Analyst Conference Summary

biotechnology

conference date: June 27, 2023
for quarter ending: May 30, 2023 (fiscal third quarter, Q3 2023)

Forward-looking statements

Overview: Strong sales growth y/y. Revised fiscal 2023 EPS down.

Basic data (GAAP):

Revenue was $35.4 billion, up 1% sequentially from $34.86 billion, and up 9% from $32.6 billion year-earlier.

Net income was $118 million, down sequentially from $703 million, and down from $289 million year-earlier.

Earnings per share (EPS), diluted, were $0.14, up sequentially from $0.81, and down from $0.33 year-earlier.

Guidance:

Ficsl 2023 adjusted EPS guidance revised down to $4.00 to $4.05; previously $4.45 to 44.65.

Preliminary fiscal 2024 expectation is for low- to mid-single digit adjusted operating income growth, driven by U.S. Healthcare and Retail Pharmacy; adjusted operating income growth expected to outpace adjusted EPS.

Conference Highlights:

CEO Rosalind Brewer said, "WBA achieved 8.9 percent constant currency sales growth in the third quarter despite a challenging operating environment. Consumers continue to appreciate the value, convenience, and range of services provided by Walgreens and Boots. However, significantly lower demand for COVID-related services, a more cautious and value-driven consumer, and a recently weaker respiratory season created margin pressures in the quarter. Our revised guidance takes an appropriately cautious forward view in light of consumer spending uncertainty, while still demonstrating clear drivers of a return to operating growth next fiscal year. We are raising our cost savings program target to $4.1 billion and taking immediate actions to optimize profitability for our U.S. Healthcare segment. I am confident that our turnaround strategy positions WBA to drive sustainable core growth and deliver long-term shareholder value." Acknowledged performance in the quarter did not meet expectations. Lowered guidance to reflect consumer and category conditions, lower Covid contribution, and a more cautious macroeconomic outlook. Accelerated the synergy target for VillageMD/Summit Health to $200 million by calendar 2026. Sees longer-term growth of earnings from the healtcare segment.

There was a 19.5% headwind, constant currency, from lower Covid vaccine and test sales. Walgreens provided 0.8 millon Covid vaccinations in fiscal Q3, down from 4.6 million year-earlier.

Walgreens realized approximately $1.9 billion in total proceeds from the monetization of a portion of holdings in AmerisourceBergen, mainly through variable prepaid forward structure, and the sale of the remaining shares of Option Care Health in fiscal Q3 and in June.

Operating loss in Fiscal Q3 reflected a $431 million non-cash impairment of pharmacy license intangible assets in Boots UK.

In fiscal Q3 2023 established scalable partnership with TelePharm, part of Cardinal Health's Outcomes business, enabling a tele-pharmacy to expand access and reach more patients in local communities. Horizon Blue Cross Blue Shield signed on as fourth payor partner for Walgreens Health. Shields added six new health system partners this year.

Some consumers have less to spend, but sees pricing environment as rational. Respitory season was weaker (less sickness) than expected.

Sold 15.5 million shares of Option Care Health common stock in March, with after-tax cash proceeds of $466 million. Walgreens completed the full acquisition of CareCentrix, on March 31, 2023 for approximately $380 million.

In fiscal Q3 U.S. pharmacy sales grew 6% y/y. The Retail Pharmacy segment sales were $27.9 million, up 4% y/y. U.S. Retail comparable sales up 7%. Total prescriptions filled in the quarter were up 1.6%. Operating income $0.4 billion, compared to a $90 million loss year-earlier.

The International segment Q2 sales $5.6 billion, up 5% y/y. 1.9% adverse currency impact. Sales up 6.9% constant currency. Operating income in Q3 was negative $302 million. Adjusted operating income was $208 million. Plans to sell the Chile pharmacy business by the end of 2023.

The U.S. Healthcare Segment had Q3 sales of $2.0 billion, up from $0.6 billion year-earlier. Gross profit was $89 million. Shields, CareCentrix and VillageMD all grew sales, with VillageMD adding clinics y/y. But operating loss was $522 million, or $172 million non-GAAP. VillageMD added 93 clinics y/y, impacting gross profit. Expects Summit helath to generate its first full year of profits in fy 2024.

Non-GAAP results: Net income $860 million, down sequentially from $1.0 billion, and up from $834 million year-earlier. EPS $1.00, down sequentially from $1.16 and up 4% from $0.96 year-earlier.

Cash and equivalents ended at $0.97 billion, down sequentially from $1.83 billion. Inventories $8.2 billion. Long-term debt $8.8 billion. Cash flow from operations was $1.2 billion. Capital expenditure $1.6 billion. Free cash flow negative $444 million, driven by phasing of working capital and increased capital expenditures including growth initiatives and U.S. Healthcare.

Cost of sales (GAAP) was $28.8 billion, leaving gross profit of $6.6 billion. SG&A expense waa $7.1 billion. Leaving operating loss of $477 million. Other income $268 million. Interest expense $173 million. Income Tax benefit $330 million. Net loss attributable to noncontrolling interests $166 million.

Q&A selective summary:

U.S. Healthcare sector, utilization v. managed care reports? Solid performance bending cost curve at VillageMD. But poor unilization at CityMD. We are at early stages of benefits at CityMD. Experience at Village will help us improve Summit and City. We have opportunities on the cost side and value side.

Dividend, greater than earnings? We clearly have a lot of work to do on cash flow. We are significantly reducing cap ex. We are absolutely committed to the dividend. We are investing about $1 billion in free cash flow in healthcare this year.

Risks to Healthcare growths next year? Challenge is in cost, not growth. Focus is on profitable growth.

Scripts? 1600 locations on reduced operating hours at end of quarter. Now down to 1100. Hiring new pharmacists in challenging markets. In Q3 saw slower script market growth. Still impacted by store hours, covid slowdown.

Long term targets? In Q4 fy 2023 we still have a bunch of headwinds. EPS will decline, but revenue growth will be rapid into 2024. Healtcare business profitability expected to improve. Quality of earnings should be good. We are encouaged by demand across our healthcare segment.

We are working on reducing inventory, we are putting a new system in place. We are working on paying down debt, we are confident we can do that in fy 2024.

340B? We expect it to be only a slight effect for us. Shields is a specialty pharmacy services business, showing strong demand growth.

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