Q4 2024 Walgreens Boots Alliance Inc Earnings Call

Speaker Change: If they ladies and gentlemen, thank you for studying by. Welcome to Walgreens Bicelline's fourth quarter, 2024 Results Ernene Scott for his call. At the summer of participants on on the Sonony mode.

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Tiffany Kanaga: I will now hand a conference over to your speaker host at the Tiffany Kanaga, Vice President of Global Investulations. Please go ahead. Good morning. Thank you for joining us for the Walgreens Boots Alliance earnings call for the fourth quarter of fiscal year 2024. I'm Tiffany Kanaga, Vice President of Global Investor Relations. Joining me on today's call are Tim Wentworth, our Chief Executive Officer, and Manmohan Mahajan, Global Chief Financial Officer. In addition, Mary Langowski, President of US Healthcare, Rick Gates, Senior Vice President, and Walgreens Chief Pharmacy Officer, and Tracey Brown, President of Walgreens Retail and Chief Customer Officer, will be participating in a Q&A.

Tiffany Kanaga: Good morning.

Speaker Change: Thank you for joining us for the Walgreens Boots Alliance earnings call for the fourth quarter of fiscal year 2024. I'm Tiffany Kanaga, Vice President of Global Investor Relations.

Speaker Change: Joining me on today's call, our Tim Wentworth, our Chief Executive Officer, and Manmohan Mahajan, Global Chief Financial Officer.

Speaker Change: In addition, Marilyn Gowski, President of US Health Care, Rick Gates, Senior Vice President and Walgreens Chief Pharmacy Officer, and Tracy Brown, President of Walgreens Retail and Chief Customer Officer, will participate in Q&A. Also in the room this morning is Eric Senior Vice President of Investor Relations.

Tiffany Kanaga: Also in the room this morning is Eric Wassostrom, Senior Vice President of Investor Relations.

Tiffany Kanaga: 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, 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. You can find our press release and the slides referenced on this call in the Investor section of the Walgreens Boots Alliance website.

Speaker Change: As always, during the conference call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could different materially do 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.

Speaker Change: 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 Boots Alliance website. During this call, we will discuss certain non-gap financial measures.

Tiffany Ann Kanaga: During this call, we will discuss certain non-GAAP financial measures. These measures are reconciled to the most directly comparable gap financial measures, and the reconciliations are set forth in the press release. You may also refer to the slides posted in the Investor 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 gap measures and reconciliation to non-GAAP values in the other earnings materials we provided.

Speaker Change: These measures are reconciled to the most directly comparable gap financial measures, and the reconciliation are set forth in the press release.

Speaker Change: You may also refer to the slides posted in the investor section of our website for reconciliation of non-gap measures to the most comparable gap measures discussed during this earnings call.

Speaker Change: We encourage you to review the comparable gap measures and reconciliation to non-gap values in the other earnings materials we provided. I will now turn the call over to Tim. Thanks, Tiffany, and good morning, everyone.

Timothy Wentworth: I will now turn the call over. Thanks, Tiffany, and good morning, everyone. Our fourth quarter in fiscal full-year results reflected our focused execution on several critical initiatives against the challenging backdrop for our consumer. When I joined, I had three immediate priorities. First, build a new management team. Second, address items within our control that could improve our financial condition within the year. And third, undertake a strategic review of our collection of valuable assets to lay the groundwork for our longer-term turnaround. With respect to the short-term actions, we successfully hit our three declared goals: cutting costs by over $1 billion, reducing CAPEX by over $700 million, and realizing over $600 million in benefits from working capital initiatives.

Tim Wentworth: Our fourth quarter in fiscal full year results reflected our focused execution on several critical initiatives against a challenging backup for our consumer. When I joined, I had three immediate priorities.

Tim Wentworth: First, build a new management team.

Tim Wentworth: Second, address items within our control that could improve our financial condition within the year, and third, undertake a strategic review of our collection of valuable assets to lay the groundwork for our longer-term turnaround.

Tim Wentworth: With respect to the short-term actions, we successfully hit our three declared goals, cutting costs by over $1 billion, reducing capex by over $700 million, and realizing over $600 million in benefits from working capital initiatives.

Timothy Wentworth: These factors contributed to our positive cash flow in the fourth quarter and helped achieve full-year cash flow that was also positive. Building on this momentum is critical as we turn our executional focus to stabilizing our core economics, improving our operating cash flow, and strengthening our balance sheet beyond the $1.9 billion net debt reduction achieved in fiscal 2024. Equally important, we have conducted a thorough strategic review. Coming out of this work, we are an organization focused on two guiding principles with clear operational and financial priorities. The first guiding principle relates to our operating model. WBA is reorienting to its legacy strength as a retail pharmacy-led company.

Tim Wentworth: These factors contributed to our positive cash flow in the fourth quarter and helped achieve full-year cash flow that was also positive.

Tim Wentworth: Building on this momentum is critical as we turn our executioner focused to stabilizing our core economics.

Tim Wentworth: Improving our operating cash flow and strengthening our balance sheet beyond the $1.9 billion net debt reduction achieved in fiscal 2024. Equally important, we have conducted a thorough strategic review.

Tim Wentworth: Coming out of this work, we are an organization focused on two guiding principles with clear operational and financial priorities.

Tim Wentworth: The first guiding principle relates to our operating model.

Tim Wentworth: WBA is reorienting to its legacy strength as a retail pharmacy lead company.

Timothy Wentworth: This reorientation allows us to leverage our key strategic assets of consumer trust, convenience, and relevance. Our position of trust stems from the millions of face-to-face interactions our consumers have with our pharmacy personnel every day, and we will continue to take actions now and for the long term to be the first choice for retail pharmacy and health services. Having earned our consumers' trust, indeed, our reason to exist. We also want to be accessible and convenient, but we need to be appropriately sized.

Tim Wentworth: This reorientation allows us to leverage our key strategic assets of consumer trust, convenience, and relevance.

Tim Wentworth: Our position of trust stems from the millions of face-to-face interactions our consumers have with our pharmacy personnel every day. And we will continue to take actions now and for the long term to be the first choice for retail pharmacy and health services.

Tim Wentworth: Having earned our consumer's trust, indeed, our reason to exist, we also want to be accessible and convenient, but we need to be appropriately sized.

Timothy Wentworth: Consequently, we are announcing an expanded footprint optimization process for our program. We have over 8,000 stores, of which the majority, approximately 6,000, are profitable. This solid base supports our conviction in a retail pharmacy-led model that is relevant to our consumers, and we intend to invest in these stores over the next several years. Part of the funding for this investment will come from accelerating the closure of underperforming stores. We expect to close approximately 1,200 of those over the next three years and reduce the fixed costs associated with them. Executing on this program will realign our footprint to a healthier store base that we believe will enable us to respond more dynamically to shifts in consumer behavior and buying preferences.

Tim Wentworth: Consequently, we are announcing an expanded footprint optimization program.

Tim Wentworth: We have over 8,000 stores of which the majority approximately 6,000 are profitable.

Tim Wentworth: This solid base supports our conviction in a retail pharmacy-led model that is relevant to our consumers, and we intend to invest in these stores over the next several years.

Tim Wentworth: Part of the funding for this investment will come from accelerating the closure of underperforming stores.

Tim Wentworth: We expect to close approximately 1,200 of those over the next three years and reduce the fixed costs associated with them.

Tim Wentworth: Executing on this program will re-align our footprint to a healthier store-based that we believe will enable us to respond more dynamically to shifts in consumer behavior and buying preferences.

Timothy C. Wentworth: Our ability to respond to a changing environment needs to improve and was a critical objective of our strategic review. We intend to close this competitive gap with some of our peers who have invested in similar capabilities over the past several years. While the decision to close the store is never an easy one, we feel confident in our ability to continue to serve our customers. We intend to follow our historic practice to redeploy the majority of the workforce in those stores that we close.

Tim Wentworth: Our ability to respond to a changing environment needs to improve and was a critical objective of our strategic review.

Tim Wentworth: We intend to close this competitive gap with some of our peers who have invested in similar capabilities over the past several years.

Tim Wentworth: While the decision to close the store is never an easy one, we feel confident in our ability to continue to serve our customers.

Tim Wentworth: and we intend to follow our historic practice to redeploy the majority of the workforce in those stores that we close.

Timothy Wentworth: In addition to being trusted and convenient, we must be relevant to today's consumer. To this end, we are re-evaluating our merchandising strategy to offer a refreshed assortment of products, including our own brands. By being more selective with national brands and expanding our own brands, we are sharpening our focus as a destination for categories for which we believe we are uniquely positioned to lead, like health and wellness and specifically women's health. We launched over 300 new own brand SKUs this year, focused in key categories, and we expect to launch another 300 plus in fiscal 2025. Our second guiding principle is a disciplined financial model which targets strong, free cash flow generation and appropriate leverage.

Tim Wentworth: In addition to being trusted and convenient, we must be relevant to today's consumer.

Tim Wentworth: To this end, we are re-evaluating our merchandising strategy to offer a refreshed assortment of products including our own brands.

Tim Wentworth: By being more selective with national brands and expanding our own brands, we are sharpening our focus as a destination for categories for which we believe we are uniquely positioned to lead, like health and wellness, and specifically women's health.

Tim Wentworth: We launched over 300 new own brand SKUs this year focused in key categories and we expect to launch another 300 plus in fiscal 2025.

Tim Wentworth: Our second guiding principle is a disciplined financial model which targets strong, free cash flow generation and appropriate leverage.

Timothy Wentworth: Our focus in the near term is on improving our operating cash flows through cost and working capital management while establishing the baseline for AOI growth. In fiscal 2025, we expect to realize $500 million in working capital initiatives and $150 million in further capex reduction. In addition, we are focused on monetizing non-core assets to generate cash. Chief among these is Village MD. While our plans for this investment may take several different forms in all scenarios related to Village MD, we are committed to redeploying any proceeds to reduce our net debt and improve the health of our balance sheet.

Tim Wentworth: Our focus in the near-term is on improving our operating caseloads through cost and working capital management, while establishing the baseline for AOI growth.

Tim Wentworth: In fiscal 2025, we expect to realize $500 million in working capital initiatives and $150 million in further capital production.

Tim Wentworth: In addition, we are focusing on monetizing non-core assets to generate cash.

Tim Wentworth: Chief of Among these is Virajam D.

Tim Wentworth: While our plans for this investment may take several different forms in all scenarios related to village MD, we are committed to redeploying any proceeds to reduce our net debt and improve the health of our balance sheet.

Timothy Wentworth: Our efforts around Village MD are just one example of how, on a go-forward basis, we are maximizing optionality around our portfolio of assets. As we consider if and when to appropriately monetize these assets, we will continue to harvest gains from our portfolio of public equities, Sincora, and Brightspring to generate cash and further enable debt reduction. As we go forward, we have three priorities: to stabilize pharmacy margin, advance the execution of our retail strategy, and improve our net debt position. This emphasis on improving the strength and quality of our balance sheet underscores Manmohan's leadership in establishing our financial priorities, to which he will speak in a few moments.

Tim Wentworth: Our efforts around Village MD are just one example of how on a go-forward basis we are maximizing optionality around our portfolio of assets.

Tim Wentworth: As we consider if and when to appropriately monetize these assets, we will continue to harvest gains from our portfolio of public equities, Sincora and Bright Spring to generate cash and further enabled that reduction.

Tim Wentworth: As we go forward, we have three priorities.

Tim Wentworth: Distabilized Pharmacy Margin.

Tim Wentworth: Advanced the execution of our retail strategy and improve our net-debt position.

Tim Wentworth: This emphasis on improving the strength and quality of our balance sheet, underscores Mammohan's leadership in establishing our financial priorities to which he will speak in a few moments.

Timothy C. Wentworth: Let me now bring some visibility to the status of our discussions surrounding pharmacy margin and reimbursement rates. We continue to be confident that we are in a multi-year process to reframe our relationship with PBMs on reimbursement. We are changing the dialogue to ensure we both procure drugs at a fair price and that we are paid fairly for the value that we provide. As part of our efforts, we have worked with some PBMs to bring more stability and predictability to our reimbursement while maintaining broad network access. It continues to be our goal to serve as many patients and communities as possible.

Tim Wentworth: Let me now bring some visibility to the status of our discussions surrounding pharmacy margin and reimbursement rates.

Tim Wentworth: We continue to be confident that we are in a multi-year process to reframe our relationship with TBMs on reimbursement.

Tim Wentworth: We are changing the dialogue to ensure we both procure drugs at a fair price and that we are paid fairly for the value that we provide.

Tim Wentworth: As part of our efforts, we have worked with some PBMs to bring more stability and predictability to our reimbursement while maintaining broad network access.

Tim Wentworth: It continues to be our goal to serve as many patients in communities as possible.

Timothy Wentworth: However, going forward, Walgreens will make difficult decisions if a PBM will not provide reasonable reimbursement for our services in order to maintain our presence in communities across America. Today, we have a high level of visibility into reimbursement for approximately 80 percent of the anticipated script volume in fiscal 2025. We are pleased with the willingness that some of our PBM partners have shown to consider current trends and adjust reimbursement, such as rebalancing brands and generics, and we look forward to working with those partners on how we can grow together. Several significant contracts are in the process of being negotiated over the next year, and we will pursue rational reimbursement that ensures we are paid fairly.

Tim Wentworth: However, going forward, Walgreens will make difficult decisions if a PBM will not provide reasonable reimbursement for our services in order to maintain our presence in communities across America.

Tim Wentworth: Today, we have a high level of visibility into reimbursement for approximately 80% of the anticipated script volume in fiscal 2025.

Tim Wentworth: We are pleased with the willingness that some of our PBM partners have shown to consider current trends and adjust reimbursement, such as rebalancing brands and generics. And we look forward to working with those partners on how we can grow together.

Tim Wentworth: Several significant contracts are in the process of being negotiated over the next year, and we will pursue rational reimbursement that ensures we are paid fairly.

Timothy Wentworth: Turning to NADAC, based on the latest data, we have seen it begin to stabilize. However, it is critical that regulators work alongside us and industry groups to implement a solution that reduces future instability and ensures that NADAC is a predictable product benchmark for pharmacy reimbursement. Finally, outside of working with PBMs and payers to evolve reimbursement, we continue to progress our efforts to broaden and deepen the services we get paid for. Provider status and other new payment arrangements remain a key opportunity for us to fully deploy our pharmacist capabilities, lighten the burden on the broader healthcare system, and further stabilize and improve our overall pharmacy economics.

Tim Wentworth: Turning to Naedak, based on the latest data, we have seen it begin to stabilize.

Tim Wentworth: However, it is critical that regulators work alongside us and industry groups to implement a solution that reduces future instability and ensures that NADAC is a predictable product benchmark for pharmacy reimbursement.

Tim Wentworth: Finally, outside of working with PBMs and payers to evolve reimbursement, we continue to progress our efforts to broaden and deepen the services we get paid for.

Tim Wentworth: Provider status and other new payment arrangements remain a key opportunity for us to fully deploy our pharmacist capabilities, lighten the burden on the broader healthcare system, and further stabilize and improve our overall pharmacy economics.

Timothy Wentworth: Many of our actions across this turnaround will take time, but I am confident that we have the right team, the right focus, and the right strategy. Menmoan will detail our expectations for fiscal 2025 in a moment. Our most recent quarterly results underscore the importance of executing with intent to stabilize the core business, irrespective of the macroeconomic backdrop. We have a lot of work to do, and 2025 will be an important rebasing year to drive longer term value creation.

Tim Wentworth: Many of our actions across this turnaround will take time, but I am confident that we have the right team, the right focus and the right strategy.

Speaker Change: Menmohan will detail our expectations for fiscal 2025 in a moment.

Speaker Change: Our most recent quarterly results underscore the importance of executing with intent to stabilize the core business irrespective of the macroeconomic backdrop.

Speaker Change: We have a lot of work to do, and 2025 will be an important rebasing year to drive longer-term value creation.

Timothy Wentworth: And before I conclude, I wanted to say a few things about how we're supporting the communities recently impacted by Hurricanes Helene and Milton. Of course, our thoughts are with all our patients, customers, team members, and everyone else that's been impacted by these terrible natural disasters. In times of crisis, it is always heartening to see the generosity of America's response. At Walgreens, we've leveraged our public-private partnerships to implement a national pin pad program with the American Red Cross to raise over $5 million, which has been used to donate water and other urgent supplies for the communities in need.

Speaker Change: And before I conclude, I wanted to say a few things about how we're supporting the communities, recently impacted by hurricanes, halene and Milton.

Speaker Change: Of course, our thoughts are with all, our patients, customers, team members and everyone else that's been impacted by these terrible natural disasters.

Speaker Change: In times of crisis, it is always heartening to see the generosity of America's response.

Speaker Change: At Walgreens, we've leveraged our public-private partnerships to implement a national pin pad program with the American Red Cross to raise over $5 million. Which has been used to donate water and other urgent supplies for the communities in need.

Timothy Wentworth: Walgreens has also made a donation to the American Red Cross Hurricane Helene Fund. In terms of the impact to us, about 1,050 of our stores were brought offline by the storms or in preparation for them, but we have restored all but 16 of them. We're working to make sure we continue to provide essential services to these impacted communities.

Speaker Change: What Greens has also made a donation to the American Red Cross Hurricane Helene Fund.

Speaker Change: In terms of the impact to us, about 1,050 of our stores were brought offline by the storms or in preparation for them, but we have restored all but 16 of them.

Speaker Change: We're working to make sure we continue to provide essential services to these impacted communities.

Manmohan Mahajan: I will now turn it over to Memawan to review our financial results.

Manmohan Mahajan: Thank you, Tim. And good morning, everyone. Overall, four quarter results were in line with our expectations. Timatically, the quarter reflected the same trends that characterize our fully-er results. With pressure on US retail pharmacy partly offset by growth in our US healthcare segment, while our international business continues to perform in line with our expectations. At just an EPS of 39 cents, decreased 41% year-over-year on a constant currency basis. Approximately 70% of this decline relates to lower-stay lease-back gains, lapping the reversal of incentive accruals in the prior year and lower-sincura equity income. Headwinds in the US retail pharmacy businesses were partly offset by cost-saving initiatives and growth in US healthcare business.

Speaker Change: I will now turn the overdomemomal into review of financial results.

Speaker Change: Thank you Tim and good morning everyone. Overall Fort Quota results were in line with our expectations.

Speaker Change: The court reflected the same trends that characterized our familiar results. With pressure on U.S. redill pharmacy, partly offset by growth in our U.S. health care segment, while our international business continues to perform in line with our expectations.

Speaker Change: At just a DPS of 39 cents decreased 41% year over year on a constant currency basis.

Speaker Change: Approximately 70% of this decline relates to lower salispeg gains, Lapping the reversal of incentive accruals in the prior year, and lower Sankora Equity income.

Speaker Change: Headwinds in the US Retail Pharmacy Businesses were partly offset by cost savings initiatives and growth in US healthcare business.

Manmohan Mahajan: Gap results for the quarter included certain non-cash charges. We recognized a $2.3 billion charge for valuation allowance on deferred tax assets. These deferred tax assets were primarily related to opioid liabilities recognized in prior periods, and they remain available for the company to offset potential future income, including gains from monetizing assets. We also recognized $696 million in impairment charges for care-centric goodwill in our equity investment in Chinese pharma company, Gota. As a reminder, last year's gap results included certain charges related to opioid claims and lawsuits.

Speaker Change: Gap results for the quarter included certain non-cast charges.

Speaker Change: We'd recognize the $2.3 billion charge for valuation allowance on deferred tax assets.

Speaker Change: These different tax assets were primarily related to opioid liabilities, recognized in prior periods. And they remain available for the company to offset potential future income, including gains from monetizing assets.

Speaker Change: We also recognize $696 million in impairment charges for care centric's goodwill and our equity investment in Chinese Farmer Company, Goda.

Speaker Change: As a reminder, last year's gap results included certain charges related to opioid claims and lawsuits.

Manmohan Mahajan: Let's move on to the full-year highlights. Adjusted EPS of $2.88 declined 28% on a constant currency basis due to the software US retail pharmacy performance and significantly lower-stay lease-back gains. This was partly offset by cost-saving initiatives and improved profitability in US healthcare. Gap net loss was $8.6 billion compared to a loss of $3.1 billion in fiscal 23. Gap results included certain non-cash impairment charges related to Village MD goodwill in the second quarter. The prior year period included $5.5 billion after-tax charge for opioid related claims and lawsuits, partly offset by a $1.7 billion after-tax gain on sale of Synchora and Option Care Health shares.

Speaker Change: Let's move on to the full year highlights.

Speaker Change: At just a DPS of $2.88 decline 28% on a cost and currency basis due to the software US retail pharmacy performance and significantly lower sales lease backings.

Speaker Change: This was partly offset by cost savings and initiatives and improved profitability in U.S. health care.

Speaker Change: Gap Net loss was $8.6 billion, compared to a loss of $3.1 billion in fiscal $23.

Speaker Change: Gap results included certain non-cash impairment charges related to village MD Goodwill in the second quarter.

Speaker Change: The prior year period included $5.5 billion after tax charge for opioid-related claims and lawsuits, partly offset by a $1.7 billion after tax gain on Sela Sincora and Option Gear Health Shares.

Manmohan Mahajan: Now, let me cover the US retail pharmacy segment. Here on here, driven by pharmacy and partly offset by decline in retail sales, AOI decreased 60% versus the prior year quarter. Approximately two thirds of this decline relates to lower sale leaseback gains, lapping the reversal of incentive accruals in the prior year, and lower synchora equity income. Headwinds in the retail and pharmacy businesses were partly offset by cost-saving initiatives. We exceeded our goal of $1 billion in cost savings for the year, with most of the benefit recognized in the US retail pharmacy segment.

Speaker Change: Now, let me cover U.S. Redil Pharmacy segment.

Speaker Change: Comparable sales grew 8.3% year-on-year, driven by pharmacy and partly offset by decline in retail sales.

Speaker Change: A.O.I. decreased 60% versus the prior year quarter. Approximately 2-3rds of this decline relates to lower sale leaseback gains, lepping the reversal of incentive accruals in the prior year, and lower Sincora Equity income.

Speaker Change: Headwinds in the retail and pharmacy businesses were partly offset by cost saving initiatives.

Speaker Change: We exceeded our goal of $1 billion in cost savings for the year, with most of the benefit recognized in the US retail pharmacy segment.

Manmohan Mahajan: Let me now turn to US pharmacy. Pharmacy comp sales increased 11.7% driven by brand inflation and mixed impacts. Comp scripts excluding immunizations grew 2.6% in the quarter. We continue to track in line with the overall prescription market year to date. Pharmacy adjusted gross margin declined versus the prior year quarter, negatively impacted by net reimbursement pressure, brand inflation, and mixed impacts. Recent fluctuations in NADAC resulted in $17 million of impact in the quarter versus the prior year, turning next to US retail business. Comparable retail sales declined 1.7% in the quarter. As Tim mentioned, the consumer backdrop remains a challenge.

Speaker Change: Let me now turn to U.S. pharmacy.

Speaker Change: Pharmacy Comsales increased 11.7% driven by brand inflation and mixed impacts.

Speaker Change: Conscripts excluding immunizations grew 2.6% in the quarter. We continue to track and line with the overall prescription market year to date.

Speaker Change: Pharmacy adjusted gross margin decline versus a prior year quarter, negatively impacted by net reimbursement pressure, brand inflation and mix impacts.

Speaker Change: Recent fluctuations in Nadek resulted in $17 million of impact in the quarter versus the prior year.

Speaker Change: Turning next to U.S. retail business.

Speaker Change: Comparable retail sales declined 1.7% in the quarter.

Manmohan Mahajan: We see this with our customer as sales pressure in the quarter was almost entirely driven by nonessential categories. We continue to refine our pricing and promotion strategy, which helped to improve gross profit margin in the quarter. At the same time, value seeking behavior and new product launches during the year have driven our own brand penetration of 70 basis points in the quarter, finishing it over 17% of sales to end the year. Retail adjusted gross margin improved year over year, positively impacted by category mix towards health and wellness products, partly offset by higher shrink levels.

Speaker Change: As I mentioned, the consumer backdrop remains a challenge.

Speaker Change: We see this with our customer. As sales pressure in the quarter was almost entirely driven by non essential categories.

Speaker Change: We continue to refine our pricing and promotion strategy, which helped to improve gross profit margin in the quarter.

Speaker Change: At the same time, value seeking behavior and new product launches during the year have driven our own brand penetration of 70 basis points in the quarter, finishing it over 17% of sales to end the year.

Speaker Change: Retail adjusted gross margin improved year over year, positively impacted by category mix towards health and wellness products, partly offset by higher shrink levels.

Manmohan Mahajan: Turning next to the international segment, and as always, I will talk in constant currency numbers. Total sales grew 3.7% with Germany wholesale increasing 8.2% and Boots UK up 2.3%. Segment adjusted gross profit increased 2% with growth across all businesses. Adjusted operating income was down 11%, primarily due to lapping real estate gains in the year-ago period.

Speaker Change: Turning next to the International segment, and as always I will talk in constant currency numbers.

Speaker Change: Total sales grew 3.7% with Germany wholesale increasing 8.2% and boots UK up 2.3%.

Speaker Change: segment adjusted gross profit increased 2% with growth across all businesses.

Speaker Change: At just an operating income was down 11% primarily due to lephing real estate gains in the year ago period.

Manmohan Mahajan: Let's now cover Boots UK in detail. Boots UK continues to perform well. Comp retail sales increased 6% with continued market share gains and all categories showing growth. Boots.com sales increased 19% year on year and represented 15% of our UK retail sales.

Speaker Change: Let's now cover boots you can detail.

Speaker Change: Goods UK continues to perform well, comp retail sales increased 6% with continued market share gains and all category showing growth.

Speaker Change: Boots.com sales increased 19% year on year and represented 15% of our UK retail sales.

Manmohan Mahajan: The US health care segment finished ahead of expectations for the year, delivering $66 million in adjusted EBITDA. Sales of $2.1 billion increased 7% compared to the prior year quarter. Village MD sales of $1.5 billion grew 7% year-on-year. The increase was driven by growth in full sales were up 28% driven by growth within existing partnerships. Adjusted EBITDA for the fourth quarter was $65 million and an improvement of $94 million compared to last year.

Speaker Change: Turning next to you as health care.

Speaker Change: The US Healthcare segment finished ahead of expectations for the year, delivering $66 million in adjusted the bidda.

Speaker Change: Sales of $2.1 billion increase 7% compared to the prior year quarter.

Speaker Change: Village MD sales of $1.5 billion grew 7% year on year. The increase was driven by growth in full risk lies and fee for service revenue, partly offset by the impact of clinic closures.

Speaker Change: Shield fails were up 28% driven by growth within existing partnerships.

Speaker Change: at just a little bit after the fourth quarter was $65 million and improvement of $94 million compared to last year.

Manmohan Mahajan: Driven by cost discipline at Village MD and growth from Shields, turning next to cashflow. Operating $134 million in payments related to legal matters and $386 million in entity premium contributions related to the Boots pension plan. We exceeded our target of $600 million in capital expenditure reductions in fiscal 24, delivering $736 million in savings versus fiscal 23. Similarly, we also exceeded our target of $500 million of benefits from working capital initiatives in fiscal 24. Free cashflow of $23 million declined by $642 million versus the prior year due to lower earnings, higher payments related to legal matters, and phasing of working capital, partly offset by lower capital expenditures.

Speaker Change: Driven by cost discipline at village MD and growth from shields.

Speaker Change: Turning next to Gashflow.

Speaker Change: Operating cash law of $1 billion for fiscal 24 was negatively impacted by $934 million in payments related to legal matters, and $386 million in energy premium contributions related to the boot pension plan.

Speaker Change: We exceeded our target of $600 million in capital expenditure reductions in fiscal 24 delivering 736 million dollars in savings versus fiscal 23.

Speaker Change: Similarly, we also exceeded our target of $500 million of benefits from working capital initiated in fiscal 24.

Speaker Change: Free cash flow of $23 million, declined by $642 million versus the prior year, due to lower earnings, higher payments related legal matters and phasing of working capital, partly offset by lower capital expenditures.

Manmohan Mahajan: Looking at the fourth quarter, free cash flow of $1.1 billion increased 98% compared to the prior year period. The increase was driven by benefits from working capital initiatives, lower legal payments, and lower capital expenditures. Over the course of fiscal 24, we reduced our net debt by nearly $2 billion and our lease obligations by over $1 billion, and our liquidity position is healthy. We ended the year with $3.2 billion in cash and cash equivalents and $5.8 billion of revolver capacity.

Speaker Change: Looking at the fourth quarter, free cash flow of $1.1 billion increased 98% compared to the prior year period.

Speaker Change: The increase was driven by benefits from working capital initiatives, lower legal payments and lower capital expenditures.

Speaker Change: Over the course of fiscal 24, we reduced our net debt by nearly $2 billion, and our lease obligations by over $1 billion.

Speaker Change: and our liquidity position is healthy.

Speaker Change: We ended the year with $3.2 billion in cash and cash equivalents and $5.8 billion over of all recovery capacity.

Manmohan Mahajan: Looking ahead, one of our key priorities is to strengthen the balance sheet condition of the company. We are focused on improving our cashflow generation and net debt position through a combination of operational actions and asset monetization activities. These priorities have significant influence on our expectations for this upcoming fiscal year, which I will detail now. As Tim underscored, our priorities for fiscal 2025 are to stabilize our core operations, while we make progress on the longer-term strategic and operational turnaround. This view is reflected in our adjusted EPS guidance of $1.40 to $1.80. This guidance is based on three central assumptions.

Speaker Change: Looking ahead, one of our key priorities is to strengthen the balance sheet condition of the company.

Speaker Change: We are focused on improving our cash flow generation and net-bed position through a combination of operational actions and asset monetization activities.

Speaker Change: These priorities have significant influence on our expectations for this upcoming fiscal year, which I will detail now.

Speaker Change: As Tim Underscored, our priorities for fiscal 2025 is to stabilize our core operations. While we make progress on the longer-term strategic and operational turnaround.

Speaker Change: This view is reflected in our Justice DPS guidance of $1.40 to $1.80.

Manmohan Mahajan: First, in U.S. pharmacy, we anticipate continued pressure on dream reimbursement rates. We have negotiated approximately 80% of the contract volume for calendar year 2025. Due to the multi-year nature of these contracts, there is still more progress to be made, but the leave we are taking incremental steps towards our goal of reducing the impact of reimbursement pressure on pharmacy margin. The second major assumption is that our customer is likely to remain under pressure and continue to demonstrate the same price-sensitive shopping behavior that we experienced in fiscal 24. In response to this dynamic, we are executing on a number of retail initiatives over multiple periods.

Speaker Change: This guidance is based on three central assumptions. First, in U.S. pharmacy, we anticipate continued pressure on reimbursement rates.

Speaker Change: We have negotiated approximately 80% of the contract volume for calendar year 2025.

Speaker Change: Due to the multi-year nature of these contracts, there is still more progress to be made. But believe we are taking incremental steps towards our goal of reducing the impact of reimbursement pressure on pharmacy margin.

Speaker Change: The second major assumption is that our customer is likely to remain under pressure and continue to demonstrate the same price sensitive shopping behavior that we experienced in fiscal 24. In response to this dynamic, we're executing on a number of retail initiatives over multiple periods.

Manmohan Mahajan: In the near term, we are taking cost actions to improve our operating leverage, including the accelerated optimization of our fiscal footprint. We expect these closures to be accretive to our cash flows in fiscal 2025. Lastly, we expect growth in our health care segment and in the international segment.

Speaker Change: In the near term, we're taking cost actions to improve our operating leverage, including the accelerated optimization of our fiscal footprint.

Speaker Change: We expect these closures to be accretive to our cash flows in fiscal 2025.

Speaker Change: Lastly, we expect growth in our health care segment and in the International segment. Let's cover the footprint optimization program next.

Manmohan Mahajan: Let's cover the footprint optimization program next. We expect to close approximately 1,200 stores over the next three years, with about 500 targeted to close in fiscal 2025. Within fiscal 25, we expect this activity to be weighted towards the back half of the year. We are prioritizing closing locations that are cash flow negative, underperforming stores where we own the locations, and ones where the lease excavations are coming to you in the next few years. This focus is expected to partially mitigate the incremental burden of dark rent. The economic benefits of this approach should begin to be tangible in fiscal 25.

Speaker Change: We expect to close approximately 1200 stores over the next three years, with about 500 targeted to close in fiscal 2025.

Speaker Change: Within fiscal 25, we expect this activity to be weighted towards the back half of the year.

Speaker Change: We are prideizing clothing locations that are cash flow negative, underperforming stores where we own the locations, and once where the lease excavations are coming to you in the next few years.

Speaker Change: This focus is expected to partially mitigate the incremental burden of dark rent.

Speaker Change: The economic benefits of this approach should begin to be tangible in fiscal 25.

Manmohan Mahajan: By accelerating the scope of our footprint optimization program, and focusing on stores with weakest cash generation, we expect to reduce our working capital needs and improve our cash flows over the next 12 months. We expect the in-year benefit from the footprint optimization program to be approximately 100 million of AOI. With positive cash contributions, including the cash benefits from working capital and sales of own stores, net of closure costs. Over time, these actions should also enable us to fund the investments we plan to make in higher performing stores, as we look to improve our customers' in-store experience.

Speaker Change: By accelerating the scope of our footprint optimization program and focusing on stores with weakest cash and ration, we expect to reduce our working capital needs and improve our cash flows over the next 12 months.

Speaker Change: We expect the in-year benefit from footprint optimization program to be approximately 100 million of the O.I. With positive cash contributions, including the cash benefits from working capital and sales of own stores, net of closure costs.

Speaker Change: Over time, these actions should also enable us to fund the investments we plan to make in higher performing stores as we look to improve our customers' in-store experience.

Manmohan Mahajan: For this year, we're prioritizing investment in those stores that should be the recipient of the scripts, merchandise, and the foot traffic from the stores we're closing. In our discussions with the investment community last quarter, we highlighted that we were evaluating 2,000 stores as part of our optimization efforts. Net of the 1200 that we have identified for closure, this indicates that there are another 800 stores for which we're focused on improving their operating performance and cash flows. However, as has always been the case, we will continuously evaluate this group and all our stores to ensure we ultimately operate with the best possible footprint.

Speaker Change: For this year, we're prioritizing investment in those stores that should be the recipient of the scripts, merchandise, and the foot traffic from the stores we're closing.

Speaker Change: In our discussions with the investment community last quarter, we highlighted that we were evaluating 2,000 stores as part of our optimization efforts.

Speaker Change: Net of the 1200, that we have identified for closure, this indicates that there are another 800 stores for which we are focused on improving their operating performance and cash flows.

Speaker Change: However, as has always been the case, we will continuously evaluate this group and all our stores to ensure we ultimately operate with the best possible footprint.

Manmohan Mahajan: Let's now turn to additional guidance line items. We are providing additional guidance on certain enterprise and segment level line items for modeling purposes. At the midpoint of our guidance range for adjusted EPS, about 60% of the year-over-year decline reflects the impact of a higher tax rate and lower contributions from sale ESPEC and Sincoral earnings. On a corporate level, we're anticipating higher interest expense due to leping prior year games on bonds.

Speaker Change: Let's now turn to additional guidance, line items.

Speaker Change: We are providing additional guidance on certain enterprise and segment-level line items for modeling purposes.

Speaker Change: At the midpoint of our guidance range for adjusted EPS, about 60% of the year-over-year decline reflects the impact of higher tax rate and lower contributions from daily spec and synchoral earnings.

Speaker Change: On a corporate level, we're anticipating higher interest expense due to leping prior year games on bonds.

Manmohan Mahajan: Let me cover segment level details next. For the US retail pharmacy segment, at the midpoint of the range, we expect a year-over-year decline in AOI of $1.1 billion. Approximately 40% of this decline is driven by headwinds from sale lease pack gains and prior sinkour our share sales. We anticipate that fiscal 25 will be the last year of headwinds from sale lease pack gains. Excluding these impacts, we expect headwinds from net reimbursement pressure and retail to drive the remaining year-over-year declines, partially offset by the impact of footprint optimization program.

Speaker Change: Let me cover segment level details next.

Speaker Change: For the US Retail Pharmacy segment, at the midpoint of the range, we expect a year over year decline in AOI of $1.1 billion. Approximately 40% of this decline is driven by headwinds from sale lease backgames and prior sync with our share sales.

Speaker Change: We anticipate that Fiscal 25 will be the last year of headwinds from Seleus Pagans.

Speaker Change: Excluding these impacts, we expect headwinds from net reimbursement pressure and retail to drive the remaining year over year declines. Partly offset by the impact of footprint optimization program.

Manmohan Mahajan: Let me share some additional KPI information. We expect the overall market growth for script volume to be between two and a half to three percent, with our total prescription growth impacted by store closures. We expect vaccinations to be slightly lower compared to Fiscal Year 24. Guidance of humans, no significant changes to the recent trends impacting pharmacy margin, including brand inflation, mix, authorised generics, and continuation of most recent trends in Nadec. We expect retail convertible sales of negative two to negative three percent, and cough cold and flu season incidences are expected to be slightly down versus last year.

Speaker Change: Let me share some additional KPI information. We expect the overall market growth for a script volume to be between 2.5 to 3%. With our total prescription growth impacted by store closures.

Speaker Change: We expect vaccinations to be slightly lower compared to fiscal year 24.

Speaker Change: Guidance of humans, no significant changes to the recent trends impacting pharmacy margins, including brand inflation, mix, authorized generics and continuation of most recent trends in Nadek.

Speaker Change: We expect retail comparable sales of negative 2 to negative 3% and cough cold and flu season incidences are expected to be slightly down versus last year.

Manmohan Mahajan: We expect international segment profitability to grow in fiscal year 25, led by boost retail business and Germany. We expect adjusted a bidda for the U.S. healthcare segment to improve by $250 million at the midpoint compared to the fiscal year 24 to a range of $280 to $350 million.

Speaker Change: We expect international segment profitability to grow in fiscal year 25, led by Booth retail business and Germany.

Speaker Change: We expect adjusted a bidah for the U.S. healthcare segment to improve by $250 million at the midpoint compared to the fiscal year 24 to a range of $280 to $350 million.

Manmohan Mahajan: Let's conclude the guidance discussion with cash flow and capital allocation. We expect our efforts to stabilize retail sales and pharmacy margin to take hold over time. In the near term, we will continue to bolster our free cash flows through working capital optimization initiatives, as well as rightsizing our capital expenditures. In fiscal 25, we expect working capital initiatives to generate approximately $500 million of free cash flows and capital expenditure reductions of approximately $150 million. We anticipate an A.O.I. had wind of approximately $400 million from lower sale leaseback gains and Sincora equity earnings. This will not have any impact on free cash flow.

Speaker Change: Let's conclude the guidance discussion with cash flow and capital allocation.

Speaker Change: We expect our efforts to stabilize retail sales and pharmacy margin to pay cold over time.

Speaker Change: In the near term, we will continue to bolster our free cash flows through working capital optimization initiatives as well as right-sizing our capital expenditures.

Speaker Change: In fiscal 25, we expect working capital initiatives to generate approximately $500 million of free cash flows and capital expenditure reductions of approximately $150 million.

Speaker Change: We anticipate an A.O.I. had wind of approximately $400 million from lower-said leaseback gains and sinkour equity earnings.

Speaker Change: This will not have any impact on free cash flow.

Manmohan Mahajan: In fiscal 2024, we began to refocus our financial philosophy. This includes decisions to simplify our financial reporting, such as wind down of the sale leaseback program and Sincora shares sales, but also in terms of capital allocation priorities. As we monetize assets in fiscal 24, we reduce our net debt position by $1.9 billion. This is a good start, but there is still much more work to be done to continue to strengthen our balance sheet in the coming years. Given this imperative, we intend to further monetize non-core assets. Additionally, we expect our lease liabilities to decline further due to the conclusion of our sale-leaseback program and as we execute against our footprint optimization program.

Speaker Change: In fiscal 2024, we began to refocus our financial philosophy.

Speaker Change: This includes decisions to simplify our financial reporting, such as line down of the sale leaseback program and syncore shares sales, but also in terms of capital allocation priorities.

Speaker Change: As we monetize the assets in fiscal 24, we reduce our net net position by $1.9 billion. This is a good start, but there is still much more work to be done to continue to strengthen our balance sheet in the coming years.

Speaker Change: Given this imperative, we intend to further monetize non-core assets.

Speaker Change: Additionally, we expect our least liabilities to decline further due to the conclusion of our daily spectrum and as we execute against our footprint optimization program.

Speaker Change: We believe these actions will improve our cash position and financial flexibility as we focus on reducing net debt while supporting the successful execution of our turnaround over the next few years.

Speaker Change: With that, let me pass it back to them.

Speaker Change: Thanks, Mammohan. Before opening the call up for Q&A, let me leave you with a few closing thoughts.

Speaker Change: We are confident that we have the right team and the right strategy and we are laser focused on two principles.

Speaker Change: That we are a retail pharmacy-led organization and that the economics of this model must be disciplined and sustainable.

Speaker Change: To this end, we intend to meaningfully strengthen our balance sheet over the next few years, and there is a clear path to doing so. As we work to stabilize our financial performance, monetize non-strategic assets, reduce our lease exposure, and address our net debt position.

Speaker Change: As part of this approach, we intend to adopt a flexible and pragmatic capital allocation strategy.

Speaker Change: To be clear, we believe our reorientation to retail pharmacy has a bright future.

Speaker Change: We're engaging in a multi-year program with a long-term goal of appropriately sized and well-positioned fleet of stores and an industry-leading customer experience in both retail and pharmacy across consumer channels.

Speaker Change: And we continue to believe that the adjacent strategic businesses in which we've invested can incrementally contribute to value creation over the longer term.

Speaker Change: We are in the early stages of a turnaround that will take time, but the fiscal fourth quarter was an important building block in the foundation of this turnaround, and we expect further progress in fiscal 2025.

Speaker Change: With that, let's take questions.

Speaker Change: Operator.

Speaker Change: Thank you.

Speaker Change: And our first question coming from the line of Lisa Gil with JP Morgan.

Lisa Gil: and thanks for taking my question. I just want to focus on a couple of things.

Lisa Gil: One would just be some of the comments that were made early on around the restructuring of the reimbursement.

Speaker Change: When you talk about 80% visibility, you also talk about, you know, very difficult decisions are around, maybe contracting going forward. So how do I blend balance that when I think about improving rates? Do we expect improving rates in 2025? Is this more of like a three-year plan? And then, secondly, when you think about those difficult decisions, are you thinking about leaving some networks? Like, how do I put all those pieces together?

Speaker Change: Sure, thanks in Good Morning Lisa. So first of all, did the answer to the DirectLage.

Speaker Change: As it relates to 2025, we have a lesson of the reimbursement pressure if you looked at a trendline.

Speaker Change: Which, by the way, continues a couple of year dynamic, which I've talked about before.

Speaker Change: We're coming in, I was...

Speaker Change: fairly confident that we had seen the payers becoming more understanding and realistic about what we could give. And at the end of the day, if all of the retailers are showing up with less being taken out of the market to then share, it begins to to support that dynamic. And so in 25, we do see less. Let me start with that. Number two, there's no question that there is a recognition by all parties, PBMs, payers and our peers. We're going to have to do that.

Speaker Change: that the dynamics have changed. And we see that clearly reflected in the conversations, very constructive conversations we have had. Both in the 80% where we have actually landed the contracts and we have seen different sorts of mechanisms put in the contracts. There's not a one size fits all. We've seen some cost plus. We've seen carve-outs for new brand drugs or existing brands that are at high prices. We've seen rebalancing of brand and generic. And we're showing up open-minded to how we reconfigure the risk and also protect our ability to not see unmanageable reimbursement pressures that frankly are an economic for us and not frankly market required.

Speaker Change: All of that said the 20% that are left, what I would say is those are constructive conversations. I don't want to portray them as something different. But in all of our conversations, not just the 20, we showed up willing to make a difficult decision if we weren't going to be in a range of being compensated fairly. And it doesn't mean we're raising prices. Let me be clear about that. It means that we are arresting the downward pressure because we are not taking money out of the market, either through purchasing or through the dynamics of generics. Generic inflation, new generics, and so forth. [inaudible]

Speaker Change: To underpin what would otherwise be our ability to increase the reimbursement that we give. So all of that to say, because I know this is a very important topic to our investors and to the market.

Speaker Change: Even the 20%

Speaker Change: Constructive Conversations, but let me be clear. We're willing to walk away from a line of business. If it doesn't make sense, I've said that there are examples where we would rather have 5% of a cash pain, a contract, then 100% of a reimbursement contract. And so from that standpoint,

Speaker Change: Again, we know that I believe the payers are very clear about it and I'm very confident that over a two to three year period we will have reset the framework for reimbursement discussions and frankly be talking more about other value creation that we can do together than simply unit cost reductions.

Speaker Change: That's very helpful. And just one follow-on. That would be, you know, if we think about the cadence of 25, you know, I know, Mama Moan talked about, you know, the store closings impacting more of the back half of the year, anything else you would call out as I think about, you know, how earnings will develop in 25.

Speaker Change: Yeah, from a cadence perspective Lisa, you ought to think about maybe the same trend as we have seen in last couple of years, we do have roughly around 500 closures, which are back half weighted, but then we also had closures in the second half of fiscal 24. So, you know, we're going to see the benefit from store closures continue to scale within 25 and then beyond over next two years as well.

Speaker Change: Thank you. I pray to the next question.

Speaker Change: Thank you, and our next question coming from the line-up and Heinz Wentworth, Mr. Hoggrup, your line is open.

Speaker Change: Hi, good morning. Thank you. Thanks for all the details on free cash flow. I just have a question on timing. I know Tim and your prepared remarks. You talked about fiscal 1225 is a rebasing year. You want to get AOI to a point we can grow. Is that?

Speaker Change: Is that fiscal 2025, or do we really have to wait until you're able to stabilize these PBM contracts and grow from there? So any timing that you can provide on when you think.

Speaker Change: would be a base to grow from. And then secondly, I think that's from what you talked about. We know going to go and negotiate in some vendor contracts. Can you provide any update on that progress? That would be great. Thank you. Yeah, I'm sorry. Could you just repeat your second question, which contract?

Speaker Change: Oh, I think some supply, I'm sorry, some prior contracts, whether it was drug distribution or anything in the front store, I think the company talked about maybe the potential to be able to renegotiate the contracts so any progress on that would be great.

Speaker Change: You know, first from a timing standpoint, as you can appreciate, we've said all along, this is a multi-year turnaround.

Speaker Change: This is a rebasing year in 25. We're not giving three-year guidance at this point, other than to say that we believe this repladforming of the company and the things that we've said we are going to do and are already doing.

Speaker Change: are meaningfully positioning us for growth in the longer term, both in terms of pharmacy services, US healthcare, and the front of the store. I'll let Mamoan give you any additional color as it relates to the longer term perspective that we have, coming back to the second part of your question, and then I'll turn it over to Mamoan.

Speaker Change: As it relates to Sincora, because I guess that is your question, you know, as you know, we do have a longer term arrangement with them that goes until 29 We meet with them regularly to make sure that they understand sort of where we sit and we evaluate together how they can help us both in terms of our cost of acquisition as well as frankly operation because they're in a crucial part of our underlying operating model. And we're not going to give any update to this time, but there is a meaningful dialogue that we're having. It is very constructive and we believe that there are ways that we can together. Thank you very much.

Speaker Change: Inclusive inventory, working capital, micro fulfillment related activities, and indeed purchasing you know acquisition costs.

Speaker Change: But there are things we can do together to...

Speaker Change: Allow for the one thing we both line, which is us to grow, because that's good for both us and them.

Speaker Change: Now, I'll turn it over to Mahmohan to just give you any additional color as it relates to the longer-term outlook that your first question asks about. Sure, so not providing long-term guidance today, but as the mentioned goal is to grow you eye and free cash flows over next three years. Maybe a couple of teams for fiscal 25 says the guidance we share today. Thank you.

Speaker Change: It reflects roughly around 80 to 85 cents, roughly around 60% headwind from higher tax rate, CELUS Incora here, so recently as well as lower CELUS back contribution. And so, 25 is a better base when you think from a quality perspective. We do have roughly around 250 million of equity earnings expected in fiscal 25 from Sincora. Now, those will, we will lap those in fiscal 26 as our existing variable prepaid forward contracts comes to maturity in late fiscal 25 and early 26.

Speaker Change: From a business core underlying business performance perspective, we do expect U.S. health care to continue to grow and we expect international to grow in fiscal 25. As they mentioned in his prepared remarks from a U.S.R.P perspective, from a longer term growth, perspective were very focused both on pharmacy margin, as well as retail sales in the U.S.

Speaker Change: Those...

Speaker Change: Benefits from those initiatives we expect to scale over next three years and so in the meantime you know from a fiscal 25 perspective we're going to be very focused on cost discipline including the footprint optimization program that we announced today which we expect to be a creative in the year and as I said earlier the benefit from the optimization program we expect it to continue to scale as we close locations over next three years.

Speaker Change: and the benefit in the year is roughly around 100 million. So that, I think gives you a shape off, you know, 25 and, you know, getting out of 25, what are going to be some of the factors we're looking at longer term?

Speaker Change: Thank you.

Speaker Change: And our next question coming from the line up towards Hill with Dr. Van Gillen is now open.

Speaker Change: Good morning, guys, and we know, and maybe I had missed this, but are you able to talk about, like, what is the discrete impact of the store closures in fiscal 2025 and maybe it's from a real estate basis to the U.S. pharmacy business, and then by quick follow, question would be, are you able to provide any color on earnings cadence in the U.S. pharmacy segment, as we think about the progression of fiscal 2025, just kind of given the slope of how earnings is progressed recently? I think that'd be helpful. Thank you.

Speaker Change: Sure, so far, store closure benefits in the year we expect roughly around $100 million contribution to AOI in fiscal 25 and that ruled and continued to scale into 26 and 7 as we close more locations over time.

Speaker Change: So, that's kind of the run rate. From a cash perspective, we expect for, for an optimization to be, uh, agreed even the year as well. And I think the way simple way to think about this is, you benefit from working capital as we close locations.

Speaker Change: Um...

Speaker Change: As well as there are certain own locations that we're going to be closing and monetizing in the year that significantly outweighs the closure cost in the year. So that's on the store closure on the cadence side. I think we're going to be pretty much in line with how the cadence has played out over last couple of years so don't expect significant changes there.

Speaker Change: 1st half, we're the second half.

Speaker Change: Thank you.

Speaker Change: Thank you.

Speaker Change: So, now, next question coming from the line-up.

Speaker Change: Charles Roy and with T.D. Securities he long has opened.

Charles Roy: Yeah, thanks for taking the question. Hey, just to follow up on Lisa's question, Tim, I think you said that.

Charles Roy: with the 80% renegotiated.

Charles Roy: in terms of the contract volume, that's is lower, but is that then stable going forward? So this is sort of at least for 80% of setting a new baseline. And then secondly, you know, appreciate all the comments around free cash flow, but can you give us a sense for where free cash flow will be for fiscal 25? I mean, there's a lot of moving parts here, but if I kind of look at some of these pieces, we're still coming out negative free cash flow for the year, just maybe give us a sense for where that kind of fits when we think about the high end and low end of the EPS guys, thanks.

Speaker Change: Sure, thanks, and I'll let the moment take the second question. As it relates to the contracts, again, what I reinforce is it is an ongoing and dynamic process. When I call it a reset, it's more a structural reset than it is. We're going to do something that, you know, then just stand still. And so those contracts typically are multi-year contracts, which is why it's going to take us a few years to actually work through all of the contracts that we have, which in many cases have us taking more risk or less reimbursement than we believe is ultimately appropriate. And sustainable. Thank you, Bob.

Speaker Change: And so it is an ongoing dynamic and furthermore, you know, in my background probably this won't surprise you to hear.

Speaker Change: I don't view them even when they're done, that we're done. There are opportunities to sit back down based on dynamics that occur, whether it's the pipeline, new indications, new products.

Speaker Change: trying to win a new client. And we work with those, those PBMs and payers to help them with that. So from that standpoint, you know, the 80% is sort of a, it's not an abstract number. It's an actual number. It says we had 100% of a group of contracts that would have been renegotiated for the 2025 plan year. We have 80% along in that, which is by itself not shocking because as you can imagine, PBMs actually operate on a January year for planned designs. So we're actually right where I would expect us to be. And I'm not surprised that the remaining contracts are, again, the ones that probably require a bit more work by both parties at the table to reach a better place. And I think we'll get there.

Speaker Change: and Mahmohan, do you want to take the second question? Sure. So from a free cash flow perspective, 25, a couple of themes for you to consider. Plus, we expect adjusted operating income to decline in 25. Now roughly around 400 million of that is due to the lower say leaseback contribution, as well as lower earnings from St. Cora. Those items do not impact free cash flow. So we just want to flag that outside of that. The legal payments in the fiscal year 25 expected the slightly increased as well roughly around 15 total.

Speaker Change: Before we, and then before they go down in 26, we expect them to decline over 26. And so what we're working to is, you know, partly offsetting these headwinds from a working capital optimization of roughly around $500 million in the year. And then be on the capex side, we expect our capex to be. And, um, uh,

Speaker Change: And our next question coming from the line-up, Eric Burser with me from Researching on the Selprin.

Speaker Change: Thank you. I have a question on US healthcare given the guiding principles you laid out to him. I guess question one is, is there any component here that's key to the strategy of rebasing around the retail pharmacy customer and then I'm going to be I'll ask you on village MD. Is the focus here, you mentioned, you know, profitability or profitable growth from the other elements of the business. Is there a reduction in investment or stabilization in the under line village MD operation?

Speaker Change: Sure, thanks for that Eric. I'll take the first part and as you directed the second to my mom, I'll let him take it.

Speaker Change: You know, in terms of what's core, you know, first of all, it starts with frankly, our clinicians and our team, which is the, you know, the underlying asset that enables us to look at other services, whether it's for payers or for all appreciated as will be over time, is our specialty pharmacy.

Speaker Change: which is really when you look at where the growth of patient need is, payer need is, being the largest independent specialty pharmacy and having the assets that we have and the team that we have is a tremendous starting point to envisioning doing more, whether that's for the pharma companies that actually originate the products, the biosimilar companies that make biosimilars, or indeed the payers who want to have their patients. [inaudible]

Speaker Change: have access to a highly reliable, clinically focused, trusted company. And so, from that standpoint, we see that as a critical asset. You know, other things are very complementary to that, such as shields and care centers to providing a broader set of ecosystem services, or services to a unique set of payers in the case of shields being health systems. And so, those are really important assets for us incrementally to the core asset that we have, which is being a retail pharmacy.

Speaker Change: You want to take the second question, Ma'am? Yeah, sure. So, let me start Q4, US Health Care segment performance. A couple of things there, common teams throughout the year, has been sheels continues to grow expansion within the existing partnership. And then we have seen improvement.

Speaker Change: within Village MD as well, driven by a significant cost reduction program that they've gone through. Now, in Q4, we also experienced slightly higher contribution from their risk-based book. And so that's driving a little bit of overperformance in the quarter. As you look out to 25, we expect these teams to continue to play. We expect shields to continue to grow within their existing partnership, you know, just continue to expand. And then on the village side, there is benefit of cost in fiscal 25, including the wraparound benefits from clinic closures.

Speaker Change: that they have executed in fiscal 24. Outside of that, we do expect their contribution margin to also improve slightly year-over-year driven by higher fee-for-service volume and a little bit growth on the risk-based side.

Speaker Change: Thank you.

Speaker Change: and our next question coming from the line-ups, Kevin Kalando with UBS, if you'll unselfened.

Kevin Kalando: Thanks for taking my question.

Kevin Kalando: Turn the star closer, just within the guide. I'm trying to understand, what do you anticipate?

Kevin Kalando: Over time, you're going to retain in terms of Rx and fluid traffic. Is there sort of a magic number as you go through this analysis? Is it used to be 70% as it 50% like how do you think about that in terms of in terms of what you're guiding for or what's implied in the guidance for that?

Speaker Change: Yeah, thanks for the question. That's an important dimension. One of a number of dimensions that is we've evaluated the 2000 stores we spoke about last quarter and now the 1200 that we've announced that we'll be actually closing.

Speaker Change: and as we continue to evaluate the 800, the recapture rate is critical and it's something that we're very very precise about as it relates to store level dynamics and so there is no one number and there is an aggregating number that I suppose that if we add it up to 1200 times the store level assumptions that we are able to make based on a number of dynamics related to how many other stores are there nearby that are ours, how many are competitive, what's the the profile of the patients that we're caring for today, etc. And there's a number of dynamics so it's not as simple as a number but it is very much a piece that we look at and challenge ourselves we obviously have a lot of experience both buying files and moving patients but also moving patients as we've closed this.

Speaker Change: Here we close a couple of hundred stores. So we know how to do this, we've gotten very good at predicting, we've also gotten obviously very good at engaging her patients.

Speaker Change: and so we've got a number and we will, that is a key assumption. What I would say though is as part of our broader retail reconfiguration and strategy, our loyalty program digital interfacing with our customers and so forth, we believe we'll enable additional touch points with these customers to both serve them potentially whether that's a home delivery and other things if they're not as close to a store or indeed engage them in other ways. We are not basing any upside assumption in our underlying model for those things, but we believe it will be meaningfully contributory to...

Speaker Change: Bringing most of the patients in many of the stores, and some of the patients from other stores along with us, and again, we want to serve every patient, and that is the goal, but we're realistic in terms of that number when we look at these closures particularly.

Speaker Change: Thanks, and if I can ask a quick follow-up, we talk a lot about the leveraging and getting your net that down.

Speaker Change: In proving pre-cache, well, I didn't necessarily hear full endorsement of the current dividend, and I just loved to understand how you think about it, it's obviously at a pretty elevated level here. Is the dividend as it's like part of the strategy for shareholders going forward as far as you think about it, or is it something that you're going to keep an eye on?

Speaker Change: for a lack of a better way to describe it. You know what you heard Memohan say is that we have adopted a flexible and pragmatic capital allocation strategy and we are going to continually evaluate our situation broadly. We are highly committed to being efficient with our capital and...

Speaker Change: and doing the things that you've already heard us talk about.

Speaker Change: and we will absolutely continue to monitor and make changes to our capital location including better aligning our dividend with our long term earnings power if we believe that that's the appropriate thing to do. And again, that requires meaningful discussion with our board on both our long term plan as well as the dividend that we're paying right now and those conversations as you saw early in my tenure here are continual and so I don't have any news for you today. We in fact believe in the near term, we can continue to monetize these non strategic assets that Mahmohan spoke about earlier to improve our balance sheet over time, but you know everything's on the table.

Speaker Change: Thank you.

Speaker Change: and our next question coming from the line-up, Elizabeth Anderson would ever call I say, you'll only open.

Elizabeth Anderson: Hey guys, thanks so much for the commentary and additional color. I have a question on the working capital improvements. Can you parse out sort of how you are thinking? I mean obviously those come from a variety of different things. You talked about suppliers, you store closures. Can you think of a help of things through sort of the bucket of that and how to think about that so we can think about it sort of on a multi-year basis, like how much is coming from stores versus supplier agreements and other factors? Yeah, that's good.

Speaker Change: Sure, I'm going to let my mom and take it other than to just say it the front because I feel I have to.

Speaker Change: It's the result of a lot of things being very well managed and executed by a team that is extraordinarily focused and aware of the opportunity that we have on working capital. I have never been proud of a team in terms of the discipline that they brought to bear as you heard both in terms of CapEx expenses and working capital. And what you're going to hear is it's not just one thing. It is execution across a number of dimensions of the business. I'll let them know and give you a bit more color. I'll let them know and give you a bit more color.

Speaker Change: Yeah sure so for us as we work to working capital our goal is always to look at all components of cash conversion cycle. And as you think about you know some of the initiatives that have played out in fiscal 24, let me just talk about on the retail side. We've talked about a sort of an mix.

Speaker Change: that we have at the stores today, and one of the initiatives we ran is how do we make sure that we take out unproductive inventory out of the stores and monetize that and replace it with more productive inventory. Now on the Rx side, things like nucleus, which is our micro fulfillment centers, is also giving us ability to optimize our inventory levels within the company as well. And then there are a number of initiatives on our account receivables and improving the collectibility and timing of it, as well as right sizing the timing on our accounts payable as well. So all components of it being looked at, as you think about kind of the incremental opportunities within

Speaker Change: and Fiscal 25 store closure as one of them, as we close these locations gives us an opportunity to take the remaining inventory and optimize that within the remaining network and that generates obviously free cash in the year.

Speaker Change: Got it, that's very helpful. And then just as a quick follow-up, maybe on the op-ex and things, how do you feel like, I mean, you've obviously executed many years of op-ex improvement? How much more opportunity on the sort of course corporate base, particularly in US retail, do you see available? I know you're sort of dude talking about like on the store counter, adjusting that. But how do we think about that as a driver of ALI going forward?

Speaker Change: Sure. Well, what you just said is really important, which is if we close 1,200 stores as we plan over the next two to three years, then there's no question that there are stranded costs that we will go after. And our goal is to frankly be out ahead of those store closures as it relates to managing those costs. So that's important. And it's something that we are very committed to. Second, it is now the culture of the company, I would say, which is that it will be a way of life forever in this company. To look at ways that we can get smarter about every dollar that we spend, particularly as it relates to non direct store related pieces. I'm we are looking I'm looking we are looking to be able to invest back into our stores, both in terms of capital and.

Speaker Change: Frankly, in terms of our associates, in terms of training and so forth, and so from that standpoint, the things that I think will be different this time as we look at these, as we have a management team that's really focused on this topic. We have a level of discipline that I think we've shown already, and we'll continue to show, and we execute.

Speaker Change: and so that will continue is the opportunity as big as it was four billion dollars ago? No, it's not but we continue to see meaningful opportunity across our business to improve what we do and do it in a more efficient way and so that's just going to continue. And there, you know, there are assumptions in this plan for our continued optimization in advance of those store closures from again, principally a corporate level. What you would see in our stores and I have to say this is, um,

Speaker Change: Because you can walk in the store and see it. We don't have a lot of de-staffing left in the stores at all. Those are stores are tight. And so, from that standpoint, that's not where you will see us making a difference. In that point, you know, from our standpoint, we know we can come back to you and talk about our strategic positioning of the Amazon and so forth, but we think those people in our stores are the crucial touch point. And so, there we're looking to invest even as we right-size our support system.

Speaker Change: Thank you. Our next question coming from the line-out, Michael Ternu with Learing Partnership on this open.

Speaker Change: Good morning and thanks for taking the question. Maybe just diving back in on the U.S. healthcare side. I appreciate the color you gave.

Speaker Change: on the various different moving pieces, particularly on a village MD, but also the...

Speaker Change: Dynamic Expectations on monetization. Is there anything that's, I guess, holding you back on that front and moving faster? I know Tim, it's something you've talked about basically since the time you started about recognizing the need to fit the business. And so, as you think about the pathway for monetization, given all the dynamics around free casually discussed, given the questions about flexibility and regarding the dividend, what are some of the thought process we have in terms of understanding the checkpoints you need to see to complete a process for monetization? Thank you very much.

Tim Wentworth: Well, the, you know, the key asset in the US healthcare business where we are looking to monetize, you know, as, as you know, as village MD and our goal is to monetize it, but to do it without destroying value unnecessarily. And so from that standpoint, you know, it has been a longer process. I wish I could have wiggled my nose and just made it happen. Believe me, because we've declared it's not, you know, a crucial part of our future. We also believe it's a, it's a great business and we'll do well on its own. But the process of getting there has been longer than we would have hoped.

Tim Wentworth: but we're going to be very methodical and very appropriate in trying to preserve value. There are physicians that are part of that that are outstanding and ensuring that we have fought through their situation and that we become, you know, even more of an employer of choice, for example, means that we're going to be really thoughtful about how we do it. And the good news is, you saw of self-sense and core and paid down 1.9 billion in debt over the course of the year. We have ways of dealing with the short-term cash situation. We have a lot of room on the revolver. We have a lot of money. We have a lot of money. [inaudible]

Tim Wentworth: and so rushing that particular decision would have not achieved anything and would have potentially destroyed even more values. So we'll keep you posted as to what happens there. We're very engaged there. Mary Langowski and our team working with both the village team and the other investors. You know, have been relentless, but it is very complicated and therefore we're going to get it right.

Speaker Change: Thank you. Now our last question are coming from the line-up, Stephanie Davis with Barclay Seal on his open.

Stephanie Davis: I would ask thanks for taking my question. It's going to be on into the village and be kind of topic again.

Stephanie Davis: and you have a lot of calls for talksmiths in Galen.

Stephanie Davis: But I was hoping could walk us through any other Martian proven initiatives beyond just take out location brochures.

Stephanie Davis: I'm looking forward to you getting down to New City O'Hire that has already been experienced as very relevant to this business.

Stephanie Davis: How should we think about how Jason said in this puzzle?

Speaker Change: I'm sorry, the last pretty question. How should we think about?

Speaker Change: Oh, Jason. Oh, Jason. Oh, no. Oh, no. No one mentioned him yet. Yeah, no, he's great. I mean, listen, we've, and Jason just sent Mary and I just, I know it after his first week about being more excited, even than he planned on being based on his conversations with payers, pharma and his colleagues. So, you know, listen, margin expansion isn't just cost cutting to your point. And we have a number of growth initiatives that Mary is incubating right now and bringing Jason on should be and is. And I appreciate you recognize it. A clear signal that we believe we have services that are highly valuable to others. You know, we haven't talked today, for example, about pharma company and some of their go direct.

Speaker Change: Initiatives. We are a natural partner there and are in fact inside of one of those. And so from that standpoint, I couldn't be more excited to ultimately come and tell you more about some of those growth initiatives that said.

Speaker Change: I want to be really clear with you that we're in the early innings of that. And so we have not baked all kinds of upside into our guidance as a result of those. We believe they will take time. The sales cycles, particularly on a B2B are not, you know, short in many cases. But boy, we have built, Mary has built a tremendous team. And I think has laser focus on a number of areas, specialty, pharma services, data analytics, and a number of other things where we believe we can double down and having a team. Including Jason is meaningful. I'm going to let Mary just, you know, she can give a little bit more color if she wants, because certainly she has been actually very quietly building a very effective team.

Speaker Change: Thank you, Tim. Thanks, Stephanie. You know, we've said it before that US healthcare business is really focused on a discipline, just growth strategy that's

Mary Langowski: really focused on near-term shareholder value creation and cost discipline and so as part of that we spent the last six months exiting non-material programs programs we didn't think would generate growth over the near term and now we're focused on you know two primary things growth of our current core and adjacent assets so the things that Tim mentioned specialty pharmacy shields data analytics are pharma services we're focused on you know two primary things that Tim mentioned and so we're focused on you know two primary things

Mary Langowski: and then secondly, doing more of what we do best, which is really built on our core infrastructure and reorienting to the pharmacy business. So reaching, engaging and activating patients and providing services to pay and pharmacy. So Jason's really a part of this and a critical part of this with the CVS and Optum experience. He'll be driving a focused approach to commercialization, B2B partnerships and services development. Thank you very much.

Speaker Change: Thank you, and I will not turn the call back over to Mr. Tim Wentworth for any closing remarks.

Tim Wentworth: Great, thank you, and I thank everybody for dialing in this morning.

Tim Wentworth: You know, I've been reflecting on my first almost year here at Walgreens and the first thing I would tell you is, if I had it to do over again, I would have only done it more quickly getting here.

Tim Wentworth: It has been quite a year and we've in that year built a brand new team here with six new leaders, all based in Chicago sitting around the table every day thinking about how to serve our patients better and at the same time grow our business.

Tim Wentworth: And then you just heard about Jason, we have hired a whole code of leaders at the next level who are going to enable this strategy beyond the senior leaders that sit around my table.

Tim Wentworth: We've drove a disciplined approach to capital and we've achieved aggressive goals for expenses, working capital, and CapEx, and we achieved positive cash flow for the year.

Tim Wentworth: We reduced our net debt by $1.9 billion, and we simplified our financial reporting. Something many of you told us you wanted to see.

Tim Wentworth: We held Market Share in Pharmacy for the first time in a number of years.

Tim Wentworth: We conducted a thorough strategic review that is driving the village MD process we just spoke about. It's driving a meaningful six-pillar retail modernization initiative that includes merchandising, own brand, loyalty, digital, and the footprint evaluation that we spoke about today.

Tim Wentworth: We additionally set a framework for multi-year reconfiguring pharmacy reimbursement.

Speaker Change: We are meeting the consumer where they are. This guidance does not assume that the consumer is magically stronger in an amazing way by the end of the year. We believe that the consumer needs to be met where they are. I have a brother-in-law, Al Miller, who is one of the experts of real estate in this country, consumer real estate. And we were talking this weekend about the fact that the consumer, they may get stronger, but boy, you wouldn't count on it right now. And certainly many industry counterparts are seeing that. So we've been realistic about the consumer. And as important, maybe the most important thing we've done is evolved our culture to where over 300,000 team members will be the ultimate differentiator in the lives of our patients and our customers.

Speaker Change: I look forward to updating you on our progress and upcoming quarters. Thanks very much for dialing in.

Speaker Change: Episode 2 Episode 2

Speaker Change: 1st of April, 2018

Speaker Change: Episode 2

Speaker Change: Episode 2

Speaker Change: The New Year's Eve, The New Year's Eve,

Speaker Change: Music

Unknown Executive: In the next episode, we'll see you in the next episode.

Unknown Executive: Hynes, John; Driscoll, Mary; Langowski, John; Driscoll, Mary; Langowski, John; Driscoll; Mary Langowski.

Speaker Change: Episode 2