Yahoo Finance Walgreens Boots Alliance, Inc. (NASDAQ:WBA) Q3 2024 Earnings Call Transcript
Walgreens Boots Alliance, Inc. (NASDAQ:WBA) Q3 2024 Earnings Call Transcript June 27, 2024
Walgreens Boots Alliance, Inc. misses on earnings expectations. Reported EPS is $0.63 EPS, expectations were $0.681.
Operator: Good day and thank you for standing by. Welcome to the Walgreens Boots Alliance Third Quarter 2024 Results Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference call over to your speaker today, Tiffany Kanaga, Vice President of Investor Relations. Please go ahead.
Tiffany Kanaga: Good morning. Thank you for joining us for the Walgreens Boots Alliance earnings call for the third quarter of fiscal year 2024. I am Tiffany Kanaga, Vice President of 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 U.S. Healthcare; Rick Gates, Senior Vice President and Walgreens’ Chief Pharmacy Officer; and Tracey Brown, President of Walgreens’ Retail and Chief Customer Officer will participate in Q&A. 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 2 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 statements after this presentation, whether as a result of new information, future events, changes in assumptions, or otherwise. You can find our press release and the slides referenced on this call in the Investors section of the Walgreens Boots Alliance website. During this call, we will discuss certain non-GAAP financial measures. These measures are reconciled to the most directly comparable GAAP financial measures and the reconciliations are set forth in the press release. You may also refer to the slides posted to the Investor section of our website for reconciliations of non-GAAP measures to the most comparable GAAP measures discussed during this earnings call. We encourage you to review the comparable GAAP measures and reconciliation to non-GAAP values in the other earnings materials we provided.
I will now turn the call over to Tim.
Tim Wentworth: Thanks Tiffany and good morning everyone. While this quarter's results were not in line with our expectations, I want to start today by sharing some reflections on what I've observed since joining WBA. I'm at Walgreens today because I believe in the future of retail pharmacy and particularly, in our future. We are motivated by the trust Americans place every day in their Walgreens Pharmacy and the experience we provide them in our stores and with our digital offerings is important in their lives. Over our 125-year heritage, we have earned the right to engage with patients and customers in a way that few others can rival. I believe that this human-to-human interaction is an imperative in healthcare and the core foundation of our business is the relationship we have with our customers.
Through our nationwide footprint, we touched nearly 9 million lives a day as the leading independent integrated retail pharmacy and healthcare provider. This dynamic is why PBMs, payers, providers, and pharma choose to work with Walgreens. Looking back over the last several quarters, we've built a world-class leadership team, including five new members. We now have the right people in place who are already executing with a sense of urgency on a turnaround for our business. All of this is underscored by our 330,000 passionate and dedicated team members who differentiate us and deliver exceptional customer and patient experiences every day. The bottom line is that I'm confident WBA will be a leader in the future of healthcare with pharmacy and retail at its center.
And the long-term potential of the company will be shaped by offerings built around the relationship that we've nurtured with our customers over time. But we also acknowledge where we are today and what we need to do to realize our longer-term ambitions. The severity and duration of the challenges in the operating environment have only added urgency to our strategic and operational review, and we are addressing them directly. Our review has been a significant driver of action as we assess both our existing Retail Pharmacy business and our collection of strategic assets. I will unpack the series of conclusions we have reached in greater detail after Manmohan and I review the quarterly results. For the third quarter, we delivered adjusted earnings per share of $0.63, reflecting significant challenges in the U.S. Retail Pharmacy business stemming from a worse than expected consumer environment and challenging pharmacy industry trends, partially offset by strength in U.S. healthcare and international.
In light of these factors, we are reducing our full year outlook, which Manmohan will take you through in more detail. In U.S. Retail Pharmacy, we witnessed continued pressure on the U.S. consumer. Our customers have become increasingly selective and price sensitive in their purchases. In response, we invested in targeted promotion and price decisions, which have driven traffic and will generate improved customer loyalty, but they weigh on near-term profitability as we refine our approach. We remain relentlessly focused on enhancing the front of store and creating the right omnichannel experience for our customers while driving in-store efficiencies. We also continue to face an incrementally challenging pharmacy industry. Recent trends such as branded mix impacts and increased regulatory and reimbursement pressures, including fluctuations in NADAC pricing have negatively impacted pricing dynamics.
Additionally, the script market is growing but continues to trail below pre-pandemic growth levels. These headwinds have affected our performance and are materially weighing on our ability to serve patients profitably. We are at a point where the current pharmacy model is not sustainable and the challenges in our operating environment require we approach the market differently. For example, we are in active discussions with our PBM and payer partners to align incentives and ensure we are paid fairly. We are also working with our suppliers and partnering directly with pharma companies to build out specialty pharmacy, clinical trials and other services, which Walgreens is uniquely positioned to facilitate given our physical footprint and the trust we've already established with patients.
In U.S. healthcare, we had another quarter of positive adjusted EBITDA and year-on-year growth, driven by continued growth and disciplined cost management at VillageMD along with strength at shields. Following last quarter's actions to right-size VillageMD's footprint, the business is now on a clearer path to profitability as it continues to add lives and optimize its cost structure. In International, the business continues to perform strongly and in line with expectations. Boots U.K. delivered meaningful retail comp growth and achieved another sequential quarter of market share gains from strength in both physical and digital channels. We continued to execute with discipline across the organization to drive further cost out and prioritize free cash flow.
We remain on track to deliver $1 billion in cost savings this year. As we look ahead to the remainder of the year, we are operating under the following assumptions. We expect the operating environment to remain challenging. We do not expect an improvement in the U.S. retail environment. And finally, we expect script volume growth to remain muted and anticipate continued pressures on pharmacy margins. In light of these factors, we are reducing our outlook. We now expect to deliver adjusted earnings per share of $2.80 to $2.95 for the fiscal year 2024. While we acknowledge that this range is wider than normal, we believe it is prudent given fluctuations in recent pharmacy industry trends. Consistent with our historic approach, we will provide our outlook for fiscal 2025 on our fiscal year end call in October, but we expect the current trends I've outlined to persist into next year.
Before going into details of our strategic review, I'll now turn it over to Manmohan to review our financial results.
Manmohan Mahajan: Thank you, Tim, and good morning, everyone. Third quarter sales grew 2.5% on a constant currency basis. U.S. retail pharmacy increased 2.3%. International was up 1.6% and U.S. Healthcare delivered sales growth of 7.6%. As Tim mentioned, overall results were below our expectations. Adjusted EPS of $0.63 decreased 37% year-over-year on a constant currency basis. This was driven by a $0.24 impact from lower sale leaseback gains, a challenging U.S. retail environment and recent pharmacy trends. Our U.S. healthcare and international segments continued to perform in line with our expectations, and we continue to deliver on our goals related to cost and CapEx reduction and working capital initiatives. As a reminder, last year's GAAP results included after-tax impairment charges of $323 million related to pharmacy license intangible assets in Boots U.K..
Let's move on to the year-to-date highlights. Sales increased 5.6% on a constant currency basis. Adjusted EPS declined 25% on a constant currency basis due to the softer U.S. retail pharmacy performance and significantly lower sale leaseback gains. This was partly offset by cost-saving initiatives, improved profitability in U.S. health care and a lower adjusted effective tax rate. GAAP net loss was $5.6 billion compared to a loss of $2.9 billion in the first nine months of fiscal 2023. The first nine months of fiscal 2024 included certain non-cash impairment charges related to VillageMD goodwill as detailed last quarter. The prior year period included a $5.5 billion after-tax charge for opioid-related claims and lawsuits partly offset by a $1.5 billion after-tax gain on the sale of Cencora and Option Care Health shares.
Now let me cover U.S. Retail Pharmacy segment. Comparable sales grew 3.5% year-on-year driven by brand inflation and pharmacy and prescription volume, partly offset by a decline in retail sales. AOI decreased 48% versus the prior year quarter. Approximately 70% of this decline relates to lower sale leaseback gains lapping reduced incentive accruals in the prior year and lower Cencora equity income. Challenging retail and pharmacy industry trends also negatively impacted AOI in the current period. Sale leaseback gains net of incremental rent expense, resulted in a $277 million headwind to AOI in the quarter. As discussed three months ago, we do not anticipate any material benefits from sale-leaseback gains going forward. Headwinds in the retail and pharmacy businesses were partly offset by cost savings initiatives.
Let me now turn to U.S. Pharmacy. Pharmacy comp sales increased 5.7% driven by brand inflation and volume growth. Comp scripts excluding immunization grew 1.7% in the quarter. We are tracking in line with the overall prescription market year-to-date. However, overall prescription market growth remains below expectations, primarily due to Medicaid redeterminations. Pharmacy adjusted gross margin declined versus the prior year quarter driven by brand mix impacts, reimbursement pressure reflecting last year's negotiations, lower COVID testing demand and incremental pressure from certain generic launches with procurement dynamics similar to brands. Recent fluctuations in NADAC drove an incremental $20 million of the partial quarter impact. Turning next to our U.S. retail business, comparable retail sales declined 2.3% in the quarter.
As Tim mentioned, the consumer backdrop remains a challenge. With this continued channel shift and a sustained pullback in discretionary spending, we have responded by lowering prices across health and wellness, personal care and seasonal categories. Where we invested in price and promotions, we saw returns in sales and unit lift. At the same time, value-seeking behavior and new product launches year-to-date helped to drive our own brand penetration up 65 basis points in the quarter. While we're seeing early signs of customers responding to our actions, retail gross margin declined more than previously anticipated due to our price and promo investments this year lapping last year's margin recovery actions as well as higher levels of shrink.
This was partly offset by positive impact on gross margin from our category performance improvement initiatives, which are tracking in line with our expectations as we deepen relationship with select suppliers. Turning next to international segment, and as always, I will talk in constant currency numbers. Total sales grew 1.6% with Boots U.K. increasing 1.6% and Germany Wholesale up 4.9%. Segment adjusted gross profit increased 2% with growth across all businesses. Adjusted operating income was down 17% due to lapping real estate gains in the prior year period. Let's now cover Boots U.K. in detail. Boots U.K. continues to perform well. Comp pharmacy sales were up 5.8%. Comp retail sales increased 6% with all categories showing growth. Across formats, destination health and beauty, flagship and travel locations performed particularly well.
Boots.com sales increased 13.8% year-on-year and represented nearly 16% of our U.K. retail sales. Turning next to U.S. Healthcare. The U.S. Healthcare segment delivered its second consecutive quarter of positive adjusted EBITDA. Third quarter sales of $2.1 billion increased 8% compared to prior year quarter. VillageMD sales of $1.6 billion grew 7% year-on-year. The increase was driven by growth in full risk and fee-for-service lives, partly offset by the impact of clinic closures. Shields sales were up 24% driven by growth within existing partnerships. Adjusted EBITDA was $23 million, an improvement of $136 million compared to last year, driven by rightsizing costs, improved productivity at VillageMD and continued robust growth at Shields. Turning next to cash flow.
Operating cash flow in the first nine months of fiscal 2024 was negatively impacted by $785 million in payments related to legal matters $386 million in annuity premium contributions related to Boots Pension Plan and underlying seasonality. Capital expenditures declined by $497 million versus the first nine months of fiscal 2023. As a result, free cash flow was down by approximately $1.1 billion versus the prior year. We continue on pace to achieve a year-over-year reduction of $600 million in capital expenditures and $500 million in working capital initiatives in fiscal 2024. I will now turn to guidance. We are lowering our fiscal 2024 adjusted EPS guidance to $2.80 to $2.95. The updated range versus our expectations three months ago, incorporates two key items.
First, the U.S. consumer environment has not improved and is driving higher promotional activity, negatively impacting retail margin. We continue to expect fiscal 2024 retail comp sales to be down approximately 3%. Second is the continuation of worse-than-expected pharmacy margin headwinds. Pharmacy margins in the second half include impact from certain generic launches with procurement dynamics similar to brands, fluctuations in NADAC, inflation and mix within branded drugs and lower overall market growth. We are maintaining full year expectations for U.S. Healthcare segment adjusted EBITDA to be breakeven at the midpoint of the guidance range. We continue to expect our adjusted effective tax rate to be under 5%. Our revised full year guidance range implies fourth quarter adjusted EPS of approximately $0.39 at the midpoint.
While we're not providing fiscal 2025 guidance today, let me offer key considerations to bridge from fourth quarter to next year. Seasonality impacts all of our businesses and the fourth quarter is typically the lowest quarter of the year. Additionally, we expect profitability growth in U.S. healthcare and international segments. However, as Tim mentioned, there are other factors discussed on today's call that we assume will impact fiscal 2025. Our decision to wind down the sale-leaseback program, sales Cencora shares and a more normalized adjusted effective tax rate are expected to have an approximately $0.75 impact in fiscal 2025. In retail, despite easing comparisons, we do not anticipate significant improvement in the U.S. consumer spending backdrop.
We are especially seeing signs of strain on the lower income consumer, driven by accumulated inflation and depleted savings. While we're adopting our model, these changes will take time. We expect to see some pharmacy headwinds continue in fiscal 2025. However, we are focused on stabilizing pharmacy margins as we continue to have active discussions with our PBM, payer and supplier partners. We have more hard work ahead of us, and we are focused on building a solid foundation for the future. Driving the stabilization of our business and returning to longer-term enterprise growth. With that, let me pass it back to Tim.
Tim Wentworth: Thanks, Manmohan. Let me now turn to our strategic review. Since launching our strategic and operational review at the beginning of the calendar year, we have been clear eyed on what we're trying to achieve and everything has been on the table. We have a deep understanding of the opportunities and complexities and we have come to a number of important conclusions. Some will take more time to execute as we maximize optionality, but all of them are aligned around three principles to drive long-term shareholder value. First, to simplify and focus our business. Second, to use our core foundation, our relationship with our customers to grow and expand in capital-efficient ways into adjacent areas. And third, to continue to identify opportunities to deliver profitable growth, generate meaningful cash flow, and strengthen our strategically-relevant businesses today and long-term.
Before unpacking the details, I want to reinforce the most important conclusion from our review. The Retail Pharmacy experience will be more important to the healthcare industry in the years ahead, but it will evolve. With widespread demand for convenient healthcare solutions, including chronic diseases, and nationwide labor shortages, the pharmacy and pharmacists have never been more important. Our Retail Pharmacy business is uniquely positioned to expand the role we play in the lives of our patients who have come to expect and need retail pharmacy at the center of their care. So, let me begin this discussion around our strategic decisions with our core business, U.S. Retail Pharmacy. The success of the business hinges on an efficient, highly relevant customer experience, and we've launched a multifaceted action plan for improvement.
As the convenient destination for millions of customers and driving $27 billion of retail sales, the store and its digital channels are central to our strategy and consumer experience. But the customers involved, demographics and preferences have shifted, and we need to reposition and operate our stores accordingly. Currently, 75% of our U.S. stores contribute roughly 100% of segment AOI. For the remaining 25% of the stores in our network, which are not currently contributing to our long-term strategy, changes are imminent. To start, we are finalizing a multifactor store footprint optimization program which we expect will include the closure of a significant portion of these underperforming stores over the next three years. Plans to finalize this number are in motion and we will update you in due course.
For the remaining portion of this cohort, we are taking action to return them to profitability and deliver an improved customer experience. We will contemplate additional closures if performance does not improve, which includes external factors such as reimbursement rates. While it is not an easy decision to close a store, we will work to minimize customer disruptions and importantly, as we have done in the past, we intend to redeploy the vast majority of the workforce in those stores that we close. In addition to these closures, we are taking a series of actions and making investments to enhance the customer and patient experience across several key areas. First, we are reevaluating our assortment to ensure its relevancy, leveraging select partners and our own brands.
This means we will work with fewer partners who are helping us win. For example, in the last quarter alone, we've removed eight national brands and redeployed those SKUs towards own brands and preferred partners within health and wellness categories. We are sharpening our focus as a destination for areas we are uniquely positioned to lead such as health and beauty and women's health. We are accelerating our digital and omnichannel offerings to meet our customers when, where and how they want to engage. We continue to deliver approximately 80% of same-day delivery orders within one hour and we see upside for improvement. As the ultra-convenient option for our over 120 million myWalgreens loyalty members, we have plans to meaningfully build our loyalty program.
We are doubling down on our efforts to define the future of pharmacy in this country. As I mentioned earlier, this starts with changing the dialogue with payers and PBMs to ensure we are paid fairly for the value we provide. We are also investing in the industry's best talent. For example, as we focus on leading in the development and elevation of the pharmacy industry profession, we are partnering with critical stakeholders such as our Deans Advisory Council to help advance our work environment and make WBA the practice setting destination of choice for pharmacy talent. Just two weeks ago, we spent two full days with 14 deans of pharmacy across our country engaging in productive discussions to reinvigorate the community pharmacy labor supply chain.
And we are enhancing our pharmacy services, like immunizations, to attract more patients through an improved experience and enhanced digital solutions. We've significantly decreased the average wait time per customer in the highest volume stores, and this is a result of several initiatives underway to improve the patient experience and increase retention. Finally, with a mindset for driving continuous improvement throughout the organization, we are committed to operating with excellence and identifying further efficiencies in both our headquarters and our retail operations. We are restructuring our organization around these conclusions to streamline and ensure efficient development and deployment of services to go to market as one Walgreens with more impact for our industry partners and to help close critical gaps in delivery of healthcare.
In that regard, Mary Langowski, our President of U.S. Healthcare, will assume responsibility for operations of specialty pharmacy, pharma and manufacturer relations and contracting, supply chain, and all services development and deployment. With these operations now under one team, we will be better aligned to go where the market is moving, sharpen our contracting, operate more efficiently and achieve better economic outcomes. And Rick Gates, our Chief Pharmacy Officer, will take on an even greater role in defining the future of pharmacy from a strategic, operational and labor force perspective. Turning to our broader portfolio, we have evaluated every non-retail pharmacy asset, prioritizing strategic fit, profit growth potential and cash flow generation.
With that in mind, we have already stopped or will stop initiatives that distract from our focus and will grow in areas that create longer-term shareholder value. Let me touch on several of our larger assets. Our review of Boots UK showed that we have attractive options to unlock value in this business. While we believe there is significant interest in Boots at the right time, its growth, strategic strength and cash flow remain key contributors to the company. We are committed to continuing to invest in Boots UK and find innovative ways for this business to fulfill its potential. Moving next to VillageMD, which currently includes three distinct assets in VillageMD, Summit Health and CityMD, we believe in the future of these businesses and intend to remain an investor and partner.
But as part of our persistent focus on value creation for WBA, we are collaborating with leadership toward an endpoint to rapidly unlock liquidity, enhance optionality and position them for additional growth. As it relates to shields, its performance, growth and leadership team remain best-in-class and serve as a complement to our core specialty business in the market. We are not taking action at this time. We are committed to executing on all of these decisions in a timely manner that maximizes shareholder value while creating optionality. And I look forward to providing more details as we progress. Before opening the call up for Q&A, let me leave you with four thoughts. First, our core retail pharmacy business is relevant, but will be different.
Second, we have the right team and the right strategy to enhance our focus, strengthen our own execution and ultimately turn around the business performance. Third, there is a clear market need for our services, but our economics are not currently structured in a way that is sensible for our shareholders. We have a firm grasp of the issues and are working to address these challenges in our business model. Fourth, while it may take time, and there's a great deal of work underway, I am confident we are executing on the conclusions from our strategic review thoughtfully and urgently to deliver the Walgreens that our country needs. With that, let's begin Q&A. Operator?
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