Walgreens Boots Alliance Inc (WBA)

• The U.S. Healthcare segment, including VillageMD and Shields Health Solutions, is showing strong revenue and profit growth, indicating potential for continued expansion and profitability in this segment. Shields Health Solutions had a "terrific quarter" with strong client renewals and increasing profit margins. -
• The company's investments in micro fulfillment centers (MFCs) are improving operational efficiency, reducing costs, and enhancing the in-store experience. Over 4,500 stores are now being serviced by MFCs, with plans to expand to 6,000 stores, leading to increased ability to counsel patients and provide higher-order clinical services that bring additional reimbursements. -
• Walgreens is successfully renegotiating pharmacy benefit manager (PBM) contracts to improve reimbursement rates, particularly for higher-cost drugs, and is rebalancing brand and generic pricing to better reflect the current environment, which should enhance pharmacy margins. Additionally, they are achieving better-than-expected prescription retention during store closures, indicating they can improve profitability by closing underperforming stores without significant customer loss. -

• Persistent challenges in the U.S. Retail Pharmacy segment, particularly in the front-end retail business, due to continued deterioration in consumer discretionary spending and shifting consumer behavior. The company notes that the consumer remains under pressure from accumulated inflation and higher interest rates, impacting discretionary categories and leading to a decline in comparable retail sales. - -
• Uncertainty in achieving long-term positive cash flow generation amid ongoing operational and financial challenges. The company acknowledges that while they improved free cash flow in the quarter, they have more work to do to strengthen their balance sheet and ensure longer-term positive cash flow. They are not providing multiyear cash flow guidance and mention that higher legal payments and planned investments are impacting cash flow. - - -
• Ongoing reimbursement pressures in the pharmacy business, with the company stating that despite progress in contract negotiations for 2025, there is "still a ton to do" over the next several years. This suggests that reimbursement pressures may continue to impact profitability in the pharmacy segment. - -

1. Reimbursement Pressure and Contracts
   Q: Are actions reducing 2025 reimbursement pressure? -
   A: Yes, we're seeing reduced pressure in 2025 compared to previous years due to restructuring our contracts with PBMs. We've rebalanced brand and generic reimbursements and aligned with PBMs to create categories for higher-cost drugs like GLP-1s. This new construct provides stability today and positions us for better visibility and improvement in future years. - -

2. Free Cash Flow and CapEx
   Q: Can you talk about confidence in positive free cash flow? -
   A: We're broadly in line with our previous commentary and feel good about working capital improvements. We achieved higher-than-expected reductions in capital expenditures in the quarter, exceeding our target of $150 million. While not sharing specific guidance, we're confident in our ability to improve operating performance over time, which will positively impact free cash flow. -

3. Procurement and Cencora Partnership
   Q: How are you maximizing procurement with Cencora? -
   A: We're working closely with Cencora to modernize our drug purchasing processes to be world-class. While we haven't built any changes into our fiscal 2025 expectations, we're engaging with them to incrementally and transformationally improve procurement, which will benefit both parties as our volumes increase. -

4. Store Closures and Footprint Optimization
   Q: Will footprint optimization impact grow over time? -
   A: We're on track to close 500 locations in fiscal year 2025, having closed about 70 stores in the quarter. The annualized operating income benefit is expected to be $100 million this year. As we continue this plan over three years, these benefits will scale over time. -

5. Peer's Cost-Plus Model Impact
   Q: Does peer's cost-plus model offer opportunities? -
   A: The peer's announcement didn't surprise us; it's similar to what we've been doing in our contracts by realigning brand and generic reimbursements. We are willing to help payers win in configurations that work for them, aiming for a sustainable pharmacy model. -

6. Healthcare Segment Performance
   Q: Which healthcare subsegments outperformed? - -
   A: VillageMD had a great quarter, growing off a smaller focused platform after facility closures. Shields saw strong revenue and profit growth with very high client renewals. CareCentrix also performed well, selling through new relationships, contributing to the overperformance. -

7. Merchandising Strategy Execution
   Q: How are you addressing front-end pressures? -
   A: We're executing several initiatives, including revamping our team, enhancing our loyalty program, and introducing new categories like superfoods, sports nutrition, and women's wellness. We've launched over 60 own-brand items this quarter to meet customers' needs with the right products at the right prices. -

8. Timing of Stabilizing Free Cash Flow
   Q: When will you stabilize free cash flow? -
   A: While not providing multi-year cash flow guidance today, we're focused on improving operating performance over time. Factors like operating improvements, CapEx reduction, working capital streamlining, and lower legal payments will positively impact future cash flows from fiscal 2026 onwards. -

9. Recontracting Impact on Pharmacy Costs
   Q: How will recontracting affect pharmacy costs? -
   A: Changing reimbursement structures isn't inherently a cost increase or decrease; it depends on negotiations. We haven't seen a cost increase ourselves. Our focus is on managing specialty pharmacy costs by ensuring the right patients receive the right drugs, which helps manage overall pharmacy costs effectively. -

10. Micro Fulfillment Centers Rollout
    Q: What's the plan for micro fulfillment centers? -
    A: We're pleased with the progress, operating over 4,500 stores through micro fulfillment centers now, aiming to reach 6,000 stores in the next 12 months. This enhances efficiency and allows store staff to focus on higher-value activities like patient counseling. -

11. Script Retention Amid Store Closures
    Q: How is script retention during store closures? -
    A: Script retention has been better than expected. We track it internally, and our new processes have improved patient experience when their store closes, leading to successful transfers to receiving stores. -

Annual guidance for FY 2025:

• Adjusted EPS: $1.40 to $1.80 - (no change from prior guidance $1.40 to $1.80 - )
• Retail Comparable Sales: Decline of approximately 4% to 5% - (lowered from negative 2% to negative 3% - )
• Footprint Optimization Program AOI Benefit: $100 million - (no change from prior guidance $100 million - )
• Working Capital Initiatives: $500 million - (no change from prior guidance $500 million - )
• Capital Expenditures Reduction: Ahead of target for $150 million reduction - (no change from prior guidance $150 million - )
• NADAC Changes Impact: Less than $50 million negative impact - (no prior guidance)