Q1 2024 Walgreens Boots Alliance Inc Earnings Call

Good morning, my name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Walgreens Boots Alliance, Incorporated First Quarter, 2024, Earnings Conference Call.

Good morning, My name is Krista and I'll be your conference operator today at this time I would like to welcome everyone to the Walgreens Boots Alliance incorporated first quarter 'twenty 'twenty four earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. And if you would like to withdraw your question, again, press star one. Thank you. I will now turn the conference over to Tiffany Kanega, Vice President of Global Investor Relations. Tiffany, you may begin your conference.

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 would like to ask a question during that time simply press star followed by the number one on your telephone keypad and if you would like to withdraw your question again press Star one thank you.

I will now turn the conference over to Tiffany can eager vice President of Global Investor Relations. Tiffany you May begin your conference.

Good morning, Thank you for joining us for the Walgreens Boots Alliance earnings call for the first quarter of fiscal year 2024, I'm, Tiffany Konaga, Vice President of Global Investor Relations.

Tiffany Canega: joining us for the Walgreens Boots Alliance earnings call for the first quarter of fiscal year 2024. I'm Tiffany Kanega, Vice President of Global Investor Relations.

Speaker Change: Joining me on today's call are Tim Wentworth, our Chief Executive Officer, and Manmohan Mahajan, our Interim Global Chief Financial Officer. In addition, John Driscoll, President of U.S. Healthcare, Rick Gates, Senior Vice President and Chief Pharmacy Officer at Walgreens, and Tracy Brown, President of Walgreens Retail and Chief Customer Officer, will participate in Q&A.

Joining me on today's call, our Timberland Wirth, our Chief Executive Officer, and Manuel in Manhattan, Our interim Global Chief Financial Officer. In addition, John Driscoll President of U S Health care, Brookdale Senior Vice President and Chief Pharmacy Officer at Walgreens, and Tracey Brown, President of Walgreens retail and <unk>.

<unk> customer officer, who will participate in Q&A.

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

As always during the conference call, we anticipate making projections and forward looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on slide two.

Speaker Change: Our actual results could differ materially due to a number of factors, including those listed on slide two, and those outlined in our latest form 10K 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.

And those outlined in our latest Form 10-K 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.

Speaker Change: You can find our press release and the slides referenced on this call in the investor section of the Walgreens Foods Alliance website.

You can find our press release and the slides referenced on this call in the investors section of the Walgreens Boots Alliance website.

Speaker Change: During this call, we will discuss certain non-GAAP financial measures.

During this call, we'll discuss certain non-GAAP financial measures.

Speaker Change: These measures are reconciled to the most directly comparable GAAP financial measures, and the reconciliations are set forth in the press release. You may also refer to the slides posted to the investor section of our website for reconciliations of non-GAAP measures to the most comparable GAAP measures discussed during this earnings call. I will now turn the call over to Tim. Thanks, Tiffany.

These measures are reconciled to the most directly comparable GAAP financial measures and the reconciliations are set forth in the press release, you may also refer to the slides posted to the investors section of our website for reconciliations of non-GAAP measures to the most comparable GAAP measures discussed during this earnings call.

I will now turn the call over to Tim.

Thanks, Tiffany and good morning, everyone.

Tim Wentworth: When I joined you for the last earnings call in October , I had not yet begun my role as CEO , but I shared how I believe that leading WBA is a once-in-a-lifetime opportunity with a tremendous brand, legacy, and neighborhood presence.

When I joined you for the last earnings call in October I had not yet begun my role as CEO.

Shared how I believe leaving Wpa as a once in a lifetime opportunity with a tremendous brand legacy and neighborhood presence.

Tim Wentworth: Today, 10 weeks into my tenure, I am even more certain of my decision. I am pleased to be here today to share our results, our outlook, and my broader convictions around how we can build on our strong pharmacy foundation to partner across healthcare services and drive sustainable value.

Today 10 weeks into my tenure I am even more certain of my decision.

I am pleased to be here today to share our results our outlook and my broader convictions around how we can build on our strong pharmacy foundation to partner across health care services and drive sustainable value.

Tim Wentworth: As you are by now aware, WBA started fiscal 2024 with unplanned results despite a weak retail environment in the U.S.

As you are by now aware Wpa started fiscal 2024 with unplanned results. Despite a weak retail environment in the U S.

Tim Wentworth: First quarter, adjusted EPS came in at 66 cents, reflecting execution and cost discipline in U.S. retail pharmacy, continued strong performance in international and progress with profitability initiatives in U.S. healthcare.

First quarter adjusted EPS came in at 66 cents.

Reflecting execution and cost discipline in U S retail pharmacy.

<unk> strong performance in international and.

And progress with profitability initiatives and U S health care.

Tim Wentworth: We are maintaining full-year adjusted EPS guidance against a challenging backdrop.

We are maintaining full year adjusted EPS guidance against the challenging backdrop.

Tim Wentworth: I must give credit here to the hard work and dedication of our team.

Must give credit here to the hard work and dedication of our teams.

Tim Wentworth: We are navigating the accumulating consumer pressures from inflation and depleted savings, and somewhat slower than anticipated market trends in pharmacy script volumes, including impacts from a weaker respiratory season and Medicaid redetermination.

We are navigating the accumulating consumer pressures from inflation and depleted savings and somewhat slower than anticipated market trends in pharmacy script volumes, including impacts from a weaker respiratory season and Medicaid redetermination.

Tim Wentworth: Retail customers in the United States are under stress and making deliberate choices to seek value, evidenced in our own brands of 90 basis points in the quarter, while the man for seasonal and discretionary categories remains weak.

Retail customers in the United States are under stress and making deliberate choices to seek value evidenced in our own brands up 90 basis points in the quarter, while demand for seasonal and discretionary categories remains weak.

Tim Wentworth: At the same time, our teams executed well during the quarter on delivering pharmacy services, including vaccines, and maintaining our overall share of script volume in the U.S.

At the same time, our teams executed well during the quarter on delivering pharmacy services, including vaccines and maintaining our overall share of script volume in the U S. <unk>.

Tim Wentworth: International was once again a bright spot in the quarter, building on last year's solid growth.

International was once again, a bright spot in the quarter building on last year's solid growth upsell.

Tim Wentworth: Upside was led by Butch UK with further share gains in retail, while both retail and pharmacy delivered gross profit improvement despite inflationary cost pressures. Germany also

Upside was led by boots UK with further share gains in retail, while both retail and pharmacy delivered gross profit improvement despite inflationary cost pressures.

Germany also achieved share gains.

In U S health care, we are on track to achieve significant year on year profit improvement.

<unk> is rapidly realigning operating costs with sales the team is executing on several initiatives from revenue cycle management to procurement with operational actions spanning the organization.

As Bill agenda focuses on increasing density in their highest opportunity markets remember the previously announced plans to optimize their footprint and exit approximately 60 clinics in non strategic markets.

Tim Wentworth: As of today, they're nearly halfway there having already exited 27.

As of today.

Are we halfway there having already exited 27.

Tim Wentworth: Additionally, VillageMD is driving patient panel growth and achieved 23% year-over-year growth in full risk lives and 9% growth in fee-for-service volume.

Additionally, village MD is driving patient panel growth and achieved 23% year over year growth in full risk lives and 9% growth in fee for service volumes.

Tim Wentworth: work is underway to implement targeted marketing efforts, leveraging Walgreens expertise and patient touch points, and we expect benefits over time as we learn and for the develop our provider-based risk strategy.

Work is underway to implement targeted marketing efforts, leveraging walgreens expertise and patient touch points and we expect benefits over time as we learn and further develop our provider base risk strategy.

Tim Wentworth: So macroeconomic conditions are clearly difficult for retailers and I fully acknowledge the structural headwinds in our core pharmacy business and the growing pains in our healthcare segment. None of this.

So macroeconomic conditions are clearly difficult for retailers and I fully acknowledge the structural headwinds in our core pharmacy business and the growing pains in our healthcare segment.

None of this is a surprise to me I came to Wpa eyes wide open with a clear mandate to act with everything on the table in terms of putting our business on the right track.

Tim Wentworth: I came to WBA eyes wide open with a clear mandate to act with everything on the table in terms of putting our business on the right track.

Tim Wentworth: In that context, we are taking swift actions to right-size costs and increase cash flow across the company.

In that context, we are taking swift actions to rightsize costs and increase cash flow across the company.

Tim Wentworth: We remain on pace toward $1 billion in cost savings this year.

We remain on pace towards $1 billion in cost savings this year.

Tim Wentworth: Our U.S. organizational efforts have resulted in a planned headquarters support office workforce reduction of approximately 20 percent.

Our U S. Organizational efforts have resulted in a planned headquarter support office workforce reduction of approximately 20%.

Tim Wentworth: Over the past two months, we have prioritized projects and capital spend to focus on the customer-facing activities that matter most.

Over the past two months, we have prioritized projects and capital spend to focus on the customer facing activities that matter most.

Tim Wentworth: First quarter, CapEx was over $100 million lower year over year on track to a $600 million reduction for the full year.

First quarter Capex was over $100 million lower year over year on track to a $600 million reduction for the full year.

Tim Wentworth: We also remain on schedule to deliver $500 million in working capital benefits in fiscal 2024.

We also remain on schedule to deliver $500 million and working capital benefits in fiscal 2024.

An additional meaningful and necessary step to strengthen our long term balance sheet and cash position today, we are announcing a 48% reduction in our quarterly dividend payment to <unk> 25 per share starting in March.

This action will free up capital to invest in driving sustainable growth in the pharmacy and healthcare businesses as well as paying down debt at.

At the same time, we will continue to deliver a competitive dividend yield as the board and I continue to view the dividend as a critical component to overall attractiveness of Wpa to many of our shareholders.

Our financial flexibility is also supported by other strategic actions with some already underway and others under consideration.

In November we monetize an additional portion of our <unk> stake with nearly $700 million of the <unk>.

<unk>.

We also took advantage of the higher interest rate environment to secure a full buy in for the boots pension plan with legal and general to ensure the benefits of all 53000 members.

Our buyout scheduled in calendar 2025, we will eliminate the companys plan obligations and commitments.

Furthermore, we continue to evaluate our existing portfolio sharpening our strategic focus on the U S retail pharmacy and health care with our remaining investments in Syncora bright spring and other minority interests, providing financial flexibility.

Let me be clear we have hard work ahead of us in our journey to simplify and strengthen Wpa, but also good momentum with important early actions that we've taken.

And there are a number of building blocks already in place for a sharper healthcare strategy positioning us well for long term profitable growth.

Walgreens is a dependable trusted and convenient local health care destination for patients and we have the ability and frankly the market mandate to be a valued independent partner of choice in health care services.

As John Driscoll detailed last quarter, we are leveraging our local presence to engage with patients across our thousands of stores.

And through our assets across the care continuum on behalf of payers providers and pharma to help them achieve their objectives at scale.

I can tell you from my early days with the team and for meetings with our partners and prospects. There is a lot to be excited about here.

But our competitive advantage is not just our neighborhood footprint and convenience with 10 million customers visiting us at Walgreens in store or online every day.

Our stores are access points and the best corners in America.

And more specifically we have over 85000 people on our teams.

Directly engage with patients and our trusted providers in their communities.

Walgreens has the unique ability through our well established physical presence and iconic brand for our people to drive trusted meaningful connections.

We are enabling pharmacists to spend less time on tasks and more time on meaningful interactions and providing essential care.

From health screenings to immunizations to diagnostic testing and treatment.

Our network of micro fulfillment centers is helping to stabilize staffing and pharmacy hours reduced workflow pain points and free up capacity to drive the outcomes that matter most to our patients and partners.

Youll remember in October we mentioned a pause in the rollout to optimize productivity.

We are happy with our continued progress and the importance of these centers and our overall strategy.

We are also piloting virtual pharmacy to redefine connected care further increased patient access enhanced workplace flexibility and extend our pharmacist reach.

Finally, we are partnering with academia and specifically key schools of pharmacy to explore ways to attract recruit and create a dynamic workplace for the next generation of pharmacists.

Our relationships with pharmacy Deans are integral to our strategy and can help us advance the profession and so we are forming an advisory council to guide us in our transformation.

I look forward to personally working with <unk> with our first meeting in March two.

To ensure Walgreens is the preferred employer in the pharmacy space and I want to thank our pharmacy teams for their tireless efforts on the front lines of health care delivery in this country.

Let me give you. One example of how we can build on our established assets in a capital efficient way to expand services and support patients and partners are.

Our clinical trials offering.

We are partnering with pharma companies and leveraging our community presence and patient engagement to help drive greater patient diversity in clinical research.

In a short span we are already improving participation in equity at double the national average.

Date, we have signed over 25 contracts with a robust pipeline of opportunities ahead.

Shield is another example of our strength serving hospital systems and has consistently delivered strong margin accretive results ahead of plan.

Sales were up 27% in the first quarter driven by meaningful growth at existing customers as well as new partner contract signings.

We expect yields continue to leverage and benefit from the rapid growth in the broader specialty market and our intense focus on accelerating hospital owned specialty pharmacy programs are.

Our specialty pharmacy assets will be an important focus going forward and while we have work to do we are pleased to be executing our next steps with gene and cell therapy.

The FDA anticipates approval of more than 20 gene and cell therapies by 2025, and this is an exciting opportunity for patients with rare conditions and for Walgreens specialty pharmacies.

In the coming months, you will hear more from us on our initiatives in specialty.

Finally, let me touch on reimbursement models and dynamics.

We continue to see the benefits of more comprehensive and responsive discussions with payors as they are realizing the broad set of value drivers the Wpa can deliver.

We are committed to and entering into pay for performance contracts beyond core dispensing as we advance our adherence and outcomes capabilities within our pharmacy platform.

In addition.

We welcome and we will work with payer and PVM partners on any model that recognizes and reimburses pharmacies for the unmatched value, we provide patients including pharmacy services.

As well as those models that can ensure more transparency and predictability in reimbursement.

With that I'll hand, it over to <unk> to review, our financial results and recent execution in further detail.

Thank you, Tim and good morning, everyone.

Overall first quarter results were in line with our expectations.

Sales increased eight 7% on a constant currency basis.

U S retail pharmacy grew at six 4% international delivered four 4% growth in.

In U S health care pro forma sales increased 12%.

Adjusted EPS of <unk> 66 declined 44% on a constant currency basis, mainly driven by lower U S retail sales and a 21 percentage point headwind from a higher adjusted effective tax rate strong international growth and improved profitability in our U S health care.

<unk> positively impacted adjusted EPS.

GAAP net loss for the first quarter included $278 million after tax charge for fair value adjustments on variable prepaid forward derivatives related to Suncor shares I remember in the first quarter of last year, we recognized a $5 $2 billion after tax charge for opioid.

Related claims and lawsuits and a $9 billion after tax gain on sale of Syncora shares now I will cover the U S. Retail pharmacy segment sales increased six 4% versus the prior year quarter, driven by brand inflation and pharmacy and higher contribution.

From pharmacy services.

Sales growth was partially offset by a six 1% decline in the retail business.

<unk> declined 37, 2% year on year, mainly driven by lower retail sales volume and margin, including higher levels of shrink.

<unk> was positively impacted by execution in our pharmacy services and progress on cost savings initiatives, Let me now turn to U S pharmacy.

Pharmacy comp sales increased 13, 1%, mainly driven by brand inflation and higher contribution from pharmacy services.

COVID-19 vaccines have now shifted to a commercial model consistent with other vaccinations.

Comp scripts grew one 8% excluding immunizations in line with the overall prescription market.

The ongoing impact of Medicaid Redetermination, and a weaker flu and respiratory season continued to negatively impact overall market growth.

Third party data showed flu cold and respiratory activity was down 13, 5% compared to the prior year quarter.

Within pharmacy services.

Vaccines portfolio, which includes flu <unk> RSV and other routine vaccinations performed well in the quarter.

Pharmacy adjusted gross profit declined slightly in the quarter with margin negatively impacted by reimbursement pressure net of procurement savings and brand mix impacts.

Turning next to our U S retail business.

Challenging macroeconomic conditions and an anticipated slow start to the cough cold flu season contributed to a weaker retail performance year on year.

Comparable sales declined 5% in the quarter there are three main drivers.

A weaker respiratory season had an impact of approximately 160 basis points through the health and wellness category.

Cough cold flu serves as a primary trip driver.

As a result, we also experienced lower attachment sales due to the weaker season, which are incremental to the 160 basis points impact.

Second customers continue to pull back on discretionary spending and actively seek out promotional opportunities as a result, we saw an approximately 90 basis points impact from a weaker holiday seasonal sales.

Lastly, our decision to close most of our stores on Thanksgiving. This year to further support our store team members led to a headwind of about 60 basis points.

While these factors have resulted in lower sales across all categories, we experienced more pronounced declines in consumables and general merchandise and in health and wellness retail gross margin was negatively impacted by 110 basis points due to higher shrink.

Our retail shrink continues to be a systemic issue across the retail industry turn.

Turning next to the international segment and as always I will talk in constant currency numbers. The international segment performed better than our expectations in the quarter total sales increased four 4% with boots, UK up six 2% and Germany wholesale growing three 7%.

Segment, adjusted gross profit increased by 7% outpacing sales growth with boots, UK driving strong retail growth.

Adjusted operating income grew 15%, including the impact from inflationary cost pressures.

Let's now cover boots, UK retail comp pharmacy sales grew 8%.

Comp retail sales increased nine 8%.

With growth across all categories led by beauty and health and wellness. We also saw a year on year growth across all store formats with flagship and travel locations, performing particularly well boots increased retail market share for the 11th consecutive quarter led by beauty <unk> Dot com sales increase.

17, 5% year on year and represented 19, 2% of our UK retail sales.

Turning next to U S health care.

U S healthcare segment results were in line with our expectations.

This is the second consecutive quarter of significant improvement in adjusted EBITDA compared to prior year.

First quarter sales of $1 9 billion.

Increased by 95% compared to the prior year.

Reflecting the acquisition of summit held by village MD and growth across all businesses.

On a pro forma basis segment sales increased 12%.

Village MD sales of $1 $4 billion were up 14% on a pro forma basis.

The year on year increase was driven by growth in full risk lives.

Better same clinic performance and increased productivity in the summit health multi specialty business.

Shields increased sales by 27% as new health system contracts and expansion of existing partnerships led to a 42% increase in the number of patients on service in the quarter versus the prior year.

Adjusted EBITDA was a loss of $39 million, reflecting investment in village MD, partly offset by profitable growth at shields and gear centrex.

Adjusted EBITDA increased $84 million compared to last year with improvement across all businesses.

We are making progress to accelerate profitability at village MD <unk>.

And profit growth from all other businesses contributed positively in the quarter.

Turning next to cash flow.

Overall free cash flows were in line with our expectations.

Operating cash flows in the quarter was negatively impacted by anticipated seasonal inventory build and timing of payer reimbursement.

Capital expenditures declined by $104 million.

Versus the first quarter of fiscal 'twenty three.

Free cash flow was down $671 million versus the prior year driven by the phasing of working capital and lower earnings partially offset by lower capital expenditures.

Tim mentioned, we are on track to reduce capital expenditures by approximately $600 million year over year and to deliver working capital improvement of $500 million.

I will now turn to guidance, we are maintaining our fiscal 2000 and for adjusted EPS guidance.

We expect certain incremental tailwind and headwinds in a challenging environment compared to our prior outlook.

On the tail wins with strong execution to date, we now expect pharmacy services to deliver ahead of our initial plan.

We also anticipate an improvement in our full year adjusted effective tax rate as a result of tax planning initiatives with a revised range of 15% to 17% compared to the prior outlook of 19% to 20% on.

On the headwinds first we.

We expect the pullback in consumer spending and shifting behaviors will continue to impact our retail sales in the U S. In the short term.

While improving in the second half.

We now expect retail comp sales for fiscal 'twenty for the declined low single digits compared to the prior outlook of flat.

We expect approximately $125 million and reduced sale and leaseback gains versus our prior outlook.

As we explained in October this is the last year of anticipated sale leaseback transactions.

Lastly, we also forecast slightly lower overall market volume growth for prescriptions compared to our previous expectations.

Importantly, as we build on the first quarter progress in U S Health care, we continue to expect segment adjusted EBITDA to be breakeven at the midpoint of the guidance range.

This represents an increase of 325 million to $425 million over fiscal 'twenty three.

The improvement is mainly driven by actions taken to accelerate profitability at village MD robust growth at shields and cost discipline.

Next I will discuss factors impacting the phasing of earnings in the second quarter versus second half of the fiscal year.

In the second quarter, we will be lapping adjusted EPS of $1 16 in the prior year quarter.

Three factors are expected to have an outsized impact on the year over year comparison.

We anticipate lower contributions from sale and leaseback activity second we're incorporating impacts of consumer pressures on spending and sentiment and higher shrink on our retail business.

Lastly, we expect these headwinds to be partly offset by a lower tax rate in the second quarter due to the phasing of tax planning initiatives.

Looking ahead to the second half of fiscal 'twenty four there are four key drivers for our improving earnings profile.

First as we have previously discussed we expect actions to lower our cost base, we will continue to ramp over the year.

Second we expect U S health care segment profitability will scale over the balance of the year, mainly driven by benefits from optimizing the clinic footprint.

<unk> patient panels, and realigning cost at village MD <unk>.

And growth across all of our businesses.

Third we cautiously expect modest level of retail market growth against an easier second half comparison.

Finally, our tax rate was elevated in the first quarter, we expect favorability in the remainder of the year with that let me now pass it back to Tim for his closing remarks to summarize what you've heard from US today, we executed on our plans in the first quarter. Despite the challenging environment and we also recognize there is still plenty.

Work to be done.

The future of health care and of this company both require innovative new thinking.

My headline to you is that everything is on the table to deliver greater shareholder value, we have the experience and the license to deeply examine our business and make the changes that position us well going forward.

Having spent time with our team members and our business I am encouraged by the significant opportunity to build on our legacy pharmacy strength and our trusted brand to evolve healthcare and the customer experience.

We're not pivoting away from our position as the Premier neighborhood retail pharmacy, but we are instead redefining what we can do to help payers providers and pharma achieve their goals.

The reasons I joined Wpa Werent just validated in these discussions they are even more true than I had anticipated I have a strong team in place to drive execution, who are effectively working together to deliver for all of our stakeholders. While I worked through several leadership transitions in the coming weeks and months, we look forward to engaging with you.

You are customers, our fellow teammates and our shareholders as we are listening learning and moving quickly to create sustainable value.

Now I would like to open the line for questions.

As a reminder, if you'd like to ask a question. Please press star followed by the number one on your telephone keypad. We also ask that you limit yourself to one question and one follow up.

Your first question comes from the line of Lisa Gill from Jpmorgan. Please go ahead. Your line is open.

Good morning, and thanks for all the comments Tim I wanted to go back to your comments around the reimbursement model you talked about pay for performance you talked about at the unmatched value transparency predictability how much of that do you think can be driven by Walgreens and Walgreens, putting a new model in place and as we think about just what's happened with.

Margins in drug retail over a number of years, what do you think can be a sustainable margin when we think about that drag.

Our retail business.

Good morning, Lisa Thanks.

So first of all as it relates to sort of how much can Walgreens Greens drive market shift I think we certainly as a major retail player and partner to Pbms and health plans are in a position to bring value to the table and different ways that they will look at and determine help them.

<unk> win in their marketplaces, and so I actually think we can play a fairly significant role in the relationships that we have the contracts that we write.

And the risk that we're willing to take in terms of the value. We know we will create at the back of the store with the way we can interact with patients on behalf of those payers. So I don't think as you know any change in our reimbursement model.

<unk> is a speedy change, but I think there is very very strong clear messaging in the marketplace from us and others that would point to the fact that.

The way that retail pharmacies will create value in the next 10 years isn't going to simply be lowering the cost of the unit cost of the drugs that were purchasing and distributing because quite frankly that largely now is not where the real gains can be made for payers and for patients and so from our standpoint, we're going to drive hard at it we can work in <unk>.

And we've proven we're inside of cost plus models now transparent models now we have a very robust cash program and we think we are a terrific partner to others that want to win in the marketplace with these more innovative models that they have talked about and that they are pushing into the market. So I feel super good now in terms of I'm not going to give you guidance on.

On the as you would expect on the.

Margins for drugs other than to say that most of the if you look at the innovation and reimbursement and pharmacy, that's likely to evolve.

It's likely to evolve in such a way that the margin per drug is going to be largely based on how much service do we provide the patient that's receiving it and I think we've seen what that looks like and models like specialty.

We've also seen when it disconnects when it looks like and those are things that we're working against as well, where we're not compensated for the kind of services, we provide and we are pretty confident that the value that we can build in what we call. Our pharmacy services, but also our use of pharmacists to help patients take the drugs and stay on them safer.

And get the benefits and make sure the payers are getting what they are paying for.

We're super well positioned to evolve those models as a leader.

Thank you and congrats on your first quarter. Thank you.

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

Yes, good morning, guys and I'll Echo Lesa sentiment is welcome aboard Tim I guess, Tim as you look at the business from where you stand right now you've kind of said everything's on the table, but I guess could you spend a little bit talking about what you think is part of the Walgreens core business, the Wpa core business and kind of what might be ancillary and kind of maybe talk about how you see.

Ending your time, and where you think your strategic focus.

His most important will be spent right now.

Sure. Thanks George.

I appreciate the question, that's a great way to ask whats on the table.

From from that standpoint, let me, let me answer your question, though because we have a terrific group of assets that I think are going to be on a go forward basis are critical but again, let me be clear I'm 60 days in we have a lot of work to do we're working to get our.

Cash flows our balance sheet.

All of our financial models.

And we're being able to invest in our company to growth to grow.

The first and most easy answer is our stores and so lest anyone think that where we were headed was a meaningful pivot away from being committed to.

A community based engagement model with patients both with what we do in pharmacy, and what we do to create a grid a great experience for them in the front of our store that is.

Central Asia Central element to what we will have going forward and that is not on the table now what is on the table is what's the right footprint in stores and we've announced already that for example, this year, we're going to optimize our footprint by roughly 200 stores and we're on track to do that we will continually look at sort of the model through the lens of where do we.

Need to be and where do we not need to be and what is what is creating value.

<unk> and what is destroying value so.

But theres no question for me that we are going to be a major community based neighborhood point of engagement for patients with human beings touching human beings, which I believe is the long term how health care in this country is going to evolve besides that though.

We very much in what you've seen.

I could ask why did you come off the couch that youre sitting on to get back into the CEO chair It was real simple.

Walgreens called me I had had three years of experience during the worst pandemic hopefully in my life.

With the pharmacy services part of our business with the vaccines that my family and I.

We were able to obtain and so for me I viewed walgreens as a fundamental public health utility as much as a business and something that literally has the potential to be.

Meaningful not just in a pandemic, but on a go forward basis, and we have proven that with our pharmacy services businesses. So we are clearly investing around being able to both free up pharmacists centralize certain activities and so forth using technology.

Me too to then expand the things that we can do in store be the testing including.

Including working with Labcorp, but also using our own employees.

Vaccines and adherence programs and other things that we do to counsel patients. Besides that though we have a really terrific cluster of businesses in <unk> and in shields, where we're adding value to payers in areas, where they are taking risk and where theyre looking for partnership and those those assets are.

My first glance, providing real value to the marketplace and have potential synergy with one another and with our retail pharmacy model. So again backing all the way up though again there are a number of other things there the clinical trials business that I mentioned in my prepared remarks Super interesting Leverages some of our assets capital.

And I think that that's the way I'll zoom out here and just leave you with the thought that says I don't want to detail every asset we have we've got lots of really good stuff. We also have investments in things like village M. D that we're actively managing but what I would say is this the lens that we're going to put on these things is do they create sustained value for payers patients health systems.

<unk> and if they do can we get a fair return for the capital that we're going to invest in them and if the answer is we can't get a fair return we're not a charity. So we won't do it but I see a lot of opportunities for us to meaningfully create high return on capital investments in the services business and that's the I think the headline I'd put out there is that we are going to evolve our services are.

Strategy from a healthcare standpoint to a health services strategy, which I think a retail pharmacy basis for that I thought a PVM basis was terrific to build a health services business I think our retail pharmacy base is a fabulous base to build the health services business from because of the engagement.

Okay, and if I can have a quick follow up I guess do you think of the care delivery businesses kind of core to the business.

Hey, you from the person to person aspect.

When would you define when you say care delivery.

The village the village in some of the assets.

So we like that investment, we're working closely with them and as <unk> mentioned in his in his prepared remarks. There is no question that they have put themselves on a good path both in terms of their cost and their footprint getting getting to a place where theyre going to be meaningfully growing and profitable. So.

So we like that as an investment I think that as a future growth area for us beyond the village investment, which we're very committed to.

I would not expect to see us investing in additional primary care assets in our portfolio of investments.

Very helpful color. Thanks, Dan.

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

Yes, Thanks for taking my question and welcome Tim back.

Tim I wanted to touch on some of your comments around specialty obviously.

Given Europe.

In specialty from your prior prior rules.

Love to hear a little bit more about this.

Talked a little bit extensively about it and potentially the path for Walgreens would be significantly bigger player. In this segment if I'm not mistaken I think shield is one of the few specialty pharmacies that has.

Sort of access to almost all of the limited distribution specialty drugs in the market and sort of given sort of the shifting channel dynamics in this market over the next few years, particularly with.

See some ongoing regulatory scrutiny.

In this space.

End of opportunities do you think this decrease of Walgreens.

Shields in particular.

Thanks, Matt I'll start and then I'll actually let let John speak a little bit more because john's been very close to the shields business, which has just been a terrific gray.

Great management team and a great partner to health systems first let me, let me clarify one thing which is that actually we walgreens specialty have access to the limited distribution drugs and shields has access to us and so what shield is able to do is actually work on behalf of the health systems to build networks and to manage the patients.

The pharmacy programs that are really important to these health systems. If you look look at their underlying economics quite often that can be many times. The only place that they are actually earning earning a profit and so we become a very very important partner.

Our Walgreens specialty assets inside that mix I'll speak to just for a second we have community a central fill we are building a gene and cell therapy, because pharma has essentially indicated strong interest in working with us in that space and so we think we've got great core assets I think that one of the things that's been underway under John and Rick.

Working together has been really making sure that we've got those assets focused very very pointedly on the payer market and since I got here, we've had a number of wins, where we were put into the network of large blue Cross Blue Shield regional plans.

As a participant that's not sufficient from where I'm sitting though we've got to be able to win more than our fair share of those patients based on the service that we provide the cost we can deliver and we're working through sort of our models to figure out what we need to do to enhance our access to patients that being said, though shields as a key enabler to our specialty strategy.

As a potential components for these pharmacies and John if you want to just give any additional color there I think.

Yes, I think the only thing I'd add is we're not just growing with payers were growing.

Beyond blues plans with other payers.

Shield does an exceptionally good job in a growing market is leveraging our clinical pharmacy model, which delivers more adherence and better outcomes and so it's really a great example.

Barry.

A lot of detail involved.

We are being paid for performance and Thats. It thats growing in terms of building on Walgreens franchise with.

Large hospital systems, and small hospital systems around America, but it's based on execution, which I think there's still a lot of runway both from a payer and from a health system perspective, and obviously the underlying.

Specialty drug market is only going to get larger and more complicated, which I think plays to the shields and the Walgreens strengths.

Great and if I could just follow up on George's question, Tim you kind of said that you probably are looking to invest in more care.

Delivery assets kind of like village MD, but.

Could we expect more type of partnerships.

Entities like Pearl.

As a way to kind of expand continued access to care.

Yes is the short answer we recognized the village MD represents in city represent a fabulous sandbox for us to build services test them and by the way demonstrates that they perform and help them achieve their objectives, while at the same time, putting us in a position of growing.

And from our perspective.

That is a starting point to being a partner of choice for any number of as you know village has certain geographies that very deepen but there are geographies that are not in at all and there are a large provider opportunities for us to partner in similar ways in those marketplaces to grow our business and importantly help them grow there.

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

Thank you.

On pharmacy, we've been hearing from Walgreens in the pharmacy services are the key to driving better reimbursement for several years.

It looks like we're seeing that in vaccines today for broader reimbursement pressure continues in the MF here, saying that <unk> hit a floor on unit cost offsets independents are saying the same and it can't go lower.

Do you share the view that we hit a floor that reimbursement pressure as has reached.

A level you can't go past in 'twenty, four 'twenty, five and perhaps more important given your PVM experienced as Walgreens have the leverage needed to drive more fair reimbursement or new models.

So listen in my 25 years with Pbms the floor just kept moving lower.

Not just for retailers, but frankly for for all the players in the system right, whether that be rebates or acquisition costs et cetera, and so we don't accept that we think that there is very little left let's put it that way in the tank in terms of if I'm, a PVM and I'm trying to deliver value to my marketplace.

The levers that I have include retail network design and my point would be is squeezing the retail beyond sort of where it's economically.

Sensible for the retailer by itself there isn't much left there and so to do that doesn't produce enough value for the pbms to go win on that basis, It's way way way more effective to win on creation of more certainty around value beyond unit costs. So I think we're close and like I said, we're close to the floor, but we are in this and we've had a very successful.

2020 for negotiations with the various pbms and our 95% along the way of being done for 24 and have some good indications for 25.

And again, we are we believe we can help drive a transition in the marketplace over time to a more value based bottle, which will frankly show well two through to the end users and the patients and so from my standpoint, I'll never declare theres, a floor and as I've said to our team.

We still have to compete we don't get to not compete just because the reimbursement model changes we will compete though on things that we are actually very good at and that we can control and I think that as I look forward in the next three or four years, we can play a leadership role in that in a way that helps pbms win let me be clear our job is to help pbms when I want.

More prescriptions coming through our stores and that does not happen simply by being a great patient experience that happens by being a great payer partner and Thats. The place that we're going to be focused and we are listening carefully and trying to understand what are the payers trying to do in order to therefore configure the places we create value and as you've seen two very large pbms have.

At least and I think they are responding it's really interesting to me to more pull from the marketplace. Then we may have experienced historically as it relates to either pass through a transparent models and therefore announcing these these.

Programs that they're putting out in the marketplace that we can play very very effectively and so the fact that there may be more marketplace pull there only presents for me a sense of urgency for our team to do what we've already done and accelerate additional value creation that we can be paid for and that our payers can go out and win with.

Rick do you want suggest that.

Yeah. Charles This is Rick Rick add some color.

I'm sorry, Eric.

The one thing I'll add is that we've been very successful in making sure that we are negotiating straight in core dispensing as one rate and anything else value add as a separate rate. So when you think about pay for performance contracts or are you thinking about any of our <unk>.

Services like vaccinations or test test and treat those are completely separate.

Reimbursements that were getting so so we've been very specific on how we contract. So that we can be laser sharp on how we look at the unit economics of our script dispensing.

That's where I was going thank you.

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

Hi, Good morning. Thanks for the question. So just Tim a follow up on the reimbursement model because obviously, it's a big focus for investors.

I think you mentioned and leases question that you think it would take some time you have a guesstimate and how long you would take it to implement and maybe putting your payer hat on since that was the majority of your career why do you think payers would be open to such a change.

Would it be the main drivers for them and maybe what would be the benefit for them longer term what would be the financial for Walgreens longer term.

So.

How long to implement as you know Pbms and health plans selling cycles are not short and so what I would expect us to see material potential change within a year or two.

And probably but you would also see for new sales mid year for small groups and stuff that churns more regularly I think you could see a fairly quick.

Uptake to the extent that the market is looking for this and again I.

Say that cautiously because we've seen before with transparent model remember in 2005, I think is a PGM I wrote.

We joined the towers Watson collaborative and it was we were doing traditional deals within six months alongside of the transparent with the market actually didn't want the risk shifted to them. They are one of the risk being held by the Pbms. So.

In this case, though I think that the plan designs that the the market have largely evolve II are creating this underlying demand to give patients the pass through of the cost plus experience. So that they don't have an odd surprise when they go to the pharmacy counter of paying more for the drug then actually they would if they were a cash payer.

So I do think that the employers don't like the employees coming into their benefits office asking questions about how good our my benefits. If in fact you know.

This is my experience at the pharmacy counter and Thats, causing some demand again I'd, let the pbms speak for themselves as to why they've launched these programs, but I would suspect that that's a piece of it I think as well the regulatory environment continues to evolve and I think that it is very appropriately responsive to some of the concerns that exists there. So I don't think its going to.

This is not a six month implementation, we are prepared and already have sat down and had conversations to support these models and we could we could convert to a cost plus model overnight. So we are a willing player in terms of what we would need to do to compete and win patients on a cost plus basis why payers would do it.

Again, I think I've, just I've answered that for you in terms of it comes down to providing a benefit and a labor market that's fairly tough competitive wise to folks that are valued and so they want the benefit the pharmacy benefits. The most used benefit they want it to be valued in and they wanted to be understood and they don't want it to be confusing and so I think these mom.

<unk> offer a pathway to achieve that what's in it for us is being paid fairly for the services, we're providing at the back of the store and not subsidizing in a large scale way.

The products that the patients are getting in a way that's not economic for us and I think the big change. There. If you go back there was an appropriate amount of incentive being created in the system to dispense generics for lots of obvious and good reasons. If you go back 25 years ago the generic wave.

People didn't believe would happen.

We had to do generic sampling in the BPM industry to even convince physicians that they were they were okay to dispense an easy to dispense and so that's different now you got 90 plus percent generic dispensing rates in most places and the need to cross subsidize enforce a essentially the profit under the generic side in exchange for a subsidy on the brand.

Typically with the new brands that are coming out just doesn't work anymore for the pharmacies or frankly for the patients in high deductible plans and so I think those.

Those powers will align to force this time.

A set of changes around reimbursement that may well stick.

Great. Thank you very helpful.

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

Thanks.

Thanks, so much for taking my question.

In your prepared remarks around guidance, you mentioned that your expectations were around market growth in the pharmacy, maybe being a little bit lower now I'd, just love any clarity on what that meant and what might be driving that.

Then secondly, more strategic question for Tim.

Given your history and everything else as you think about pharmacy services does it benefit walgreens to actually own a PVM.

Well I'll turn the first part of your question over to a memo in and then be happy to answer the second part sure as you think about the prescription market growth as we as we shared the outlook in October our.

Guidance was that we're going to grow in line with market on the prescription side.

We've continued to see in the first quarter is the market is growing at a lower base and that's really driven by two factors first is the weaker respiratory season and the second is the impact of continued impact of Medicaid Redetermination. So as we're thinking about the full year now versus October we expect the overall market growth.

To slowdown.

Roughly around 50 bps versus previous estimates.

And as it relates to owning a ppm.

I don't think that that's the best path for us quite frankly, we <unk>.

I Love and you've heard me say this in past lives I love being independent I love being someone who can work across the ecosystem in a way that doesn't create anything but trust and in having a small pbms the economics of delivering really good service and really good costs favor large pbms for.

It really obvious reasons, they produce a lot of value by scale and so buying a second tier PVM for us does not make sense I would much rather work with every pbms and owned a small one.

Understood can I ask a quick follow up if possible.

Despite this morning, Lilly announced a new program called literally direct I don't even know if you guys are able to see it but it sounds like something that maybe you could participate in there talking about having a third party online pharmacy fulfillment services and they're going to use existing pharmacy.

Existing pharmacies to help to spend I don't know if you had to look at that but is that something that you are talking about in terms of some of the services you might be able to offer our work with something like this or how would this impact.

No. It's a great question and we did see it this morning and.

My preferences as I've mentioned, we can work inside of almost any reimbursement model MBA service provider to payers as well as patients as well as pharma with that said I can I can toss it over to Rick who can speak a little bit as it relates to sort of how we think about that program and others like it that may or may evolve in the market.

I think Tim you had I think what we can talk about right now I think what I would say that obviously transparency for consumers and anything that lowers drug cost to consumers. We think is a good thing and so obviously we are supportive of those types of programs. We work with all of our partners will be a payer <unk> our pharma partners in order to help deliver against those so is it an opportunity.

Absolutely and we certainly would support and work with Lilly on that.

Thanks, so much for all the details on this call has been great.

Thanks.

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

Hi, guys. Thanks, so much for that question and nice to work with you again Tim.

I think maybe double clicking on what you've talked about in terms of the paper for peripheral.

Pay for performance contracts that you've done so far can you talk maybe and maybe this is a question for Tim and for Rick like sort of where the current focus on the contracts that you've signed has really focused on those contracts and then as we think about the total opportunity like do you have a sense of like what percentage of those contracts like have some sort of element of that now answer to that.

As we think about that broader opportunity for that going forward. Thank you.

Yes, I will let let Rick answer other than to say I had a conversation last week with the CEO of a very very large payer who wanted to set our teams down to actually look at 2025, and how we may work together, particularly on Medicare advantage with them and so there is a lot of some of the other.

And the marketplace that are macro now.

There are going to then bubble back through our contracting process and the kind of conversations that we can come to the table creatively with Rick in terms of the current state of play do you want to if you want to address that.

I would just say that obviously most of the pay for performance contracts still sit within the Medicare part D space and so obviously, we not only contract on specific deliverables, but we obviously plan operationally and how we're going to deliver against the ones that make sense. So that we can deliver value within the ecosystem. We are starting to see in the Medicaid space that they are starting to.

Contracts come through and obviously generally then it would move into the commercial space. So I think just to reiterate what Tim said I think we are having conversations and obviously our ability to deliver on these pay for performance contracts gives us more credibility to actually enter into more going forward.

Got it thanks, so much.

Our last question today will be from Brian <unk> from Jefferies. Please go ahead. Your line is open.

Okay.

Brian Your line is open.

Your next question comes from the line of Stephanie Davis from Barclays. Please go ahead. Your line is open.

Hi, guys, Congrats Macquarie and thanks for taking my question Pam.

One last one on the car Park Manav just given your background at two P. M.

Rob.

I'd be curious about your perspective on market share opportunities in this model.

Or is it status quo, given there's a lot of peers.

Or is there a way to structure that to increase relative attractiveness, you kind of gain some share as well.

Sure I appreciate the question the way that we view every opportunity is how do we gained share with it.

<unk> <unk>.

Competing on unit price as a fairly straightforward exercise and we continue to do that.

Competing on the underlying cost to deliver the basic service.

Is something again that we understand them and live with hard to differentiate on those two will always be the low cost provider thats one of the goals that we have and we are driving toward in our in our.

Pharmacy business, but what I really like is the models that are being discussed and evaluated and I think being pulled into the market will allow differentiation on how well you leverage other assets and what assets you have in that respect we've got 123 year head start on some folks as it relates to build.

Building out a trusted brand that patients will respond to.

Compelled by the kind of response that we are able to get on behalf of payers. For example, in our Walgreens health business. When we use our brand and have our pharmacists call a patient and suggest to them on behalf of one of our plans that a flu shot would be a good idea for our Medicare advantage patient or that perhaps complete coming to the store and getting our cologuard.

Test and actually completing it and showing that we can get 50% plus response rates, even with something as challenging as a cologuard test to me that shows the kind of thing that we can do better than anybody that will differentiate us as these contracts with payors broadened out from pure unit cost and so I feel really really good about.

Where we sit as an ability to do that to gain access to patients and therefore gained share.

Thank you I will now turn the call over to Tim Wentworth, Chief Executive Officer for closing remarks, great. Thank you.

So in summary, and thanks for dialing in.

We are pleased with our first quarter results, but we recognize we have a lot of work to do it is still early the market continues to be particularly for for our retailers challenging I think we're responding really very well and we have a very supportive board you've seen the changes we've already been supported to make and we have additional.

Things that we're looking to do we are on a path, but we are nowhere near.

The even the halfway point of the kind of things that we believe we can do long term to build a really powerful health services company on the back of and leveraging an excellent community asset that today, we call a retail pharmacy and so from that standpoint.

The exciting thing for me is not only that we are on that path and that the results. So far have been what we would have hoped for despite being very challenging and having to make some very very difficult decisions, but to me. The thing that I go home and get excited about every day is after we talk to payers and we talked to the marketplace, we talked to pharma and we.

Find out the level of need and interest they have in Walgreens being a preferred partner and I think over the coming quarters, we will be able to give you greater clarity as it relates to what that's going to look like in our future and we look forward to doing that thanks very much.

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

Okay.

Okay.