Analyst Conference Summary

biotechnology

conference date: January 5, 2023
for quarter ending: November 30, 2022 (fiscal first quarter, Q1 2023)

Forward-looking statements

Overview: Good quarter marred by the opioid litigation settlement.

Basic data (GAAP):

Revenue was $33.4 billion, up 3% sequentially from $32.5 billion, and down 2% from $33.9 billion year-earlier.

Net income was negative $3.72 billion, down sequentially from negative $415 million, and down from $3.58 Bmillion year-earlier.

Earnings per share (EPS), diluted, were negative $4.31, down sequentially from negative $0.48, and down from $4.13 year-earlier.

Guidance:

For fiscal 2023 maintained non-GAAP EPS estimate at $4.45 to $4.65. Sales $133.5 to $137.5 billion. Raised 2025 U.S. Healthcare sales goal to $14.5 to $16 billion, with positive adjusted EBITDA by the end of 2023. Believes beyond 2025 non-GAAP annual EPS growth will be in the low-teens percent. Current core business growth projected at 8% to 9%. Sees second half momentum in US retail. [See slide 17 for segment details]

Conference Highlights:

CEO Rosalind Brewer said, "WBA delivered a solid start to the fiscal year, as we continue to accelerate our transformation to a consumer-centric healthcare company. We're making significant progress in driving our U.S. Healthcare segment to scale and profit, including the recent VillageMD acquisition of Summit Health. Our core retail pharmacy businesses in both the United States and United Kingdom remain resilient in challenging operating environments. Execution across segments reinforces our confidence in achieving full-year guidance, and our strategic actions are creating long-term shareholder value."

Loss in the quarter reflects a $6.5 billion pre-tax charge for opioid-related claims and litigation. Excluding the negative impact from AllianceRx Walgreens of 485 basis points and the positive contributions from U.S. Healthcare M&A of 280 basis points, sales growth was 3.2 percent on a constant currency basis, y/y. Walgreens sold 19.2 million shares of AmerisourceBergen common stock in November and December, for $3 billion, after-taxes. Free cash flow was negative $117 million, primarily driven by lower earnings, phasing of working capital, and increased capital expenditures in growth initiatives, including the VillageMD footprint expansion, the rollout of micro-fulfillment centers, and digital transformation initiatives. Walgreens sold its stake in Guangzhou Pharmaceuticals in December 2022 for approximately $150 million.

In November announced will pay $5.7 billion over 15 years to settle the opioid litigation, per agreement in principal. But only covers "a substantial majority" of the litigation.

Staffing is improving, allowing return of stores to normal hours.

Walgreens provided 8.4 millon Covid vaccinations in fiscal Q1 and million tests.

In Q4 completed majority share acquisition of CareCentrix and expects full acquisition to close in fiscal Q3 2023. U.S. Healthcare segment had sales of $989 million, adj. EBITDA loss $124 million. Contracted lives exceeded 26 million. VillageMD grew 48.7 percent, reflecting existing clinic growth and clinic footprint expansion. Shields grew 44.1 percent, driven by recent contract wins, further expansion of existing partnerships, and strong executional focus. CareCentrix grew 22.3 percent as a result of additional service offerings with existing partners. Closed full acquisition of Shields on December 28, 2022. Continued the rollout of VillageMD with 393 total clinics and 200 co-located clinics now open. Established 112 Walgreens Health Corners by end of CY22.

Walgreens U.S. retail pharmacy comparable sales growth was 3.8% y/y, but sales of $17.2 billion were down 3.0% y/y. MyWalgreens membership rose to 102 million. Pharmacy sales decreased 4.2% y/y due to impact from AllianceRx but comparable pharmacy sales increased 4.8% y/y because of branded drug inflation. Total prescriptions filled in the quarter were flat y/y.

Expects $150 million from sales agreement for Guangzhou Pharmaceuticals stake.

The International segment Q1 sales $5.2 billion, down 11% y/y. Comp sales up 4.6%. 15.4% adverse currency impact. Sales up 4.6% constant currency. Operating income in Q1 was $106 million Adjusted operating income grew to $116 million, a decrease of 20% on a constant currency basis, mainly due to lower demand for Covid-19 services. Bookts UK had 8.7% retail comp sales, with a particularly strong November.

Non-GAAP results: Net income $1.00 billion, up 44% sequentially from $694 million, and down 32% from $1.46 billion year-earlier. EPS $1.16, up 45% sequentially from $0.80 and down 31% from $1.68 year-earlier.

Cash and equivalents ended at $4.23 billion, up sequentially from $2.46 billion. Inventories $9.32 billion. Long-term debt $7.79 billion. Cash flow from operations was $493 million. Capital expenditure $610 million. Free cash flow negative $117 million due to heavy investment in growth initiatives and legal settlements.

Cost of sales (GAAP) was $26.4 billion, leaving gross profit of $6.95 billion. SG&A expense waa $13.2 billion. Leaving operating loss of $6.15 million. Other income $1.0 billion. Interest expense $110 million. Income Tax benefit $1.45 billion. Net loss attributable to noncontrolling interests $94 million.

Q&A selective summary:

Script recovery when stores return to normal hours? Invested in pharmy labor. Applications are up, as are acceptances of offers. Rx comp trending up in normal hours, significantly better than non-normalized stores. 600 new pharmacists have joined Walgreens. Now re-engaging consumers.

Payment Investment timing? $100 million includes the minimum wage investment.

Priorities for capital? Now in a comfortable place with debt raising agencies. Announced all plans, no further M and A planned short term. Looking for some cost synergies. We could by small companies to enhance our capabilities.

Cadence, remainder of fiscal 2023? We had planned for the tax rate in Q1, we were surprised by the international downside, which was a timing issue, not execution. We see a return to very strong growth in the international segment in Q2. Vaccinations continue to slow, that is the main driver in 1H including 2Q. In 2H the vaccine headwind is not as bad. Reimbursements will be a tailwind in 2H, due to timing. We expect strong growth in 2H both in the US and internationally.

We put in incremental security in the first quarter, we are getting a good return by reducing the shrink, but it increased our SG&A. We also got a bump from cough/cold/flu, but not that much.

Integration strategy? Easier is VillageMD in value-based care, looking to improve patient mix and scale in a relative few local markets. More complex is Summit model of cross-refering patients including risk-based patients and specialty care. That could take a 5 year period for the transition.

Free cash flow guidance? Still working on implications from Summit acquisition. Q1 usually has relatively weak cash flow. But no free cash flow full year guidance yet.

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