Q4 2024 Earnings Summary
- WBA is focusing on margin improvement through growth initiatives such as specialty pharma services, data analytics, and specialty pharmacy, which are expected to drive near-term shareholder value creation.
- The company has strengthened its leadership team by hiring Jason, a new Chief Commercial Officer with relevant value-based care experience, to drive commercialization, B2B partnerships, and services development.
- WBA is making progress in restructuring pharmacy reimbursement rates, with lessening reimbursement pressure expected in 2025 and constructive negotiations with PBMs to ensure fair compensation, which should positively impact financial performance over the next few years.
- Persistent reimbursement pressure in the pharmacy business is expected to continue affecting operating income, with negotiations still ongoing and willingness to exit unprofitable contracts.
- Plans to close approximately 1,200 stores over the next three years, including about 500 in fiscal 2025, reflect significant challenges in retail operations and may lead to revenue loss despite efforts to recapture customers.
- Turnaround initiatives and growth strategies are in early stages and not expected to contribute to financial performance in the near term, indicating continued pressure on earnings.
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Reimbursement Rates
Q: Do we expect improving rates in 2025?
A: Tim stated that in fiscal 2025, they anticipate a lessening of reimbursement pressure. They have 80% visibility on contracts and are having constructive conversations with payers and PBMs. They are open to making difficult decisions, including walking away from unprofitable business if necessary. -
Store Closures Impact
Q: How will store closures affect earnings in '25?
A: Manmohan noted they expect to close around 500 stores, weighted towards the back half of fiscal '25. The benefits from these closures will scale within '25 and continue over the next three years. -
Dividend Sustainability
Q: Is the current dividend sustainable?
A: Tim explained they are adopting a flexible and pragmatic capital allocation strategy. They will continually evaluate their situation and may adjust the dividend to align with long-term earnings if appropriate. Everything is on the table. -
VillageMD Monetization
Q: What's the plan for monetizing VillageMD?
A: Tim acknowledged they aim to monetize VillageMD but want to avoid destroying value unnecessarily. The process is complex and requires careful consideration to preserve value. They are engaged and will proceed methodically. -
Free Cash Flow Outlook
Q: Where will free cash flow be for FY25?
A: Manmohan indicated adjusted operating income will decline in '25 due to lower sale-leaseback contributions and lower earnings from Cencora, but these do not impact free cash flow. Legal payments will slightly increase to about $1.5 billion. They plan to offset headwinds with working capital optimization of around $500 million and reducing CapEx by about $150 million. -
Working Capital Improvements
Q: Can you break down the working capital improvement?
A: Manmohan said they are optimizing all components of the cash conversion cycle. Initiatives include removing unproductive inventory, optimizing Rx inventory via micro-fulfillment centers, improving accounts receivable collection, and adjusting accounts payable timing. Store closures will also generate free cash by optimizing inventory within the remaining network. -
Earnings Cadence in U.S. Pharmacy
Q: What's the earnings cadence in U.S. Pharmacy for '25?
A: Manmohan expects the cadence to be similar to the last couple of years. No significant changes are anticipated; first half versus second half should align with previous trends. -
Cost Reduction Initiatives
Q: What other margin improvements are planned beyond cost cuts?
A: Tim emphasized they are focused on continuous cost optimization, including addressing stranded costs from store closures. They see opportunities to improve efficiency across the business, particularly at the corporate level. Investments will continue in stores and associates. -
Recapture Rate Post Store Closures
Q: How much Rx and foot traffic will you retain post closures?
A: Tim stated there's no one-size-fits-all number, but they are precise in store-level assumptions. They leverage loyalty programs and digital engagement to retain customers. They aim to serve every patient but are realistic in their models. -
Vendor Contracts Negotiations
Q: Any updates on renegotiating vendor contracts?
A: Tim mentioned they have a long-term arrangement with Cencora until 2029 and meet regularly to explore opportunities. They are having meaningful and constructive dialogues to find ways to grow together, but no specific updates were provided.