Q1 2025 Walgreens Boots Alliance Inc Earnings Call
We are making incremental progress in these discussions as we work towards a more acceptable long term solution.
Turning now to our third priority the turnaround of our consumer retail business.
This has been made more challenging by the persistent deterioration in consumer discretionary spending.
Our consumer remains under pressure from accumulated inflation and higher interest rates and we are seeing continued value seeking and channel shifting behavior.
Additionally, the warmer season impacted our first quarter results with reduced respiratory incidences and the associated baskets with those trips contributing to about half of our retail decline versus last year.
As we look to effectuate, a broader repositioning of our retail business. We're responding to these conditions in real time.
Some of our actions like recent changes in our targeted approach to managing store inventory have been successful and our in stock rate is the highest it's been in over four years.
We are also modernizing the tools, we used for assortment optimization to have the right item in the right store to create a customer centric assortment.
We began to introduce new products as a part of our health and well being focused growth strategy, specifically in categories, such as womens wellness Super Foods and sports nutrition.
We also continued to pursue owned brand penetration, which is up 75 basis points in the first quarter to 17, 8%.
Coming into this year, we targeted introducing about 300, new owned brand products and have introduced approximately 60.
First quarter.
As it relates to the evolution of our consumer experience. We are further leveraging our omni channel capabilities, such as home delivery and virtual care to meet evolving consumer preferences. Walgreens has offered same day prescription delivery nationwide for more than three years and delivery within two hours from approximately 800 stores.
We also offer virtual care in 30 states available to nearly 90% of the U S population.
While we expect home delivery to continue to grow across retail and health care, we view it as one component of many touch points with our customers, including in store drive thru and online.
In summary, we are progressing a number of elements of our retail strategy. While we are seeing early green shoots we still have substantial work to do here.
Turning to our non core assets, we are underway with the sale process for village medical while continuing to evaluate the best options for summit City M D.
We are encouraged by the leadership of new CEO healthcare veteran Jim Murray to be clear, our ultimate intent to exit is unchanged and we remain committed to redeploying any proceeds to reduce our net debt and improve the health of our balance sheet.
Importantly, we improved free cash flow this quarter with decreased capital expenditures and higher adjusted operating income excluding the noncash impact of sale leasebacks.
Longer term generation of positive cash flow remains a key priority for us in the context of litigation.
Beyond payments debt and our current dividend.
Progress on cash flow will require meaningful action and focus.
In conclusion, we have shown progress on our priorities over the past quarter and while we have a lot of work ahead of US This progress underpins our belief in delivering a successful turnaround.
I will now turn it over to memo and to review our financial results.
Memo: You, Tim and good morning, everyone.
Memo: Overall first quarter results were better than our expectations.
Memo: Sales increased six 9% on a constant currency basis with growth across all segments.
Memo: Adjusted EPS of <unk>, 51 declined 23% year over year and on a constant currency basis.
Memo: This decline was entirely driven by prior year sale leaseback gains and lower Syncora equity income.
Memo: Absent these two factors.
Memo: Continued cost discipline and U S retail pharmacy.
Memo: And growth across U S health care and international businesses were partly offset by challenging U S retail market trends.
Memo: GAAP net earnings for the first quarter included after tax charges of $252 million related to footprint optimization program and.
Memo: $152 million noncash charge related to fair value adjustments on variable prepaid forward derivatives related to monetization of Suncor shares.
Memo: Now, let me cover U S retail pharmacy segment.
Memo: Comparable sales grew eight 5% driven by pharmacy, and partly offset by decline in retail sales.
Memo: The footprint optimization program negatively impacted total sales during the quarter.
Memo: DIY decreased 36% versus the prior year quarter.
Memo: Including a $184 million headwind related to prior year sale leaseback gains and lower <unk> equity income.
Memo: Absent these impacts <unk> declined due to lower retail sales, partly offset by continued cost discipline.
Memo: Despite the $160 million headwind from prior year sale leaseback gains adjusted SG&A was flat to last year.
Memo: This cost improvement was largely driven by our initiative to modernize our store level demand forecasting and labor deployment tools.
Memo: Let me now cover U S pharmacy.
Memo: Pharmacy comp sales increased 12, 7% driven by brand inflation and script volume, partly offset by lower vaccine volume.
Memo: Comps grips, excluding amortization grew three 5% in the quarter and we held market share.
Memo: Pharmacy services performed better than our expectations during the quarter as higher margin for COVID-19 vaccines was offset by the lower overall vaccine market volume due to the weaker cough cold and flu season.
Pharmacy, adjusted gross margin declined versus the prior year quarter negatively impacted by brand inflation and mix impacts and net reimbursement pressure.
Memo: Net changes in November did not have any material impact to the gross profit in the quarter.
Memo: Turning next to our U S retail business.
Memo: Comparable retail sales declined four 6% in the quarter, which was lower than our expectations.
Memo: There are two key drivers.
Memo: Third party data shows flu cold and respiratory activity over 40% lower compared to the prior year, which paired with the warm weather through November led to a much softer cough cold and flu season.
Memo: This dynamic negatively impacted comparable retail sales by approximately 270 bps in the quarter, including the impact from the attacks basket.
Memo: Which was about half of the comp sales decline.
Memo: Second.
Memo: The consumer backdrop also remains difficult with the promotional environment and continued channel shift impacting our discretionary categories.
Memo: Retail adjusted gross margin decline year over year negatively impacted by pricing and promotions as well as lower sales related to cough cold and flu.
Memo: Turning next to the international segment and as always I will talk in constant currency numbers.
Memo: Total sales grew six 5% with Germany wholesale increasing 11, 3% in boots UK up four 5%.
Memo: Segment, adjusted gross profit increased 3% with growth across all businesses.
Memo: Adjusted operating income was up 16% led by a strong retail performance in boots, UK and growth in Germany, partly offset by cost inflation and technology investments.
Let's now cover boots, you can detail.
Memo: Boots UK continues to perform well.
Memo: Retail sales increased eight 1% with gains across all categories.
Memo: <unk> Dot com sales increased 23% year on year aided by a strong black Friday performance and represented 22% of our UK retail sales.
Memo: Turning next to U S health care.
Sales of $2 2 billion increase.
Memo: <unk> increased 12% compared to the prior year quarter.
Memo: <unk> sales of $1 6 billion grew 9% year on year, despite the impact of clinic closures.
Memo: The increase was driven by growth in full risk lives and fee for service revenue.
Shield sales were up 30% driven by growth within existing partnerships.
Memo: Adjusted EBITDA for the first quarter was $70 million up sequentially and an improvement of $109 million compared to last year, reflecting the growth at village M D and shields.
Memo: Turning next to cash flow.
Memo: Operating cash flow in the quarter was negatively impacted by the seasonal inventory build in the U S UK and Germany.
Memo: And legal payments of $137 million.
Memo: Year over year free cash flow improvement benefited from decreased capital expenditures and a higher adjusted operating income excluding sale leaseback, which does not impact free cash flow.
We remain on track to achieve $500 million and working capital initiatives and are currently ahead of our target for $150 million reduction in capital expenditures.
Memo: While we do see opportunity for further reduction in Capex, we have plans for investment later this year in our stores and technology to support them.
Memo: During the first quarter, we reduced our lease obligations by $652 million.
Memo: We remain committed to improving our cash flow generation and net debt position.
Through a combination of operational actions and asset monetization activities.
Memo: As Tim alluded to we also continue to evaluate the appropriateness and size of our dividend as part of our capital allocation policy.
Memo: Our priority for fiscal 2025 is to stabilize our core performance, while we make progress on the longer term strategic and operational turnaround.
Our progress to date is reflected in our reaffirmed adjusted EPS guidance of $1 40 to $1 80.
Memo: We continue to execute on cost savings.
Memo: <unk> of our footprint optimization program.
Memo: We continue to expect $100 million in AOI benefit from footprint optimization program.
Memo: With working capital benefits and sale proceeds from owned locations significantly higher than cash closure costs.
Memo: We are also encouraged by pharmacy services results to date.
Memo: We believe the impact of lower than originally expected vaccines volume to be offset by higher margin on COVID-19 vaccines.
Memo: The recently announced <unk> changes are expected to be less than a $50 million negative impact on pharmacy margin for the remainder of the year versus our original expectations.
Memo: However, as we think about rest of the year, there remains certain risks to our outlook as well.
Memo: The weaker cough cold flu season, and continued challenging consumer discretionary spending are impacting our retail sales in the U S.
Memo: We now expect retail comp sales for fiscal 'twenty five to decline approximately 4% to 5% compared to our prior outlook of down 2% to 3%.
Memo: While the first quarter results are encouraging we are maintaining our guidance range, considering the challenging U S retail environment.
Memo: With that let me pass it back to Tim.
Tim: Thanks Manuel and.
Tim: Before I open the call up for Q&A, Let me leave you with a few closing thoughts our first quarter results demonstrate that we are executing against our long term strategic priorities importantly, we believe our approach to 2025 payer contracting supports our expectation for future stabilization in our pharmacy business and we're still in the early stage.
Tim: As of getting to a better outcome on our drug procurement costs.
Tim: We're also executing on items that are in our control.
Tim: Our initial wave of store closures has performed better than expected on multiple facets, including script retention and employee engagement.
Tim: This gives us increased confidence in our centralized deliberate approach to this process.
Tim: Also fundamental to our turnaround is financial discipline.
Tim: While we are pleased with our first quarter results. There is more work to be done as we aim to strengthen our balance sheet and to ensure longer term positive cash flow generation.
Tim: We remain committed to achieving a retail pharmacy led turnaround underpinned by a sustainable economic model.
Tim: Our turnaround will take time, but as the quarters results demonstrate we are executing with urgency and believe the actions, we're taking will be the basis for sustained value creation over the long term.
Tim: With that let's take questions operator.
Tim: Thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again, we ask that you. Please limit yourselves to one question and one.
Tim: One follow up question. Please.
Tim: Please standby, while we compile the Q&A roster.
Our first question comes from the line of Lisa Gill from Jpmorgan.
Lisa Gill: Thanks for taking my question.
Tim: Tim.
Inspired by the comments that you made around the levers to lessen reimbursement risk and the fact that contracts for 2025 are John but can you maybe just give us a little bit more color on why why does that new reimbursement look like and two when I think about contracts are generally three years in length. So thinking that for calendar 'twenty five it's roughly a third of your bucket.
Tim: Business that has some type of new reimbursement metrics that are tied to reimbursement.
Tim: That would be the first thing and then secondly, just really want to understand the script retention you talked about script retention being better than expected can you, maybe just give us a number around that.
Lisa Gill: Sure. Thanks, Lisa.
Tim: So the new reimbursement actually.
Tim: Actually let me answer the other part of your question first which is you are correct that the arrangements that we have with Pbms typically are multi year. It doesn't mean that we don't by the way come back to the table and open them up in response to opportunities or changes in the market, but generally so we haven't said exactly what percentage it is but it was a meaningful percentage.
Tim: Your number broadly speaking as is probably about right.
Tim: And in terms of what the actual arrangements themselves, how they've evolved and what they look like.
Tim: What <unk> seen is a couple of things one is we've been successful in aligning with pbms to create a category for higher cost drugs for example, where in the past those drugs would fall into the basic reimbursements and they were massively insufficient in certain cases, we've highlighted <unk> as an example, and so.
Tim: That's one of the things that we've done in many of the contracts.
Tim: In other contracts, what we've seen is rebalancing of brands and generics to more appropriately reflect the environment today, both in terms of the absolute environment and how it's going to be evolving because if you really take a look back and I know I've spoken about this before what you had was essentially us.
Tim: Performing well on generics, but its being insufficient to offset the less than our acquisition cost.
Tim: Brand drug reimbursements or and are less than cost to deliver services and so we've been able to in many of the contracts again rebalance and so what I'd say is.
Tim: Each contract we've come to the table to be creative and we have found good receptivity, we still have a ton to do let's be very clear because what you just said indirectly as we are two thirds of our contracts left the good news is many of those are with some of the same payers that we've had success with this year aligning ongoing forward.
Tim: Terms of the script retention.
Tim: We haven't given a number on that but we do track it internally and again. It has it has been much better than our underlying assumption in those stores that we've been closing and I would point out we closed about 70 stores in the quarter. We have a lot left to do this year, but we have a very different process. It has been definitely pushed through our.
Tim: Receiving stores, so that the patient experience when they are stores closing is meaningfully different as they come into a new store and all of this really drives to longer term pivoting to profitability in the back of our stores. Obviously other services such as vaccines adherence programs. Other things we may do for pharma orphan.
Tim: Payers will be incremental to that but in the current short term things that we've done have put us in a position that we wanted to be in at this point.
Speaker Change: Thank you one moment far next question.
Speaker Change: Our next question comes from the line of Eric Percher from Nephron research.
Speaker Change: I'd like to stay on the same subject, Tim and I.
Speaker Change: I guess, what I would ask is when you look at the type of pressure that youre facing in reimbursement in 2025 are you finding that the actions you've taken are leading to an absolute.
Speaker Change: Improvement a reduction in the pressure on <unk> 25 versus what you saw in the last couple of years or is your focus then on changing terms and contracting in a way that leads to stability today and really positions you for better visibility and the improvement comes in future years.
Speaker Change: The answer is both.
Speaker Change: So there's no question that restructuring our contracts to be I'll call it future proofed or at least more resistant to the inordinate shifting of risk to us that was simply we had no levers to manage to be Frank.
Speaker Change: It was really really important and again I think the good news is that our <unk>.
And payer partners also saw that in in many cases their markets are sort of looking for the same sort of changed.
Speaker Change: Terms in terms of unraveling the cross subsidization that has just gotten so distorted and so from that standpoint.
Speaker Change: The construct is important also though in 2025 and of course, we are in the very early days of calendar 2025, setting aside our fiscal calendar.
Speaker Change: We are now fully in those contracts.
Speaker Change: That were redone and our projections are continue to be that we see a reduced.
Speaker Change: Pressure than we've seen in the past that is a continuation of.
Speaker Change: Several years and the number that we achieved in these negotiations was pretty darn close to what we had set out as our goal to experience and again I would remind you that in the context of what we have said is over the next three years. This being the first of three that we expect to reach a place where what we are taking.
Out of the market in terms of increased value, whether that's new generics or other things that we would not be giving more than that and ideally then we would be subjected to being able to collect on other services and other things that we do to improve profitability in the back of the store. So we have continued to set the stage for that 2024 was a very important year for.
Speaker Change: And we are very pleased with that start on the three year process.
Speaker Change: Thank you.
Speaker Change: A moment for our next question.
Speaker Change: Our next question comes from the line of Charles <unk> from TD Cowen.
Speaker Change: Yes, thanks for taking the questions Tim.
Speaker Change: Youre, saying it sounds like you are definitely making progress here.
In the contracting side.
Speaker Change: Let's see.
Speaker Change: A lot of these are 411 starts with a calendar 'twenty five year.
Speaker Change: Given sort of the strength in the fiscal first quarter.
Speaker Change: Any reason not to think that we would see the incremental.
Speaker Change: Sort of a positive step changes as we move through the rest of this year along with that.
Speaker Change: We're still at the early part of the store closure cycle.
Speaker Change: And yet you still maintain guidance can you help us square that a little bit of I understand trying to dispose of them.
Speaker Change: Yes.
So the outperformance in the first quarter suggest particular pharmacy side.
Speaker Change: Things are at least moving in the right direction relative to at least where initial guidance was that thanks.
Speaker Change: Charles So what I'd point out is that the first quarter, which as you correctly say did not was not impacted by any of the 2025 contracts that we were able to negotiate.
Speaker Change: Is it was strong for two fundamental reasons. One is we had good pharmacy volumes and two is we had good.
Speaker Change: In terms of pharmacy services, particularly vaccines, we had good reimbursement and so those two things were strong in the quarter and we.
What <unk> seen as part of those volumes as closing stores, we were successful and beating our own targets and moving patients into the receiving stores. So that was good we closed stores and we didn't just give up share.
And again, while the vaccine.
Speaker Change: Volumes haven't been quite as strong as we might have expected.
Speaker Change: The fundamental fact of the matter is that we were reimbursed pretty fairly for those vaccines and we were very successful in getting patients who came into our store to nearly 5% 40% of the time or thereabouts actually co administer multiple vaccines to keep themselves safe across several disease platform. So that all was what carried the quarter.
Speaker Change: Therefore, as I look at our full year 2025.
Speaker Change: What we see based on the contracts results, we've had so far and again there will be some perturbation because of mix of or did you get as many patients as you thought with some new business that may have been one but those are generally small impacts we would expect to continue to see what we wanted to see in 2025 and nothing incremental to that in.
Speaker Change: Terms of things, so we see it being better than it was in 'twenty four but we ended 2004 strong because of some things that didn't have to do with <unk> reimbursement.
Speaker Change: Thank you.
Enrollment for next question.
Speaker Change: Our next question comes from the line of Michael Cherny from Leerink partners.
Michael Cherny: Good morning, and thanks for taking the question, maybe if I can build a little bit on Charles's question, there relative to the changing dynamics of the business. Tim you spent a lot of time on the reimbursement side, maybe if we can go back to the procurement side and the work Youre doing with Syncora, what does that look like qualitatively in terms of <unk>.
Michael Cherny: I'm sure that you're maximizing your procure especially for a partner that you had for more than a decade and specifically within the guidance are there any changes to procurement that are built into your current fiscal 'twenty five expectations.
Michael Cherny: Yes, So we haven't let me start with the second question, which is that we haven't broken down in our guidance would be contributed by any improvements that we make in our process or our underlying result.
Michael Cherny: Contract with Suncor.
Michael Cherny: That said.
Michael Cherny: You asked about qualitative sorts of things you know what I would tell you is quantitatively.
There is a question of having a.
Michael Cherny: Partner, who sits down with us and we have made very clear what our long term aspiration is which is to be world class at buying drugs and today, we're not and so from that and they are in a position to help us and to benefit from that when our volumes increase because we're able to be more competitive in our underlying business model and so from that standpoint.
Michael Cherny: What I would tell you is we have relationships with their team. We have spent a lot of time together and we continue to spend time together to navigate a way forward that not only helps us in the short term incrementally, but more importantly, transformational long term modernizes the way that we buy drugs in a way that keeps us very competitive and growing which is good for both.
Michael Cherny: Parties.
Michael Cherny: I'm pleased that we've had the discussions we've had we have a lot more work to do.
Michael Cherny: Thank you one moment for our next question.
Michael Cherny: Our next question comes from the line of Kevin Caliendo from UBS.
Kevin Caliendo: Guys. Thanks for taking my question.
Kevin Caliendo: First just on the footprint optimization is that number going to grow over time like how do we think about that as the store closings.
Kevin Caliendo: <unk> is it a is it a forward look as to where we are is that like your projection is $331 million a projection or is that point in time and as the stores keep going that optimization add back grows.
Kevin Caliendo: And then I guess my my second question.
Kevin Caliendo: Hum.
Kevin Caliendo: Your peer.
Speaker Change: <unk> announced that they had put in their sort of cost plus model successfully across our 2025.
Speaker Change: As you see that happening is there opportunity for you guys is that a pivot for the market that maybe it can be advantageous to you I know youre renegotiating all your contracts you did that already I'm. Just wondering if this changes the market in any way shape or form positively or negatively for ya. Thanks, yes.
Yes. Thanks, let me take the second half of your question first which is you know.
Speaker Change: Obviously, we're always pleased when we can see the market moving in a direction that is rational for us in the role that we play and so cvs's announcement, while I'm not going to comment specifically on.
Details with that really if you think about what they announced it's very similar.
It's a different way of thinking about what we've been doing in our contracts, which is realigning branded generic because if you think about a cost plus model cost plus model. Therefore, it doesn't have a cross subsidization and as a service fee on top of a acquisition cost and from our perspective, that's very much what we have been coming to the table with willing to both work with.
Various payers and how they want that constructed and how they want to go to market because not all cases, where the payers necessarily go to market with that exact model. They may use it and then alter it to meet what the benefits consultants drive at.
Speaker Change: It's self insured employer level, let's say and so and I don't want to get into sort of the real arcane detail sales of how all that works, but suffice it to say that their announcement didn't surprise us, we haven't announced or put a brand name on our process for unwinding. These things in the contracts, but we are doing exactly the same thing and we.
Speaker Change: Come to the table is a very willing partner to help the payers win in whatever configuration of value works for them, but also more importantly puts us back on track to have a sustainable pharmacy model as.
Speaker Change: As it relates to the stores the store closures, which of course, we mentioned 70 or thereabouts in the quarter, but for the full year on track and prepared for another almost 450, I'll, let <unk> speak to the underlying financial impacts of that.
So Kevin as you think about the impact of store closure in the year, we've talked about.
Expecting $100 million of benefit in the year.
Speaker Change: We're still on track to close 500 locations.
During our fiscal year, 'twenty, five and from a cash flow benefit perspective.
Speaker Change: We believe the benefit from working capital as well as sales proceeds from some of the old locations that we're closing and we will sell is going to outpace the closure cost in the year.
Speaker Change: Think about this these are in your benefits and so as we continue down the bad over a three year plan. These benefits will scale over time.
Speaker Change: Thank you one moment for our next question.
Speaker Change: Our next question comes from the line of Elizabeth Anderson from Evercore ISI.
Elizabeth Anderson: Hey, guys. Good morning. Thanks, so much for that question to question you, obviously had a very nice improvement in the free cash flow on a year over year basis, and I know memo and talked about that.
Elizabeth Anderson: And we're both working capital and Capex can you talk about your sort of confidence for a positive free cash flow on a full year basis and as a follow up can we also talk about sort of the rollout of that Microsoft Feldman tenders I know you've talked about to you from a broad level that you expect to roll them out to an increased number of stores, but how do we think about the pacing of that as we think about the rest of 2000.
Elizabeth Anderson: Thank you.
Elizabeth Anderson: First of all let me take the free cash flow question first since it's such a central question two what we focus on everyday so a little bit on the free cash flow, yes, the year over year cash flows were better in the in the quarter.
Couple of elements driving it plus the underlying performance the adjusted EBITDA was higher year over year as you exclude the sale leaseback gains, which does not impact free cash flows in secondhand.
Elizabeth Anderson: We did see higher than expected reduction in.
In the capital expenditure is actually we talked about at the beginning of the year targeting $150 million, we achieved more than that in the quarter and in my prepared remarks, I talked about while we do see opportunities on Capex reduction rest of the year. We also have plans to invest in stores and in technology that supports them. So.
Elizabeth Anderson: There is that phasing part to think about in terms of overall free cash flows for the year, we're not we're not sharing guidance on the free cash flows today.
Elizabeth Anderson: But I would say we're broadly in line with the commentary I provided at the beginning of the year.
Elizabeth Anderson: We've had really four four factors in there which is.
Elizabeth Anderson: The sale leaseback gains in core earnings reduction does not impact <unk>.
Elizabeth Anderson: Capex reduction, which we have achieved in the quarter.
Elizabeth Anderson: Working capital.
Elizabeth Anderson: We feel good about and so those elements were broadly in line with.
Elizabeth Anderson: And as it relates to the multi site multi fulfillment centers, we're super pleased with where we are in the progress. We've made this year on a number of levels first is in the absolute operating operations of them and the cost to operate them and we brought in a very very talented very talented leader a gentleman named John Joplin, who is <unk>.
Elizabeth Anderson: Done a phenomenal job working with our team to take that to the next level in terms of operating efficiency, but also longer term in terms of the experience for our stores as receivers for this as you may recall a year ago, we had slowed this way down in part because the experience at the last mile was not what we wanted it to be it also was not as core.
Elizabeth Anderson: Cost effective as we'd hoped we've made massive improvements in both to the point, where again today, we have over 4500 of our stores that are being serviced by our by the MFC and we believe over the next 12 months, we will get that number closer to 6000.
Elizabeth Anderson: As we continue to again ratchet down the cost so that it does not cost disadvantageous for us to use automation and importantly, what we've seen in the stores that we have moved onto the platform has been a material increase in our ability to counsel patients do adherence programs and use our clinician.
<unk> in frankly more.
Elizabeth Anderson: Higher order activities that also bring reimbursements that helped sustain our model and so we are very focused on it as I said, we're not going to give you guidance exactly as to how many or when we have several more that we are going to be bringing up and I can tell you that now I'm in the stores, it's very exciting a year ago, but they don't want to talk about it the bags were too big the bottle.
Elizabeth Anderson: We're too big now we go into the stores and they are saying when are we going to get onto the platform because they've heard from their colleagues that we have meaningfully improved the experience. So it's a great. It's a great example of our broad theme of hopefully you are hearing today, which is execution for the customer and for the shareholder.
Speaker Change: Thank you one moment for our next question.
Speaker Change: Our next question comes from the line of Ann Hynes from Mizuho.
Speaker Change: Good morning. Thanks, I just wanted to focus on long term just given that news speculation of a potential private equity I really feel it's important from a stock perspective that investors have some visibility on the timing of when management thinks they can stabilize free cash flow and adjusted operating Timna.
Speaker Change: <unk> been over here.
Speaker Change: Do you think you can provide more clarity.
Speaker Change: And the long term and if not today when do you think youll be in a position to provide more clarity more certainty to investors. That's my first question. My second question is health care, obviously did better this quarter both on the revenue and cost side can you talk about what.
Speaker Change: Segments and provide better than your expectations that would be great. Thanks sure.
Speaker Change: So we arent going to give multiyear.
Cash flow guidance per say I'm going to let my won't speak briefly to cash flow because again I. Appreciate the spirit of your question and the fact is that as I think we've said our focus on our balance sheet and on a sustained positive operating cash flow and doing the things we have to do in order to achieve that are front and center for us and it is a multiyear process to <unk>.
Speaker Change: <unk> ourselves to be able to consistently and reliably deliver that so I'll come back and I don't want to add any color to that he wants as it relates to what drove our healthcare our U S health care assets.
Speaker Change: It was it was a great quarter and a <unk>.
Speaker Change: <unk> of ways, we saw village M D. As we said in our prepared remarks grow so even though we are running a sale process for village M. D. We have new leadership, there and Jim.
We have a team that's really functioning very effectively and executing well on the smaller platform because we closed a lot of facilities and we're growing off of that smaller platform and economically. We're also seeing the benefits of that focus the business. So that was that was a piece of the puzzle is village village M. D. The second piece of the puzzle of Shields had a terrific quarter and continue.
Speaker Change: News too.
What you would see if you were sitting in our chair is strong revenue growth that comes with strong profit growth also interestingly, we don't talk a lot about it.
Speaker Change: Very strong renewals so there.
Speaker Change: Their clients are renewing at rates that are not putting us in a position where we're essentially dropping backwards in terms of the growth platform. In fact, if anything they are some of the most.
<unk>.
Speaker Change: Strong supporters I have ever worked with for a company when I speak to the CEO of one of the largest health systems in the country or I speak to the head of strategy.
Speaker Change: They tell me how important shields as to them. So that business is terrific and that shows through in its growth profile.
Speaker Change: <unk> had a good quarter they are selling through some new relationships that they have it wasn't material.
Speaker Change: Aerial to the over performance, but we're super pleased are.
Speaker Change: And again from our perspective longer term, we see that the opportunity to serve.
Speaker Change: The b to B payers as well as pharma companies.
Speaker Change: Is super interesting longer term, but it's nice to see that resolved this quarter obviously.
Speaker Change: And in terms of Mamone anything you'd want to add additional to the longer term cash flow outlook and how we would want to communicate that sure. So a couple of thoughts as you think about the long term.
Speaker Change: From a cash flow perspective, again, we're not providing guidance on this call, but few elements to consider first obviously operating performance as we think about the free cash flow generation as we improved operating performance over time.
Speaker Change: That's going to have an impact I think from a capex perspective, we've made a great.
Speaker Change: Progress over last year, and a half and so I think we're getting to a good place. There I believe working capital continues to be an area for us to streamline and take the benefit on the cash flow. So we'll continue to do that.
Speaker Change: <unk> the rest of this year the one.
Speaker Change: That is impacting our cash flow this year as well as in fiscal 'twenty four was significantly higher run rate on the legal payments and so as we're looking at.
At this point fiscal 'twenty six onwards, we believe that we're going to come down from the run rate you have seen and then the last thing I'd say from a cash flow perspective outside of free cash flow as we continue to look at asset monetization we have.
Speaker Change: We made progress with with our Syncora shareholding as well as bright spring in the quarter and so those activities will continue to provide us flexibility from a cash perspective.
Thank you.
Speaker Change: One moment for next question.
Speaker Change: Our next question comes from the line of George Hill from Deutsche Bank.
George Hill: Hey, good morning, Tim and Midtown one and thanks for taking my question. This.
George Hill: Maybe one for you more from an employer perspective, and this goes back to the idea of the re contracting around pharmacy rates as a large employer I'd be interested if you could comment on how you guys have modeled out how this will impact your pharmacy costs. We've done some calls around how the cost plus models are impacting payors and it seems like some.
George Hill: With him are seeing.
George Hill: A significant cost increase as part of our model transition, regardless of who the pharmacy partners.
Speaker Change: Im wondering if theres anything you can tell us about like what you guys are seeing as it relates to pharmacy costs for Walgreens.
Speaker Change: And just maybe generally speaking how your payer partners are telling you this will impact pharmacy costs downstream.
Speaker Change: Actually I'll take that.
Speaker Change: What I want to point out is changing how we're reimbursed and how the industry is reimbursed is not in and of itself a cost increase or decrease that depends on the negotiations that sit underneath of that every payer we negotiate with starts with a essentially a matrix to understand what the cost of goods is going to be to them that they take to the market and so again <unk>.
Speaker Change: <unk>, how the risk is being assigned and managed and future proofing things is different than I.
Speaker Change: I would not position us as the region, where our industry is that the reconfiguration is necessarily a price increase it is instead, a realignment that sets a place for us to get paid over the longer term for what we do.
Speaker Change: What I would say is what we've seen I haven't looked at it directly but in talking with Elizabeth our head of HR, we have not seen a cost increase as a result of how pharmacy is showing through to our.
Speaker Change: Except I think the thing I would point to and it's something we don't talk a lot about and it's a really strong attribute of our longer term growth is you certainly see in specialty.
Speaker Change: Cost going up as new indications, new products, and so forth come to market and obviously the levers around that are very different than the levers on the small molecule pilsen capsule sort of business and so from that standpoint, we and frankly, probably every payer in America continues to be very focused on managing specialty pharmacy to ensure.
Sure that the right patient is getting the right drug that they're staying on it because of the downstream benefits you get from those particularly intense patients.
Speaker Change: Not from cutting drug costs as much as from making sure that you're getting what you're paying for it in terms of outcomes and so we continue to see very strong interest in our specialty pharmacy.
Speaker Change: Some carve out bids as payers begin to want the transparency that we can bring to the table as an independent specialty pharmacy and also the tools that we bring to keep patients safe and healthy and help them manage the costs.
Yeah.
Speaker Change: Thank you one moment far next question.
Speaker Change: Our last question comes from the line of Brian Tim Quillin from Jefferies.
Speaker Change: Hey, good morning, Tim Thanks for squeezing us in so maybe in your prepared remarks, you talked a little bit about the execution of the merchandising strategy as a way to.
Speaker Change: Some of the pressures on the retail front end side. So maybe just walk us through what those are and kind of like the success checkpoints. So you need to see for that to be viewed as the right strategy going forward.
Speaker Change: Sure I appreciate it so we've got a lot of things underway inside of our front of store envelope of initiatives.
Speaker Change: Beyond getting to the right number of stores. So that we can invest in them properly for the customer experience that needs to be frankly from too many of our stores improved.
Speaker Change: And so there are a shrink elements for example, and continuing to be I, just met with our head of asset protection to look at some of the creative things that we're looking at both as a company and as an industry as it relates to the customer experience on shrink I don't have anything magnificent to share with you today. It is a hand to hand combat battle is still unfortunately, but.
Speaker Change: But it does impact how sales worked through the store because when you lock things up for example, you don't sell as many of them, we've kind of proven that pretty pretty conclusively.
Speaker Change: But we're excited about the fact that we.
Speaker Change: Have revamped our team I want I want to point that out under Tracey Brown <unk> leadership, we have revamped our team in terms of our analytics, our omnichannel and our digital experience as well as our merchandising team and.
Speaker Change: We've got significant underway work around customer loyalty program that tie us much closer to our go forward strategy as a health and wellness provider in the marketplace. We just this quarter or in the process of launching.
Speaker Change: Launching Super Foods sports nutrition, and women's wellness three new categories for us in our stores and I saw some photographs of some encapsule look phenomenal and it's too early for me to tell you. How those are doing but that's aligned with what we're trying to do longer term, which is really really meet the customer where they are with the things they want from us. Unfortunately, some of the things that we've hit.
Speaker Change: Storage <unk> done a great job of selling through arent the things that people today are spending money on given the changed mindset of our consumer and so some of the seasonal things that have typically been strength for us are not quite as strong and we saw that during the Christmas piece.
Speaker Change: We were able to get consumers to meaningfully respond to our promotional sort of approach that acknowledged that rather than trying to fight it and so our Christmas we're not going to talk in detail about it today, but what we saw about our Christmas sales was better.
Speaker Change: Then are several.
Speaker Change: Holidays prior to that by virtue of a more targeted promotional strategy that meets our customers where they are longer term, we've got to get our pricing strategy aligned to that and our merchandising strategy, which is all things that we're doing we also are in the back of the store because it is relevant.
We are now launching in 100 stores, we had it in a couple we thoroughly tested it.
Speaker Change: We're doing digital and virtual check in for pharmacy patients what does that enable that enables you to actually know where you are when your products can be available do that without having to stand in line and you can shop the store, while you're actually waiting and you don't get angry at our employees because he was doing online and so these things which by the way the NPS for employees in.
Speaker Change: In those stores that we have the digital check in and so forth is.
Speaker Change: Higher and of course, the customers, it's higher as well and what we've learned in there as we put in some of our stores concierge is at the front to help our patients who come in particularly some of the older patients to access that approach for us So again digital and virtual loyalty program merchandising in some new areas own brand is the last piece.
Speaker Change: I'd point to because again, a key part of our value strategy is a trusted provider of high quality owned brand merchandise and this quarter. We said, we launched 60 things I have a daughter Who's got it I've got three daughters, you have new baby My youngest daughter has a brand new baby. She is so excited about the fact, we have launched owned brand diapers because he actually trust that they are going to work and that there aren't gonna be blowout.
Speaker Change: At her house and at the same time that the price will be right and then it'll be something that she and her husband can afford so from that standpoint again long answer for you because we didn't spend any time on the front of the store. It is a longer putt for us. It requires a lot of work. It is a multiyear piece that just shrinking our footprint and improving our digital experience is not going to be sufficient we've got to have the right.
Speaker Change: At the right price and the good news is and.
Speaker Change: I think the Mone spoke about it in his prepared remarks, when you look at our stores.
Speaker Change: What are the stores that were not on the closures list, we see those stores being materially stronger still not where they need to be materially stronger than the stores that we're closing and that gives us a lot of hope that as we reconfigure our consumer experience across all channels that the consumer who millions of whom trust US every day will.
Speaker Change: Just us to buy more everyday.
Speaker Change: Thank you at this time I would now like to turn the conference back over to Tim for closing remarks, great.
Speaker Change: Great well I appreciate everybody dialing in.
Speaker Change: Hopefully what you take away is that we are executing against both short and long term priorities that this turnaround. We've said it is going to take time, but the level of urgency discipline and focus that our team has throughout our team and I want to thank all of our 300000 plus employees. We didn't talk about international at all today for example.
Speaker Change: The team at Boots had a great Christmas and continues to perform well.
Speaker Change: So again across our entire platform.
Speaker Change: We're acting with discipline and focus and we are committed to our vision of a retail pharmacy led organization that has a sustainable economic model and drives long term value not only for shareholders, but it positively impacts the health and lives of millions of Americans, who trust US every day and so we look forward to updating you on our progress next quarter. Thanks very much.
Speaker Change: Sure.
This concludes today's conference call. Thank you for participating you may now disconnect.
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