Analyst Conference Summary

biotechnology

conference date: June 30, 2022
for quarter ending: May 31, 2022 (fiscal third quarter, Q3 2022)

Forward-looking statements

Overview: Not great, but within expectations. Earnings hurt by Florida opioid payment. Keeping Boots.

Basic data (GAAP):

Revenue was $32.6 billion, down 4% sequentially from $33.8 billion, and down 4% from $34.0 billion year-earlier.

Net income was $289 million, down 67% sequentially from $883 million, and down 76% from $1.20 billion year-earlier.

Earnings per share (EPS), diluted, were $0.33, down 68% sequentially from $1.02, and down 76% from $1.38 year-earlier.

Guidance:

Is maintaining full year adjusted EPS guidance of low-single digit growth; year-to-date performance is tracking broadly in line with expectations. Fiscal Q4 is a difficult y/y comparison, with vaccinations and investments as headwinds for a 36% y/y decrease. But then headwinds should drop in FY 2023.

Conference Highlights:

Operating loss in the quarter reflects a $683 million charge related to the opioid settlement with the State of Florida and higher costs related to the Transformational Cost Management Program. Impacted by declining Covid vaccine sales and from AllianceRx. WBA sold 6 million shares of AmerisourceBergen, receiving $900 in cash. Decided to keep Boots, given the lack of a fair bid.

The Transformational Cost Management Program now expected to deliver $3.5 billion in annual cost savings by fiscal 2024, up from $3.3 billion previously. But also focusing labor investments to return approximately 3,000 stores to normal operating hours, which should help recovery. Walgreens increased capital expenditures for growth initiatives.

CEO Rosalind Brewer said, "WBA delivered strong execution across operating segments and against very robust growth last year. Third quarter results were broadly in line with our expectations, demonstrating the resilience of our business through our deep community connections and relevance to consumers. Walgreens Health achieved 65 percent pro forma sales growth with progress on several fronts, including adding Buckeye Health Plan as a strategic partner, already exceeding our 2022 target for covered lives, and launching our clinical trials business. With our decision to conclude the Boots strategic review, I firmly believe that our strategic actions are working to deliver long-term shareholder value." Navigating a difficult operating environment. Seeing higher levels of traffic due to stores located close to consumers.

Walgreens provided 4.7 millon Covid vaccinations in fiscal Q3 and 3.9 million tests.

Announced a strategic partnership with Buckeye Health Plan, with over 400,000 covered lives. Walgreens Health expects to exceed 2 million covered lives by the end of calendar 2022. Segment had sales of $596 million. It owns a majority position in VillageMD and in Shields. Also launched a clinical trials business. Village MD sales wer up 69% y/y pro forma, Shields up 47% y/y pro forma.

Walgreens U.S. retail comparable sales growth was 1.4% y/y, or 2.4% excluding tobacco. MyWalgreens membership rose to 99 million. Digital sales were up 25% in the U.S. Walgreens Health pro-forma sales were up 65% y/y. Pharmacy sales decreased 9.7% y/y due to impact from AllianceRx. Comparable pharmacy sales decreased 1.8% y/y. Total prescriptions filled in the quarter increased 2.5% percent to 304 million. Pharmacy impacted by ongoing reimbursement pressure net of procurement savings, partly offset by favorable mix from specialty segment.

The International segment had Q3 sales of $ billion, up sequentially from $5.6 billion, and up % from the year-ago quarter. Boots UK retail comparable sales were up 24% y/y with market share gains across all categories. Boots Online Doctor has been a big success.

Non-GAAP results: Net income $834 million, down 40% sequentially from $1.38 billion, and down 30% from $1.19 billion year-earlier. EPS $0.96, down 40% sequentially from $1.59 and down 30% from $1.38 year-earlier.

Cash and equivalents ended at $2.29 billion, up sequentially from $1.87 billion. Inventories $8.5 billion. Long-term debt $10.7 billion. Cash flow from operations was $1.6 billion. Free cash flow $1.3 million due to heavy investment in growth initiatives.

Cost of sales (GAAP) was $26.0 billion, leaving gross profit of $6.57 billion. SG&A expense waa $7.0 billion. Leaving operating loss of $320 million. Other income $410 million. Interest expense $108 million. Post tax earnings from other equivty investments $5 million. Income Tax benefit $242 million. Net loss attributable to noncontrolling interests $60 million.

Q&A selective summary:

Boots decision vs. healthcare initiative needs? We had high interest in Boots in January, 8 to 10 parties. Then the market turned down. Boots business is doing well, so better to retain for now. We have other opportunities to look at, but are prioritizing investment in Walgreens Health. No change in that timeline.

Double digit growth in 2023, or is that later? We don't expect to hit double digit growth until 2025. We do not think it is right to annualize by taking Q4, our weakest quarter, and multiplying by 4. Our front of store margins and growth are doing well. We are confident in the long term targets we shared last October.

340B headwind details? Embedded in our current guidance already. Seeing manufacturer restrictions. In some instances we are the designated pharmacy for our 340B partners. Working to keep that program.

We are actively looking for further acquisitions for Walgreens Health.

With a new clinic we expect 2 years of losses, break even in 3 year, good profits by year 7. So the first hundred clinics will turn profitable next year, then each year will show improvements.

Maintaining margins despite inflation? We are working diligently on our supply chain including shifting to about 22% our private label, from our current 16%. We are adding categories, working with suppliers. Mitigating cost increases as best we can.

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