Analyst Conference Summary

biotechnology

conference date: October 15, 2024
for quarter ending: August 31, 2024 (fiscal fourth quarter, Q4 2024)

Forward-looking statements

Overview: Despite sales growth of 6%, numbers are bad, hit by an over $2 billion income tax provision and $332 million goodwill impairment. But cash greatly increased to $3.21 billion.

Basic data (GAAP):

Revenue was $37.5 billion, up 3% sequentially from $36.4 billion, and up 6% from $35.4 billion year-earlier.

Net income was negative $3.0 billion, down sequentially from $344 million, and down from negative $180 million year-earlier.

Earnings per share (EPS), diluted, were negative $3.48, down sequentially from $0.40, and down from negative $0.21 year-earlier.

Guidance:

For fiscal 2025 "expecting adjusted EPS of $1.40 to $1.80, with growth in U.S. Healthcare and International more than offset by a decline in U.S. Retail Pharmacy, a higher adjusted effective tax rate, and lower contributions from sale-leaseback and Cencora earnings." Sales $147 to $151 billion. Adjusted operating income $1.6 to $2.0 billion.

Conference Highlights:

CEO Tim Wentworth said, "Our financial results in the fiscal fourth quarter and full year 2024 reflected our disciplined execution on cost management, working capital initiatives and capex reduction. In fiscal 2025, we are focusing on stabilizing the retail pharmacy by optimizing our footprint, controlling operating costs, improving cash flow, and continuing to address reimbursement models to support dispensing margins and preserve patient access for the future. Fiscal 2025 will be an important rebasing year as we advance our strategy to drive value creation. This turnaround will take time, but we are confident it will yield significant financial and consumer benefits over the long term.". The consumer backdrop was challenging. Reorienting to prioritize retail pharmacy company. Looking to refresh product selection.

Will close about 1,200 stores over the next three years, including approximately 500 closures in fiscal 2025. That will be immediately accretive to adjusted EPS and free cash flow. But will invest more in the remaining stores. About 150 stores were closed due to Hurricane Helene, but as of today all but 16 have been reopened.

In fiscal 2024 WBA achieved its targets for cost management, working capital, and capex reduction. Achieved postive adjusted EBITDA in U.S. Healthcare segment. In 2025 main goal is to stabilize the core retail pharmacy buiness and execute on retail strategy. Also aims to reduce net debt.

Working to get fair pricing from PBMs and reimbursements. Pleased with some PBM partners on working together for rational reimbursement.

The U.S. Retail Pharmacy segment had sales of $29.5 billion, up 3.5% sequentially from $28.5 billion, and up 6.5% y/y from $27.7 billion. Comp sales up 8.3% y/y. Pharmacy sales up 9.6% y/y, but prescription sales up only 2.5% y/y. Adjusted operating income $220 million, down 60% y/y. Pharmacy margin under net reimbursement pressure, brand inflation. U.S. retail total sales down 3.5% y/y, comp sales down 1.7%. Continues pushing own-brand items.

The International segment sales $5.97 billion, up sequentially from $5.72 billion, and up 3% y/y from $5.78 billion. $175 million adjusted operating income. Boots UK retail comp sales up 10% y/y. Results were in line with expectations. Germany saw a 8.2% sales increase y/y.

The U.S. Healthcare Segment had sales of $2.11 billion, down slightly sequentially from $2.13 billion, and up 7% from $1.97 billion from year-earlier. Operating loss was $17 million. Adjusted EBITDA was $65 million, third consequtive quarter of positive adjusted EBITDA. VillageMD sales up 7%, Shields up 28%. But operating loss $526 million, including $332 non-cash goodwill impairment from CareCentrix. Adjusted operating income was $17 million, adjusted EBITDA $165 million. Owned brands penetration increased to 17%.

Non-GAAP results: Net income $340 million, down sequentially from $545 million, and down 41% from $575 million year-earlier. Non-GAAP EPS $0.39, down sequentially from $0.63 and down 42% from $0.67 year-earlier.

Cash and equivalents ended at $3.2 billion, up sequentially from $703 million. Inventories $8.32 billion. Long-term debt $8.04 billion. Cash from operations was $1.02 billion. Capital expenditure $1.38 billion, but cash provided by investment activities $1.88 billion. Free cash flow $1.3 billion. $1.26 billion paid in dividends. Proceeds from debt $31.4 billion versus payment of debt of $30.5 billion.

Cost of sales (GAAP) was $31.3 billion, leaving gross profit of $6.3 billion. SG&A expense was $6.95 billion. Cencora equity earnings $49 million. Goodwill impairment $332 million. Leaving operating income of negative $978 million. Other income $112 million. Interest expense $132 million. Income Tax $2.08 billion. Post-tax earnings from other equity $2 million. Net loss attributable to noncontrolling interests $73.

For the full fiscal year 2024 sales were $147.7 billion, up 6.2% y/y. GAAP loss per share was $10.01, but adjusted EPS was $2.88. Includes non-cash impairment for VillageMD goodwill. U.S. Healthcare segment adjusted EBITDA increase of $442 million. Exceeded fiscal 2024 targets. Reduced debt by $1.9 billion and lease obligations by $1.2 billion. Free cash flow $23 million.

Q&A selective summary:

Restructuring of PBM reimbursements? We see a lessening of reimbursement pressure in 2025. Payers are becoming more realistic. Everyone recognizes dynamics have changed. We have seen a lot of specific variations for specific brands. The 20% who have not lessened, we have still had constructive conversations. But we are willing to walk away from a loss situation.

Earnings cadence in 2025? About the same as last year. More closures in second half, but that was the case in 2024 too.

Timing on base for Adjusted Operating Income growth? Multi-year turnaround, not giving 3 year guidance. Meaningfully positioning us for growth. Cencora relationship is until 2029; having a constructive dialog. Optimization should scale as we close stores over the 3 years.

Free cash flow in fiscal 2025? AOI to decline in 2025 due to sale-leaseback with Cencora. Legal payments will be up slightly, but then down in 2026. Will optimize working capital, decrease cap ex. [No specific amount projected]

VillageMD? Our US retail strategy is a healthcare strategy, including specialty pharmacy. We are seeing cost reductions in VillageMD. In 2025 expects VillageMD will reduce costs and increase contribution margins.

Loyalty program and home delivery should allow us to retain many patients who use the stores we will be closing.

Dividend plans? Highly committed to capital efficiency. May better align dividend with long-term earnings power. No news today.

We believe we have reduced staff in stores to a level of maximum efficiency.

We want to monetize VillageMD without destroying value. The process has been longer than we had hoped. We have outstanding physicians there. It is complicated, we want to get it right. We have growht initiatives at VillageMD in addition to cost cutting measures.

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