Analyst Conference Summary

biotechnology

conference date: March 31, 2022
for quarter ending: February 28, 2022 (fiscal second quarter, Q2 2022)

Forward-looking statements

Overview: A good quarter as investments in new business accelerate.

Basic data (GAAP):

Revenue was $33.8 billion, down less than 1% sequentially from $33.9 billion, and up 3% from $32.8 billion year-earlier.

Net income was $883 million, down sequentially from $3.58 billion, and down from $1.02 billion year-earlier. The prior quarter had a large after-tax gain.

Earnings per share (EPS), diluted, were $1.02, down sequentially from $4.14, and down from $1.19 year-earlier.

Guidance:

Maintained full year fiscal 2022 adjusted EPS guidance of low-single digit growth. Base business growth of 6% or more will be offset by investments in new businesses.

Conference Highlights:

VillageMD and Shields majority investments closed on November 24th and October 29th, 2021 respectively. CareCentrix closing expected by the end of 3Q 2022. 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. Three automated microfulfillment centers opened and on pace to open 22 centers by the end of FY24.

A strategic reveiw of the Boots business is in progress and progressing well. The expanded Transformational Cost Management Program is on track to deliver $3.3 billion in annual cost savings by fiscal 2024. Increased capital expenditures y/y. Rollout of VillageMD continues with 102 co-located clinics now open. Walgreens acquired remaining interest in Germany wholesale business on January 31, 2022.

CEO Rosalind Brewer said, "Second quarter results demonstrated broad-based execution, driving strong comparable sales and robust earnings growth. We continue to make important strides along our strategic priorities, building a consumer-centric, technology-enabled healthcare enterprise at the center of local communities. VillageMD and Shields are delivering tremendous pro forma sales growth compared to their year-ago standalone results, and our Walgreens Health segment is on track toward long-term targets. The strategic review of our Boots business is progressing, and our transformational actions are accelerating sustainable value creation." Building a Pharmacy of the Future. Revenue gains in most segments were partly offset by delining AllianceRX sales, but completed 100% ownership goal on December 31, 2021. U.S. support offices will reopen on April 4.

Walgreens provided 11.8 millon Covid vaccinations in fiscal Q2.

Walgreens U.S. retail comparable sales growth was 14.7%. MyWalgreens membership rose 10.9 million members in the first half to 96.1 million. Digital sales were up 38% in the U.S. Walgreens Health pro-forma sales were up 128% y/y. Pharmacy sales decreased 3.3% y/y, negatively impacted by a 910 basis point headwind from AllianceRx Walgreens. Comparable pharmacy sales increased 7.3% y/y, with prescriptions filled increasing by 4.7%. Total prescriptions filled in the quarter increased 3.9 percent to 300 million.

The International segment had Q1 sales of $5.6 billion, up sequentially from $5.5 billion, and up 3% from the year-ago quarter. Boots UK retail comparable sales were up 22% y/y. In store sales grew while online sales dropped. Beauty sales led gains.

Non-GAAP results: net income $1.38 billion, EPS $1.59. That is up y/y from $1.21 billion and $1.40.

Cash and equivalents ended at $1.87 billion. Inventories $8.95 billion. Equity investments $6.25 billion. Accounts receivable $5.33 billion. Accounts payable $11.2 billion. Long-term debt $11.2 billion. Cash flow from operations was $1.1 billion. Free cash flow $669 million.

Cost of sales (GAAP) was $26.0 billion, leaving gross profit of $7.71 billion. SG&A expense waa $6.57 billion. Other income $0.1 billion. Leaving operating income of $1.25 billion. Interest expense $100 million. Post tax earnings from other equivty investments $31 million. Income Tax $172 million. Net loss attributable to noncontrolling interests $78 million.

Q&A summary:

We were about 8 cents ahead of our internal consensus, with retail providing the bouyancy.

Vaccinations were slowing down, as was testing, but 4th shots began yesterday. There is still a steady stream of ongoing testing and vaccinations.

Boots review and % of international profit? Most international profit is from Boots. We are still a bit below pre-pandemic profitability levels. But it was a fabulous quarter for foot traffic compared to earlier in the pandemic, but still lower than 3 years ago. Does not expect a full recovery until fiscal year 2023.

We continued to invest in Walgreens Health, integrating where it makes sense. We are seeing really good performance, especially in specialty pharmacy business. Investment will be heavier in 2H fiscal 2023, particularly for VillageMD, as we increase the rate of rollout for new clinics. Investing in microfulfillment, call centers, employees.

Is VillageMD or Health Centers contributing to increased prescriptions yet? It is early days. We are building a primary care practice, relations with consumers and pharmacists. Focus is on gaining confidence. The patient feedback is very good so far, as is pharmacist feedback. We are seeing script uplift, not releasing specific data at this point. We believe it takes 2 years for a new clinic to get up to speed and break even.

We are working on the ability to test and treat a variety of diseases in store.

Back half of fiscal 2022? Look first at FY 2023, which will begin from a position of strength. In 2023 we will continue to deliver on Walgreen Health investments and aim for a $4 billion run rate by end of year. The slide in the presentation showed details of headwinds in the second half. We won't have the vaccination boost we saw in 2H 2021.

We believe we also have a merchandizing opportunity in front of us, the front of store sales have not changed maybe ever since the stores were built.

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