Analyst Conference Summary

biotechnology

conference date: October 12, 2023
for quarter ending: August 31, 2023 (fiscal fourth quarter, Q4 2023)

Forward-looking statements

Overview: Good y/y revenue growth, still negative GAAP earnings, positive non-GAAP, as continues to launch healthcare provider businesses.

Basic data (GAAP):

Revenue was $35.4 billion, flat sequentially from $35.4 billion, and up 9% from $32.4 billion year-earlier.

Net income was negative $180 million, down sequentially from $118 million, but up from negative $415 million year-earlier.

Earnings per share (EPS), diluted, were negative $0.21, down sequentially from $0.14, and up from negative $0.48 year-earlier.

Guidance:

Fiscal 2024 sales $141 to $145 billion; adjusted EPS of $3.20 to $3.50. U.S. Healtchcare division near breakeven for adjusted EBITDA. Considerably more detail on slides and audio presentation. Only estimates 5 million Covid vaccinations.

Conference Highlights:

Interim CEO Ginger Graham said, "Our performance this year has not reflected WBA's strong assets, brand legacy, or our commitment to our customers and patients. In just six weeks, we have taken a number of steps to align our cost structure with our business performance, including planned cost reductions of at least $1 billion, and lowered capital expenditures by approximately $600 million. We anticipate seeing the impact of these actions in fiscal 2024, beginning in the second quarter. We are also intently focused on accelerating our profitability in the U.S. Healthcare segment. As we welcome our new Chief Executive Officer, Tim Wentworth, who brings deep healthcare experience and the skills needed to propel WBA forward, along with the support of the Board, I am confident in our company's future and the ability to deliver greater value to our customers, shareholders, partners, and employees." Sales growth was 8.3% y/y on constant currency basis, led by retail, with contribution from U.S. Healthcare segment.

Gaap loss in the quarter was due to legal and regulatory settlements, plus cost of implementing the Transformational Cost Management Program, which is meant to reduce costs longer run. Y/y improvement was becauseof a $783 million impairment in Boots UK the prior year. Plusses for non-GAAP earnings growth included improved US pharmacy sales, strong international growth, and less losses in US Healthcare. Drags were lower COVID related sales. U.S. Healthcare focus is now shifting to profitable growth from rapid growth.

Tim Wentworth with start as CEO on October 23, 2023. Spoke of his excitement. Builder of relationships. Looks to build better outcomes for customers at a lower cost.

Working on improving capital allocation and cash management. Expects over $1 billion in cost savings in FY 2024 v. FY 2023. Closing unprofitable stores. New pharmacy inventory system now in place. Opened 11 regional microfulfillment centers. Making progress on own-brand products. Will reduce cap ex in 2024. Ordered team back to physical offices.

In fiscal Q4 U.S. pharmacy sales grew 3.7% y/y. Comp sales 9.2%. The Retail Pharmacy segment sales were $27.7 billion. U.S. Retail comparable sales up 9.2%, driven by inflation. Total prescriptions filled in the quarter were down 0.5% y/y. Walgreens provided 0.4 millon Covid vaccinations in fiscal Q4, down from 2.9 million year-earlier. Weaker than normal respiratory season. Operating income $554 billion, compared to a $786 million loss year-earlier, due to lower COVID related sales. Retail comp sales overall declined about 3% y/y.

The International segment Q4 sales $5.78 billion, up 12.4% y/y. 5.7% positive currency impact. Sales up 6.7% constant currency. Adjusted operating income was $259 million. Boots UK saw strong retail growth, grew market share 1%. Boots.com sales grew 29% y/y.

The U.S. Healthcare Segment had Q4 sales of $1.97 billion, up from $0.62 billion year-earlier. Shields, CareCentrix and VillageMD all grew sales. But operating loss was $294 million, or $83 million non-GAAP loss. Sales were VillageMD $1.4 billion, CareCentrix $0.4 billion, Shields $0.1 billion. May exit non-strategic markets in FY 2024. Now will work with Pearl Health's tech platform.

Non-GAAP results: Net income $575 million, down sequentially from $860 million, and down from $694 million year-earlier. EPS $0.67, down sequentially from $1.00 and down 18% from $0.80 year-earlier.

Cash and equivalents ended at $0.73 billion, down sequentially from $0.97 billion. Inventories $8.26 billion. Long-term debt $8.15 billion. Cash flow from operations was $1.0 billion. Capital expenditure $na billion. Free cash flow $549 million, driven by phasing of working capital, offset by opioid settlement payments.

Cost of sales (GAAP) was $28.95 billion, leaving gross profit of $6.48 billion. SG&A expense waa $6.99 billion. Leaving operating loss of $450 million. Other income $231 million. Interest expense $155 million. Income Tax benefit $151 million. Gain from other investments $16 million. Net loss attributable to noncontrolling interests $28 million.

Full fiscal year 2023 revenue was $139 billion, up 4.8% y/y. Net loss $3.1 billion GAAP. Includes a pretax $6.8 billion opioid charge. Non-GAAP earnings $3.4 billion. GAAP EPS loss $3.57. Non-GAAP EPS $3.98.

Q&A selective summary:

Improved profitability in 2024? Cost reduction is just one piece. Right-sizing. Revenue synergies. We are already seeing core revenue growth. Confident in ability to perform.

Scripts reduction in 2024, pull-through opportunity? Respiratory was low, already advancing insurance programs that drives scripts. Access initiatives.

Tim Wentworth hiring? Looked at dozens of candidates. Very extended conversations before picking Tim. Every board member was involved. Tim is a striking candidate on a number of fronts. Customer focus. But he did not help form the 2024 plan. He does understand the plan.

Dividend policy? Reviewed annually. No changes.

Billion in cost savings, cut in cap ex, how allocated by segment? Majority from U.S. retail pharmacy business. Closing unprofitable locations, or changing hours. Want to deliver more value to customers. Cap ex reductions is getting back to normal after the recent build. Not so much new cap ex to Healthcare segment. Also pausing new fulfillment centers.

60 clinics to be closed? Some will be closed, some transition to affiliates. They are growing, but not fast enough, compared to our other clinics. Focus is on markets where we have momentum and scale.

VillageMD opening new clinics? We have stopped opening of new VillageMD clinics. But will be opening across other businesses.

Utilization at VillageMD? Friend at City and Summit, a headwind at Village. But mature markets are showing improved margins. Converting fee for service lives to full list lives.

Labor costs? We have invested this last year, Q1 would be the last quarter to see headwinds from a labor investment perspective.

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