Analyst Conference Summary

biotechnology

conference date: March 28, 2024
for quarter ending: February 29, 2024 (fiscal second quarter, Q2 2024)

Forward-looking statements

Overview: Sales up y/y, but GAAP results hurt by $12 billion impairment charge.

Basic data (GAAP):

Revenue was $37.1 billion, up 1% sequentially from $36.7 billion, and up 6% from $34.9 billion year-earlier.

Net income was negative $5.9 billion, down sequentially from negative $67 million, and down from $703 million year-earlier.

Earnings per share (EPS), diluted, were negative $6.85, down sequentially from negative $0.08, and down from $0.81 year-earlier.

Guidance:

Narrowed fiscal 2024 adjusted EPS to $3.20 to $3.35. Challenging U.S. retail environment. U.S. Healthcare segment adjusted EBITDA near break-even.

Conference Highlights:

CEO Tim Wentworth said, "We are encouraged by our first quarter of U.S. Healthcare positive adjusted EBITDA and continued topline growth alongside another quarter of strong execution in pharmacy, as we look to re-energize and evolve its impact both at Walgreens and at large. As we continue to operate in a challenging retail environment, we are taking actions to focus on customer engagement and value. We remain confident in our goal of achieving $1 billion in cost savings this year. We are continuing to strategically review our portfolio over the next three months in an effort to ensure it drives growth and delivers value. Our team members, led by WBA's new executive committee with a track record of operational excellence, are powering our progress as we map growth opportunities, aim to create long-term value across our businesses and execute the hard work to simplify and strengthen WBA." Continues to increase store-brand products and reduce the set of national suppliers. Enhancing internet sales and home delivery services. But consumers are pulling back from discretionary spending, and the respiratory season sales were weaker y/y.

Walgreens is planning and executing, 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. Cap ex was $250 million lower in 1H than in the prior year.

The non-cash $12.4 billion in impairment of goodwill charge was for VillageMD goodwill, which was found to be below its carrying value. A lower adjusted tax rate was due to recognition of deferred tax assets in foreign jurisdictions.

In February 2024 expects to sold its shares in Cencora.

The U.S. Retail Pharmacy segment had sales of $28.9 billion, up 5% y/y from $27.6 billion, partly driven by inflation. Comp sales up 5% y/y. Pharmacy sales up 8% y/y. But comp retail sales decreased 4% y/y. Adjusted operating income $752 million, down 30% from $1.07 billion y/y.

The International segment sales $6.0 billion, up 5% y/y from $5.7 billion. Adjusted operating income was $245 million, down 30% from $352 million year-earlier. Constant currency sales grew 3%.

The U.S. Healthcare Segment had sales of $2.18 billion, up 33% from $1.63 billion year-earlier. Increase helped by acquisition of Summit Health. Shields $141 million up 13% y/y, CareCentrix $366 million, and VillageMD $1.6 billion in sales, up 20% y/y. Operating loss was $13.1 billion due to the VillageMD impairment charge, or $34 million non-GAAP loss. But VillageMD decided to exit 140 more locations. Adjusted EBITDA was $17 million, the first positive quarter.

Non-GAAP results: Net income $1.0 billion, up sequentially from $571 million, and up 3% from $1.0 billion year-earlier. Non-GAAP EPS $1.20, up sequentially from $0.66 and up 3% from $1.16 year-earlier.

Cash and equivalents ended at $0.72 billion, down sequentially from $0.85 billion. Inventories $8.6 billion. Long-term debt $7.5 billion. Cash used in operations was $918 million. Capital expenditure $858 million. Free cash flow negative $1.40 billion, impacted by legal payments, but expects to be better in 2H. $828 million paid in dividends.

Cost of sales (GAAP) was $30.0 billion, leaving gross profit of $7.0 billion. SG&A expense was $7.9 billion. Impairment of goodwill was $12.4 billion. Leaving operating loss of $13.2 billion. Other income $195 million. Interest expense $138 million. Income Tax benefit $782 million. Net loss attributable to noncontrolling interests $6.4 billion.

Q&A selective summary:

Timing to more profitable model? Reimbursement model conversations with PBMs and other payers are just starting for 2025. So far appear constructive, everyone realizes changes are needed. Adherence based contracts and test-and-treat opportunities are also advancing. But changes could take multiple years.

VillageMD closings, etc. going forward? Payers and health systems are approaching us to help drive savings. In 2025 we expect continued U.S. Healthcare segment growth. We expect VillageMD revenue growth as they focus on their core markets and reduce costs. We expect Shields to continue to grow. Plus the usual seasonal factors 1H v. 2H.

Own brand strategy timeline? Been accelerating this. We are incentivising our store team members to push these products. As consumers look at value, we are able to discontinue some brands.

Direct relationship with pharma manufacturers? Pharma companies might want to go direct to patients when the supply chain is not optimal. We can be a partner with them in those situations. We "roll up our sleeves" and help the pharma companies.

Portfolio strategy? We have been looking at our core, including store management. Larger pieces need to fit or synergize. We are looking at trends in healthcare and how they impact our businesses. We are already testing markets. We are excited about the opportunities.

In 2H we expect our script share to remain steady and grow with the market.

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