Analyst Conference Summary

biotechnology

conference date: January 10, 2025
for quarter ending: November 30, 2024 (fiscal first quarter, Q1 2025)

Forward-looking statements

Overview: Non-GAAP results, including free cash flow, pretty good, but GAAP results hit by significant charges.

Basic data (GAAP):

Revenue was $39.5 billion, up 5% sequentially from $37.5 billion, and up 7.5% from $36.7 billion year-earlier.

Net income was negative $265 million, up sequentially from negative $3.0 billion, and down from negative $67 million year-earlier.

Earnings per share (EPS), diluted, werenegative $0.31, up sequentially from negative $3.48, and down from negative $0.08 year-earlier.

Guidance:

Fiscal 2025 adjusted EPS $1.40 to $1.80.

Conference Highlights:

CEO Tim Wentworth said, "Our first quarter results reflect our disciplined execution against our 2025 priorities: stabilizing the retail pharmacy by optimizing our footprint, controlling operating costs, improving cash flow and continuing to address reimbursement models. While our turnaround will take time, our early progress reinforces our belief in a sustainable, retail pharmacy-led operating model." Changes y/y driven by lower U.S. retail sales and prior-year sale-leaseback gains, partly offset by cost savings and growth in U.S. Healthcare. Maintained script market share in the U.S. market.

GAAP results include $252M after-tax charge for the Footprint Optimization Program and $152M for fair value adjustments on variable prepaid forward derivatives of Cencora shares.

In Fiscal year 2025 expects y/y growth in U.S. Healthcare and International, offset by declining U.S. Retail Pharmacy, a higher adjusted effective tax rate, and lower contributions from sale-leaseback and Cencora.

Closed 67 stores in Q1, scheduled about 450 more closings to rationalize the footprint. Improving efficiency with micro-fulfillment centers; lowers cost per script. Looking to sell Village Medical, use proceeds to reduce debt. Renegotiated pharmacy supply contracts to stabilize net reimbursement.

The U.S. Retail Pharmacy segment had sales of $30.9 billion, up 5% sequentially from $29.5 billion, and up 7% y/y from $28.9 billion. Comp sales up 8.5% y/y. Pharmacy sales up 10.4% y/y, but prescription sales up only 2.3% y/y. Adjusted operating income $441 million, down 36% y/y. U.S. retail total sales down 6.2% y/y, comp sales down 4.6%. Continues pushing own-brand items. Cough cold season was weaker y/y and discretionary categories also fell y/y.

The International segment sales $6.43 billion, up 8% sequentially from $5.97 billion, and up 10% y/y from $5.83 billion. $168 million adjusted operating income. Boots UK retail comp sales up 8% y/y. Results were in line with expectations. Germany performed well.

The U.S. Healthcare Segment had sales of $2.17 billion, up 3% sequentially from $2.11 billion, and up 12% from $1.93 billion from year-earlier. Operating loss was $325 million. Adjusted EBITDA was $70 million. VillageMD sales up 9%, Shields up 30%, CareCentrix up 16%. But operating loss $325 million. Adjusted operating income was $15 million, adjusted EBITDA $70 million.

Non-GAAP results: Net income $440 million, up sequentially from $340 million, and down 23% from $571 million year-earlier. Non-GAAP EPS $0.51, up sequentially from $0.39 and down 23% from $0.66 year-earlier.

Cash and equivalents ended at $1.2 billion, down sequentially from $3.2 billion. Inventories $9.1 billion. Long-term debt $7.6 billion. Cash used un operations was $140 million. Capital expenditure $284 million, but cash provided by investment activities negative $76 million. Free cash flow negative $424 million. $216 million paid in dividends.

Cost of sales (GAAP) was $32.7 billion, leaving gross profit of $6.78 billion. SG&A expense was $7.01 billion. Cencora equity loss $9 million. Leaving operating income of negative $245 million. Other expense $171 million. Interest expense $122 million. Income Tax $66 million. Post-tax loss from other equity $1 million. Net loss attributable to noncontrolling interests $340 million.

Q&A selective summary:

New reimbursement details? PBM arrangements are typically multi-year. A meaningful percentage of contracts were renegotiated. Aligned with PBMs on higher-priced drugs. Appropriate rebalancing of generics v. brands. Still have a long way to go to get appropriate conditions.

Reimbursement pressure in 2025? Shifted risk away from us. Everyone is working on problems caused by cross-subsidization. We project reduced pressure in 2025 compared to the past. Q1 was not impacted by the changes we made for calendar 2025. We did well at moving patients from our closed stores to continuing stores.

Calendar 2024 ended strong becaue of other things than the coming changes in PBM reimbursement. So no change in guidance due to better Q1.

Footprint optimization trajectory? We will have some sales proceeds from buildings we own, that should offset closing costs for the total of about 500 stores in fiscal 2025. We see continued cap ex reduction for remainder of year. Not guiding on free cash flow for 2025.

Private equity acquisition, cash flow clarity? We are focussed on building a sustained strong cash flow. Legal payments have been a drag, but should get better starting in 2026.

Strong subsegments? VillageMD, Shields grew.

Working to improve customer experience. Shrink is still a problem, locking products up is a problem. Launching superfoods, women's wellness sections. Consumer spending patterns continue to evolve. We are aligning our pricing and promotion strategies. Digital and virtual check ins for pharmacy. Adding conceirges at front of store to help elder patients and others with that.

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