalizes for COVID-19 related volatility comp scripts, excluding them realizations increased seven 7%.

We administered $3 4 million COVID-19 tests in the quarter.

Compared to $5 2 million last year.

Additionally, with payers now reimbursing OTC dose, we sold seven 8 million OTC tests through the pharmacy.

As a reminder, our comp script numbers exclude testing.

Finally pharmacy adjusted gross profit declined driven by a much lower level of COVID-19, vaccinations the ongoing margin pressure.

Turning next to our U S retail business.

Overall, we saw good retail performance as we continued to benefit from our Omnichannel and mass personalization initiatives.

Comp retail sales decreased one 9% and this was largely due to lapping a very strong prior year quarter when sales advanced six 2%.

Overall, our retail business has good underlying momentum.

With 13% growth on a three year stack basis.

On a full year basis.

Comp retail sales were up a strong 6% the highest in nearly two decades with positive contributions from personal care beauty on cough cold flu.

As well as COVID-19, OTC tests, which contributed about three percentage points of growth.

Retail gross margin expanded throughout the year, reflecting the effective margin management, including strategic pricing and promotion optimization.

Stabilizing shrink levels.

Turning next to the international segment.

As always I will talk to constant currency numbers.

International delivered a strong set of results sales increased six 7%.

<unk> growth across all international markets with boots, UK up, 6% and Germany wholesale advancing six 8%.

Adjusted operating income was $163 million in the quarter up 31% versus prior year.

The strong finish to the year led to full year sales and adjusted operating income growth of 13% on 65% respectively.

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

Strong retail sales performance more than offset a decline in comp pharmacy sales of 7% as we lapped strong demand for COVID-19 services comp.

Comp retail sales advanced 15%.

Reflecting a 20% rebound in footfall with flagship on travel locations showing robust improvement.

Market share increased with personal care and health and wellness driving notable gains.

Compared to pre Covid levels store footfall remains around 15% lower.

However, this was more than offset by a 14% increase in store basket size.

<unk> stock comp sales that more than doubled.

Over 11% of our total UK retail sales came from digital in the quarter.

Up from around 6% pre COVID-19.

Turning next to U S <unk>.

Segment sales were over $600 million in the quarter with pro forma combined sales growth of 34%.

Village MD grew in line with plan and revenue growth is on track as we launch new clinics scale existing clinics and increase value based arrangements.

Shields delivered another excellent quarter with pro forma sales growth of 48%.

Driven by Annualizing recent contract wins and by expanding the value proposition with existing health system partners.

Segment adjusted operating income was a loss of $151 million in the quarter organic investments accounted for $45 million.

Investments with <unk> more than offset the profit contribution from <unk>.

And led to a $106 million Oi loss across a majority of the investments.

The clinic rollout at village MD continues on pace.

<unk> had 334 clinics at the end of the year, an increase of 82 clinics compared to prior year.

Village MD had 433000 value based patients as of the end of fiscal 'twenty two.

Up from 326000 at the end of fiscal 'twenty one.

Fiscal 'twenty two was a peak investment year.

On the fourth quarter loss is not a good indicator for fiscal 'twenty three and beyond.

Village MD shields on care Centrex will drive increasingly high contributions as the businesses mature.

Additionally investments in the Walgreens health organic business will be partially offset by positive contributions from clinical trials expansion.

Integration synergies.

Turning next to cash flow.

Operating cash flow was $3 $9 billion on free cash flow was $2 2 billion as we cycled through some exceptional headwinds.

First the sales decline of alliance Rx led to the unwinding of a favorable working capital position with a year over year impact of $400 million.

Secondly, we benefited from COVID-19 government related support in fiscal 'twenty, one, whereas this partially reversed the deferred FICA payments became Jew in fiscal 'twenty two.

In total the year over year impact was around $400 million.

Additionally, we executed an inventory pre buy ahead of an expected strong cough cold flu and holiday season.

Finally, there were some one time items, including legal settlements in the U S of $200 million.

Free cash flow was also impacted by a $355 million increase in capital expenditures to support our growth initiatives.

Including the village MD clinic expansion rollout of micro fulfillment centers.

<unk> Omnichannel and digital investments.

Before moving on I want to reiterate that our full year EPS grew 3%.

Head of our original guidance of flat.

And we've made substantial progress against our goals as we build out our U S health care business.

I'll now turn to our fiscal 'twenty three guidance on long term growth outlooks.

We are guiding to fiscal 'twenty three adjusted EPS of between $4 45.

And $4 65.

Compared to the $5 and <unk> achieved in fiscal 'twenty two.

While we expect solid core business growth.

Looking forward into 'twenty three we are facing two key challenges.

First we project a much lower level of COVID-19, vaccination and testing activity.

This leads to an earnings headwind of <unk>, 15% to 17%.

Second the dollar has strengthened significantly and as a 2% headwind to EPS and reported currencies.

Excluding these two headwinds we expect core EPS growth of 8% to 10% on a constant currency basis with positive contributions from all segments.

This healthy core growth reinforces our confidence in achieving our long term growth algorithm.

And today, we are providing more clarity and raising our U S health care targets.

Based on the execution to date and the improved visibility we are increasing our 2025 sales target for U S healthcare by over 20%.

And we are now projecting sales of 11% to $12 billion by 2025.

Furthermore, we expect the U S healthcare segment to generate positive adjusted EBITDA by fiscal 'twenty four.

Later, I will provide greater detail on the key drivers.

Let me now walk you through our 2023 guidance in greater detail starting with double uba.

Overall, we expect low single digit sales growth on a constant currency basis, excluding the COVID-19 headwinds, we do expect sales growth of 2% to 4%.

This sales growth is also impacted by a two percentage point headwind from alliance Rx, which largely cycles out in the second quarter.

So if you strip out the alliance <unk> and COVID-19 impacts, we expect constant currency sales to be up mid single digit.

Adjusted EPS is projected at $4 45.

To $4 65.

Our constant currency decline of 6% to 10%.

Excluding the COVID-19, and Forex headwinds adjusted EPS growth is around 8% to 10%.

Let me now walk you through the assumptions in guidance for each of our reporting segments, starting with U S retail pharmacy.

Sales are projected to decline low single digits.

Our lower sales contribution from vaccinations and testing will reduce the growth by two percentage points.

Whereas the low margin Alliance Rx business also has an adverse impact of two percentage points.

In summary, if you strip out these factors, we expect low single digit sales growth.

We are projecting 16 million vaccinations in 2023 <unk>.

Compared to $35 million in both of the previous years.

The $16 million estimate assumes only one booster this year.

And that around 40% of the population chooses to get one.

<unk> is projected at four five to $4 6 billion.

Including on the 18 percentage points headwind from the lower COVID-19 contribution.

Excluding this impact.

Core Oi growth is 10% to 11%.

Let's walk through some of the key growth drivers.

First we anticipate script volume recovery as we move through the year.

Focused labor investments are already leading to positive net stuffing trends and over the coming months will allow more stores to return to normal operating hours.

We expect the ongoing rollout of micro fulfillment centers to continue to drive efficiencies in the pharmacy easing staffing challenges.

Additionally, pharmacy will be boosted by increased contributions from pharmacy services and patient acquisition initiatives.

We also have good visibility to reimbursement net of procurement savings.

Second.

We expect continued momentum from the retail business driven by our digital and Omnichannel offerings. The enhancements, we have made to our my Walgreens loyalty program and through innovation and growth and owned brands.

We are also seeing increasing contribution from alternative profit streams, including financial services and media.

Finally actions to mitigate shrink are well underway and we are already seeing improved shrink rates.

Overall, we expect gross profit to be broadly flat, but up around 5% to 6% excluding the COVID-19 headwind.

SG&A is expected to increase by around 1% to 2%.

Reflecting increased investments in team members on technology.

Set by continued strong results from the transformational cost management program.

Turning next to the international segment.

International had a very strong year in fiscal 'twenty, two and we expect continued robust growth in 2023.

However, the strong dollar will negatively impact reported results and represent a headwind to sales on adjusted operating income of around 11% to 12%.

Yeah.

Sales are projected to grow 5% to 7% on a constant currency basis with all markets growing.

Specifically, we expect the UK to grow 6% and Germany will grow 4%.

We expect adjusted operating income of 832 $870 million with strong constant currency growth of 26% to 32%.

This follows on from 65% growth in 2022.

Sales growth strong cost management discipline, and the integration related benefits in Germany are the key drivers.

Now, let's turn to U S health care.

We are very encouraged by our progress as we build out our next growth engine, we expect sales of around $5 billion.

Including a full year of contribution from prior acquisitions and pro forma sales growth of 45% to 55%.

We are introducing an adjusted EBITDA metric for the U S health care segment and for fiscal 'twenty. Three we expect an adjusted EBITDA loss of $220 million to $240 million.

This is an improvement of $70 million to $90 million versus fiscal 'twenty two.

We have moved past the fiscal 'twenty, two peak investment period, and the team is operating with agility and efficiency.

And we have clear line of sight to positive adjusted EBITDA in fiscal 'twenty four.

Let's now take a deeper look at the U S health care projections.

The U S. Healthcare segment is scaling the $5 billion in sales on pro forma sales growth of 45% to 55% reflects strong growth across all of our health care businesses.

Vintage MD sales are projected a two $8 billion to $3 billion.

Growing 50% to 60% with the performance driven by growth in value based patients at existing clinics and continued expansion of their clinic footprint.

We anticipate pro forma growth of 20%, 30% at <unk>.

Reaching sales of over $1 4 billion in fiscal 'twenty three.

This performance reflects growth across existing and new payer and provider customers and upsell of innovative new home services.

Shields is expected to drive pro forma sales growth of 30% to 40%.

Through new health system partners, and an expanding value proposition at existing customers.

Given the relatively early stage of development, we expect the Walgreens health organic prisoners to deliver a modest sales contribution of $120 million to $150 million.

Let me now walk you through some of the key corporate assumptions.

Our tax rate is expected to be around 16% in fiscal 'twenty, three roughly 50 basis points higher than the prior year.

However, we do anticipate an increase to around 20% in fiscal 'twenty four.

Largely consistent with our previous expectations.

This step up will be driven by higher tax rates in the UK in Switzerland on a greater percentage of income from U S based businesses.

Interest expense is expected to increase by $100 million.

June largely to higher interest rates.

Our fiscal 'twenty three guidance assumes only anti dilutive share repurchase activity.

As our near term capital allocation priorities will be primarily focused on growth investments and debt paydown.

However, beyond 'twenty three we do expect to have flexibility for a sizable new program.

Please note that our fiscal 'twenty three guidance does not assume any acquisitions or divestitures.

Finally, corporate costs will decline slightly as we tightly manage central costs.

While we are not providing quarterly EPS guidance, we see a more balanced cadence between the first and second half.

Compared to current consensus which appears more first half weighted.

In the first half we will be lapping strong COVID-19, the execution and record retail comps with.

The second half of the year will reflect the pace and timing of script volume recovery and reduced U S health care losses as the segment scales up.

Let me now turn to our long term outlook.

Looking beyond 'twenty three we are reconfirming, our long term growth algorithm.

With mid to high single digit adjusted EPS growth and 24.

Building to low teens growth in 2025.

Additionally, I would highlight the 2024 includes a more modest headwind from COVID-19, and the impact of a higher tax rate.

Our transformation to a health care company will drive a celebrated earnings growth as the faster growth and higher margin U S healthcare business reaches scale.

We expect U S health care to contribute over half of the annual adjusted EPS growth over the long term.

While we continue to assume moderate growth from the core business and increase returns from capital deployment as we exit 'twenty three with improved credit metrics.

Looking now at our capital allocation priorities.

First we will continue to prioritize organic investments and our resilient core business.

And this will drive consistent returns on fast payback.

Second.

We will prioritize M&A that advances our healthcare ambitions evaluating all opportunities to our rigorous strategic and financial loans.

We intend to further simplify our portfolio to unlock value on this provides significant flexibility as we execute on our transformation.

Third balance sheet strength is a key focus area for us.

We remain committed to maintaining our investment grade rating.

Finally, we will return excess capital to shareholders, including a growing dividend.

Beyond fiscal 'twenty, three we have potential capacity to resume sizable share repurchases.

Given the rising importance of U S healthcare I would like to provide.

<unk> increased clarity on the segment goals over the next three years.

With our solid execution to date and greater visibility ahead, we are increasing our fiscal 'twenty five sales goal from nine to 10 billion previously to 11% to $12 billion and representing a compound annual growth rate of approximately 50%.

On a pro forma basis.

Village M D. As the largest contributor with growth achieved as existing clinics mature and realize more attractive economics and through ongoing expansion of village Mds clinic footprint.

We expect continued strong sales growth at shields.

<unk> from rapid growth in the broader specialty pharmacy market and their unique focus on health system enablement.

Carrier centric sales will be driven by increased demand to better manage the needs of patients with complex or chronic conditions as they transitioned out of the hospital and into other post acute settings, including the home.

Finally, we expect the Walgreens health organic business to scale rapidly as we add new payer and provider partners and increasingly move to value based and delegated risk arrangements.

We expect the Walgreens health organic business to contribute over $1 billion in sales by 2025.

Moving now to our EBITDA projections for U S health care.

We have a clear path to profitability by fiscal year 2024 building to a target of mid teens adjusted EBITDA margin.

We are projecting adjusted EBITDA of $125 million to $225 million and 24.

Rising to $500 million to $700 million in 2025.

We are confident in this trajectory with several factors expected to drive significant profit growth.

Achieving scale across the portfolio as critical.

As it enhances our ability to cover central overheads on platform investments, including technology.

As you have seen earlier.

Sales will scale from $5 billion in fiscal 'twenty, three to $7 billion to $8 billion in 'twenty, four and 11% to $12 billion by 2025.

Our maturing village MD clinic profile is a significant tailwind as a greater percentage of clinics reached positive contribution margin.

As a reminder, this typically occurs in year three on a seven year glide path to very attractive at scale economics.

Within the Walgreens health organic business, we continue to have productive discussions with existing and prospective payer partners around a shift to risk arrangements.

And our margin accretive shields business is projected to continue to grow strongly.

On top of all this the U S health care team has identified sizable synergy opportunities across our various healthcare assets.

And they are operating with speed and agility and driving operating efficiencies on a clear path to profitability.

Let me now wrap up the guidance section.

I would like to leave you with three key takeaways as to why we are excited about the near term and long term outlook for Wpa.

First we expect to drive positive core business momentum in fiscal 'twenty three as we lapped strong COVID-19 execution in 2022.

The U S healthcare segment is rapidly approaching positive adjusted EBITDA the.

The business continues to scale and we have raised our 2025 sales outlook to 11% to $12 billion.

Resenting, a compound annual growth rate of roughly 50%.

Finally, we remain confident in our long term growth algorithm and we are reconfirming, our goal of low teens EPS growth.

We are committed to our vision and our strategy and we have and will take action to simplify the business and unlock shareholder value.

With that let me now pass it back to Russ.

Thank you James.

Now I'm going to turn the page and offer more insights into our U S Health care segment as I mentioned earlier, we're very happy to have John Driscoll, joining us as our president of U S Health care.

John is an outstanding entrepreneur, who has partnered closely with us for some time now in his role as CEO of Kerr Centrex.

He is an incredibly knowledgeable thought leader in healthcare and has become a confidant and a friend as we work side by side during our three year planning process.

I am certain he will be able to hit the ground running overseeing this vitally important part of our business and building on our strong momentum John welcome month, again, and now I'll turn it over to you.

Thank you Ross.

I have spent my career, leading initiatives to re imagine and reinvent healthcare solutions that improve outcomes lower costs and meet patients where they are I am delighted to join you today as the president of U S Health care.

I believe that Walgreens is uniquely positioned with its pharmacy backbone as well as the quality of the assets and teams that we have invested in to.

To start the journey at scale to help health plans and patients.

Lower costs and improve outcomes.

Yes.

Building on our strong foundation in retail and specialty pharmacy.

Our U S healthcare business expands wpa into significantly larger and faster growing profit pools were gaining access to $135 billion in addressable EBITDA profit pools versus <unk> $41 billion today.

We focus on market segments that are natural extensions of the pharmacy.

Create value for our payer and provider partners and again meet consumers where they are.

I'm thrilled that Wpa has invested in foundational best in class assets with village MD Shields and care centrex that.

Together create a platform for us to drive growth in some of the most attractive health care markets.

Primary care physicians are at the center of managing health and wellness of patients and.

And we have a market leading business in village M D.

As more care moves into the home and the community. We are a natural platform to meet that demand from plans in patients with care centrex.

Specialty pharmacy is one of the fastest growing segments in health care and.

And most specialty spend originates and health systems.

We also have an industry, leading provider and health system specialty pharma services in shields.

Simple convenient access to low acuity healthcare services is also key to managing the health of our consumers.

We're starting to deliver population health services through our health corners to close care gaps and help our payer and provider partners expand their reach.

In the end scale is critical but healthcare is local we're creating a nationally scaled healthcare business, which will leverage our entire portfolio to deliver better care at lower costs and by focusing our portfolio on these higher growth markets, we will accelerate the.

Return on our investment and our path to profitability in U S health care.

Today, most patients and their caregivers are overwhelmed as they try to manage across different health conditions providers.

Appointments bills and medications.

Struggle with getting basic access to care and experienced a lack of coordination across their health needs.

Our consumer centric tech enabled model will provide care across the full continuum, bringing together products and services across our portfolio.

We see significant opportunities for synergies, allowing us to pursue value based care and risk arrangements, which will demonstrate the value of an integrated approach.

Our focus is on expanding our risk business.

Supporting integrated care.

Expanding our pharmacy value proposition and driving operational efficiencies.

Over the past year, we've made strategic investments to rapidly expand the breadth and depth of our portfolio.

Bringing together our current individual assets, which are increasingly working together our U S. Healthcare segment now covers over 26 million lives.

<unk> four through a network of over 12000 providers and communities across all 50 states.

While the retail pharmacy is not part of our U S. Healthcare segment. It serves as the bedrock of our health care portfolio.

We have deep community ties and.

And demand for healthcare services in our stores has never been higher.

And it's not just consumers looking to Walgreens for help with health care.

Federal state and local jurisdictions are increasingly looking to partner with us because we are close to patients and they know they can count on us to deliver high quality services that are absolutely critical.

Our pharmacy serves 96 million patients through a team of 90000 care providers.

We administered $48 million total vaccines in fiscal year 'twenty two.

And importantly, almost half of our pharmacies are in high need underserved areas, where we can drive health and vaccine equity.

Our front end business is increasingly relevant to health and wellness as we've seen with the sale of Covid OTC tests.

As well as our trusted selection of OTC medications.

Both the retail and pharmacy businesses are serving the consumer across channels, we drove 117 million visits to the Walgreens App last year.

Lastly, our stores our anchor access points to serve consumers through our Walgreens health business, which now covers more than $2 3 million lives through three health plan partners.

Health advisors in our stores conducted over 200000 interactions with consumers to tend to their health care needs.

Being lost in the wilderness of health care is a big challenge for patients and families.

Walgreens health is perfectly positioned to help consumers navigate what can be a bewildering experienced in U S healthcare.

Now, let's turn to village MD.

Village is a leading asset in the field of risk taking primary care.

Village is uniquely positioned as one of the largest primary care providers in the U S.

We can now leverage the combined power of the Walgreens stores and our trusted brand with primary care.

Village MD providers touched the lives of over one 6 million patients.

Over 430000 value based patients through over 340 clinics in 22 markets.

152 clinics are co located with Walgreens stores half of which are in underserved areas.

Village MD has achieved a Medicare stars rating of four point out to five point out in their mature markets.

Generates material Medicare advantage cost savings of $2400 per patient per year.

We are also very proud to say that we serve patients across all associated economic statuses and our truly payer agnostic.

Village MD is one of the leaders in the move to value based care the move to value is increasing and inevitable and we expect very attractive growth ahead.

There are a number of companies directly or indirectly competing in the value based primary care marketplace, but village MD is differentiated by a faster path to favorable economics, driven by our acceptance of all patient populations and all payer types.

We have a unique ability to address all of the ecosystems pain points at scale.

Village Mds payer agnostic model.

Has enabled us to secure value based contracts with every major national health plan as well as many of the local and regional health plans in the markets we serve.

Our integrated primary care and pharmacy model has driven strong results, especially in combating chronic disease in the Medicare population.

23% of village Mds Medicare patients are on at least 10 medications, making pharmacists critical members of the care teams.

And moving forward, we see opportunity for commercial and care delivery synergies with care centrex.

Now, let me talk about Shields health solutions.

Shields is not a traditional specialty pharmacy.

But instead represents an evolution to the model.

Shields participates in the specialty pharmacy space by building and accelerating hospital owned specialty pharmacy programs.

That are integrated with care providers at the point of care.

The idea is simple 75% of specialty prescriptions in the U S originate in a health system.

Yet those hospitals retain only 10% of those prescriptions.

Shields mission is to help the health system closed that gap by driving a five to seven times higher capture rate of specialty prescriptions for our partners.

Today, our network of more than 75 health system partners.

<unk> represents more than a thousand hospitals nationwide.

Our partners include well known health systems, such as Umass Memorial <unk>.

New York Presbyterian.

Ohio State University and UC health.

Our health system Enablement model has three core components.

<unk> and integrated clinical model between the pharmacy team and the patient care team.

Second centralized infrastructure to remove administrative burdens.

And third proprietary software for end to end workflow and operations.

Shields benefits the health system, the patient and Walgreens.

We expect this business will continue to yield strong topline growth at accretive margins, while also providing a balanced approach to the traditional contract pharmacy model.

The shields high touch model is highly effective resulting in nearly a 40% reduction in readmission rates.

Shields create strong value for every participant in the ecosystem and is well ahead of key market averages.

For patients that need to get on therapy as soon as possible is critical we do.

Get them on therapy in two days.

Versus a market average of 21.

Affordability is also critical for patients the shields team can help achieve an average co pay of $8 versus an industry average of more than $100.

As I mentioned before shields drives a superior specialty capture rate at up to 70% versus the market average.

Of under 10%.

Shields ultimately reduces the total cost of care by about 13% compared to market averages.

Finally, let me turn to care centrex as the only non payer owned.

Post acute and home services platform.

<unk> will help us extend Walgreens pharmacy network and services to the home.

<unk> provides a national scale care coordination and actuarial capabilities, along with a deep focus.

On the customer experience.

We COVID-19 million lives across the network.

7500 homes supplier locations.

In 2022, we will coordinate nearly $6 million home based services.

Care Centrex has externally validated results showing the total cost of care reductions of up to 20% delivered with member satisfaction results routinely exceeding 90%.

And we are already working to integrate care centrex across our business, including village MD and shields.

For example, together with village MD after a hospital discharge care centers will be able to immediately refer remember to a primary care physician when needed and even schedule an appointment for follow up care.

Analysis has shown that this rapid action can reduce hospital readmission rates by 20%.

Collaboration with Walgreens pharmacist can increase the number of successful medication reconciliations after a hospital discharge by 15% to 20%.

When done right. These not only lower carrot costs, but also improve our health plans stars rating to drive sales growth, creating a very attractive value proposition.

Relative to the competition.

<unk> is highly differentiated.

Not only are we a pair agnostic provider of home and post acute services, but our network based model provides national reach today with an ability to easily scale.

We have the most experience with over 25 years in managing home based care as well as the broadest portfolio of home and post acute services, including home health.

Durable medical equipment home infusion, Homebase, palliative and hospice care and post acute and Readmissions management.

This home focused platform simplifies the coordination of home services for the member's health plans and hospitals.

Over time the platform can also easily expand to include other types of home services.

Not only does care centrex manage the broadest set of home services, but we also manage all lines of business.

Medicare advantage.

Medicaid commercial and marketplace exchange.

Let me close today by emphasizing my excitement to be joining Wpa at this key moment of transformation for our company and for the U S health care system.

Wpa has the right assets the right team and the right strategy.

We are already providing care delivery across the health care continuum, and driving consumer engagement through our platform.

Thank you and let me hand, it back to Ross for closing remarks.

Thank you John and thanks to everyone for joining us for today's extended call before we kick off Q&A, let me sum up what you've heard.

Fiscal 'twenty two was a year of broad based outperformance against our expectations.

We are well positioned to drive continued execution through our resilient core business and by scaling our winning assets.

We see a clear path for U S health care to achieve profitability starting in fiscal year 'twenty, four and we're already raising long term sales targets.

At the same time, we are investing in talent and capabilities and rapidly simplifying the portfolio as part of our transformation to a health care company.

We have good visibility to tremendous growth with best in class assets that we have in place today.

This builds my confidence that our strategic priorities are working to drive our long term growth algorithm.

In closing we are pleased with this year's performance.

We are tackling the challenges that next year poses.

And we have conviction in the development of our new U S healthcare business and our future growth potential.

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

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.

First question comes from the line of Lisa Gill from Jpmorgan. Your line is open.

Thanks, very much. Thank you for all the details and.

John I have personally I'm very excited that you are back on the public side of the market.

So let me start there when we think about all the comments that you made.

Round Walgreens health I, just really want to understand a couple of things one when we think about the more than 2 million lives that you are talking about today.

When I try to look back and I look at some of the other comments you made around at risk lives at village empty can you maybe just talk about how we think about those $2 3 million lines. How do you monetize those lives is shifting towards value based arrangements and then secondly, I know James talked about 2025 and in the increase.

And getting to profitability in that segment, how do we think about the longer term profitability of Walgreens health.

Hi, Lisa this is Ross I'll start that off and then James and I and John might fill in a few little pieces here.

You asked the question about value based arrangement. So the assets that we have right now I will talk about a little bit on the billet side <unk> has a large amount of their current business that isn't about value based arrangement.

And you'll see that even more of that will grow over time that is our objective and then to think about how we tie our assets together I wanted to talk a little bit about the grounding of what we have in that relationship between the pharmacy and the primary care physician because that's the real key for us in terms of what we do inside our stores and taking.

That relationship that we have between our current customer and the patient that comes into a village MD and bring those two relationships together between the pharmacists and the primary care physician.

When you think about value based care.

John do you want to say a few words about that and I think Lisa. Thank you for those kind words.

It's great to be on this side again.

I'm really want to underscore the fact that I think this is an amazing platform with regard to the contracted lives.

But we're starting with contracting with health plans that are really enthusiastic about partnering with Walgreens around closing care gaps and working on screenings and really integrating more into the health care system over time, you will see us work more closely with those plans on shifting to risk, it's a natural basis.

Line and we've obviously got some great assets with village MD and care Centrex.

To accelerate that transformation over time, but right now for those 2 million lives. It's really initial contracting around leveraging the pharmacies to close care gaps and screenings.

Yes, Lisa we you asked about the long term margins, we've given our long term target of mid teens, and that's probably even a little bit on the conservative side.

And as you've seen we've started flipping the metric to EBITDA emphasize that we've already passed the peak of the investments.

As we look out over the coming years I think we will we have shields, which is immediately profitable and were not breaking out by unit, but it's at least 100 million profit in the fiscal 'twenty, two and others growing like gangbusters. We've given you the revenue growth and you can probably assume that the.

Profit growth in that business will outpace the revenue growth as it scales.

<unk> is a new acquisition I think you can make your own estimates I think we've said in the past and.

It's like mid to high single digit margins.

We've given you a revenue number we've given you a growth numbers, so thats pretty easy I think the one week.

The struggling with a bit is village M. D. We've been quite clear on this one that's an investment phase and we actually accelerated the investments in 2022, so instead of 160 clinics in calendar <unk>.

'twenty two we've gone to 200, so we're actually doing the smart thing we're doubling down this is a scale business.

The unique part of as John said about the model is this is not an old story. This is a model that breaks even in year three so opening clinics for US yes, it will be painful in the first two years, but then the returns are outsized because we get a very rapid payback.

But realistically if you plot out the number of clinics that will be fiscal 'twenty five before were EBITDA breakeven on the same goes for the organic business and just add to what John said is there is a lot of excitement amongst the partners. We have been discussing with we do expect spec to take delegated risk and probably in the near term.

Six to 12 months kind of a time frame. So we're very excited by it.

We've called up the revenue guidance and that is basically just coming from better visibility as we went through all the business reviews and the three year plan.

And.

We're very excited by the signal that assembly men for strong operational.

<unk> plans behind each one of those.

Great. Thank you for the detail.

Your next question comes from the line of Elizabeth Anderson from Evercore ISI. Your line is open.

Hi, guys.

Thanks, So much for the question I had a couple of questions about sort of just like cash flow.

The debt pay down can you talk about like how much are you sort of thinking of asking of mandatory virus voluntary pay down over the next couple of years.

And then on M&A I think it was very helpful to hear obviously that Walgreens health outlook I just wanted to see if there was any other additional asset you felt like you needed I think at sometimes you've talked about maybe a health care IP asset there. So I just wanted to understand how that fits in your current mix of thinking and then any other one off sort of cash flow I don't think opioids or anything.

That might change going forward.

Thanks Elizabeth to that question, let me start off by first saying that first of all we've moved past our.

Most significant M&A period in FY 'twenty, two we're past our peak investment period at this point, so where we're pleased with the assets that we have but we remain committed to our prior conversation that probably our next asset will look something like a tech asset, but I'll also mention though too.

Side of that.

You would see something that is currently achieving.

EBITDA.

As we look forward in terms of where we would invest but in terms of what we would do next is looking to really carefully tethered. These assets together and it lenses to look in that technology space. James do you want to go through on cash flow and debt Paydown, Yes, I think on the debt pay down.

I think we've got exiting the year of $12 billion of debt.

But we also have a lease liability of 24 billion.

So I think you can do the calculation yourself our target is 275 two.

EBITDA for Moody's and four times for S&P and were currently running above those levels and we have taken commitments with the agencies to get them below these levels. So im not giving an absolute number what I would point out though is the tremendous flexibility we have in our portfolio we have.

A lot of assets.

Portion of them are liquid so it gets back to your M&A question should we need to do M&A, it's more likely to be EBITDA accretive and then secondly, as we have a lot of firepower to do EBITDA, because we have a lot of assets that are not necessarily for.

Very close to the core.

So we feel like we're in a fairly good position, but your question is the right. One we will in the short term focus on internal.

Actually potentially some M&A, but not very large we will focus on.

Investment in the business on debt Paydown.

Then as we look forward beyond 2003, we've put it in the materials, our cash flow generation improved substantially when we get into 'twenty, three and 'twenty four.

Healthcare investments taper off and it turns profitable at that stage, we probably have fairly significant capacity too.

We returned capital to shareholders.

A lot can happen between now and 2024.

Got it thank you okay. Thanks.

Your next question comes from the line of Steven Valiquette from Barclays. Your line is open.

Great. Thanks, Good morning, so in the U S. You mentioned that the comp script growth axe immunizations was flat year over year EMEA the fiscal fourth quarter.

And this should start to recover in fiscal 'twenty, three and you've talked about the labor investments starting to pay off and I guess with that I wasn't quite clear whether the labor investments are the key variable in your U S growth recovery in fiscal 'twenty, three or have other factors on one core. So I guess I was hoping to just give more color on the <unk>.

Expected U S script growth recovery in fiscal 'twenty three.

Yes, we think we love I think I would almost take it up a level up on for the pharmacy business, we actually see pharmacy growing next year. So you take out the impact of Covid and we're expecting a very strong performance across pharmacy.

And Theres a couple of factors so.

Number one is scripts. So you asked the number one question, we expect script growth of above 5%, which is well above what we're currently doing.

We expect an acceleration as we go through the year.

Directly answer your question, we expect 50% to come from either the labor investments are fairly sizable marketing investments, we're making on customer retention and regaining lost customers because frankly, we lost customers jewelry.

Over focus on Covid and now we've got to win them back so the.

Short answer is we're investing in people and we're investing in marketing and we're investing in attracting and winning back because the patients that we lost but if you look at the bigger picture saw a 5% script growth.

Generates significant profit growth.

And obviously it is ahead of us the other factor is reimbursement.

This is quite an unusual year, because we have 95% of the contracts closed. So we have extremely high visibility to the actually reimbursement number some 95% closed and this is some of our contracts are in the second year. So this was a step down here so the reimbursement in 2020.

Four is around 80% to 85% of the reimbursement sorry in 'twenty three is 80% to 85% of the reimbursement level in 'twenty. Two so we're getting a favorable call. It net margin compared to what a typical year would look like.

The third one is we have pharmacy services. So obviously as we've gone through Covid, we've developed new capabilities Theres lots of states opening up.

The ability of pharmacists to do more activity, so our pharmacy services business.

Is growing quite strongly so that's <unk>.

Three things script growth, which is big investments to drive script too.

To us, it's an easier done norm.

Reimbursement net of procurement year, and then the third one is a fast growing pharmacy services business. So we have a firmly.

Strong plan for the pharmacy business for next year.

Okay, that's great color. Thank.

Thank you.

Your next question comes from the line of Charles <unk> from Cowen Your line is open.

Yes. Thanks for taking the question just wanted to follow up as we think about the macro environment and we are no Bob Patel.

Potentially moving into sort of a recessionary environment can you talk about sort of what you guys are planning and your assumptions in the guidance, particularly for this next fiscal year and maybe beyond.

To kind of.

Please just get ahead of.

The potential slowdown in the economy.

Yes, maybe.

Just to give you some of the impacts that are already assumed in the P&L and we've essentially plan for a moderate recession.

There are significant impacts in the income statement, we've got about eight or 10 of higher interest costs. We've got lower pension returns in the U K on slide <unk>.

On the labor investments, we've told above are not necessarily directly of recession impact, but we have a very high level of installation planned in the income statement. So I think the total inflation impact in the U S income statement is probably my guess $700 million.

And we have a significant cost program in the U S. The TCM program offsetting that right.

And then the other things that we do have still have some assumptions on supply chain on inflation.

See that a little bit of an opportunity we see.

We see China, becoming less difficult right now and shipments are coming our way faster and I think there is a bit of a release in the system.

The latest inflation numbers are not particularly encouraging while we've planned the inflation side of the envelope quite.

In a detailed way.

The real question is about how do you offset it.

Maybe I'll flip to the retail side that side of the business right. So I think you have to look at track record.

Look forward into our plans on the track record of the U S front of store business in 'twenty. Two laws. We grew overall volume on sorry comp revenue at 6% of which about three points came from from OTC to us, but still a strong 3% across the business first.

The year and we increased margins at the same time, so we could walk and chew gum right. So the margins went up despite all of the inflation supply chain.

Confusion.

Around COVID-19 and the stress on the stores, we still deliver this kind of performance. So looking forward. We have planned we have planned for inflation, but our offsets are coming from a lot of the levers we pulled in the current year. One is where we are assuming mix through a comp growth of about 2% to 3%.

So we're not expecting an acceleration versus the previous year, we're expecting repeat what we did in the base year.

Two is we have a lot of marketing levers and it's not just the omnichannel and digital investments that we've been making over the last two years, there's a customer value Trust and transformation program that has delivered significant margin enhancement in the in 2022 and that will continue into 2023.

And the Big one is owned brands, we didn't get entirely to the targets we expected in 'twenty two so actually we see homeruns being an even bigger lever going into 'twenty three 'twenty four so owned brands assortment and that will drive a tremendous mix, we have strong own brand positions in some of the health of women.

Let's kind of categories, but have we covered them all no.

Should we be covering them, yes, an hour they are very profitable yes. So.

A lot of plans.

More of the same and more on pump again, while we're very excited by front of store.

Ken can I, just follow up and ask on the owned brand is that tied also to shipments coming from China being coming in quicker is that part of what will help accelerate owned brands and the input of no. We actually did pretty good in fiscal 'twenty two one on availability in the stores it wasn't in line with prior.

Levels, but I think of the.

The prior years were up 96% 98, I think we were up 92 or 90, right. So not dramatically different so I think the supply chain guys here that a really good job on getting installed in.

Seasonal was not great in the current year, we missed some of the seasonal but the core health and wellness products, we generally had stock across the stores.

That's one of the opportunities we have in the current fiscal year ends.

Supply has released freed up from China, So seasonal all the seasonal holidays will be better than they were in 'twenty two.

Great. Thank you.

Your next question comes from the line of Ann Hynes from Mizuho Securities. Your line is open.

Hi, Good morning. So my question really has to do with the previous question because.

Stuck out to me when I saw the guidance for retail, especially at the adjusted operating income is attempting to 11%.

Growth ex Covid, which is in my sector, one of the probably highest operating growth.

For next year.

I know you have a lot of confidence in.

Gaining the market share back maybe can we look at it in a different way like when you look at your guidance what do you worry about most.

It will be the rest of the downside of you're not achieving it and can we also talk about international on Youre, assuming international grows and instead of hearing in the U S. We see a lot of headlines that they are going into a recession. So maybe if you can give a little bit more details.

What would be the drivers of growth over there. Thanks, maybe I'll take it a different way, though I'll take it.

What's the core EPS growth.

Take a midpoint of around 55 and <unk>.

Just break it out by business and we have <unk> coming from health care, so not a lot.

We have very strong plans behind all of the acquisitions of being closed.

And I would say if I take the health care business I would say its slightly skewed to opportunity.

We the team there has been shifting to more of a private equity cost optimized rollout of all of the businesses and we probably have opportunity on the amount of costs were putting in upfront. So I would say healthcare <unk>, Don would probably some opportunities.

International and we expect the contribution and this is a midpoint of estimates about 14.

Sure.

I don't think its a crazy number given that we've put out there of 5% to 7% growth in sales.

You just got to look at the most recent performance we are doing with 6% growth in both the U K.

And in the current environment in the UK and we're doing a 6% in Germany on the plan for next year has to do with <unk>.

But we're not counting on improved circumstances, when I would argue the UK is already in the depths of.

Pretty challenging environment.

Something in the U K is this.

This has happened over the last 12 to 18 months a lot of high Street retailers went bust.

And we won all of the market share and these are very profitable categories. So in front of the basically the retail business.

We're in a very very and much stronger position than pre COVID-19.

And then two as we have completely shifted the business model in the UK onto online. So we have doubled the penetration that we had pre COVID-19. So it's a completely different business with a different set of strengths. So we believe international should be able to grow revenue at five seven and that's what we're doing in the most recent quarter. So there's no reason to say it would.

Get materially worse. The other differentiating factor is the cost management across international has been very very aggressive we have really downsize. The stores is includes the opticians business the mainstream business in Germany, we have an integration of two businesses last year on the synergies.

We're ahead of plan.

Turned out to be a very smart combination and we own 100% of the business now so we're getting all the benefits of the synergies. So I think the 14th is pretty safe. So you basically come down to talking about the U S business, which is 48.

And just for transparency.

We'll give you the numbers by business 45 comes from pharmacy.

48 from retail and a negative <unk> 55 from SG&A.

This is the precision with which we're prepared to give the guidance.

We walked through a little bit.

So and I do want to emphasize don't worry about the international and the health care. This is a discussion around just dimensions in the U S. The Rx we discussed a 45 retail 48, the SG&A 55.

We have <unk>.

Three we have an investment focus plan, we have 40 cents of labor investments either minimum wage or in the pharmacy, the pharmacy investments of 24%.

Generates a return on investment through scripts, we have incremental marketing on pharmacy probably for.

I think it is.

Thats generating a return on investment we have other investments are roughly 55, that's over half a billion dollars in systems capabilities Omnichannel digital so we're continuing to invest and that's what's driving the top line.

We have we mentioned the inflation number, but TCM and the U S. The transformational cost management were $650 million of savings of one year plus the businesses saving another I think 300 million. So were taken out to fund all these investments, we're taking out almost $1 billion of cost.

Which is a massive number and we are being deliberately.

Transparent on this to make you understand we know what we're doing when we're giving these guidance.

And I think your question is on risk I think the number one risk as we have the plans on the very detailed on the money is in the income statement and the question is how quickly will we get the scripts and the pharmacy business. We're not concerned about reimbursement, we're not concerned about procurement savings the only risk we see is on Rx.

Groups in the U S.

It's orders of magnitude you can figure out for yourself, a much 1% of growth is worth its not the end of the world that just brings you to the bottom end of your guidance.

Aro brings you to the midpoint of it depends on where the street comes out on the flip side, there could be a deeper recession, while we think our business is differentiated against mainstream retailers I'm talking front of store for a minute that we're not in the same high ticket categories, where we have smaller basket.

When gas prices are high people don't travel as much to a Walmart they go to Walgreens, but so we have and we have.

And intense focus on building a much much bigger old label business.

We intend to we don't say, we're insulated, but we're far more insulated from some of the other.

Peers out there.

If you then flip to the opposite side.

<unk>.

I personally think and I'm not sure I can convince all my compatriots old if I am I think we have more.

Opportunity on the pump side, and I think thats. The job we have to do we will develop contingency plans on the cost side, such that we will offset any risk in the income statement.

It was mentioned that earlier.

Deployment of capital could we do smaller acquisitions that are immediately EBITDA accretive yes, probably.

So that becomes an opportunity.

Im thinking cost plus capital deployment offset our exposure with the simple Soma and I don't know raws, how you would characterize it I think you said it well the one thing I would add is I don't want to overlook the investments that we're making in our fulfillment centers.

The capital investment and the intention with the eight centers that we have currently.

Supporting 1800 of our stores our goal is to take about 50% of the.

Out of the store put them in a central fill location and feed those back to the store. So when you see these investments not only investment in the labor piece it sounds from investment for better jobs for our pharmacists.

Can lift up and consult and then also we get better throughput in the stores and so that's part of this equation to return the script count is that you'll have better service at the same time, and we're reducing costs by bringing in the fulfillment centers and it's one of those things that in the backdrop of our business are really strengthens our operating <unk>.

Model and inside the stores.

Alright. Thanks.

Your next question comes from the line of George Hill from Deutsche Bank. Your line is open.

Hey, good morning, guys and thanks for taking the question James I guess I have a couple of questions related to the portfolio and then a housekeeping question. So I guess as you guys talk about continuing to streamline the portfolio is it safe to assume that we should continue to see moves like you guys have made with the minority investments in other public companies and I don't know if youre willing to talk about timing on.

That the flip side of that is.

Given that <unk> does it make sense to fully consolidate and buy out the remaining interest in village FD given the growth profile, there and I wanted to ask my housekeeping question of you guys have a prearranged purchase price for the balance there and then I have a quick housekeeping follow up if you don't mind.

George Thanks for that question. So let me talk a little bit about our our M&A position.

I think one of the things to think about too is the work that we did around our boots strategic position this year as well so when we look at our portfolio with broad and.

James mentioned earlier that we have a repository of.

Cash that we could access and you've seen us do that with the work we did with ABC. We did that work also with.

Our arrangement with option care. So our whole objective here is to simplify our portfolio. That's most important for US is to simplify and then when you see us strategically invest its about our health care growth and so we'll be very deliberate about that and send that through strategic funnel as we think about what we do next to talk a little bit about.

Our work with <unk>, we went through a confidential process.

We achieved a high level of interest about eight to 10 interested parties.

And we were really encouraged they were productive discussions with a wide range of individuals.

And the markets turned on us and we went in another direction and decided to hold onto that asset and you can see their performance. Since we finished fiscal year 2002 was strong and so we're going to continue to work there in boots and keep keep it strong until we make a decision. There. So that's one piece to think about and then again just going back to look at.

The the work that we've already done we'll engage village our care central <unk> and shield and with village. We don't have a number out there that we settled on in <unk>.

That a preconceived number and then we have not made any plans.

With village.

Any further at this point, but.

The work, we're doing with them right now is very strong it's it's.

Probably the center of our health care work for Us and so we're excited about it and it's going well.

Yes, so I think I think it's.

Just let me.

Add in a little bit on the portfolio and we can say anything about any of our future actions, but I think you should listen to what Raj said that we are we're very very focused on simplifying the company because it's too complex for investors and then the second piece is we are focused on our debt and.

Returning value to shareholders. So we will be in cleanup mode for the foreseeable future.

That's great and maybe just a point of clarification I wanted to follow up on Steve's question. When you talked about reimbursement being 80% to 85% of 2023 is that what we should assume kind of a like for like reimbursement reduction looks like the basically call it down 15%.

Yes.

If you look at absolute in the income statement in 2022, 23 number is about 80% to 85% lower just because certain of the contracts.

On a year or two of the contract and then but the most important factor is.

We have 95% of the contracts closed so the volatility in the guidance is reduced right. So because thats what it all is it's all about volatility and we got the question on opposite the only thing we theoretically ton control, we can influence very heavily as Rx scripts.

But the reimbursement rate is not a large concern going into the year.

Okay. That's helpful. Thank you.

Your next question comes from the line of Michael Cherny from Bank of America. Your line is open.

Hi, good morning, Thanks for taking the question maybe <unk>.

James to pick up on that last comment and then some of the commentary you made around the control of regaining some of that script capture.

As you think about the push and pull you have on trying to get some of those scripts that were lost due to the staffing dynamics.

Can you give a little more granular into some of the specific dynamics that you're pulling forward to how much of it is consumer oriented versus payer oriented in terms of that outreach and in the past, especially when there's been times of scrip loss and that was before a lot of management's time, but thinking back to the.

Express scripts dispute from a decade or so ago, what were some of the activities that worked in order to make sure that you recaptured the script growth that you were targeting.

Yes, I think it's actually quite scientific if you take the labor investments, we have each of the stores truck.

Startling what the result is the stores the don't have a labor hour restriction or growing scripts, 3%.

The stores that have a labor restrictions are down 3% was actually a delta of 6%. So store by store you put in the labor.

You don't just switching on straight away you got a playbook they got to start calling patients. So there is a big physical element to this and there is a training and playbook element the other partners the marketing team house.

Defined programs on outreach to all of the patients.

We got to first figure out which ones we lost by store because it makes most sense to contract the patient if that store hasn't been solved right. So you first got to put the labor, but then you got to do the outreach and as I've said, we've built in I think $45 million of marketing incremental marketing dollars and pharmacy on this consumer engagement.

So it's very data driven.

We're very focused on ultimately it's quite complex because you've got to reach the consumer and they have lapsed and you've got to convince them to come back on the.

And our service level and the overall store has gone up I don't know Rick do you want to maybe add some light to that.

I think it's a great question I think as you will get the our ability in the marketing space. It's very much advanced from where it was back in the days of express scripts and all the stuff that you referenced and if you look at our ability on the mass personalization side of it and really understanding the dynamics of where consumers are how do we actually meet them, where they are and understanding how to win them back if not just a wind back it's also.

Trying to engage them in a different way to really get them to to leverage our stores for more than just scripts our services and the other types of things that we're doing as well. So I think what youll see is a very focused approach on <unk>.

How we leverage our marketing dollars to really have a bigger impact than we would have been the mass personalization tie or the broad based marketing campaigns. We may have had in the past.

So if I may a quick follow up along those lines relative to those marketing campaigns. What precisely are you doing I know theres a bit dynamic in place when someone leaves, it's really hard to pull them back out and if there are scenarios, where because they are disappointed.

Hours didn't work whatever it means how do you convince them really specifically to get back in the door.

So there's a couple of them.

Access points that we have on it.

It really lies in the space of the digital work that we've done over the past couple of years and it's mounting we opened the conversation today and talked about that we had 102 million members right now coming through our Walgreens My Walgreens App.

Those are customers that come into our stores in various ways and then we also are aware of what they purchase so a lot of this has to do with the data and analytics that we're pulling together around the customer and speaking to them on a one to one basis and then we can reach back out to them and then engage reengage them back into the process. So we can track script loss.

We can track their activity in the store and we put that information together and then tie them back into that actual physical location that they had their script that in the past. So that's the work that we're doing and the marketing dollars that come behind this are not the traditional.

Marketing dollars from years past this is primarily a digital plan.

Okay. Thank you.

Your next question comes from the line of Kevin Kelly Endo from UBS. Your line is open.

Hi, Thanks for taking my question.

Hello James.

Dividend payout ratio is really really high this year I think we calculated at something like 75% you've talked about growing the dividend. That's certainly a goal remaining investment grade.

And having the cash flow improved dramatically next year and I guess I wanted to sort of understand is the cash flow improvement going to come from lower Capex is it better cash flow conversion like I noticed your ratio to net income was really low in fiscal 'twenty two.

At what point like what's the right payout ratio for Walgreens given now it's an accelerated growth story, how should we think about that in the context of all the moving parts around around investment spend and potential M&A and everything else.

Our cash flow. This year, we were honestly a little disappointed how we finished the year, we could probably came in a couple of hundred million lighter than we expected.

We kind of mentioned it in the prepared comments Bob.

It's this thing we have placed all the advanced orders to make sure onshore on shelf availability was even higher on China opened up quicker than we expected and we ended up with some excesses.

Completely worked itself out of the system over the next few months.

We have specifically I think.

Hope I don't get the Sonic we've up 700 roughly million of working capital initiatives next year.

Had some delays on UK us this year and they're going to just be pushed into next year. So we are counting on around $700 million of working capital initiatives next year, but I think the work the.

The cash flow will improve next year, but we're actually going to be increasing our capital investments.

And so don't expect next year to get back to the run rate because we will be probably.

In our.

<unk> capex spend over multi year period was $1 4 billion.

This year is one seven or something next year will be higher it will be we have.

<unk> nucleus centers were scaling up on vintage M D.

We have compelling programs that will deliver long term returns.

Thank you get into 'twenty four 'twenty five on the topics, we'll be sorry the.

Free cash flow will be substantially higher.

Than current levels.

We'll work ourselves comfortably into on a kind of susceptible payout ratio Youre right were a little uncomfortable and where the ratio is but we have great visibility for the long term ratio. So we're much less concerned than some maybe some market participants about the absolute level of the dividend.

<unk>.

You saw in the materials. We just presented this morning remains growing the dividend is still one of our priorities and in fact, we did highlight that when we look to 2024 and 2025, we didn't just mentioned the dividend. We said there is the potential for a large.

Potential for a large share repurchase program.

But no decision has been taken on any share repurchase program. So we.

This is I think what we said last October we're facing into a period of 24 months of investment to build out the U S healthcare business and the returns will be outsized on the cup the.

Working capital will sorry.

Cash flow will come back up to.

<unk>.

In the three to 4 billion type range in 'twenty four 'twenty five that kind of range will comfortably work ourselves into the an appropriate ratio.

For dividend.

I don't know does that answer your question.

It's really helpful to understand sort of how youre thinking about this and how we should think about it yes, I think we've a large I'd leave it on that I think if you look at $24 25, we have a large opportunity on capital deployment.

It is it's either share repurchases M&A and it just becomes a discussion on which one is more accretive which one drives more shareholder value longer term.

Your next question comes from the line of a J Rice from credit Suisse. Your line is open.

Hi, everybody.

Thanks for all the detail just maybe ask about.

The retail a little bit more you mentioned the forward buying youre doing ahead of the cough cold and flu season does that suggests you have any particular view as to what this.

<unk> is going to look like I know also you got the scripts coming back in the U S are you assuming any benefit on the front of store from that pickup in incremental scripts and then I would finally ask around this that you hire.

Highlighted that you are still.

Running below pre pandemic levels in foot traffic in the U K.

Do you think that's the new normal or do you think that will at some point come back and any comment about where the U S sits relative to.

Pre pandemic levels, and whether you're pretty much normalized I know you had an uptick in COVID-19, but just aware we add do you think we're at a normalized front of store.

Today.

At this point and going forward.

So let me start that.

To start this off in a lot of questions here on our predictions on on Covid level, it's hard to predict right. Now we saw some recent comments this week about availability of vaccines at different age levels I'm, taking that down and then that's something that we hadn't forecasted in our thinking.

The two in terms of what we see in cold cough and flu, we know that people.

Ben.

And then in flu spin out there and we know that last year.

People were wearing mask and so after a while your immunity.

Can get hit pretty severely so I've got rig gates here in the room I'm going to let him talk a little bit about what he is seeing out in the industry there and what we're doing in terms of on the shelf.

Product and those kinds of thing again.

Youre right Robin just to add and I think as you look at fiscal year 'twenty. Three we're anticipating are back to normal seasonal flu back to a more of a COVID-19 pandemic and so I think what youre seeing in the southern hemisphere is going to really impact us here in the northern hemisphere, and so I think what I was going to be seasonal scripts or it's going to be OTC sales I think thats all built into the plan.

Based off of the expectations that we have I think the COVID-19 side of it is still the unknown right. If you look at the thoughts of annual boosters, how that ties together, but we are seeing pretty strong uptake already in flu shots and those types of things early in the year, which is indicative I think of consumers really you're trying to protect themselves for what could be a pretty heavy.

The flu season this year.

Yes, none of your other question on the foot traffic. So it's a great question and the UK foot traffic is below pre pandemic.

The center of city, plus travel locations continue to improve sequentially every quarter. So there will be improvement overall, but.

But I would say the recovery will not necessarily be absolute and it'll be over a multi year period. The key question is how many people pull back to the office Central London is very very driven hemani people and train stations on ammonia people are actually doing this off the strip.

Until the and I don't think it's realistic to assume that youre going to get 100% returned to pre Covid office behaviors. So.

On the flip side of this as though we believe that we will continue to capture the larger basket size, because thats, a behavioral shift that has changed and that hasnt been deteriorating and plus the shift to omnichannel. So I would say that the store, we'll never get back to exactly where it was before in the UK, but we have more than compensated.

Slide the Omnichannel and the size of the online business. So as I said before we're much much stronger overall in the UK on our shares our share of the <unk>.

As in the share of market our share of market is already higher than on a value basis. So in one way or another we've captured Buck the value that's in the UK market and more and I think that's the ultimate test.

I don't have three year stacks in the U S.

Foot traffic I don't think we have yes.

But it wasn't as dramatic in the UK the drop was not as dramatic because our stores stayed open.

The UK sorry in the U S. The U K there were actually shutdowns of some of our stores in select locations. So the trough was in those deep in the U S and the recovery was much much quicker in the U S. But I don't think its entirely recovered to pre COVID-19.

The only thing I'd add to that is the uniqueness and the in.

In the U K.

The airport locations. If you look at just segmenting, where our retail exists airport locations had significant growth and continue to see that we're seeing recovery in.

Our convenient locations and then as.

James just mentioned.

Where we need to see some improved performances around our flagship stores and those stores that are on high Street and some of the destination in health and beauty area. So.

We will continue to.

See the nice work that the UK team is doing in that business and launch things like you know they are facing energy cost and you just wonder if that's going to slow down traffic over a period of time. So we'll keep you know we're we're optimistic on the UK business.

Your next question comes from the line of Brian <unk> from Jefferies. Your line is open.

Hi, Good morning, everyone, you've got Tashi Phillips honestly, Brian So I just want to circle back to the issue around pharmacists labor and that driving software scripts. This quarter can you just talk about how the labor environment has trended throughout the year and the levers that you can pull that bring that SG&A impact down and then as a follow up.

Of that general topic can you discuss the labor headwinds youre seeing across across Walgreens health and is that baked into the guidance and if you can provide some color on what's the magnitude of that thank you.

Okay, So labor trends in Walgreens health side.

There's really no impact there.

Our primary care physician position through village MD, we're continuing to grow the number of primary care physicians. So we're really not seeing a labor issue on a Walgreens health side, it's primarily in our retail sector and.

Traffic in our stores.

Impacted by.

What we have to do I'll give you. Some examples we still have emergency call out.

People are diagnosed with COVID-19 and so that requires us to take a look almost daily at who's running the pharmacy and the pharmacy technician and then the second part of that is to make sure that some of this is geographically based too we are seeing in the upper northeast areas like Vermont.

Those areas that we're seeing that.

Really the.

Workplace and people re engaging and work is not happening as quickly. So we're working a little bit harder to reengage people to get them back to.

Back to work and that's why you see some of the incentives that we had in.

And getting people to sign up for bonus pay and starting with our pharmacist. So really what we're seeing in terms of labor we made investments over.

Timeframe, we announced last year that we would go to $15 an hour on our hourly labor that has helped us tremendously because we're competitive in the stores and that's rolling out and.

And we will be finished in the next I think we've got another 12 months to roll that across the country. So the combination of our investments in labor.

Improving our working conditions and stores all of those things are driving our employees back to the store and.

Also you're probably seeing some issues with.

With labor in different sectors, but I would have to say that we're doing our best work in terms of best jobs and best pay.

For for our labor model that we deploy in our stores.

Your next question comes from the line of Eric Percher from Nephron Research. Your line is open.

Thank you I wanted to connect some of the commentary on on both labor and Covid to the guidance for the year, you mentioned, a lower first half.

And relative to where consensus is is it fair to assume that the <unk> benefit 60 million shots will be first half weighted.

And at $16 million is that still larger than your expectation for flu shots in the average year.

And then aside from that is it fair also to assume the labor benefits will not be in place by the flu season, and those are going to back half of the year. So what we should expect relative to retail.

I'm just looking at the.

Forecast I think the majority of the.

Of the vaccines will be earlier in the year.

Of the $16 million, we said.

So because it's all booster right and all of the emphasis is on now so I would have said out of 16, probably I don't know if theres a couple of million dollars that would be in the second half the rest would be in the first off with probably a skew to the first quarter, but when we made the comment on the phasing I think the consensus.

As up 54% something like that 64% of the EPS is in the first half.

It's probably closer to 52% or 51, it's not down at 50.

But we just wanted to guide that it was a little bit on the heavy side just required slight adjustment plus the way I would emphasize it.

And then you asked about labor the labor is basically in place right. So it's going to be if you take from now onwards, all the temporary measures are already in place on changes are in place.

It has been.

<unk>.

So if you take the $2 65, a pharmacy.

I think it's pretty much all year I might get this slightly wrong. Thank you Matt.

The minimum wage is pretty similar we're gone up in stages.

Also the minimum wage which is I think it's 240.

In 2023, and that's roughly coming in the same phasing all year.

Sorry did I get that I get all your questions.

Yes, I guess is the implication that has really ramp of <unk>.

And maybe the U S healthcare.

Contributions back.

Yes look at.

Larry Youre right Youre right U S health care as an EPS will still be a headwind in the first quarter.

It will be neutral in the second quarter and actually health care returns to be.

A generator of favorable EPS growth in the second half of next year.

There is a large phasing impact on health care.

Your next question comes from the line of Ricky Goldwasser from Morgan Stanley . Your line is open.

Hi, This is Erin Wright on for Ricky today.

Blow up on capital deployment and the question there I know that you're limited on what you can say on the investment that you mentioned, but.

Speaking because your debt paydown assumptions in 2023.

<unk> contingent on further monetization of those assets in your portfolio and then just a quick clarification I just wanted to make sure.

Our clarify are you anticipating any recession risk in your international target at this point or is it really just the continuation of what Youre seeing now.

Yes, sorry.

Go ahead with a international recession, the recession risk in international we've already built in a fairly not wouldn't say conservative but realistic plan.

The I would argue the recession to see if there is one is with the UK already so the <unk> came in with their budgets and we had a robust discussion on what the outlook looks like and they have probably built.

The scenario that is <unk>.

Recession, whereas in the U S. It's moderate.

Recession stance.

So that covers that piece and then on monetization we come speak that much about it.

Yes.

Alright, it's just not.

It's impacting other people's sugar prices, but I think you need to go back to the prepared comments, we want to simplify the company over a fairly short period of time.

But that's not saying, what we're going to do specifically next year.

Your next question comes from the line of Justin Lake from Wolfe Research. Your line is open.

Hey, guys. This is Austin on for Justin Thanks for squeezing us in here James I wanted to kind of return quick to the.

You guys laid out that 8% to 10% core growth and I know you've kind of laid out a lot of moving parts through the Q&A here, but hoping you can kind of just consolidate and kind of bridge that in one place and what are the building blocks there around shrink the pharmacist bonuses kind of working our way through that and then as a quick follow up there just hoping for any kind of updated color on 340, B, if there's kind of a <unk>.

It's either a headwind or tailwind that you guys are sort of thinking about there. Thanks.

Yes.

I kind of simplify and just summarize Lee U S business, we said that the pharmacy business was 45 favorable retail was negative 48.

Sorry positive 48.

SG&A negative 55.

We had a robust discussion that labor on significant investments to drive top line.

Are mostly offset by transformational cost management program on cost programs are all very well defined with.

People are names beside each initiatives in the SG&A.

We had the discussion on retail shrink specifically I think is a <unk> <unk> favorable honestly in 2023, if you want the specific number but the retail story of 48 <unk> is all about the comps are growing 2% to 3% ex COVID-19 impacts mix will be significantly positive because of.

A large drive on new own label on the assortment and then finally, the strategic planning and customer sorry, strategic pricing and customer value transformation and you get into Rx and we said the scripts were up 5%.

We have very large visibility to reimbursement, which is slightly lower than the previous year.

We have high visibility to cost evolution on generics, which continues.

At a similar pace in 2023 as we did in 2002, So and then pharmacy services was the last piece. So I think we have cigna.

Significant programs on drivers behind each of the numbers. We gave you and I Hope you appreciate were given a lot more guidance on the individual components of the business and what's driving them.

And your final question comes from the line of John Ransom from Raymond James Your line is open.

Thanks.

If I look at the new guidance for 'twenty, three and I compare it to what you guys implied a year ago, we were running.

70, or so behind.

So I was just wondering if you could help bridge us to where we are now versus where we thought we'd be and kind of what the specifics of Oracle change. Thanks.

Sure.

It's actually 60.

The two biggest drivers.

<unk>.

Well I'll give you one as ABC for example, we sold some of our shareholder costs, 14th So it's not a small number.

Then the financial climate, we have lower pension returns in the U K that's about five.

And then Forex was 12.

So theres a lot of corporate type items that have nothing to do with the core business.

So if you take the core of the business. The pharmacy business is the largest variation thats about 30.

Sure.

It's coming from two things 340 <unk>.

It's not a particular headwind year on year, but versus our original guidance. It is a very large number of its almost all of the <unk>.

Script volume script volume is worse than the prior guidance, what's sort of the procurement savings.

Our way way better and we offset that so I wouldn't call. It a 340 b issue on pharmacy, and then if we flip to SG&A.

<unk> 30 worse and that's all from labor costs. So it's all of the pharmacy.

Labor that we've put in place. So if you wanted to kind of simplify it theres a bunch of corporate staff.

1% or 30, and then there is a 340 b issue.

And this concludes our Q&A session I will now turn the call back over to MS. Roz Brewer for some closing remarks.

So thanks again to all of you all for joining US today I personally appreciate the engagement and the relevancy of the questions.

We were very intentional about making sure that you knew we were committed to providing you with as much detail and transparency as possible and we shared even more information about how <unk> is executing well on the four strategic priorities and then how we're transforming rapidly into a health care company those are the real takeaways.

But to just recap as we close this down I know it's been a couple of hours is I want to remind everybody that we will be focused on accelerating our growth and profitability in our U S health care segment.

We will focus on optimizing our best in class assets and our partners.

We will focus on driving positive momentum in our resilient core business and making significant progress on talent and capabilities and moving quickly to simplify our portfolio and we will do this at a pace to deliver our long term growth algorithm. So.

So we look forward to continue to keeping your fully updated as we build on our success in the months ahead. We hope you have a great rest of your day and as always we deeply appreciate all of your support and commitment to the bright future. We have planned. Thank you so much.

This concludes today's conference call. Thank you for your participation you may now disconnect.

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