Q2 2024 Walgreens Boots Alliance Inc Earnings Call
Good day, and thank you for standing by and welcome to the Walgreens Boots Alliance second quarter 2024 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session you'll need to press star one on your telephone you will then hear an automated message a bias in your hand is raised to withdraw your question.
Please press Star one again, please be advised today's conference is being recorded I would now like to hand, the comps over your speaker today, Chris <unk>, Vice President Finance planning and analysis. Please go ahead.
Good morning, Thank you for joining us for the Walgreens Boots Alliance earnings call for the second quarter of fiscal 2024, I'm Christo Group, Vice President financial planning and analysis filling in for Tiffany.
Chris: Joining me on today's call are Tim Wentworth, Our Chief Executive Officer, Maryland, Koski, President of U S Health care, and Mamone Mahajan Global Chief Financial Officer.
Chris: Rick Capes, senior Vice President and Walgreens, Chief Pharmacy Officer, and Tracey Brown, President Walgreens retail and Chief customer officer will participate in Q&A.
Chris: As always during the conference call, we anticipate making projections and forward looking statements based on our current expectations are.
Chris: Actual results could differ materially due to a number of factors, including those listed on slide two and those outlined in our latest Form 10-K filed with the Securities and Exchange Commission.
Chris: We undertake no obligation to publicly update any forward looking statements. After this presentation, but there was a result of new information future events changes in assumptions or otherwise.
Chris: You can find our press release and the slides referenced on this call in the Investor section of the Walgreens Boots Alliance website.
Chris: During this call we will discuss certain non-GAAP financial measures. These measures are reconciled to the most directly comparable GAAP financial measures and the reconciliations are set forth in the press release.
Chris: 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. We encourage you to review the comparable GAAP measures and reconciliation to non-GAAP values and the other earnings materials. We've provided I will now turn the call over to Tim.
Tim Wentworth: Thanks, Chris and good morning, everyone.
Tim Wentworth: Wpa second quarter operational results were in line with our expectations. Despite continued challenges in the U S retail environment.
Tim Wentworth: Adjusted EPS of $1 20.
Tim Wentworth: It reflects good execution and cost discipline in our U S retail pharmacy segment.
Tim Wentworth: Continued strong performance in international.
Tim Wentworth: Our first quarter of positive adjusted EBITDA in U S health care.
Tim Wentworth: And positive impacts from tax planning benefits.
Tim Wentworth: During the quarter, we recognized a $5 8 billion after tax noncash goodwill impairment charge net of Noncontrolling interest related to our investment in village MD <unk>.
Tim Wentworth: This charge is excluded from any of our adjusted non-GAAP earnings measures.
Tim Wentworth: We are narrowing full year adjusted EPS guidance to a range of $3 20 to $3 35.
Tim Wentworth: This guidance reflects a challenging retail environment in the U S and their decisions to both wind down the sale leaseback program and to sell additional shares of Suncor and a further effort to simplify our financial reporting.
Tim Wentworth: We expect these impacts to be partially offset by execution in pharmacy services and tax favorability.
Tim Wentworth: We have recently solidified our leadership team, which I believe has the capabilities and commitment to best lead Wpa into its future.
Tim Wentworth: Once again I'm excited to welcome our newest Wpa leaders, who were announced this quarter Elizabeth Burger as Chief Human Resources Officer.
Tim Wentworth: Benicia mimics as Chief legal officer, and Mary Lynne Gaskey as President of U S Health care.
Tim Wentworth: They joined <unk> Mahajan, who was confirmed as our Chief Financial Officer, and Beth Leonard who was named our Chief Corporate Affairs Officer, and rounding out our Executive Committee.
Tim Wentworth: Together, our executive Committee is comprised of individuals that bringing a stablish track record of operational excellence.
Tim Wentworth: And are all base together in Chicago, working to drive collaboration and acting with urgency to drive results.
Tim Wentworth: Over the next three months, we will continue the intense review of our portfolio of assets in an effort to ensure that each contributes to the growth we aspire to deliver and drives our go forward strategy to be the leading retail pharmacy and health services partner that creates deep relationships and trust.
Tim Wentworth: Let me share further detail on the progress happening across our businesses to date.
Tim Wentworth: And our U S retail pharmacy business, we are navigating a challenging backdrop and exploring innovative pathways to boost profitability and growth.
Tim Wentworth: Within retail our U S customers confronting considerable pressure from multi year inflationary trends and depleted household savings with U S household debt at record levels and delinquency rates on the rise.
Our shoppers, making deliberate choices to seek value, resulting in channel shifting behavior.
We are responding to these market dynamics by making investments in key value items.
Tim Wentworth: And focusing our capabilities to engage with customers and an intelligent targeted way.
Tim Wentworth: Additionally, we have implemented initiatives to improve front end performance.
Tim Wentworth: We are leaning into the massive and timely opportunity to increase own brand penetration now standing at 17, 1% up 95 basis points year over year, we expect that we can further expand with a meaningful margin advantage over national brands.
Tim Wentworth: We plan to deepen our partnership with a reduced set of national suppliers carefully selecting who we work with alongside our own brands.
Tim Wentworth: Operationally, we are intensely focused on the customer experience and meeting customers, where when and how they want to shop.
Tim Wentworth: That means enhancing the experience not only in store, but ordering online for pickup in store and also same day delivery where over 80% of orders are received in less than an hour.
Tim Wentworth: Additionally, we are empowering our store managers and field leaders to share in our company's anticipated growth and increase their ability to impact areas that matter most to their stores and their customers.
Tim Wentworth: To do this we are realigning incentives in an effort to place much greater weight on individual store performance.
Tim Wentworth: Moving to pharmacy, we delivered another quarter of strong execution with outperformance in pharmacy services led by our vaccines portfolio.
Tim Wentworth: While market growth was slower than originally anticipated we maintained market share.
Tim Wentworth: Our 11 micro fulfillment centers currently support 4600 stores, which is over half of our footprint.
Tim Wentworth: Earlier this year, we talked about pausing the rollout of additional micro fulfillment centers as we work to optimize the model that gives our pharmacists and technicians the ability to spend more time on customer facing activities and less time on core dispensing.
Tim Wentworth: We're seeing benefits such as improved NPS scores patient retention and adherence.
Tim Wentworth: Not only is this better for the patient it improves team member retention and talent acquisition as they perform more of the clinical activities that they are so well trained to do.
Tim Wentworth: We are focused on creating an environment that makes us the practice setting of choice for pharmacists.
Tim Wentworth: In fact earlier.
Tim Wentworth: Earlier this month, we kicked off our first Dean's Advisory Council meeting with the mission of re energizing and evolving the definition of community pharmacy.
Tim Wentworth: As demand for pharmacy services increases, while the industry faces a pronounced labor shortage.
Tim Wentworth: We are on a mission to achieve provider status for our pharmacists given their influence which was so clearly highlighted during the pandemic.
Tim Wentworth: This would allow them to be reimbursed for providing select health care services to patients.
Tim Wentworth: These are highly trained clinical professionals, just five miles or less for most Americans.
Tim Wentworth: <unk> scope of practice goes well beyond dispensing medications and includes immunizations patient counseling.
Tim Wentworth: And point of care testing for infectious diseases.
Tim Wentworth: As an example of what is ultimately possible in the U K. The NHS Pharmacy first service, which launched on January 31 expands.
Tim Wentworth: Expands the role of boots pharmacists throughout England.
Tim Wentworth: To advise and prescribed for the treatment of seven common health conditions.
Tim Wentworth: This model serves as a use case of new ways to fully deploy pharmacist capabilities to lighten the burden on the broader health care system.
Tim Wentworth: Speaking of value there is real opportunity for change and transparency and reimbursement models to help slow the inflationary pressures on drug prices and our patients wallets.
Tim Wentworth: We already operate in a number of cost plus and other alternative reimbursement models very successfully and welcome any model that reimburses us for the unmatched value we provide patients.
Tim Wentworth: We are having more active and constructive conversations with pbms and other payers around cost plus models.
Tim Wentworth: Many of these discussions are still in early stages, but they share a general theme.
Tim Wentworth: There is value to all from a transparent predictable model.
What patients pay at the counter is rationally tied to the cost of the drug.
Tim Wentworth: We don't expect an industry shift to happen overnight as there are a number of dynamics that need to be worked out but it is especially encouraging to see pbms and payers open to these models.
Tim Wentworth: Now turning to U S health care, we have reached an important milestone delivering our first ever quarter of positive adjusted EBITDA and another quarter of significant year on year growth.
Tim Wentworth: Shields continues to deliver strong top and Bottomline performance as Theyre differentiated model is driving significant value for health system partners.
Tim Wentworth: Which has resulted in several recent long term extensions.
Tim Wentworth: Village Md's actions to accelerate profitability, including recent right sizing of their cost structure optimizing their clinic footprint and growing patient panels are driving improvement in adjusted EBITDA.
Tim Wentworth: Full risk lives grew by 19% year on year in the second quarter.
Tim Wentworth: Village prioritizes density in their highest opportunity markets. They decided in January to exit a total of approximately 160 clinics.
Tim Wentworth: <unk> of the 60 that had been previously communicated.
Tim Wentworth: As of today, they have already exited 140 locations.
Tim Wentworth: <unk> will discuss in more detail our recent reevaluation of our investment in village M D.
Tim Wentworth: Shifting to international the business once again performed well demonstrating strong and consistent execution.
Tim Wentworth: Highlighted by meaningful retail comp growth at boots, UK, and a 12 successive quarter of market share gains.
Tim Wentworth: Finally, let me offer further detail on the progress of our Swift actions to rightsize, the WNBA cost structure and increase cash flow across the company.
Tim Wentworth: We have a very high degree of visibility into the $1 billion in cost savings. This year as actions already taken to date will account for a significant majority of the total.
Tim Wentworth: We're driving savings primarily in our U S retail pharmacy segment in three ways.
Tim Wentworth: Organizational initiatives, including support office workforce reductions.
Tim Wentworth: Location optimization.
Tim Wentworth: And additional pharmacy and retail operating model improvements.
Tim Wentworth: We are also working to improve cash flow by prioritizing projects and capital spend.
Tim Wentworth: In the first half Capex was $250 million lower than the prior year period.
Tim Wentworth: We are on track to deliver a $600 million reduction for the full year and $500 million and working capital benefits in fiscal 2024.
Speaker Change: Next I'd like to introduce Mary Lynne Koski to say a few words she'll then hand, it over to <unk> to review our financial results in further detail. Thank.
Speaker Change: Thank you Tim Good morning, everyone I'm excited to join you all today and I'm thrilled to be a part of this iconic company.
Speaker Change: I've spent 25 years in the health care government and retail sectors.
Speaker Change: <unk> is focused on leading teams to unlock new areas of growth commercialize new products in health care services and accelerate execution through financial discipline.
Speaker Change: I've been fortunate to have worked with some of the most successful fortune 50, and health care growth companies that have sought to embrace and drive change to improve the health care system.
Speaker Change: At Cvs Health, I led and executed our strategy to expand health care services, leveraging the company's core assets, including leading aspects of Cbs's acquisition of Aetna.
Speaker Change: Most recently I was CEO of Solera health, a leading digital health technology company, serving payers and employers where I led the transformation of the business launching new condition product lines, our new technology platform and a new economic model to support sustained growth my vantage point of working across providers pharma payers and retail.
Speaker Change: Has made one thing clear.
Speaker Change: Very few companies have the platform access and reach of Walgreens.
Speaker Change: Since the announcement I have heard from health plans health systems, and others, who see an opportunity to partner with Walgreens.
Speaker Change: They know the value of our community presence the role of our pharmacists can play and the need for higher touch more frequent and lower cost engagement to drive better health outcomes.
Speaker Change: Health care is changing and consumer expectations are changing and the.
Speaker Change: The face of that we believe Walgreens is still the best positioned to be the most convenient entry point into the health care system.
Speaker Change: And our position as an independent partner.
Speaker Change: Able to work with any health plan or Pbms is a true strength that we will capitalize on.
Speaker Change: Finally, I want to congratulate the team on achieving positive adjusted EBITDA in U S health care. This quarter, it's a significant milestone and we will continue to build on this progress to drive value for our shareholders customers and patients thanks to Tim and the board for this opportunity I'll now turn it to <unk> Mellon.
Tim Wentworth: Thank you Mary and good morning, everyone.
Mellon: Overall second quarter operational results were in line with our expectations.
Mellon: Sales grew five 7% on a constant currency basis U.
Mellon: U S retail pharmacy increased four 7% international was up three 2% in U S health care delivered pro forma sales growth of 14%.
Mellon: Adjusted EPS of $1 20 increased year over year by two 8% on a constant currency basis, reflecting.
Mellon: Improved profitability in our U S health care segment impact of cost savings and a lower adjusted effective tax rate.
Mellon: Offset by the lower U S retail performance and lower sale leaseback gains.
Mellon: The lower adjusted effective tax rate reflects the initial recognition of a deferred tax asset in certain international jurisdictions.
Mellon: GAAP net loss for the second quarter included a $5 8 billion noncash impairment charge related to village MD goodwill.
Mellon: During the fourth quarter of fiscal 'twenty, three we disclosed in our annual goodwill impairment test for our village MD reporting unit resulted in its fair value exceeding its carrying value by a narrow margin as a result, we have been closely monitoring the performance of the business for potential indicators of impairment.
Mellon: In February we received a downward revised longer term forecast from village MD management <unk>.
Including the impact of closing approximately 160 clinics inclusive of the 60 previously communicated.
Mellon: Slower than expected trends in patient panel growth and multi specialty productivity and recent changes in Medicare reimbursement models.
Mellon: These impacts were partly offset by actions taken in an attempt to right size the cost structure.
Mellon: Given this revised forecast.
Mellon: Performed an interim test of village MD reporting unit goodwill that resulted in a fair value below its carrying value.
Mellon: Accordingly, we recognized a $12 4 billion noncash goodwill impairment charge prior to the attributions of loss to Noncontrolling interests.
Mellon: On an after tax basis, and net of 47% Noncontrolling interest. This resulted in a net loss of $5 8 billion in the quarter.
Mellon: This charge is excluded from non-GAAP earnings measures.
Mellon: The fair value of the business was determined using a combination of the income and market approaches.
Mellon: The impairment charge is due to the lower than previously expected longer term financial performance expectations.
Mellon: Challenged market multiples for village entities peer group.
Mellon: <unk> continued to decline and increased discount rates.
Mellon: As a reminder, our share of village Mds net assets getting value also included a $2 billion gain recognized on the equity interest owned by the company immediately prior to the acquisition of majority equity interest in village MD during the first quarter of fiscal 'twenty two.
Mellon: This goodwill write off is noncash and we do not believe it will have a significant impact on our financial position or our ability to invest across businesses going forward.
Mellon: During the first half of fiscal 'twenty four we have seen positive financial impacts from the recent actions taken by village empty management team to accelerate profitability.
Mellon: We believe the focused approach on improving performance in core markets.
Mellon: As well as right sizing the cost structure will provide village MDM platform for future growth.
Mellon: The second quarter also included a $455 million noncash.
Mellon: The noncash impairment charge related to certain long lived assets in the U S retail pharmacy segment.
Mellon: As part of a deep dive exercise over the last several months we concluded during the quarter that instead of continuing to build a new technology platform for pharmacy operations in the U S. It would be better to modernize our existing system over time with new capabilities and in Asia and capital efficient manner with.
Mellon: Much lower disruption risk as a result, we recognized a charge against the underlying software and development assets.
Mellon: Finally, similar to last quarter, we recognized a $474 million gain on the sale of <unk>, partly offset by a $396 million after tax noncash charge for fair value adjustments on variable prepaid forward derivatives related to suncor shares.
Mellon: Now, let's move on to the first half highlights.
Mellon: Sales increased seven 2% on a constant currency basis at.
Mellon: Adjusted EPS declined 25% on a constant currency basis due to softer U S retail performance and lower sale leaseback gains, partly offset by improved profitability in U S health care and a lower adjusted effective tax rate.
Mellon: GAAP net loss was $6 billion.
Mellon: Compared to a loss of $3 billion.
Mellon: In the first half of fiscal 'twenty three.
As I explained earlier, the first half of fiscal 'twenty four included certain noncash impairment charges.
Mellon: The prior year period included a $5 $4 billion after tax charge for opioid related claims and lawsuits, partly offset by a $1 $4 billion after tax gain on the sale of Syncora shares now.
Mellon: Now, let me cover U S retail pharmacy segment note that all comparable figures are on a leap year adjusted basis for all segments.
Sales grew four 7% year on year, driven by brand inflation, and pharmacy prescription volume and a higher contribution from pharmacy services.
Mellon: Which was partly offset by a four 5% decline in the retail business.
Mellon: <unk> declined 29, 5% versus the prior year quarter due to lower retail sales volume elevated levels of shrink in lower sale leaseback gains bars.
Mellon: Partially offset by continued progress on cost savings initiatives.
Mellon: Looking ahead, we are winding down the sale leaseback program and we do not anticipate any material benefit going forward.
Mellon: Leaseback gains net of incremental rent expense.
Mellon: We're in approximately $125 million headwind to Eni in.
Mellon: In the quarter, let me now turn to U S pharmacy.
Mellon: Pharmacy comp sales increased eight 7%, mainly driven by brand inflation volume growth and contribution from pharmacy services.
Mellon: <unk> scripts grew two 9% excluding immunizations in line with the overall prescription market.
Mellon: The ongoing impact of Medicaid Redetermination continued to negatively impact overall market growth.
Mellon: Pharmacy services performed better than expectations, driven by our vaccines portfolio.
Mellon: Pharmacy, adjusted gross profit was down slightly versus the prior year quarter with margin negatively impacted by brand mix impacts and reimbursement pressure net of procurement savings.
Mellon: Turning next to our U S retail business we.
Mellon: We continue to see a challenging retail environment with a shift in discretionary spend away from the direct channel as consumers seek value.
Mellon: Comparable retail sales declined four 3% in the quarter there were three main drivers.
Mellon: First as consumers continue to pullback on discretionary spending we saw an impact of approximately 170 basis points from weaker sales and holiday seasonal and general merchandise categories.
Mellon: Second as expected, we saw weaker than normal respiratory season, which directly impacted comparable sales by approximately 90 basis points.
Third party data showed flu cold and respiratory activity was down 6% compared to the prior year quarter in.
Mellon: In addition, as cough cold flu.
Mellon: <unk> as a primary trip driver there was also an incremental impact from the lower attachment sales.
Mellon: Lastly, weather conditions in January led to a headwind of approximately 40 basis points in the quarter.
Mellon: Retail gross margin declined year on year impacted by higher shrink, partly offset by benefits from category performance improvement program.
Mellon: Turning next to the international segment and as always I will talk in constant currency numbers.
Mellon: The international segment again exceeded our expectations in the quarter.
Mellon: Total sales grew three 2% with boots, UK, increasing 3% and Germany wholesale up five 3%.
Mellon: <unk> adjusted gross profit increased by three 2% adjusted.
Mellon: Adjusted operating income was down 32% entirely due to lapping the real estate gains in the year ago period.
Mellon: With underlying growth offsetting inflationary pressures.
None: Let's now cover boots, you can detail.
None: Comp pharmacy sales were up one 7% comp retail sales increased five 9% with all categories showing growth led by beauty and personal care.
None: Across formats destination health and beauty flagship in travel locations performed particularly well.
None: Boots Dotcom sales increased 16, 8% year on year and represented over 17% of our UK retail sales.
None: Turning next to U S health care.
None: The U S health care segment delivered its first quarter of positive adjusted EBITDA.
None: This was the third consecutive quarter of significant year on year improvement in adjusted EBITDA.
None: Second quarter sales of $2 2 billion increased 33% compared to the prior year quarter aided by the acquisition of summit health on a pro forma basis segment sales increased 14%.
None: <unk> sales of $1 6 billion grew 20% on a pro forma basis.
None: The year on year increase was driven by same clinic performance and growth in full risk lives.
None: Shield sales were up 13% as new health system contracts and expansion of existing partnerships led to an over 40% increase in the number of patients on service in the quarter versus the prior year.
None: Adjusted EBITDA was $17 million.
None: An improvement of $127 million compared to last year, mainly.
None: Mainly driven by village MD and shields.
None: We believe village MD continues to make progress to accelerate profitability by right sizing its cost structure and growing its patient panel.
None: Shield saw robust adjusted EBITDA growth compared to the prior year period.
None: Turning next to cash flow.
None: Operating cash flows in the first half of fiscal 'twenty four was negatively impacted by roughly $700 million in payments related to legal matters three.
None: $380 million entity premium contributions related to the expansion plan and underlying seasonality.
None: Capital expenditures declined by $250 million versus the first half of fiscal 'twenty three.
None: As a result free cash flow was down by approximately $2 billion versus the prior year.
None: We expect second half free cash flow improvement compared to the first half driven by several factors.
None: First we expect lower payments related to legal matters in the second half of fiscal 'twenty four.
None: We remain on track to reduce capital expenditure by approximately $600 million of year over year.
None: Third we expect to deliver working capital improvement of $500 million during fiscal 'twenty four while we did see some benefit of these initiatives during the first half of 'twenty four we expect the majority of these benefits will impact the second half.
None: Lastly, similar to prior years, we believe the underlying working capital seasonality in the U S retail pharmacy and international segments will have a favorable impact on the second half of the year compared to the first half I will now turn to guidance.
None: We are narrowing our fiscal 2000 and for adjusted EPS guidance to $3 20 to $3 35.
None: The updated range incorporates a challenging U S retail environment, lower sale leaseback gains and reduced syncora equity income offset by the execution and pharmacy services and a lower adjusted effective tax rate.
None: On the tail wins, we continue to see strong execution in our pharmacy services business, which has delivered results ahead of our initial plan to date. In addition, we now expect our adjusted effective tax rate to be under 5%.
On the headwinds we expect the challenging retail backdrop, we will continue to negatively impact our U S. Retail sales in the short term, we now expect fiscal 'twenty four retail comp sales to be down approximately 3%.
None: Second with the early wind down of the sale leaseback program no material gains are expected in the future.
None: Third the block sale of Suncor shares in February will reduce the equity earnings going forward.
None: Lastly, as discussed with our first quarter results, we forecast slightly lower market growth in U S pharmacy business compared to our initial guidance.
None: Importantly, based on the progress made in the U S Health care segment through the first half 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.
None: Next I will provide additional details on the factors impacting earnings in the second half in.
None: In the second half, we will be lapping adjusted EPS of $1 66 in prior year period.
None: We expect several key factors to impact the year over year comparison.
None: First the wind down of the sale leaseback program is expected to be a significant headwind in the second half.
None: Second we will lap incentive accruals reduction in the third and fourth quarter of fiscal 'twenty three.
None: Third our updated guidance implies a higher tax rate over the remainder of the year.
None: The U S health care segment remains on track to achieve $165 million of year over year adjusted EBITDA improvement in the second half based on the midpoint of the guidance range and finally within our U S. Retail pharmacy business, we expect year on year improvement in the second half driven by cost savings initiatives.
None: With that let me now pass it back to them for his closing remarks.
None: To wrap up we have hard work ahead of us in our journey to simplify and strengthen Wpa.
None: But we are encouraged by our progress.
None: This team has a clear mandate to act with everything on the table to put our business on the right track.
None: We are well positioned to drive capital efficient growth rooted in our retail pharmacy footprint and build out an asset light health services strategy to deliver care for communities and create value for partners.
None: We've kicked off our strategic planning work.
None: Over the next three to six months. This team is undergoing an in depth analysis to determine the actions necessary to achieve what we believe will be the optimal portfolio with.
None: With a focus on maximizing growth potential and generating cash flow.
None: We are reviewing every business through a longer term lens focused on strategic fit.
None: Synergy potential financial upside and new or complementary capabilities.
None: We are taking a thoughtful approach fueled by a sense of urgency to finding opportunities to unlock value or validate existing pathways.
None: And my five months with Wpa I've been most impressed with our 330000 team members' commitment to our company.
None: In my experience, it's very hard to get that.
That provide is foundational to our future growth <unk>.
None: Ability to consistently execute and create sustainable long term shareholder value.
None: That dedication also gives me and our team great confidence in our future.
None: Now I would like to open the line for questions.
None: Operator.
None: Thank you ladies and gentlemen, if you have a question or comment at this time. Please press star one on your telephone. If your question has been answered we're sticking with yourself from the queue. Please press star one again, we will pause for a moment, while we compile our Q&A roster.
None: Uh huh.
None: Yeah.
None: Our first question comes from Lisa Gill with Jpmorgan. Your line is open.
Lisa Christine Gill: Thanks, very much good morning, Tim I have a multipart question.
Lisa Christine Gill: I wanted to start with your comments, where you talked about boosting profit and growth you talked about new reimbursement model. If you talked about provider status. So can you talk about a lot of different things that you think you can come into play can you maybe just talk about your line of sight and timing to get there would be the first part and then secondly, I wanted to say welcome to Mary Mary.
Lisa Christine Gill: As we think about the profitability when we think about competition and the commitment of village and the capital markets.
Lisa Christine Gill: The comments were made today around the number of closings now of 140 locations closed Ken can you maybe just talk about what you see as the future of the competition and then putting that all together and just really want to understand how to think about the progression going into 25, Tim I know you have a big strategic review coming I know youre not ready to give guidance on 'twenty five but are there kind of some building blocks.
Tim Wentworth: To think about when we think about the progression of the back half of 'twenty four going into 'twenty five.
None: Thanks, Lisa a lot there so I'll take the first part and probably a Ric gates add a little color will have Mary take your question that memo and go ahead and.
Ric: And talk about the back half of the year in the 25.
Ric: In terms of.
Ric: New reimbursement models growth et cetera et cetera.
None: You're clearly as we said.
None: Last quarter, we're now just coming into the 25.
None: Conversations that are more structured with payers, particularly pbms as it relates to reimbursement and what I would say, which is what I've said in my prepared remarks as well is we are having very constructive conversations as well as AD hoc conversations with certain payers, which continued to lead me to believe.
None: Okay.
None: Okay.
None: Okay.
None: Okay.
None: Okay.
None: Great.
None: Okay.
None: Yes.
None: 25 years is not going to work and I think everyone acknowledges that in the conversation of how we help the pbms win in their marketplaces with this drive to higher transparency more member friendliness, and so forth really actually aligns us quite well in those conversations I don't know Rick if you want to take add any color to those conversations.
None: Your team is obviously very close to them, yes, Lisa This is Rick and I'll just add we are just in earnest starting up.
Rick Gates: Calendar year twenty-five negotiations, but I will say you also talked about some of the expanded services, we have gotten traction not only on our adherence based programs and our performance against those to continue to get more inherent space contracts going forward vaccines that have been a very strong part of what we're doing but we're working very closely in the selling cycle right now when it comes to.
Rick Gates: Testing testing treat as we expand those opportunities across the country as well and Thats a state by state really.
Rick Gates: Process that we're going through until there is a federal provider status, which Tim talked about in his remarks, and then and thanks, Rick So bottomline Lisa this area. We're realistic we know that the longer term structural changes that are very likely to occur we will take multiple years and we're prepared we're also working with our distributor to reconfigure the way that we work with them to ensure.
Rick Gates: That we are again.
Rick Gates: Making sure that the value of that flows to us as well as through US is what it should be.
Rick Gates: Mary I'll, let you just briefly comment on the at least the second question.
Mary: Thanks, Lisa I'll, just say reiterate what I said in my opening remarks that payers and health systems are approaching us and are very interested in working with.
Mary: Walgreens to help them drive my that savings, we've got unmatched assets in the marketplace, given our reach with consumers and that's something that a lot of the traditional players in the health system don't have so we will be working with them and having conversations in the coming months.
Mary: Some of those underway I expect them to accelerate meaningfully with with <unk> arrival.
Mary: And by the way. This is an appropriate time for me to also thank John Driscoll in my prepared remarks, I did not do that and of course.
John actually helped me find and recruit Mary.
Mary: John did a lot of terrific work during his time here at WBI I look forward to continuing to work with him in a different role as an adviser through the end of the year.
Mary: Thank you to John and then finally, Mamone I'm sure leases not the only one with a question as it relates to the second half and.
None: So I think that short term. So Lisa this is minimal as you'd think about the building blocks were 425, let me start by saying we're not providing.
None: Slide 25 guidance on this call as you heard in Tim's prepared remarks, we are working through a strategic review.
None: With the executive team in place now in a detailed three year plan and so we will share that input over the next three to six months, but let me let me share some themes as you'd think about the second half and as you think about <unk> 25.
None: In terms of second half a couple of things to point out that I think are obvious and we understand one is we do not expect any meaningful contributions from sale leaseback in the second half and so it's pretty clean in terms of not including any sale leaseback gains from that perspective, and the second is the lower <unk>.
None: <unk> effective tax rate the timing of that fleet out for us in the second quarter and so we do expect a much more normalized tax rate in the second half now as you think about bridging into 'twenty five a couple of teams to consider.
None: First U S healthcare growth you'd see that we are maintaining our guidance on adjusted EBITDA, which is at the midpoint of the range $375 million increase year over year in fiscal 'twenty four and so we do see is as we look ahead into 2005, we do see growth continuing and healthier.
None: Realage, we expect to continue to drive growth.
None: Focus on the core markets as well as continuing on there.
None: Cost actions that they are going through this year.
None: Thats one part shields, obviously continues to grow throughout the year and we do expect them to continue to grow.
None: [noise] into fiscal 'twenty five.
None: Second cost savings is the actions we have taken in the first half will have a ramp up effect in the second half we're not done yet we continue to make decisions to rightsize our cost structure here at <unk> and so we do expect the wraparound effect of that into.
Fiscal 'twenty five.
None: <unk>.
None: Retail business in the U S. As I shared in my prepared remarks, we have seen headwinds persisting for longer than expected.
None: In the U S retail environment, and we have lowered our expectation for the second half or for the full year fiscal 'twenty four to a negative 3% comp now within that we do expect slight improvement overtime in the second half as the actions that crazy and the team are taking will be.
None: Hold and will drive certain level of improvements or how to think about what that is going to be into into 25, and then maybe the last piece on this is our business does have some seasonality and so pharmacy services business, which has really performed strong throughout the first half.
None: It does generate significantly higher contributions in the first half.
None: In the second half of the year.
None: Cough cold flu season does have both impact on our pharmacy business in the U S as well as on the retail business in the U S and the timing of that on a more normalized basis does play out more in the first half than in the second half and lastly, just on the on the seasonality because as you know. Another example is boots, which does have.
None: Contributions in our holiday seasons in the first half. So you got to factor those I just wanted to make sure you have those things.
None: Okay. Thank you.
None: One moment for our next question.
None: Our next question comes from Charles Meade with TD Cowen Your line is open.
Charles Meade: Hi, yes, thanks for taking the questions I wanted to drill down a little bit more on the retail segment in U S retail here.
Charles Meade: You talked about a number of things right trying to increase our own brand.
Charles Meade: Realign around.
Charles Meade: A number of.
Charles Meade: National brands as well.
Charles Meade: Can you talk about how.
Charles Meade: How quickly some of those can be implemented here.
Charles Meade: Particularly as you think about realigning around fewer national brands like how long would that process take.
Charles Meade: You mentioned that vaccines have been leading in the pharmacy services part of the business.
Charles Meade: Is there any way you can give us a sense on when we look at USB.
Charles Meade: Why.
Charles Meade: Maybe not quantitatively, but qualitatively to a sense of how you would split contribution between let's say pharma services traditional front end and pharmacy.
None: Thanks Charles.
None: To your second question, we're not prepared today to break that out obviously, we build from that and I think over time, we're going to be looking to give you incremental visibility to key operating metrics that would help you model some of that out.
None: I can tell you is the the vaccine and test and treat and so forth portfolio is very meaningful in terms of our overall back of the store reimbursements.
None: And our growth if you think about it it's actually quite amazing.
None: Five to 10 years ago, let's call. It 10 years ago pharma had pretty much abandoned vaccines in a large scale basis a lot of the companies had moved away there was not a strong strong incremental demand today, we see it as one of the key areas of innovation inside pharma companies and the exciting part for US that is underappreciated is that in every case those.
<unk> look to their core ability to get to patients as being able to leverage what we do at Walgreens and what our industry does and we have a unique position in that the conversations I have with the Ceos of major pharma companies that are driving these innovations suggest to me that that model, where we're paid fairly for the work that we do at the back of the store.
None: Sure.
None: Is a model that the future not only needs, but it is going to reward our shareholders as it relates to U S retail I'll turn it over to Tracy other than to say.
None: That is one of a number of key areas for us the idea of SKU rationalization alongside of growing private label I think you've got to look at both of those things.
Tracy: And we are moving rapidly on a lot of things, we announced last week a change in store manager compensation for 2024.
Tracy: Initially that was thought to need to be until 'twenty five to get it right and we found a way to get it done now so that we can unleash the energy of our key field based leadership in our stores and so what I've seen is our ability and we saw it during COVID-19 our ability to execute quickly when we've got a goal when we've got a clear ability to create value.
Tracy: Is something that I've actually been pleasantly surprised by since I have joined the company and Tracey has been leading the along with I've Terrorised, a few national brands myself and a few meetings lately.
Tracy: In terms of saying that we're looking for partners and we arent going to be a partner to everybody. We are we want somebody that is going to be everything to us rather than something for everyone.
Tracy: With that Tracey you want to give a little color on the the whole national brand strategy. Yeah. Good morning, Charles Yes, so as it relates to our own brand expansion as Tim has indicated we have been accelerating at a rapid pace.
Tracey Brown: <unk> been tracking our own brand penetration has been growing quite nicely to your question around how quickly there are something that we can do very quickly one of those again, Tim mentioned around embracing and incentivizing our front line team members to really showcase their own brand.
Tracey Brown: Products and what is important to the consumers and their market. The second is in terms of store reach and shelf that we can move on those quite quickly and then the third area is around new product innovation and this is the part that actually takes a little bit longer, but just to give you a little bit of color.
Tracey Brown: We launched 37, new products in Q2, and what this means for US is as the consumers' behavior continue to focus on looking at value and finding one brand and being willing to.
Tracey Brown: Lean into one brand. This is working out quite nicely for US we are feeling quite good about the level of depth that we can go with own brand.
None: Great I appreciate it thank you.
None: One moment for our next question.
None: Our next question comes from Eric Percher with Nephron Research Your line is open.
Eric R. Percher: Thank you I appreciate the commentary on pharmacy services and reimbursement model. So a follow up for Tim and Rick.
Eric R. Percher: It's interesting to hear you call out looking beyond payer and PVM.
Eric R. Percher: Manufacturers in this our ability to get to patients.
I'd love to get your updated view on Lilly direct and if the goal is to expand access to as it makes sense.
Eric R. Percher: Include retail do you view it possible to have direct relationships given PVM contracts any perspective, there would be appreciated.
None: Sure. Thanks, I'll start and turn it over to Rick first of all I would prefer the Dave and the Lilly team talk about their strategy.
None: But that being said first of all I'd point out we have a direct relationship with literally every American and it may not be in their funded benefit in all cases, but they come into our stores for a lot of other things and so I love, where we start when it comes to looking at programs, where pharma companies may want to go direct to patients for a particular product where.
None: The normal supply chain reimbursement model et cetera isn't working effectively I think if you look at the <unk> ones. For example, the adherence on those drugs over a reasonable periods of time is not what I believe anybody would hope for not the patients that the payers to the extent that that's a paid.
None: Product and certainly not the innovators and so we are uniquely positioned to be a partner. It's one thing to have a distribution partner. It's another thing to have a clinically aligned partner that can actually help a patient work their way through safely because I believe the companies that made these products also want to ensure that they retain a high safety profile otherwise there will be other issues.
None: Downstream, which are not what anybody would want so we think we are a natural partner for those things and Rick I'll, let you add any color there, but from our perspective again.
Rick: Our ability to work on a product basis direct with pharma is unencumbered by any of our other relationships.
Rick: The only thing I would add as you said, we have relationships with every consumer walks in our store we have a relationship with every pharma company and I think what they what they see with US is that we are a natural partner, we roll up our sleeves, we help them solve what they're really trying to solve for and I think that that's a natural place first at that because we are an independent provider. If you think about that way.
Rick: We don't have any other assets vertically integrated and so I think we're a natural partner for them and I think they see us as a willing partner to help them really drive programs in the market.
Rick: Was this what drove the comment on your distributor relationship profile changing.
None: Not really nothing to add I mean, we've had a long standing relationship with Syncora I did prior.
None: Another life.
None: And that relationship is always got to be organic and dynamic because the market changes and while a long term relationship is a great context into which to operate it's important that as well we sit down as we do with Syncora and look at not only where is it working but where might it work a bit better and more importantly over the next three years.
None: Where are the changes in the marketplace likely to manifest and how do we make sure that we retain a contemporary and.
None: <unk>.
None: Competitive.
None: Situation as it relates to our cost structure as it relates to the services that we receive as it relates to the things that we can provide as a good partner. So all of those things are things that we throw on the table and I look forward to working with my team does with Bob in his new role I congratulate Steve who had a terrific run there and was a great partner to me over a lot of years.
None: But again you can't just sit still.
None: And we're not going to.
None: Thank you.
None: One moment for our next question.
None: Our next question comes from Kevin Caliendo with UBS. Your line is open.
Kevin Caliendo: Thanks, Thanks for taking my question.
Kevin Caliendo: I wanted to talk about the sort of second half guidance and what it implies.
Kevin Caliendo: As we think about the headwinds and tailwind.
Kevin Caliendo: That base into fiscal 'twenty five so if we if we take that sort of midpoint of $1 42.
None: No sale leasebacks there.
None: Zuma bleed tax would be a headwind or would it be.
I guess, what I'm, asking like some headwinds and <unk> from that base, whether it's tax we understand core is probably going to be a headwind.
Maybe $3 40 b.
None: And then the second question that I have above and beyond taking that run rate is was there any effect from the changes in <unk> reimbursement like the timing.
None: For the retail segment because of DIR fees going away, meaning did it change the cadence at all or impact the cash flows at all.
None: Yeah, Let me let me let me take the let me take the guidance first and then Rick can talk about <unk>, a little bit more so from a guidance perspective, if you'd think about.
None: The midpoint of the.
None: The range Youre calculating in the second half and thinking about 25.
On the tax rate side, we expect fairly normalized tax rate for the second half. We did have a significant benefit that we recognized in the second quarter and timing of that bleed out here.
None: So that I think is.
None: There is no more headwind from taxes, if that's your starting point for fiscal 'twenty five.
None: And then as I said I think a couple of couple of themes to consider.
None: <unk>.
None: U S healthcare growth significant growth expected, we're maintaining guidance in fiscal 'twenty four and as we look out we do see growth continuing both at shields as we'll ever Realage as they concentrate on their core markets and continue to drive the cost down in the business.
None: Our own cost savings initiatives, we've talked about $1 billion of cost savings in the year and we're on track to achieve that in.
None: There are actions that we will continue to take in the second half and so you will see a wraparound benefit.
None: <unk> 25, as well as the new initiatives that will continue on cost efficiency side.
None: Talked about retail negative 3% comp expected for the year as we thought about the second half guidance or second half implied guidance.
None: So we do see however.
None: At improving overtime slightly and so going into 'twenty five the actions that Tracy just talked about and theme is thinking.
None: They will be cold and I think that we do expect some improvement in 'twenty five for them and then seasonality I think you've got to factor in as well you talked about earlier in the call around vaccines portfolio, obviously, there's seasonality there.
None: There is seasonality there in booths there is seasonality there. So those are maybe some of the things that that you want to consider.
None: Yes, and just to.
None: And just to answer on a dirt fees and impacts that we might be seeing there outside of obviously, the cash flow, which obviously works its way out throughout the year.
None: We really arent seeing a negative impact on reimbursement by and large what we're seeing is that we're contracting for the rates that we were performing against either historically.
None: <unk>, even if there was a negative impact on reimbursement, we're signing and pay for performance contracts that we have the ability to over perform on so I would say that there are fee has been really neutral to us when you look at it from a reimbursement perspective.
None: Okay Super helpful. Thank you guys.
None: One moment for our next question.
None: Yeah.
None: Our next question comes from George Hill with Deutsche Bank. Your line is open.
George Robert Hill: Hey, good morning, guys and thanks for taking the question and I kind of have a couple of glaucoma.
George Robert Hill: A brief question, which.
George Robert Hill: First for Rick I guess I would ask when we think about potential changes to the reimbursement model you touched on this I guess could you talk about the push and pull a little bit.
George Robert Hill: And those discussions all Manuel.
None: I would ask just if you could make a quick comment on earnings cadence between fiscal Q3 and Q4.
None: Tim.
None: Throwing a lot here, but kind of an update on portfolio strategy a lot of us look at the company and do some of the parts analysis.
Tim Wentworth: We made that youre getting the core U S business for free.
Tim Wentworth: Given the value of the other assets kind of we just want to know how youre thinking about the portfolio and lock volume.
None: Great. Thanks, I'll have Rick take the first part of your question and then I'll have <unk> take the second and I'll take the third.
Rick: George Thanks for the question and the push pull when it comes to some of the reimbursement model changes I would say, we obviously work with Pbms and in hand to understand what payers are looking for.
Rick: In the marketplace in the ecosystem.
Rick: Obviously, they are looking for a standard base a reimbursement models in AWP based model, we have those with them. If they are looking for cost plus models or other types of reimbursement models, we work with them to make sure. They have those solutions to go to payers that may be looking for it. So right now I think it's an opportunity for us to continue to put different types of models in the March.
Rick: And then see what payer uptake really looks like and then really try to advance those models as we move forward.
Rick: From a cadence perspective, I think what we're looking at here is fairly balanced here in third and fourth quarter.
Rick: And then finally the portfolio strategy, let me be real clear.
Rick: Because I don't think it was ambiguous, but we have been over the last several months digging deeply into the core business as well as every piece of of our portfolio. Obviously, the big chunks, you know what they are and what their brand names are and so forth, but also looking at our store footprint looking at as you heard before.
Rick: Our suppliers and our assortment looking at manager compensation looking at workflow design in pharmacies, and working with deems as well as looking at our automation and but when you step back to the large piece to your sum of the parts question. Obviously, we're very conscious of the fact, we have about a half a dozen things that need to either fit they need to synergize they need to offer.
Rick: Outside in a long term runway for growth either by themselves or perhaps combined with other things they need to unlock capabilities that we would otherwise not be able to have.
Rick: Locked or else, we need to find a better place for them and so from our perspective I can tell you that for example, Mary on the U S health care side, which has its own collection of assets independent from.
Rick: Boots, and shields <unk> centric and the businesses that you know that we have Mary has been doing a complete stripped down of every one of those businesses and looking at both is it staffed right is it built for growth due to market support growth and this is going to culminate in part and let me be really clear I don't want to send a message that there is some big bang coming but that when we sit down with <unk>.
Rick: At the end of April we are going to give them outside in context about the forces in health care over the next five to 10 years, we're going to then look at the how does that impact the people that we serve both the payers the health systems. The consumers the patients pharma companies and then we're going to make a series of either recommendations or next steps. So that the board is very.
Rick: Clear, where we're headed and some things we have some things already underway as part of this.
Rick: We go from examining things to testing markets and so forth I'm not going to get detailed at this point about that other than to say again, it's dynamic it is across the company and I'm Super excited to have a fully staffed executive committee based here in Chicago to do it alongside me.
None: That's great color. Thanks, one more before our next question.
None: Our next question comes from Michael Cherny with Leerink Partners. Your line is open.
Michael Aaron Cherny: Good morning, Thanks for taking the question so maybe along the lines of the push and pull between your previous guidance versus the updated guidance.
Michael Aaron Cherny: Just a couple of things first.
Michael Aaron Cherny: On the dynamics behind the retail decline and you talked about the same store growth, but are you seeing any changes in what youre expecting on economics on a same store script basis in the back half of the year and then just on the health care as well I know you highlighted the strong EBITDA performance I would've thought with the accelerated pace of diligently closures that you might see.
Michael Aaron Cherny: Better second half ramp is there any other puts and takes we should think about within the health care business there'll leads to the dynamics of your current expectations versus year to date performance.
None: Rob I'll take that.
Rob: Yes sure so.
Rob: Look as you think about the second half implied guide.
Rob: A couple of factors to consider.
Rob: I'll go through in order retail is is the biggest factor from a second half perspective, and we have seen the the challenging environment continues to persist for longer than expected and so we are lowering our expectation I think we were at.
Rob: Low single digits now we're now we're expecting negative 3% comp so that is going into it.
Rob: Our decision to early wind down the sale leaseback program.
Rob: As well as our decision to sell Suncor shares through block trade versus using a bps structure variable prepaid forward structure.
Rob: As creating additional headwinds as I think about the guidance we provided.
Rob: Last quarter. So those are those are three headwinds.
Rob: I've said that from a full year perspective is obviously one of the factors is the favorable tax rate we have in the year now the timing of that has played out in the second quarter.
Rob: You had some specific questions on.
Rob: The script and how do we think about that.
If you think about the second quarter are our arms group growth ex amortization of $2, 9% fairly consistent with where market, we're holding our share and as we think about risks.
Rob: Second half of the year, we expect us to continue to grow in line with the market and hold this year. So that's kind of the expectation we have on the on.
Rob: On the script side on healthcare.
Rob: Youll look village continues to big decisions to rightsize their cost structure and think about clinical footprint and they did make the decision to exit certain more locations.
Rob: To us we are very pleased with reaching the first quarter of positive adjusted EBITDA in the segment, we want to be we want to take a prudent approach for the next half and so therefore, we're just we just continued to maintain the guidance we have.
Rob: Thank you ladies and gentlemen, this does conclude the Q&A portion of today's conference I'd like to turn the call back over to Tim for any closing remarks.
Tim Wentworth: Thank you operator, and thank you for your questions and your time today.
Tim Wentworth: As we close I just wanted to just quickly remind you of what you've heard today.
Tim Wentworth: Our second quarter operational results were in line with our expectations. Despite continued challenges in the U S retail environment.
Tim Wentworth: We drove solid execution I'm very very proud of the team.
Tim Wentworth: And cost discipline in our U S retail pharmacy segment with continued strong performance in international and we had our first quarter of positive adjusted EBITDA in U S health care.
Tim Wentworth: Now driven by our recently solidified leadership team I would remind all of you that there are one member of the team actually is starting in two weeks, but basically now we're all around the table. We are we have come together.
Tim Wentworth: To be committed to an intense review in the coming months and to the hard work that's going to ensure that each asset in our portfolio advances our expansion into the fastest growing areas of healthcare and as you saw this quarter. We are willing to revalue things that we take a second look at.
Tim Wentworth: And make difficult decisions.
Tim Wentworth: And we're going to do that not in one big Bang, but as it becomes obvious to us and on a situation by situation basis that we can act.
Tim Wentworth: And as I said before everything is on the table as we identify opportunities that unlock value validate existing pathways and lead <unk> into a successful future.
Tim Wentworth: We look forward to continuing to keep you updated on our progress and again. Thank you.
None: Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
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