Analyst Conference Summary

biotechnology

conference date: January 4, 2024
for quarter ending: November 30, 2023 (fiscal first quarter, Q1 2024)

Forward-looking statements

Overview: Cut the dividend in about half, to $0.25 per share per quarter. But revenue growth was strong.

Basic data (GAAP):

Revenue was $36.7 billion, up 4% sequentially from $35.4 billion, and up 10% from $33.4 billion year-earlier.

Net income was negative $67 million, up sequentially from negative $180 million, and up from negative $3.72 billion year-earlier.

Earnings per share (EPS), diluted, were negative $0.08, up sequentially from negative $0.21, and up from negative $4.31 year-earlier.

Guidance:

For fiscal 2024 expects adjusted EPS between $3.20 and $3.50. U.S. Healthcare segment Adjusted EBITDA between negative $50 million and positive $50 million.

Conference Highlights:

CEO Tim Wentworth said, "WBA delivered fiscal first quarter results in line with overall expectations, reflecting disciplined execution in a challenging consumer backdrop. We are evaluating all strategic options to drive sustainable long-term shareholder value, focusing on swift actions to right-size costs and increase cash flow, with a balanced approach to capital allocation priorities. Today we are announcing a 48 percent reduction in our quarterly dividend payment, while maintaining a competitive yield. We are proud to be a trusted and independent partner of choice, delivering healthcare to millions of people. And, we will leverage our local, convenient presence to engage with patients and help payors, providers, and pharma companies also achieve better health outcomes at an affordable cost." The dividend was cut to $0.25 per quarter. Walgreens seeks to be the independent partner of choice in healthcare services. Wants to be the prefered employer for pharmacists.

Walgreens is planning, for fiscal 2024, on $1 billion is cost savings, $600 million less in capital expense, and a $500 million improvement in working capital. Also reduction of the dividend will provide cash for growth and to pay down debt. The tax rate was elevated in Q1, should be less for remainder of year.

Guidance is despite pressure on consumers from inflation and depleted savings, plus a slower-than-normal respiratory season. In Q1 maintained overall share of script volume in U.S.

Net loss in Q1 included a $278 million after-tax charge for fair value adjustments on derivatives related to the forward sale of Cencora shares. Decline in GAAP EPS y/y was due to a higher adjusted tax rate from carryforwards a year earlier.

The U.S. Retail Pharmacy segment had sales of $28.9 billion, up 6% y/y from $27.2 billion, partly driven by inflation. Comp sales up 8.15 y/y. Pharmacy sales up 10.7% y/y, despite weaker immunizations. But comp retail sales decreased 5% y/y from weaker respiratory season and Thanksgiving store closures. Adjusted operating income $694 million, down 37% from $1.1 billion y/y. Pharmacy reimbursement pressure was a negative factor.

The International segment Q1 sales $5.83 billion, up 12% y/y from $5.19 billion. Adjusted operating income was $142 million, up % from $116 million year-earlier. Constant currency sales grew 4.4%.

The U.S. Healthcare Segment had Q1 sales of $1.93 billion, up from $0.99 billion year-earlier. Shields $133 million up 27% y/y, CareCentrix $240 million, and VillageMD $1.4 billion in sales; all grew y/y sales. Operating loss was $436 million, or $96 million non-GAAP loss, due to continuing investment in VillageMD. On track to improved y/y profitability.

Non-GAAP results: Net income $571 million, down sequentially from $575 million, and down from $1.0 billion year-earlier. Non-GAAP EPS $0.66, up sequentially from $0.67 and down from $1.16 year-earlier.

Cash and equivalents ended at $0.85 billion, up sequentially from $0.73 billion. Inventories $9.45 billion. Long-term debt $7.58 billion. Cash used in operations was $281 million due to inventory build. Capital expenditure $506 million. Free cash flow negative $788 million. $415 million paid in dividends. $731 million proceeds from sale-leasebacks and sales of assets.

Cost of sales (GAAP) was $29.9 billion, leaving gross profit of $6.8 billion. SG&A expense waa $6.9 billion. Leaving operating loss of $39 million. Other expense $220 million. Interest expense $99 million. Income Tax benefit $74 million. Gain from other investments $6 million. Net loss attributable to noncontrolling interests $210 million.

Q&A selective summary:

Reimbursement model changes? We can bring value to PBMs and insurers. Changes likely to be slow. We can work with cost plus models. Margin per prescription likely to be driven by the value of services we provide.

Strategic focus? We are working on our financial models. Stores are core to a community-based model. We will optimize footprint by 200 stores this year. We believe in the future of the human touch. We are using tech to free up pharmacists, etc. Our Healthcare assets are synergistic with our retail. Looking for a fair return on capital.

Shields opportunity? Walgreens has access to specialty drugs, Shields has access to us, then provides access to healthcare providers. Building for gene and cell therapy. Focus is on payors. Alreay on Blue Cross/Blue Shield regional plans. Shields is an enabler of our specialty pharmacy plan.

PBM floor? In my 25 years at PBMs, the floor just kept getting lower. If you squeeze the retailer to the point they are not profitable, that does not work. Walgreens has had good 2024 negotiations with PBMs, moving towards a value-based model.

Selling cycles are not short, but we could see changes within a year or two with PBMs. Insurers do not want customers going to counters and having to pay more for a prescription than they would need to if they did not have any insurance. Walgreens should not subsidize drugs.

We don't see owning a PBM as a good path for Walgreens. A small PBM does not have the scale to compete. We would rather work with all PBMs.

[No question on the dividend cut or future plans!]

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