Analyst Conference Summary

biotechnology

conference date: January 6, 2022
for quarter ending: November 30, 2022 (fiscal first quarter, Q1 2022)

Forward-looking statements

Overview: Strong quarter, increased guidance.

Basic data (GAAP):

Revenue was $33.9 billion, down 1% sequentially from $34.3 billion, and up 8% from $31.4 billion year-earlier.

Net income was $3.58 billion, up sequentially from $627 million, and up from negative $308 million year-earlier.

Earnings per share (EPS), diluted, were $4.13, up sequentially from $0.72, and up from negative $0.36 year-earlier. But $ was from discontinued operations.

Guidance:

Raised for full fiscal year 2022. Increasing adjusted EPS guidance to low-single digit growth, from previous guidance to flat. That is despite an expected 4% negative impact from planned investments.

Conference Highlights:

VillageMD and Shields majority investments closed on November 24th and October 29th, respectively. CareCentrix closing expected by the end of 3Q. Rollout of VillageMD continues with 81 co-located centers now open, and 160+ targeted for calendar 2022 year-end. 47 Walgreens Health Corners launched to date, including 10 in California in 1Q, on track for over 100 by calendar year end. The Walgreens Health consumer app launched with Blue Shield of California and Clover Health.

No earnings were from discontinued operations, compared to $83 million in Q1 FY 2021. Adjusted (non-GAAP) EPS from continuing operations was $1.68, up 44% sequentially from $1.17, and up 54% y/y from $1.09.

CEO Rosalind Brewer said, "We are off to a very strong start to the new fiscal year. First quarter results exceeded our expectations, with a very encouraging performance across all our business segments. I am particularly excited about the progress we are making in building out Walgreens Health. Our majority investments in VillageMD and Shields closed during the quarter, and we are rolling out VillageMD primary care co-locations and Walgreens Health Corners at pace. The strong start to the the fiscal year reinforces our confidence in the future. As a result, we are raising our guidance for the full year." Strong results were driven by Covid-19 vacinations and testing. The Cost Management Program is expected to save $3.3 billion annually by 2024. Investing more in employees while building a growth engine. Believes longer term earning growth can reach the low teens.

Walgreens provided 15.6 millon Covid vaccinations in fiscal Q1.

Walgreens U.S. retail comparable sales growth was 10.6%, the highest in over 20 years. Actual sales were $28.0 billion, up 3% y/y. MyWalgreens membership rose 7.2 million members to 92.4 million. Digital sales were up 88% in the U.S. However, there is continuing pharmacy reimbursement pressure. Overall retail was pressured by shipping cost and retail theft.

The International segment had Q1 sales of $5.8 billion, up sequentially from $5.5 billion, and up 36% from the year-ago quarter. That includes a favorable currency impact of percent. Boots is one of the UK's leading COVID-19 test providers. There was strong demand for pharmacy services.

Believes in this fiscal year VillageMD will be dilutive to earnings while Shields will be acretive.

Cash and equivalents ended at $4.14 billion, up sequentially from $1.19 billion. inventories $9.48 billion. Equity investments $6.37 billion. Accounts receivable $5.96 billion. Accounts payable $12.45 billion. Long-term debt $11.2 billion. Cash flow from operations was $1.09 billion. Cap ex $454 million. Free cash flow $645 million. Cash dividends paid cost $0.4 billion. Stock repurchases $154 million.

Cost of sales (GAAP) was $26.3 billion, leaving gross profit of $7.6 billion. G&A expense waa $6.4 billion. Equity earnings in AmerisourceBergen was $100 million. Leaving operating income of $1.28 billion. Other income $2.6 billion. Interest expense $86 million. Post tax loss from other equivty investments $7 million. Income Tax $275 million. Net loss attributable to noncontrolling interests $48 million.

Q&A summary:

AllianceRX, Walgreens Prime color takeover? 55% to 100% stake. Should have no or minor effect on guidance. We are formulating a new specialty strategy. Legal disputes between the parties were resolved by the acquisition. Total size of specialty business is north of $20 billion.

Testing? We have a fairly large opportunity, it was a bigger driver in Q1 than vaccines.

We hope to bring down the cost of healthcare for consumers, for instance by making it easy for diabetics to monitor their A1C levels, preventing hospital visits.

Underlying RX in quarter? We saw script count growth above what resulted from vaccinations, but there is room to improve. RX was up 1.1% y/y excluding vaccinations. We had to reduce hours in some locations due to lack of staffing; we are working on that.

There is not free testing yet, it could be a couple of months away. Our share of at-home test sales has been 40 to 45%. We have done well with the supply chain, although we are spotty at present. We had seven differnt types of at-home Covid tests in our stores. The future is hard to predict, but our full year forecast is not riding on this.

Once CareCentrix closes we will have about a $1 billion per quarter run rate.

The shrink issue this year is in excess of $0.15 per year. We will be making efforts to get this number in a different direction. Shrink has been up every year for 10 years, now about 3.25%. The increase is organized theft, mainly aimed at beauty products.

We have invested more in labor, which should help regain our script business. But the labor market is very uncertain.

Seasonality, fiscal Q2? We see Q2 positive on EPS growth y/y. But the rate of vaccinations v. Q1 is not known yet.

340B program effect? It is not hugely material, we are monitoring it. The idea is to provide access of medicines to patients. We want patients to have access to their medicines. It appears to be neutral y/y.

DIR fees possible legislation? We are working with industry groups to make performance related fees fair, which currently they often are not. We want a fee structure that makes sense.

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