Walgreens Boots Alliance
WBA
conference date: June 27, 2024
for quarter ending: May 31, 2024 (fiscal third quarter, Q3 2024)
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Forward-looking
statements
Overview: Consumer environment not-so-great.
Basic data (GAAP):
Revenue was $36.4 billion, down 2% sequentially from $37.1 billion, and up 3% from $35.4 billion year-earlier.
Net income was $344 million, up sequentially from negative $5.9 billion, and up 192% from $118 million year-earlier.
Earnings per share (EPS), diluted, were negative $0.40, up sequentially from negative $6.85, and up 186% from $0.14 year-earlier.
Guidance:
Lowered fiscal 2024 adjusted EPS to $2.80 to $2.95.
Conference Highlights:
CEO Tim Wentworth said, "We continue to face a difficult operating environment, including persistent pressures on the U.S. consumer and the impact of recent marketplace dynamics which have eroded pharmacy margins. Our results and outlook reflect these headwinds, despite solid performance in both our International and U.S. Healthcare segments. Informed by our strategic review, we are focused on improving our core business: retail pharmacy, which is central to the future of healthcare. We are addressing critical issues with urgency and working to unlock opportunities for growth. Many of these actions will take time, but I am confident that we have the right team and the right strategy to lead a business turnaround for the Walgreens that our customers and patients need." The current pharmacy market is not sustainable, working to meet changing. Anticipates continued pressures on pharmacy margins. Hurt by sale-leaseback weakness.
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. Plans to close a significant number of underperforming stores. Launching a retail pharmacy action plan to invest in improved customer and patient experiences. Simplifying the U.S. Healthcare segment.
Sees retail pharmacy as a core business, working with partners like PBMs to obtain better outcomes. Success depends on the customer experience. Also working on recruiting more quality pharmacy personnel.
No actions currently planned with the International segment or Shields, given recent strong performance. Tht is despite significant investor interest in Boots.
The U.S. Retail Pharmacy segment had sales of $28.5 billion, down sequentially from $28.9 billion, and up 2.3% y/y. Comp sales up 3.5% y/y. Pharmacy sales up 4.4% y/y, but prescription sales up only 0.5% y/y. Adjusted operating income $501 million, down 48% y/y. U.S. retail total sales down 4.0% y/y, comp sales down 2.3%. Industry trends were challenging and the consumer environment was worse than expected. Has reduced prices on a variety of items, and continue pushing own-brand items.
The International segment sales $5.72 billion, down sequentially from $6.0 billion, and up 1.6% y/y. $175 million adjusted operating income. Boots UK retail comp sales up 6% y/y. In Q3 results were in line with expectations. Germany saw a 4.9% sales increase y/y.
The U.S. Healthcare Segment had sales of $2.13 billion, down slightly sequentially from $2.18 billion, and up $150 million from year-earlier. Increase helped by acquisition of Summit Health. Shields up 21% y/y. Operating loss was $ billion. Adjusted EBITDA was $23 million, second consequtive quarter of positive adjusted EBITDA. VillageMD now on a clearer path to profitability.
Non-GAAP results: Net income $545 billion, down sequentially from $1.0 billion, and down 37% from $860 million year-earlier. Non-GAAP EPS $0.63, down sequentially from $1.20 and down 37% from $1.00 year-earlier.
Cash and equivalents ended at $703 million, down sequentially from $720 million. Inventories $5.95 billion. Long-term debt $7.4 billion. Cash from operations was $605 million. Capital expenditure $278 million. Free cash flow $334 billion. $1.04 billion paid in dividends.
Cost of sales (GAAP) was $36.35 billion, leaving gross profit of $6.46 billion. SG&A expense was $6.39 billion. Cencora equity earnings $44 million. Leaving operating income of $111 million. Other income $254 million. Interest expense $113 million. Income Tax $20 million. Net loss attributable to noncontrolling interests $114.
Q&A selective summary:
Future of pharmacy, payers, PBMs, reimbursement? Retail pharmacy, we need to meet consumer needs. Working on improving front-of-store experience. Working with fewer brands. In pharmacy looking to increase automation, improve working conditions. But we do not need the number of stores we have today. We are focussed on being paid fairly for pharmacy services we provide. We face complexity, so working with PBMs to make changes.
Store underperformance, getting out of leases, shrink issue? We have many very good locations. We believe leases need not be an overhang, will be highly disciplined. Multiple factors in choosing which stores to close. Shrink is a factor, but so are growing consumer v. shrinking markets and local competition. Also issues with government, policing, etc. We are the last company standing in many places, local governments needs to step up.
NADAC (Medicaid) margin impacts? Retail pharmacy gross margin did not improve in the quarter. We have to invest, which reduced margin. Level of shrink also hits margins. Pharmacy NADAC index did improve in June, Medicaid had re-enrollment challenges, after ballooning during pandemic. Mix coming in on branded side is also negative for margins.
Stock down premarket, sense of when business will stabilize? We see a growth path for the business, more likely quarters, not years. Medicaid users losing insurance has had a major impact.
25% of stores possibly closing, impact of? Have closed several hundred stores over the past few years, we detain a large percent of prescription customers. We are evaluating 25%, we will not close that much, just the ones we can't bring back to profitability. Closings more likely if cash flow positive. Closing stores also requires us to decrease our fixed costs. There is no one exact number of stores to close, a big factor is payor mix. We have known retail pharmacy has been overbuilt, given changes like mail-order delivery.
Payer conversations, any positive? Not finalized, but payer conversations are encouraging. Everyone knows the old system needs to be updated.
We expect fiscal Q4 to be free cash flow positive.
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