Analyst Conference Summary

biotechnology

conference date: October 13, 2022
for quarter ending: August 31, 2022 (fiscal fourth quarter, Q4 2022)

Forward-looking statements

Overview: Better than expected, but declining y/y sales, GAAP loss, non-GAAP positive net income. 2 hour conference call!

Basic data (GAAP):

Revenue was $32.5 billion, down % sequentially from $32.6 billion, and down % from $34.3 billion year-earlier.

Net income was negative $415 million, down sequentially from $289 million, and down from $627 million year-earlier.

Earnings per share (EPS), diluted, were negative $0.48, down sequentially from $0.33, and down from $0.72 year-earlier.

Guidance:

Full fiscal year 2023 non-GAAP EPS $4.45 to $4.65. Core growth of 8% to 10%. Raised U.S. Healthcare fiscal 2025 sales target to $11 billion to $12 billion, to achieve positive adjusted EBITDA by FY 2024. Announced increased visibility to the long-term growth algorithm, building to low-teens adjusted EPS growth in fiscal year 2025 and beyond

Conference Highlights:

Fiscal Q4 was better than expected, leading to full fiscal year 2022 exceeding expectations. Continued focus on growth and profitability of the U.S. healthcare business sector. Q4 sales from continuing operations decreased 5.3% y/y and were down 3.2 percent on a constant currency basis, including a 660 basis point impact from the anticipated sales decline at AllianceRx Walgreens

CEO Rosalind Brewer said, "WBA has delivered ahead of expectations in the first year of our transformation to a consumer-centric healthcare company. Our resilient business achieved growth while navigating macroeconomic headwinds. Fiscal 2023 will be a year of accelerating core growth and rapidly scaling our U.S. Healthcare business. Our execution to date provides us visibility and confidence to increase the long-term outlook for our next growth engine and reconfirm our path to low-teens adjusted EPS growth. Our strategic actions are unlocking sustainable shareholder value as we simplify the company and continue our journey to being a healthcare leader."

Key headwinds in FY 2023 will be lower Covid vaccinations and foreign currency exchange rates. Excluded those from 8-10% core business guidance.

AllianceRX Walgreens had a negative 660 basis point impact on sales growth. Operating loss in the quarter reflects a $783 million non-cash impairment charge related to intangible assets in Boots UK, and higher costs in the Transformational Cost Management Program. Adjusted operating income from continuing operations was $744 million, a decrease of 38.2% on a constant currency basis. U.S. pharmacy operating results were lower y/yy on lower volumes of COVID-19 vaccinations and growth investments in U.S. Healthcare. Retail contributions improved in both the U.S. Retail Pharmacy and International segments.

Walgreens provided 2.9 millon Covid vaccinations in fiscal Q4 and 3.4 million tests.

In Q4 completed majority share acquisition of CareCentrix and accelerated full acquisition. 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 accelerating full acquisition of Shields. Continued the rollout of VillageMD with 342 total clinics and 152 co-located clinics now open, on track toward 200 co-located clinics by end of CY22. Established 70 Walgreens Health Corners to date, on track toward 100 by end of CY22. Also launched a clinical trials business.

Walgreens U.S. retail pharmacy comparable sales growth was 1.6% y/y. MyWalgreens membership rose to 102 million. Digital sales were up 14% in the U.S. and 37% for the full year. Walgreens Health pro-forma sales were up % y/y. Pharmacy sales decreased 8.8% y/y due to impact from AllianceRx. Comparable pharmacy sales decreased 3.5% y/y. Total prescriptions filled in the quarter decreased 4.4% percent to $298.7 million. Returned stores to normal operating hours. Adjusted operating income decreased 36.1% to $786 million compared to $1.2 billion in the year-earlier quarter, reflecting lower vaccination volumes and continued reimbursement pressure, partly offset by improved retail gross margin and SG&A expense improvement. Missed on goal to have 11 microfulfillment centers by end of FY22, only has 8, but they are performing well.

To raise cash sold 11 million shares of Option Care Health for $360 million. Expects $150 million from sales agreement for Guangzhou Pharmaceuticals stake.

The International segment Q4 sales $5.1 billion, down 6.6% y/y. 13.3% adverse currency impact. Sales up 6.7% constant currency. Operating loss in Q4 was $672 million compared to operating income of $46 million in the year-earlier quarter, as a result of the $783 million impairment charges in Boots UK. Adjusted operating income grew to $163 million, an increase of 31.3 percent on a constant currency basis.

Non-GAAP results: Net income $694 million, down 17% sequentially from $834 million, and down 32% from $1.02 billion year-earlier. EPS $0.80, down 17% sequentially from $0.96 and down 32% from $1.17 year-earlier.

Cash and equivalents ended at $2.46 billion, up sequentially from $2.29 billion. Inventories $8.35 billion. Long-term debt $10.6 billion. Cash flow from operations was $85 million. Free cash flow negative $407 million due to heavy investment in growth initiatives and legal settlements.

Cost of sales (GAAP) was $26.0 billion, leaving gross profit of $6.4 billion. SG&A expense waa $7.3 billion. Leaving operating loss of $822 million. Other income $169 million. Interest expense $105 million. Post tax earnings from other equivty investments $21 million. Income Tax benefit $235 million. Net loss attributable to noncontrolling interests $86 million.

Full FY 2022 revenue was $132.7 billion, nearly flat y/y. GAAP net income $4.34 billion. GAAP EPS $5.01. Non-GAAP net income $4.36 billion. Non-GAAP EPS $5.05. Free cash flow $2.17 billion.

Q&A selective summary:

Walgreen's House, how do you monitize the lives? Longer term possibility? Value based, VillageMD is already in that, will grow with time. Key is relationship between pharmacists and primary care physicians. Contracting is about closing care gaps and screenings. Long term margin target is mid-teens. We have already passed the peak investment point.

We are doubling down on VillageMD, opening more in 2022 than planned, but will be 2025 before EBITDA break-even.

Debt pay down, next couple of years? We exited with $12 billion of debt. Target is 3.75 debt to EBITDA. Cash flow should improve in 2023, by 2024 we should be able to return more capital to shareholders.

We are past peak M&A. Our next acquired asset is likely to be a tech asset, or something that is already achieving EBITDA. Focus in on internal development and debt pay down.

We are aiming for 5% script growth in FY 2023. We have 95% closure on reimbursement, the margins in 2023 are better than a typical year. States are allowing pharmacists to do more services.

Recessionary macro environment in 2023? We assumed a moderate recession, higher interest costs, and a high level of wage inflation. Offsetting all that should be our cost reduction program. Shipments from China are coming faster, which helps. Also, we continue to move to Own brands, missing out 2022 target for that by a bit.

The UK is already is the depths of economic problems. In past year several high street retailers went out of business, allowing us to gain market share. So we see continued revenue growth there.

There was a high level of interest in buying Boots, but then the market turned and so we decided to keep it for now. Emphasized focus is on simplifying company, reducing debt, returning to shareholders.

Dividend payout ratio v. cash flow, etc.? We were a little disappointed in FY 2022 cash flow, it was partly due to advanced orders, but those should work through system in the next few months. We plan $700 million in working cash initiatives. We still expect higher cash flow next year. We expect substantial improvement in cash flow in 2024 and 2025, when we might resume large share repurchases, or do more M&A.

Going to $15 per hour in stores has helped us out in labor recruiting in most of the country.

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