Tiffany Kanaga:

Good morning. Thank you for joining us for the Walgreens Boots Alliance earnings call for the third quarter of fiscal year 2024. I am Tiffany Kanaga, Vice President of Investor Relations. Joining me on today’s call are Tim Wentworth, our Chief Executive Officer; and Manmohan Mahajan, Global Chief Financial Officer. In addition, Mary Langowski, President of U.S. Healthcare; Rick Gates, Senior Vice President and Walgreens’ Chief Pharmacy Officer; and Tracey Brown, President of Walgreens’ Retail and Chief Customer Officer will participate in Q&A. As always, during the conference call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on Slide 2 and those outlined in our latest Form 10-K, filed with the Securities and Exchange Commission. We undertake no obligation to publicly update any forward-looking statements after this presentation, whether as a result of new information, future events, changes in assumptions, or otherwise. You can find our press release and the slides referenced on this call in the Investors section of the Walgreens Boots Alliance website. During this call, we will discuss certain non-GAAP financial measures. These measures are reconciled to the most directly comparable GAAP financial measures and the reconciliations are set forth in the press release. You may also refer to the slides posted to the Investor section of our website for reconciliations of non-GAAP measures to the most comparable GAAP measures discussed during this earnings call. We encourage you to review the comparable GAAP measures and reconciliation to non-GAAP values in the other earnings materials we provided. I will now turn the call over to Tim.

Manmohan Mahajan:

Thank you, Tim, and good morning, everyone. Third quarter sales grew 2.5% on a constant currency basis. U.S. retail pharmacy increased 2.3%. International was up 1.6% and U.S. Healthcare delivered sales growth of 7.6%. As Tim mentioned, overall results were below our expectations. Adjusted EPS of $0.63 decreased 37% year-over-year on a constant currency basis. This was driven by a $0.24 impact from lower sale leaseback gains, a challenging U.S. retail environment and recent pharmacy trends. Our U.S. healthcare and international segments continued to perform in line with our expectations, and we continue to deliver on our goals related to cost and CapEx reduction and working capital initiatives. As a reminder, last year's GAAP results included after-tax impairment charges of $323 million related to pharmacy license intangible assets in Boots U.K.. Let's move on to the year-to-date highlights. Sales increased 5.6% on a constant currency basis. Adjusted EPS declined 25% on a constant currency basis due to the softer U.S. retail pharmacy performance and significantly lower sale leaseback gains. This was partly offset by cost-saving initiatives, improved profitability in U.S. health care and a lower adjusted effective tax rate. GAAP net loss was $5.6 billion compared to a loss of $2.9 billion in the first nine months of fiscal 2023. The first nine months of fiscal 2024 included certain non-cash impairment charges related to VillageMD goodwill as detailed last quarter. The prior year period included a $5.5 billion after-tax charge for opioid-related claims and lawsuits partly offset by a $1.5 billion after-tax gain on the sale of Cencora and Option Care Health shares. Now let me cover U.S. Retail Pharmacy segment. Comparable sales grew 3.5% year-on-year driven by brand inflation and pharmacy and prescription volume, partly offset by a decline in retail sales. AOI decreased 48% versus the prior year quarter. Approximately 70% of this decline relates to lower sale leaseback gains lapping reduced incentive accruals in the prior year and lower Cencora equity income. Challenging retail and pharmacy industry trends also negatively impacted AOI in the current period. Sale leaseback gains net of incremental rent expense, resulted in a $277 million headwind to AOI in the quarter. As discussed three months ago, we do not anticipate any material benefits from sale-leaseback gains going forward. Headwinds in the retail and pharmacy businesses were partly offset by cost savings initiatives. Let me now turn to U.S. Pharmacy. Pharmacy comp sales increased 5.7% driven by brand inflation and volume growth. Comp scripts excluding immunization grew 1.7% in the quarter. We are tracking in line with the overall prescription market year-to-date. However, overall prescription market growth remains below expectations, primarily due to Medicaid redeterminations. Pharmacy adjusted gross margin declined versus the prior year quarter driven by brand mix impacts, reimbursement pressure reflecting last year's negotiations, lower COVID testing demand and incremental pressure from certain generic launches with procurement dynamics similar to brands. Recent fluctuations in NADAC drove an incremental $20 million of the partial quarter impact. Turning next to our U.S. retail business, comparable retail sales declined 2.3% in the quarter. As Tim mentioned, the consumer backdrop remains a challenge. With this continued channel shift and a sustained pullback in discretionary spending, we have responded by lowering prices across health and wellness, personal care and seasonal categories. Where we invested in price and promotions, we saw returns in sales and unit lift. At the same time, value-seeking behavior and new product launches year-to-date helped to drive our own brand penetration up 65 basis points in the quarter. While we're seeing early signs of customers responding to our actions, retail gross margin declined more than previously anticipated due to our price and promo investments this year lapping last year's margin recovery actions as well as higher levels of shrink. This was partly offset by positive impact on gross margin from our category performance improvement initiatives, which are tracking in line with our expectations as we deepen relationship with select suppliers. Turning next to international segment, and as always, I will talk in constant currency numbers. Total sales grew 1.6% with Boots U.K. increasing 1.6% and Germany Wholesale up 4.9%. Segment adjusted gross profit increased 2% with growth across all businesses. Adjusted operating income was down 17% due to lapping real estate gains in the prior year period. Let's now cover Boots U.K. in detail. Boots U.K. continues to perform well. Comp pharmacy sales were up 5.8%. Comp retail sales increased 6% with all categories showing growth. Across formats, destination health and beauty, flagship and travel locations performed particularly well. Boots.com sales increased 13.8% year-on-year and represented nearly 16% of our U.K. retail sales. Turning next to U.S. Healthcare. The U.S. Healthcare segment delivered its second consecutive quarter of positive adjusted EBITDA. Third quarter sales of $2.1 billion increased 8% compared to prior year quarter. VillageMD sales of $1.6 billion grew 7% year-on-year. The increase was driven by growth in full risk and fee-for-service lives, partly offset by the impact of clinic closures. Shields sales were up 24% driven by growth within existing partnerships. Adjusted EBITDA was $23 million, an improvement of $136 million compared to last year, driven by rightsizing costs, improved productivity at VillageMD and continued robust growth at Shields. Turning next to cash flow. Operating cash flow in the first nine months of fiscal 2024 was negatively impacted by $785 million in payments related to legal matters $386 million in annuity premium contributions related to Boots Pension Plan and underlying seasonality. Capital expenditures declined by $497 million versus the first nine months of fiscal 2023. As a result, free cash flow was down by approximately $1.1 billion versus the prior year. We continue on pace to achieve a year-over-year reduction of $600 million in capital expenditures and $500 million in working capital initiatives in fiscal 2024. I will now turn to guidance. We are lowering our fiscal 2024 adjusted EPS guidance to $2.80 to $2.95. The updated range versus our expectations three months ago, incorporates two key items. First, the U.S. consumer environment has not improved and is driving higher promotional activity, negatively impacting retail margin. We continue to expect fiscal 2024 retail comp sales to be down approximately 3%. Second is the continuation of worse-than-expected pharmacy margin headwinds. Pharmacy margins in the second half include impact from certain generic launches with procurement dynamics similar to brands, fluctuations in NADAC, inflation and mix within branded drugs and lower overall market growth. We are maintaining full year expectations for U.S. Healthcare segment adjusted EBITDA to be breakeven at the midpoint of the guidance range. We continue to expect our adjusted effective tax rate to be under 5%. Our revised full year guidance range implies fourth quarter adjusted EPS of approximately $0.39 at the midpoint. While we're not providing fiscal 2025 guidance today, let me offer key considerations to bridge from fourth quarter to next year. Seasonality impacts all of our businesses and the fourth quarter is typically the lowest quarter of the year. Additionally, we expect profitability growth in U.S. healthcare and international segments. However, as Tim mentioned, there are other factors discussed on today's call that we assume will impact fiscal 2025. Our decision to wind down the sale-leaseback program, sales Cencora shares and a more normalized adjusted effective tax rate are expected to have an approximately $0.75 impact in fiscal 2025. In retail, despite easing comparisons, we do not anticipate significant improvement in the U.S. consumer spending backdrop. We are especially seeing signs of strain on the lower income consumer, driven by accumulated inflation and depleted savings. While we're adopting our model, these changes will take time. We expect to see some pharmacy headwinds continue in fiscal 2025. However, we are focused on stabilizing pharmacy margins as we continue to have active discussions with our PBM, payer and supplier partners. We have more hard work ahead of us, and we are focused on building a solid foundation for the future. Driving the stabilization of our business and returning to longer-term enterprise growth. With that, let me pass it back to Tim.

Operator:

Thank you. [Operator Instructions] Our first question comes from the line of Lisa Gill with JPMorgan. Your line is now open.

Tim Wentworth:

Thanks, Lisa. So big question. Future pharmacy, I'll take quickly. And then I'll let Mary Langowski, talk a little bit more detail about our payer conversations. Obviously, we won't get specific. But needless to say, they have I think, changed both in tenor and content and are constructive. And then I'll let Manmohan talk about NADAC. You know, as far as the future of pharmacy -- retail pharmacy in particular, which we talk about the store as part of an overall experience, we are working to essentially meet the consumer where they are today and where they need us to be. And there are a number of elements to that, both in the back of the store and in the front of the store. And so -- and I don't want to take as much time as we take to take you in detail through all of those pieces. But at the front of the store, you saw us talk about footprint, which leaves us a more rational investment horizon in terms of them bringing up to the standard that our customers would expect the store experience as well as the assortment that we would have for them reducing our -- using almost a PBM-like approach to formulary to how we work with national brands being deeper with fewer in order to both drive better economics and better outcomes for them. As well as I saw yesterday a really exciting presentation on where we're taking our loyalty program. And so again, how we engage with our most valuable consumers as well as everything from home delivery, omnichannel and freeing up our store managers to really have flexibility in their framework, changing their compensation program dramatically in order to incent outcomes in their individual stores and have them act as owners. That's the front of the store. The back of the store, we know, and Rick and the team have done a tremendous amount of work around automating the workflow at the back of the store. As you know, we had paused our investment in backend automation, but we have pushed forward. We are continuing to drive and ultimately are highly committed to having that be a key part of how we both free up labor to do higher order things as well as be more efficient. Also at the back of the store, the dean's council, we spent two detailed days working with the deans of 15 pharmacy schools as well as the trade association, or association of deans rather, looking deeply at community pharmacy as a preference, what we can do to be a leader in that space, design of -- we're talking about design of curricula, so these pharmacists come out of school excited. And importantly, starting even as far back as middle school, to animate and excite sort of potential future pharmacists to the idea of community pharmacy, where unlike hospital pharmacy, you have the opportunity to build long-term relationships with your patients. So the supply chain of labor we're taking super seriously, both in terms of the effectiveness of it, but also the size and the sort of skill set. Our contracting strategy is a key part of what we do in the back of the store, expansion of pharma services. I got an email yesterday from the CEO of a major vaccine manufacturer, who again, wanted to make sure that we were on the edge of our seat, getting excited about what their innovation was going to bring and how we were going to play a role in that. So a lot there between the front and the back, but you don't need the number of stores we have today. We have a very clear picture of what we need to do there. We will have more details to follow. With that, I'll turn it over briefly to Mary, to just go a little bit more color for you with the payer conversations that we've had, which I believe are highly constructive, and then Manmohan.

Tim Wentworth:

And Manmohan.

Lisa Gill:

Great. Thank you.

Charles Rhyee:

Yes. Thanks for taking the question. Tim, I wanted to touch a little bit more on, on the strategy to looking at this 25% of stores that are underperforming. And a lot of these are under probably long-term leases. And I just wondering, sort of what your cash flow position is to be able to affect getting out of these leases perhaps earlier than intended. And maybe also, when you look at these stores, how much of the underperformance is just purely a broad retail issue of just a weak consumer versus maybe stores that are facing higher levels of shrink. And thus, when you close those stores, does that solve a lot more of your margin problem all at once?

Tracey Brown:

Yes. Thank you, Tim, and thank you, Charles. So as Tim has mentioned, this is a multi-factored disciplined way of looking at where to close. Yes, shrink is an issue in some stores, but we have our eyes on our high shrink stores all the time. The second thing is consumer behavior, consumer trends and where you look at the market and where our stores are located in terms of the markets that are growing versus the markets that are declining. Third, you actually have to look at like the competitive landscape in each of these markets. And then the fourth thing that I would say is we are actually looking at how we are actually leveraging our assortment in these markets. So there are multiple levers that we look at that go into the model that drive underperformance. The other thing that I will say is there are stores that would be on this bubble, we're also taking a focused approach on those stores to get them in the right context. And I guess the last thing that I would say, Charles, this is a multi-level set of factors that come into play between ourselves, between local state officials between law enforcement. There are a lot of players in these markets that need to partner with us in order to make sure that we are growing those that need to grow and those that are not, we're taking the appropriate action.

Charles Rhyee:

Great. Thank you.

Eric Percher:

Thank you. Two related questions relative to gross margin in the pharmacy. And I think, first, if we look at the retail gross margin, it appears to be at a low point relative to the last 10 years. Can you give us a bit more on the discounting that you engaged in and your expectation for that through the fourth quarter and how you expect it to taper and then the second part is looking at NADAC, if it was $20 million over a month and change and you're saying conservative over the second or this full quarter, are you assuming that there's still more expansion as it flows from Medicaid to commercial? Or do you think we can -- we've kind of seen the peak in this month and change?

Manmohan Mahajan:

Yes, sure. So, as you think about the gross margin on the retail pharmacy side, maybe a couple of themes there. Let me start on the retail side. And what we experienced in the third quarter, and we think the trend is going to continue in Q4 is the environment didn't improve as we anticipated. And as a result, we focused on investing in price and promotion. Now we've seen the unit and sales uplift as a result thereof, but at the same time, there is impact on the gross margin in the short term. And so that is coming through, and we expect that's going to continue along the same lines in Q4. The second piece that does impact our gross margin year-over-year is the level of shrink. And I think we talked about shrink in the last couple of calls as well. We have seen it on an increase in trends, and there are a number of actions that Tracey and the team are taking to bring it back to historical normals. On the pharmacy side, then on the margin, a couple of themes playing out, NADAC is one of them significant fluctuation, as I said earlier in the call, we have seen some level of improvement as the index itself changed in June. But as I said, we're -- at this point, the level of fluctuations we have seen month-over-month, we're just being prudent in terms of what can play out here in Q4. Outside of that, the last point I'd say is there are some market dynamics that we experienced in Q3 as well and some will play in Q4 and maybe a couple of those to point out is there are certain generic launches where the procurement dynamics continues to be just like branded and so that is impacting our gross margin on the pharmacy side. And then lastly, I'd say the mix that's coming in on the branded side is also having a negative impact on the margin. So that's maybe overall profile of what's driving our margin in the quarter.

Ann Hynes:

Hi. Good morning. Thank you. I have 2 questions. One is just about your commentary around prescriptions and not back to prepandemic level. I guess I find that a little surprising just because overall healthcare utilization is so strong. So, do you think it's a market share issue? Is it a pharmacist issue? I know you lost some pharmacists during the pandemic. Maybe if you can provide some updates on that. I know you mentioned Medicaid, but it was my understanding Medicaid is pretty small as a percentage of total revenue. So any other detail would be great. And then my second question is just, I guess, bigger picture. I know you're not giving all the details about the strategic review, but your stock is down a lot premarket. Like do you have a sense for maybe some of your longer term investors, when you think you could stabilize operating profit in the Retail segment and free cash flow? Is it like a 2026 timeframe? Like any update on the timeframe when you think you can recover this business would be great? Thanks.

Rick Gates:

Yes. And I think as you look at volume, I think we stated that we are growing with market right now. So, it's not just a Walgreens thing, it is a market dynamic. And so when you look at Medicaid redetermination as an example, Medicaid enrollment really ballooned during the pandemic as, obviously, they were not moving people outside of the Medicaid coverage. And so what we've seen is that states has continued to move patients out. We're seeing upwards of closer to 18 million to 20 million individuals who've moved out of Medicaid coverage and either they have to go out and find coverage like either discount cards, individual plans or get into commercial plans. And so we've seen a dynamic where they actually have not picked up coverage as quickly and utilization has dropped. And so what I think we're seeing is that pandemic, we were running closer to 4%, 4.5% towards the end of it from a market growth perspective, pre-pandemic was closer to 2.5%. And I think what we're seeing right now is we're actually running below the 2.5% from a market perspective and obviously, we're trying to track with that.

Kevin Caliendo:

Thanks. Thanks for taking my question. I guess I wanted to expand on Charles' question a little bit. If we were to just do simple math of the stores that you've identified, the 25% stores. And let's just say those stores were gone as of today, what would be the financial impact on the company right now? Like what would be the change in terms of your gross profit or your EBIT or however you want to define it? And then the follow-up to that is of those 25 stores, I appreciate you calling out that you expect to retain most of the workforce. What is the expectation on the retention of Rx of the scripts in those stores? Meaning, usually when you close a store or relocate a store, you oftentimes are able to keep a vast majority of those scripts. Has there been an analysis of that done yet? Thank you.

Manmohan Mahajan:

Yes, sure. So, look, I think from an analytics perspective, as we think through the closure, maybe two points there, 25% is the overall footprint that we're evaluating. And as Tim mentioned, it's not that all of them are foreclosures. So, we're going through the detailed analysis store by store, where we can improve the performance and bring them back into the portfolio and what's the remaining part where we need to take the action. Now Tracy mentioned a number of -- several factors that go into our determination of where we need to take the action. I'd say maybe I focus on the financial side. It's really driven, it comes down to the cash flow analysis, is cash flow positive to keep it open or cash flow positive to close. And so decision to close typically would result in accretion both on the cash as well as on the adjusted EPS side. And then so far retention is concerned, yes, I think Tim covered that as well. We've closed 2,000 locations over the last 10 years. So at this point, I think we have a pretty good view of -- depending upon the location of the stores, what would be the retention on the scrip side?

Operator:

Thank you. Our next question comes from the line of Michael Cherny with Leerink Partners. Your line is now open.

Tim Wentworth:

Sure. I would tell you that we have not only ourselves using our models, but used a very aggressive outside firm that brings incredibly thoughtful models to the table and have done this in other scenarios to challenge our thinking. And so listen, there's no one exact right number. Let's be clear. There are a group of stores that are clear. There are a group of stores that we will be working to see whether or not they make sense and one of the factors that we actually factor in is our payer mix. But I also want to be clear, this industry has been reducing its capacity over the last several years, and that is not a bad thing. I think most of us knew, when I was in the PBM business, I knew that retail pharmacy was largely overbuilt for where the future was going to be, particularly given the possibility of technology, home delivery and so forth. And so, for us, that's another factor as well as the number of stores we may need to serve a particular payer today may be very different than what it would have been 10 years ago. I mean, if you look at the Department of Defense as a contracting entity, they have minimum standards and they're very tough and they don't require 70,000 pharmacies, let's be clear in their network. So we think that reducing capacity in the industry is not a bad thing. We think it's good for the labor so that we're not actually overusing pharmacists in stores that we don't need. But we also think that from a payer standpoint, we are going to be positioned to serve payers very effectively with the footprint that remains.

Elizabeth Anderson:

Hi, guys. Thanks so much for the question. I don't know maybe a short term one and then maybe a longer-term one. On this year, obviously, you had a nice quarter-over-quarter improvement in free cash flow. Can you help us think about sort of the free cash flow expectations for the fourth quarter and then sort of maybe anything you can say directionally on 2025? And then as we think about some of these payer conversations that you've been having I mean, have any of the payers sort of agreed on terms that kind of help stabilize things for, I don't know, starting 01/01/25? Is this like more of a longer-term kind of conversation? Any other color you could provide on that ad would be very helpful. Thank you.

Manmohan Mahajan:

Sure. So from a third quarter perspective, we did have positive free cash flows in the quarter, and that was aided in part by the working capital improvements in the quarter as well as decreased capital expenditures. As you think about the first nine months of the year though, the cash flows are impacted by lower earnings and then $785 million of payments related to legal matters as well as the phasing on the working capital. As we think through Q4, we expect Q4 free cash flow to be positive, similar to third quarter. And that is including a roughly around $150 million payment related to opioid in the quarter. And then maybe finally, I'd say, look, this is a top priority for us in the company. And all the actions we've outlined and will continue to boost the cash flow position here.

Tim Wentworth:

And then Mary. Sorry, I'll let Mary take the piece of -- characterizing our conversations.

Elizabeth Anderson:

Thanks.

Operator:

Thank you. Our next question comes from the line of George Hill with Deutsche Bank. Your line is now open.

Manmohan Mahajan:

Yes, sure, George. So on the earnings for fiscal 2025, you're right, we're not providing guidance, but we will come back and provide detailed information and guidance in October. But what we offered in the prepared remarks is a couple of things to consider as you bridge to 2025. First is Q4 seasonality impacts all of our businesses and you think about vaccinations, you think about cough cold season, you think about the holiday season impacting the retail sales. So seasonality drives Q4 to be typically our lowest quarter, and so you got to consider that. And second is, we do expect profitability growth, both in our U.S. Healthcare segment as well as in our International segment as we move into fiscal 2025. However, said that, there are a few headwinds. And the biggest one here is as we think about our decision to wind down the sale-leaseback program, sale of Cencora shares and then you consider a more normalized tax rate into fiscal 2025 that we believe will result in approximately $0.75 headwind in. And then on the retail side, you have to consider – we do believe the environment will continue to be challenging here in 2025 from a consumer perspective. But there is a little bit of easing comparisons as you think about 2024 versus 2025. And on the pharmacy side, some of these headwinds will continue as you think through this. So these are all kind of the building blocks as you work through modeling 2025.

Operator:

Thank you. Our last question is from Stephanie Davis with Barclays. Your line is now open.

Tim Wentworth:

Yes. I will let Mary. I would remind all the listeners, Mary joined about three months ago and brings tremendous experience and relationships in this space, understands it well. And I want to be clear; we are big believers in value-based healthcare. Actually, pharmacy is the value-based healthcare provider in the ecosystem. Quite frankly, if you really look at cost for outcomes and the work that we can do to impact those outcomes, so we love the fact that we actually own what will be seen over the next 20 years and needed as the most valuable part of the healthcare ecosystem. And frankly, the most accessible, that's number one. Number two, as it relates to VillageMD and that model, we like that model. That's why we've said we would continue to have some investment and it's participate in their growth. It will take time and as I said, we are looking for a different horizon for what we're going to be investing in strategically under our own leadership. But Mary, do you want to talk more generally about that question as it relates to U.S. Healthcare strategy and Village in fee-for-service versus value.

Operator:

Thank you. I would now like to turn the call back over to Tim Wentworth for closing remarks.

Operator:

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Unidentified Company Representative:

Good morning. Thank you for joining us for the Walgreens Boots Alliance earnings call for the second quarter of fiscal year 2024. I'm Chris Dale, Group Vice President of Financial, Planning and Analysis, filling in Tiffany. Joining me on today's call are Tim Wentworth, our Chief Executive Officer; Mary Langowski, President of US Healthcare and Manmohan Mahajan, Global Chief Financial Officer. In addition, Rick Gates, Senior Vice President and Walgreen’s Chief Pharmacy Officer and Tracey Brown, President of Walgreens Retail and Chief Customer Officer, will participate in Q&A. As always, during the conference call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on slide 2, and those outlined in our latest Form 10-K filed with the Securities and Exchange Commission. We undertake no obligation to publicly update any forward-looking statement after this presentation, whether as a result of new information, future events, changes in assumptions or otherwise. You can find our press release and the slides referenced on this call in the Investors section of the Walgreens Boots Alliance website. During this call, we will discuss certain non-GAAP financial measures. These measures are reconciled to the most directly comparable GAAP financial measures and the reconciliations are set forth in the press release. You may also refer to the slides posted to the Investors section of our website, for reconciliations of non-GAAP measures to the most comparable GAAP measures discussed during this earnings call. We encourage you to review the comparable GAAP measures and reconciliation to non-GAAP values and other earnings materials we provided. I will now turn the call over to Tim.

Mary Langowski :

Thank you, Tim. Good morning, everyone. I'm excited to join you all today and I'm thrilled to be a part of this iconic company. I've spent 25 years in the healthcare, government, and retail sectors. My career is focused on leading teams to unlock new areas of growth, commercialize new products and healthcare services, and accelerate execution through financial discipline. I've been fortunate to have worked with some of the most successful Fortune 50 and healthcare growth companies that have sought to embrace and drive change to improve the healthcare system. At CVS Health, I led and executed a strategy to expand healthcare services, leveraging the company's core assets, including leading aspects of CVS' acquisition of Aetna. Most recently, I was CEO of Solera Health, a leading digital health technology company serving payers and employers, where I led a transformation of the business, launching new condition product lines, a new technology platform, and a new economic model to support sustained growth. My vantage point of working across providers, pharma, payers, and retail has made one thing clear. Very few companies have the platform, access, and reach of Walgreens. Since the announcement, I have heard from health plans, health systems, and others who see an opportunity to partner with Walgreens. They know the value of our community presence, the role our pharmacists can play, and the need for higher touch, more frequent, and lower cost engagement to drive better health outcomes. Healthcare is changing and consumer expectations are changing. In the face of that, we believe Walgreens is still the best position to be the most convenient entry point into the healthcare system. And our position as an independent partner, able to work with any health plan of PBM, is a true strength that we will capitalize on. Finally, I want to congratulate the team on achieving positive adjusted EBITDA in U.S. healthcare this quarter. It's a significant milestone, and we will continue to build on this progress to drive value for our shareholders, customers, and patients. Thanks to Tim and the board for this opportunity. I'll now turn it to Manmohan.

Tim Wentworth:

To wrap up, we have hard work ahead of us in our journey to simplify and strengthen WBA, but we are encouraged by our progress. This team has a clear mandate to act with everything on the table to put our business on the right track. We are well-positioned to drive capital-efficient growth, rooted in our retail pharmacy footprint, and build out an asset light health services strategy to deliver care for communities and create value for partners. We've kicked off our strategic planning work. Over the next three to six months, this team is undergoing an in-depth analysis to determine the actions necessary to achieve what we believe will be the optimal portfolio with a focus on maximizing growth potential and generating cash flow. We are reviewing every business through a longer-term lens focused on strategic fit, synergy potential, financial upside, and new or complementary capabilities. We are taking a thoughtful approach, fueled by a sense of urgency to finding opportunities to unlock value or validate existing pathways. In my five months with WBA, I have been most impressed with our 330, 000 team members' commitment to our company. In my experience, it's very hard to get that. That pride is foundational to our future growth, ability to consistently execute and create sustainable long-term shareholder value. That dedication also gives me and our team great confidence in our future. Now I would like to open the line for questions. Operator?

Lisa Gill:

Great. Thanks very much. Good morning, Tim. I have a multi-part question. I just really want to start with your comments where you talked about boosting profit and growth. You talked about new reimbursement models. You talked about provider status. So you talked about a lot of different things that you think can come into play. Can you maybe just talk about your line of sight and timing to get there would be the first part. And then secondly, I want to say welcome to Mary. Mary, as we think about the profitability and we think about capitation and the commitment of Village in the capitated markets, the comments were made today around the number of closings, now 140 locations closed. Can you maybe just talk about what you see as the future of the capitation and then putting that all together, I just really want to understand how to think about the progression going into ‘25. Tim, I know you have a big strategic review coming. I know you're not ready to give guidance on ‘25, but are there kind of some building blocks to think about when we think about the progression of the back half of ‘24 going into ‘25?

Rick Gates:

Yes. Lisa, this is Rick. and I'll just add we are just in earnest starting up that this calendar year ’25 negotiations but I will say you also talked about some of the expanded services. We have gotten traction not only on our inherent based programs and our performance against those to continue to get more inherent based contracts going forward, vaccines have been a very strong part of what we're doing but we're working very closely in the selling cycle right now when it comes to testing, test and treat as we expand those opportunities across the country as well and that the pay by state really process ever going through until there's a federal provider status which Tim talked about his remarks.

Mary Langowski :

Thanks Lisa. I'll just say reiterate what I said in my opening remarks that peers and health systems are approaching us and are very interested in working with Walgreens to help them drive medic savings. We've got unmatched assets in the marketplace given our reach with consumers and that's something that a lot of the traditional players now system don't have. So we'll be working with them and having conversations in the coming month.

Manmohan Mahajan :

Sure, Tim. So Lisa, this is Manmohan. As you think about the building blocks for ‘25, let me start by saying we're not providing FY25 guidance on this call. As you heard in Tim's prepared remarks, we are working through a strategic review with the executive team in place now and a detailed three year plan and so we will share that input over the next three to six months. But let me share some themes as you think about the second half and as you think about ‘25. In terms of second half, a couple of things to point out that I think are obvious and you understand. One is we do not expect any meaningful contributions from sale leaseback in the second half. And so it's pretty clean in terms of not including any sale leaseback gains from that perspective. And second is the lower adjusted effective tax rate, the timing of that played out for us in the second quarter. And so we do expect a much more normalized tax rate in the second half. Now, as you think about bridging into ‘25, a couple of themes to consider. First, U.S. Healthcare growth, you see that we're maintaining our guidance on adjusted EBITDA, which is at the midpoint of the range, $375 million increase year-over-year in fiscal ‘24. And so we do see as we look ahead into ‘25, we do see growth continuing in healthcare. Village, we expect to continue to drive growth as they focus on the core markets, as well as continue on their cost actions that they are going through this year. So that's one part. Shields obviously continues to grow throughout the year. And we do expect them to continue to grow into fiscal ‘25. Second, cost savings. If the actions we have taken in the first half will have a ramp up effect in the second half, we're not done yet. We continue to make decisions to right-size our cost structure here at WBA. And so we do expect a wraparound effect of that into fiscal ‘25. Third, retail business in the US, as I shared in my prepared remarks, we have seen headwinds persisting for longer than expected in the US retail environment. And we have lowered our expectation for the second half or for the full year fiscal ‘24 to a negative 3% comp. Now within that, we do expect slight improvement over time in the second half as the actions that Tracey and the team are taking will take hold and will drive certain level of improvement. So I don't think about what that is going to be into ‘25. And then maybe the last piece on this is, our business does have some seasonality and so pharmacy services business which has really performed strong throughout the first half and that does generate significantly higher contributions in the first half compared to the second half of the year, couple flu season does have both impact on our pharmacy business in the US as well as on the retail business in the US and the timing of that on a more normalized basis does play out more in the first half than in the second half. And lastly just on the seasonality pieces, another example is Boots which does have higher contributions in the holiday seasons in the first half. So we've got a factor those, I just want to make sure you have those things.

Charles Rhyee:

Yes, thanks for taking the questions. I wanted to drill down a little bit more on the retail segment, US Retail here. Tim, you talked about a number of things, right, trying to increase own brand, real line around a number of national brands as well. Maybe can you talk about how quickly some of those can be implemented here, particularly as you think about realigning around fewer national brands, like how long would that process take? And then, you mentioned that vaccines have been leading in the pharmacy services part of the business. Is there any way you can give us a sense on when we look at US retail, AOI, maybe not quantitatively, but qualitatively to a sense of how you would split the contribution between, let's say, pharma services, traditional front end and pharmacy?

Tracey Brown:

Yes, good morning, Charles. Yes, so as it relates to our own brand expansion, as Tim has indicated, we have been accelerating this at a rapid pace. And if you've been tracking, our own brand penetration has been growing quite nicely. To your question around how quickly, there are some things that we can do very quickly. One of those, again, Tim mentioned around embracing and incentivizing our frontline team members to really showcase their own brand products and what is important to the consumers in their market. The second is in terms of store reach and shelf depth, we can move on those quite quickly. And then the third area is around new product innovation. And then the third area is around new product innovation. And this is the part that actually takes a little bit longer, but just to give you a little bit of color, we launched 37 new products in Q2. And what this means for us is as the consumer's behavior continue to focus on looking at value and finding own brand and being willing to lean into own brand, this is working out quite nicely for us. We are feeling quite good about the level of depth that we can go with own brands.

Eric Percher:

Thank you. I appreciate the commentary on pharmacy services and reimbursement models, so a follow-up for Tim and Rick. It's interesting to hear you call out looking beyond payer and PBM to the manufacturers and this core ability to get to patients. I'd love to get your updated view on Lilly Direct, and if the goal is to expand access, does it make sense to include retail? Do you view it possible to have direct relationships given PBM contracts? Any perspective there would be appreciated.

Rick Gates :

Yes. The only thing I'd add is, you said we have relationships with whatever consumer walks into our store. We have a relationship with every pharma company. And I think what they see with us is that we are a natural partner. We roll up our sleeves. We help them solve what they're really trying to solve for. And I think that's a natural place first at that, because we are an independent provider. If you think about it that way, we don't have any other assets vertically integrated. And so I think we're a natural partner for them. And I think they see us as a willing partner to help them really drive programs in the market.

Tim Wentworth:

No, really nothing to add. I mean, we've had a longstanding relationship with Cencora. I did prior in another life. And that relationship has always got to be organic and dynamic, because the market changes. And while a long-term relationship is a great context into which to operate, it's important that as well we sit down as we do with Cencora and look at not only where is it working, but where might it work a bit better? And more importantly, over the next three years, where are the changes in the marketplace likely to manifest? And how do we make sure that we retain a contemporary and a competitive situation as it relates to our cost structure, as it relates to the services that we receive, as it relates to the things that we can provide as a good partner? So all of those things are things that we throw on the table. And I look forward to working with, I know my team does, with Bob in his new role. I congratulate Steve, who had a terrific run there and was a great partner to me over a lot of years. But again, you can't just sit still, and we're not going to.

Kevin Caliendo:

Thanks for taking my question. I wanted to talk about the sort of second half guidance and what it implies as we think about the headwinds and tailwinds from that base into fiscal ‘25. So if we take that sort of midpoint $1.42, there's no sale leasebacks there, presumably tax would be a headwind, or would it sort of be, I guess what I'm asking, like some headwinds and tailwinds from that base, whether it's tax, we understand, core is probably going to be headwind, maybe 340B. And then the second question that I have above and beyond taking that run rate is, was there any effect from the changes in PBM reimbursement like the timing for the retail segment because of DIR fees going away, meaning did it change the cadence at all or impact the cash flows at?

Rick Gates:

Yes, and just to answer on the [DER] fees and impacts that we might be seeing there outside of obviously cash flow, which obviously works its way out throughout the year. We really aren't seeing a negative impact on reimbursement. By and large, what we're seeing is that we are contracting for the rates that we were performing against either historically and or even if there was a negative impact on the reimbursement, we were signing and pay for performance contracts that we have the ability to overperform on. And so I would say that DER-C has been really neutral to us when you look at it from a reimbursement perspective.

George Hill:

Hey, good morning, guys, and thanks for taking the question. And I kind of have a couple of what I'll call kind of brief quick-hit questions, which first, for Rick, I guess I would ask, when we think about potential changes to the reimbursement model, you touched on this. I guess could you talk about the push and pull a little bit on those discussions? Mid-melon, I guess, just if you could make a quick comment on earnings cadence between fiscal Q3 and Q4. And Tim, I know hearing a lot here but just kind of an update on portfolio strategy. A lot of us look at the company and do some of the parts analysis. There are arguments to be made that you're getting the core U.S. business for free, given the value of other assets. Kind of just want to know how you think about the portfolio and how to unlock value.

Rick Gates:

George, thanks for the question. The push-pull when it comes to some reimbursement model changes, I would say we obviously work with PBMs hand-in-hand to understand what payers are looking for in the marketplace and the ecosystem. If obviously, they're looking for a standard-based reimbursement model, an AWP-based model. We have those with them. If they are look for cost-plus models or other types of reimbursement models, we work with them to make sure they have the solutions to go to payers that may be looking forward. So right now, I think it's an opportunity for us to continue to put different types of models in a market and then see what a payer uptake really looks like and really try to advance those models as we move forward.

George Hill:

Then finally the portfolios --

Operator:

Our next question comes from Michael Cherny with Leerink Partners.

Tim Wentworth:

I'll let Manmohan take that.

Operator:

Thank you. Ladies and gentlemen, this concludes the Q&A portion of today's conference. I'd like to turn the call back over to Tim for any closing remarks.

Operator:

Ladies and gentlemen, this concludes today's presentation. You may now disconnect. And have a wonderful day.

Tiffany Kanaga:

Good morning. Thank you for joining us for the Walgreens Boots Alliance earnings call for the first quarter of fiscal year 2024. I'm Tiffany Kanaga, Vice President of Global Investor Relations. Joining me on today's call are Tim Wentworth, our Chief Executive Officer; and Manmohan Mahajan, our Interim Global Chief Financial Officer. In addition, John Driscoll, President of US Healthcare; Rick Gates, Senior Vice President and Chief Pharmacy Officer at Walgreens; and Tracey Brown, President of Walgreens Retail and Chief Customer Officer, will participate in Q&A. As always, during the conference call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on slide two, and those outlined in our latest Form 10-K filed with the Securities and Exchange Commission. We undertake no obligation to publicly update any forward-looking statement after this presentation, whether as a result of new information, future events, changes in assumptions or otherwise. You can find our press release and the slides referenced on this call in the Investors section of the Walgreens Boots Alliance website. During this call, we will discuss certain non-GAAP financial measures. These measures are reconciled to the most directly comparable GAAP financial measures and the reconciliations are set forth in the press release. You may also refer to the slides posted to the Investors section of our website, for reconciliations of non-GAAP measures to the most comparable GAAP measures discussed during this earnings call. I will now turn the call over to Tim.

Manmohan Mahajan:

Thank you, Tim, and good morning, everyone. Overall, first quarter results were in line with our expectations. Sales increased 8.7% on a constant currency basis. US Retail Pharmacy grew at 6.4%. International delivered 4.4% growth. And US Healthcare pro forma sales increased 12%. Adjusted EPS of $0.66 declined 44% on a constant currency basis, mainly driven by lower US retail sales and a 21 percentage point headwind from a higher adjusted effective tax rate. Strong international growth and improved profitability in our U.S. Healthcare segment positively impacted adjusted EPS. GAAP net loss for the first quarter included $278 million after-tax charge for fair value adjustments on variable prepaid forward derivatives related to Cencora shares. Remember, in the first quarter of last year, we recognized a $5.2 billion after-tax charge for opioid-related claims and lawsuits and a $0.9 billion after-tax gain on sale of Cencora shares. Now I will cover the US Retail Pharmacy segment. Sales increased 6.4% versus the prior year quarter, driven by brand inflation in pharmacy and higher contributions from pharmacy services. Sales growth was partially offset by a 6.1% decline in the retail business. AOI declined 37.2% year-on-year, mainly driven by lower retail sales volume and margin, including higher levels of shrink. AOI was positively impacted by execution in our pharmacy services and progress on cost savings initiatives. Let me now turn to US Pharmacy. Pharmacy comp sales increased 13.1%, mainly driven by brand inflation and higher contribution from pharmacy services. COVID-19 vaccines have now shifted to a commercial model consistent with other vaccinations. Comp scripts grew 1.8%, excluding immunizations, in line with the overall prescription market. The ongoing impact of Medicaid redeterminations and a weaker flu and respiratory season continued to negatively impact overall market growth. Third-party data showed flu, cold and respiratory activity was down 13.5% compared to the prior year quarter. Within Pharmacy Services, our vaccines portfolio, which includes flu, COVID, RSV and other routine vaccinations, performed well in the quarter. Pharmacy adjusted gross profit declined slightly in the quarter, with margin negatively impacted by reimbursement pressure net of procurement savings and brand mix impacts. Turning next to our US Retail business. Challenging macroeconomic conditions and an anticipated slow start to the cough, cold, flu season contributed to a weaker retail performance year-on-year. Comparable sales declined 5% in the quarter. There are three main drivers. First, a weaker respiratory season had an impact of approximately 160 basis points through the health and wellness category. Cough, cold, flu serves as a primary scripts driver. As a result, we also experienced lower attachment sales due to the weaker season, which are incremental to the 160 basis points impact. Second, customers continue to pull back on discretionary spending, and actively seek out promotional opportunities. As a result, we saw an approximately 90 basis points impact from weaker holiday seasonal sales. Lastly, our decision to close most of our stores on Thanksgiving this year to further support our store team members led to a headwind of about 60 basis points. While these factors resulted in lower sales across all categories, we experienced more pronounced declines in consumables and general merchandise and in health and wellness. Retail gross margin was negatively impacted by 110 basis points due to higher shrink. Retail shrink continues to be a systemic issue across the retail industry. Turning next to the International segment. And as always, I will talk in constant currency numbers. The International segment performed better than our expectations in the quarter. Total sales increased 4.4%, with Boots UK up 6.2% and Germany wholesale growing 3.7%. Segment adjusted gross profit increased by 7%, outpacing sales growth, with Boots UK driving strong retail growth. Adjusted operating income grew 15%, including the impact from inflationary cost pressures. Let's now cover Boots UK in detail. Comp pharmacy sales grew 0.8%. Comp retail sales increased 9.8%, with growth across all categories, led by beauty and health and wellness. We also saw a year-on-year growth across all store formats, with flagship and travel locations performing particularly well. Boots increased retail market share for the 11th consecutive quarter, led by beauty. Boots.com sales increased 17.5% year-on-year and represented 19.2% of our UK retail sales. Turning next to US Healthcare. US Healthcare segment results were in line with our expectations. This is the second consecutive quarter of significant improvement in AOI and adjusted EBITDA compared to prior year. First quarter sales of $1.9 billion increased by 95% compared to the prior year, reflecting the acquisition of Summit Health by VillageMD and growth across all businesses. On a pro forma basis, segment sales increased 12%. VillageMD sales of $1.4 billion were up 14% on a pro forma basis. The year-on-year increase was driven by growth in full risk lives, better same clinic performance, and increased productivity in the Summit Health multi-specialty business. Shields increased sales by 27% as new health system contracts and expansion of existing partnerships led to a 42% increase in the number of patients on service in the quarter versus the prior year. Adjusted EBITDA was a loss of $39 million, reflecting investment in VillageMD, partly offset by profitable growth at Shields and CareCentrix. Adjusted EBITDA increased $84 million compared to last year, with improvement across all businesses. We are making progress to accelerate profitability at VillageMD, and profit growth from all other businesses contributed positively in the quarter. Turning next to cash flow. Overall, free cash flows were in line with our expectations. Operating cash flows in the quarter was negatively impacted by anticipated seasonal inventory build and timing of payor reimbursement. Capital expenditures declined by $104 million versus the first quarter of fiscal '23. Free cash flow was down $671 million versus the prior year, driven by the phasing of working capital and lower earnings, partially offset by lower capital expenditures. As Tim mentioned, we are on track to reduce capital expenditures by approximately $600 million year-over-year and to deliver working capital improvement of $500 million. I will now turn to guidance. We are maintaining our fiscal '24 adjusted EPS guidance. We expect certain incremental tailwinds and headwinds in a challenging environment compared to our prior outlook. On the tailwinds, with strong execution to date, we now expect pharmacy services to deliver ahead of our initial plan. We also anticipate an improvement in our full year adjusted effective tax rate as a result of tax planning initiatives, with a revised range of 15% to 17%, compared to the prior outlook of 19% to 20%. On the headwinds. First, we expect the pullback in consumer spending and shifting behaviors will continue to impact our retail sales in the US in the short term, while improving in the second half. We now expect retail comp sales for fiscal '24 to decline low single-digits compared to the prior outlook of flat. Second, we expect approximately $125 million in reduced sale and leaseback gains versus our prior outlook. As we explained in October, this is the last year of anticipated sale leaseback transactions. Lastly, we also forecast slightly lower overall market volume growth for prescriptions compared to our previous expectations. Importantly, as we build on the first quarter progress in US Healthcare, we continue to expect segment adjusted EBITDA to be breakeven at the midpoint of the guidance range. This represents an increase of $325 million to $425 million over fiscal '23. The improvement is mainly driven by actions taken to accelerate profitability at VillageMD, robust growth at Shields, and cost discipline. Next, I will discuss factors impacting the phasing of earnings in the second quarter versus second half of the fiscal year. In the second quarter, we will be lapping adjusted EPS of $1.16 in the prior year quarter. Three factors are expected to have an outsized impact on the year-over-year comparison. First, we anticipate lower contributions from sale and leaseback activity. Second, we're incorporating impacts of consumer pressures on spending and sentiment, and higher shrink on our retail business. Lastly, we expect these headwinds to be partly offset by a lower tax rate in the second quarter due to the phasing of tax planning initiatives. Looking ahead to the second half of fiscal '24, there are four key drivers for our improving earnings profile. First, as we have previously discussed, we expect actions to lower our cost base will continue to ramp over the year. Second, we expect US Healthcare segment profitability will scale over the balance of the year, mainly driven by benefits from optimizing the clinic footprint, growing patient panels and realigning cost at VillageMD, and growth across all of the businesses. Third, we cautiously expect modest level of retail market growth against an easier second half comparison. Finally, our tax rate was elevated in the first quarter. We expect favorability in the remainder of the year. With that, let me now pass it back to Tim for his closing remarks.

Operator:

[Operator Instructions] Your first question comes from the line of Lisa Gill from JPMorgan. Please go ahead. Your line is open.

Tim Wentworth:

Good morning, Lisa. Thanks. So, first of all, as it relates to sort of how much can Walgreens drive market shift, I think we certainly, as a major retail player and partner to PBMs and health plans, are in a position to bring value to the table in different ways that they will look at and determine -- help them win in their marketplaces. And so I actually think we can play a fairly significant role in the relationships that we have, the contracts that we write and the risk that we're willing to take in terms of the value we know we will create at the back of the store with the way we can interact with patients on behalf of those payors. So I don't think, as you know, any change in a reimbursement model is a speedy change. But I think there's very, very strong clear messaging in the marketplace from us and others that would point to the fact that the way that retail pharmacies will create value in the next 10 years isn't going to simply be lowering the cost of -- the unit cost of the drugs that we're purchasing and distributing because, quite frankly, that largely now is not where the real gains can be made for payors and for patients. And so from our standpoint, we're going to drive hard at it. We can work inside of, and we've proven, we're inside of cost-plus models now, transparent models now. We have a very robust cash program. And we think we're a terrific partner to others that want to win in the marketplace with these more innovative models that they have talked about and that they are pushing into the market. So I feel super good. Now in terms of -- I'm not going to give you guidance on the, as you would expect, on the margins for drugs, other than to say that most of the -- if you look at the innovation and reimbursement in pharmacy that's likely to evolve, it's likely to evolve in such a way that the margin per drug is going to be largely based on how much service do we provide to patients that's receiving it. And I think we've seen what that looks like in models like specialty. We've also seen, when it disconnects, what it looks like. And those are things that we're working against as well, where we're not compensated for the kind of services we provide. And we are pretty confident that the value that we can build in what we call our pharmacy services, but also our use of pharmacists to help patients take the drugs and stay on them safely and get the benefits and make sure the payors are getting what they're paying for, we're super well positioned to evolve those models as a leader.

Tim Wentworth:

Thank you.

George Hill:

Yes. Good morning, guys, and I'll echo Lisa's sentiment, is welcome aboard, Tim. I guess, Tim, as you look at the business from where you stand right now, you've kind of said that everything is on the table. But I guess, could you spend a little bit talking about what you think is part of the Walgreens core business, the WBA core business, and kind of what might be ancillary? And kind of maybe talk about how you're spending your time and where you think your strategic focus is most important to be spent right now.

George Hill:

Okay. And if I could have a quick follow-up. I guess, do you think of the care delivery business as kind of core to the business in the way you frame the person-to-person aspect?

George Hill:

The Village and some of the assets?

George Hill:

Very helpful color. Thanks, Tim.

Charles Rhyee:

Yes. Thanks for taking the question. And welcome, Tim, back. Tim, I wanted to touch on sort of your comments around specialty. Obviously, given you're in specialty from your prior roles, would love to hear a little bit more about this. You talked a little bit extensively about it and potentially the path for Walgreens to be a significantly bigger player in this segment. If I'm not mistaken, I think Shields is one of the few specialty pharmacies that has sort of access to almost all the limited distribution specialty drugs in the market. And sort of -- given sort of the shifting channel dynamics in this market over the next few years, particularly with, I would say, some ongoing regulatory scrutiny in this space, what kind of opportunities do you think this could create for Walgreens and Shields in particular? .

John Driscoll:

I think you nailed it, Tim. I think the only thing I'd add is we're not just growing with payors. We're growing beyond Blue's plans, with other payors. And it -- and what Shields does an exceptionally good job and in a growing market is leveraging a clinical pharmacy model, which delivers more adherence and better outcomes. And so it's really a great example, very -- where there's a lot of detail involved of we're being paid for performance, and that's growing in terms of building on Walgreens franchise with large hospital systems and small hospital systems around America. But it's based on execution, which I think there's still a lot of runway both from a payor and from a health system perspective, and obviously, the underlying especially drug market that is only going to get larger and more complicated, which I think plays to the Shields and the Walgreens strengths.

Tim Wentworth:

Yes is the short answer. We recognize that VillageMD represents, and City, represent a fabulous sandbox for us to build services, test them, and by the way, demonstrate that they perform and help them achieve their objectives, while at the same time putting us in a position of growing. And from our perspective, that is a starting point to being a partner of choice for any number of -- as you know, Village has certain geographies they're very deep in, but there are geographies they're not in at all. And there are large provider opportunities for us to partner in similar ways in those marketplaces to grow our business and, importantly, help them grow theirs.

Eric Percher:

Thank you. On pharmacy, we've been hearing from Walgreens and the pharmacy services are the key to driving better reimbursement for several years. And it looks like we're seeing that in vaccines today, the broader reimbursement pressure continues. And you have a peer saying that you've hit a floor on unit cost offsets. Independents are saying the same and it can't go lower. Do you share the view that we've hit a floor or that reimbursement pressure has reached a level you can't go past in '24 or '25? And perhaps more important, given your PBM experience, does Walgreens have the leverage needed to drive more fair reimbursement or new models?

Rick Gates:

Yes, Charles, this is Rick.

Rick Gates:

Yes. Sorry, Eric. The one thing I'll add is that we've been very successful at making sure that we are negotiating straight and core dispensing as one rate and anything else, value add, is a separate rate. So when you think about pay-for-performance contracts or you think about any of our services like vaccinations or test, test and treat, those are completely separate reimbursements that we're getting. So we've been very specific on how we contract so that we can be laser sharp on how we look at the unit economics of our scripts dispensing.

Operator:

Your next question comes from the line of Ann Hynes from Mizuho Securities. Please go ahead. Your line is open.

Tim Wentworth:

So how long to implement, as you know, PBM and health plan selling cycles are not short. And so what I would expect is to see material potential change within a year or two. And probably -- but you'd also see for new sales midyear for small groups and stuff that churns more regularly, I think you could see a fairly quick uptake to the extent that the market is looking for this. And again, I say that cautiously because we've seen before with transparent, I remember in 2005, I think, as a PBM, I wrote the -- we joined the Towers Watson collaborative and it was -- we were doing traditional deals within six months alongside of the transparent because the market actually didn't want the risk shifted to them. They wanted the risk being held by the PBM. So in this case though, I think that the plan designs that the market have largely evolved to are creating this underlying demand to give patients the pass-through of the cost plus experience so that they don't have an odd surprise when they go to the pharmacy counter of paying more for the drug than actually they would if they were a cash payor. So I do think that the employers don't like the employees coming into their benefits office asking questions about how good are my benefits, if, in fact -- this is my experience at the pharmacy counter. And that's causing some demand. Again, I'd let the PBM speak for themselves as to why they've launched these programs. But I would suspect that, that's a piece of it. I think as well, the regulatory environment continues to evolve. And I think that it is very appropriately responsive to some of the concerns that exist there. So I don't think it's going to be -- this is not a six-month implementation. We are prepared and already have sat down and had conversations to support these models, and we could convert to a cost plus model overnight. So we are a willing player in terms of what we would need to do to compete and win patients on a cost-plus basis. Why payers would do it? Again, I think I've just -- I've answered that for you in terms of it comes down to providing a benefit in a labor market that's fairly tough competitive-wise to folks that are valued. And so they want the benefit, the pharmacy benefits, the most used benefit, they want it to be valued. And they want it to be understood and they don't want it to be confusing. And so I think these models offer a pathway to achieve that. What's in it for us is being paid fairly for the services we're providing at the back of the store, and not subsidizing in a large-scale way the products that the patients are getting in a way that's not economic for us. And I think the big change there, if you go back, there was an appropriate amount of incentive being created in the system to dispense generics, for lots of obvious and good reasons. If you go back 25 years ago, the generic wave was -- people didn't believe would happen. We had to do generic sampling in the PBM industry to even convince physicians that they were okay to dispense and easy to dispense. And so that's different now. You've got 90-plus percent generic dispensing rates in most places. And the need to cross-subsidize and force essentially the profit on to the generic side in exchange for a subsidy on the brand, particularly with the new brands that are coming out, just doesn't work anymore for the pharmacies or, frankly, for the patients in high deductible plans. And so I think those powers will align to force this time a set of changes around reimbursement that may well stick.

Operator:

Your next question comes from the line of Kevin Caliendo from UBS. Please go ahead. Your line is open.

Tim Wentworth:

Well, I'll turn the first part of your question over to Manmohan and then be happy to answer the second part.

Tim Wentworth:

And as it relates to owning a PBM, I don't think that that's the best path for us, quite frankly. We -- I love -- and you've heard me say this in the past lives, I love being independent. I love being someone who can work across the ecosystem in a way that doesn't create anything but trust. And having a small PBM, the economics of delivering really good service and really good costs favor large PBMs for really obvious reasons. They produce a lot of value by scale. And so buying a second-tier PBM for us does not make sense. I would much rather work with every PBM than own a small one.

Tim Wentworth:

No, it's a great question, and we did see it this morning. And my preface is, as I've mentioned, we can work inside of almost any reimbursement model and be a service provider to payors as well as patients as well as pharma. With that said, I can touch it over to Rick, who can speak a little bit as it relates to sort of how we think about that program and others like it that may evolve in the market.

Kevin Caliendo:

Guys, thanks so much for all the details on this call. It's been great.

Operator:

Your next question comes from the line of Elizabeth Anderson from Evercore ISI. Please go ahead. Your line is open.

Tim Wentworth:

Yes, I will let Rick answer, other than to say I had a conversation last week with the CEO of a very, very large payor who wanted to sit our teams down to actually look at 2025 and how we may work together, particularly on Medicare Advantage, with them. And so there is a lot of -- some of the other dynamics in the marketplace that are macro now are going to then bubble back through our contracting process and the kind of conversations that we can come to the table creatively with. Rick, in terms of the current state of play, you want to address that?

Elizabeth Anderson:

Got it. Thanks so much.

Stephanie Davis:

Hey, guys. Congrats on the quarter and thanks for taking my question. Tim, I've got one last one on the cost plus model, just given your background in PBM and payor world. I'd be curious about your perspective on market share opportunities in this model. Is it status quo given it's a line of one of your peers? Or is there a way to structure those to increase relative attractiveness or kind of gain some share as well?

Operator:

Thank you. I will now turn the call over to Tim Wentworth, Chief Executive Officer, for closing remarks.

Operator:

This concludes today's conference call. Thank you for your participation and you may now disconnect.

Tiffany Kanaga:

Good morning. Thank you for joining us for the Walgreens Boots Alliance earnings call for the fourth quarter of fiscal year 2023. I'm Tiffany Kanaga, Vice President of Global Investor Relations. Joining me on today's call are Ginger Graham, our Interim Chief Executive Officer; Manmohan Mahajan, our Interim Global Chief Financial Officer; and John Driscoll, President of U.S. Healthcare. In addition, Rick Gates, Senior Vice President and Chief Pharmacy Officer at Walgreens and Tracey Brown, President of Walgreens Retail and Chief Customer Officer will participate in Q&A. All references to the COVID-19 headwind on today’s call include U.S. vaccines, drive-through tests, and OTC tests. As always, during the conference call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on Slide 2 and those outlined in our latest form 10-K filed with the Securities and Exchange Commission. We undertake no obligation to publicly update any forward-looking statement after this presentation, whether as a result of new information, future events, changes in assumptions or otherwise. You can find our press release and the slides referenced on this call in the Investors section of the Walgreens Boots Alliance website. The slides in the press release also contain further information about the non-GAAP financial measures that we will discuss during this call. I'll now turn the call over to Ginger.

Tim Wentworth:

Thanks, Ginger. I’m excited to join the call today and even more excited to get to work after next week. During my nearly three decades in health care, I’ve led efforts to create innovative and flexible health services to meet the needs of health plans, employers and government organizations as well as their employees and members. And building a team that grew the largest, most operationally efficient PBM in the country or helping to establish Accredo as the most significant specialty pharmacy in the United States or helping to put together Evernorth [ph], a $100 billion plus health services business, I’ve consistently built relationships and offered solutions both for customers who are looking for a trusted innovative partner who listens, and for patients who are looking for access and affordability. This impact was the direct result of having a winning team of employees and a culture that valued patients. Now I know WBA. I have worked with Walgreens as a customer, partner, competitor, investor and family member, and I understand the challenges ahead for us as well as for the health care industry. Walgreens is built on convenience, access and trust and has unique advantages in today's health care environment. I see the opportunities before us to build on our pharmacy strength, and our trusted brand to evolve health care and the customer experience to deliver better outcomes at a lower cost. Now I've learned a lot over the recent weeks, as you might imagine. I've spent time with each and every Board member, talking about the future and their priorities, learning about our challenges and opportunities, and most importantly, the importance of execution. Those discussions inform my own research. And of course, I have my personal experiences. For example, just last week, Maeve, a terrific store employee in Rochester, New York, professionally and cheerfully delivered to me a critical prescription to help my mother. It was the kind of experience I appreciate and everyone deserves. And I know that Maeve is surrounded by committed pharmacists and other team members, all of whom together can improve the lives of each person who walks through our door in my mom's hometown Walgreens in Rochester, and in every store we operate. All of these experiences together made my decision to join WBA, frankly, an easy one. There is a reservoir of goodwill for this company across communities, and a substantial opportunity to return value to our customers, employees and shareholders. Alongside the Board, our team members and partners, I'm enthusiastic about our future and realizing our health care strategy and vision. I'm humbled to serve as WBA's next CEO and look forward to speaking to many of you in the coming weeks. Ginger, thank you, and thank you to the entire WBA Board for this opportunity. I'll now turn it back to you.

Manmohan Mahajan:

Thank you, Ginger, and good morning. Fourth quarter adjusted EPS came in near the low end of the range provided on June 27 and in line with our update on September 1. Our results reflected a further slowdown in respiratory events, shifting consumer behaviors driven by a challenging macroeconomic environment and lower COVID-19 related contributions. Overall, we delivered 8.3% sales growth on a constant currency basis. This includes $1.4 billion in growth in our health care business versus the prior year. Our U.S Retail Pharmacy business grew 3.6% and our Boots U.K business delivered 10.9% sales growth. Adjusted EPS of $0.67 was down 18%, on a constant currency basis. The 18% decline was driven by lower COVID-19 contributions, lower sale leaseback gains net of rent and a higher tax rate. We saw positive results from underlying retail pharmacy performance, lower incentive accruals strong international growth and improved profitability in U.S health care. GAAP net loss of $180 million improved by $235 million compared to prior year. Remember that we had a $783 million noncash impairment charge in the year ago quarter. The loss in the quarter was driven by charges for certain legal and regulatory accruals and settlements, and one-time charges related to transformational cost management program. Now let's move to the year-to-date highlights. Fiscal '23 sales increased 5.6% on a constant currency basis. Adjusted EPS of $3.98 was down 20.3% on a constant currency basis. Our results reflected lower COVID-19 contributions and increased labor investments. These challenges were partly offset by lower incentive accruals, growth in international and retail performance in the U.S. GAAP net loss was $3.1 billion compared to net earnings of $4.3 billion in fiscal '22. Fiscal '23 included a $5.5 billion after tax charge for opioid-related claims and lawsuits. Now, let's move to the U.S Retail Pharmacy segments. Comp sales growth was 5.7% reflecting higher brand inflation and mix impacts in our pharmacy business and comp script growth. AOI was down 29.4% in the quarter, reflecting a 27% impact from lower COVID-19 contributions and a 17% impact from lower levels of sale leaseback gains net of rent, higher underlying pharmacy gross profit, and lower incentive accruals contributed positively to AOI. Let me now turn to U.S Pharmacy. Pharmacy comp sales increased 9.2% in the quarter, driven by brand inflation and mix impacts and comp script growth. A weaker than normal respiratory season and impact of Medicaid redeterminations resulted in a weaker overall prescription market during the quarter. Third-party market data showed flu, cold and respiratory activity down 35% compared to the prior year quarter. Despite these weaker trends, comp scripts grew 1.6% excluding immunizations. We administered roughly 400,000 COVID-19 vaccinations in the quarter, down from 2.9 million in the prior year quarter. Excluding the impact of COVID-19, fourth quarter adjusted gross profit increased versus the prior year period. Turning next to our U.S Retail business. During the quarter, the Retail business was impacted by a weaker than normal respiratory season, and a continued shift in consumer behaviors driven by a challenging macroeconomic environment. As a result, comparable sales declined 3.3% in the quarter. There are three main drivers. First, an 80% decline in COVID-19 test kits impacted growth by around 160 basis points. Second, weaker cough, cold, flu sales had an approximately 100 basis points impact. And lastly, we were impacted by approximately 60 basis points from summer seasonal weakness as customers continue to pull back on discretionary spending, reflecting the challenging macroeconomic environment. Looking at category performance, we saw a decline in health and wellness while personal care and beauty both grew low single digits. Retail gross margin was impacted by elevated shrink and lower sales in a higher margin categories such as cough, cold, flu, seasonal and COVID-19 test kits. Despite the pressure in the second half, gross margin grew by nearly 100 basis points in fiscal '23 on top of 100 basis point increase in the prior year. Turning next to the international segment, and as always, I will talk in constant currency numbers. The International segment again performed very well in the quarter delivering profit ahead of guidance. Sales increased 6.7% with growth across all international markets. Boots U.K was up 10.9% and Germany wholesale grew 3.5%. Gross Profit increased nearly 10%, outpacing sales growth. Boots U.K experienced continued strong retail growth and improved pharmacy margin compared to the prior year period. Despite higher inflation and increased store related costs, SG&A as a percentage of sales improved, benefiting from disciplined cost management. These impacts resulted in adjusted operating income growth of 52%. Let's now look in more details at Boots U.K. Comp retail sales increased 11.7% on top of a 15.2% comp in the prior year quarter. Boots grew market share for the 10th consecutive quarter, approximately 1 percentage point versus the prior year quarter. With gains in beauty and health and wellness, Boots.com sales grew 29% year-on-year and represented over 13% of our U.K Retail sales. Turning next to U.S Healthcare. U.S Healthcare segment results were in line with the guidance provided on June 27 with AOI and adjusted EBITDA both up sequentially and year-over-year. The business continues to rapidly scale with fourth quarter sales of $2 billion, reflecting the acquisition of CareCentrix, the acquisition of Summit Health by VillageMD and growth in all businesses. Segment pro forma sales grew 19% driven by VillageMD sales of $1.4 billion, up 17% on a pro forma basis. The growth was led by higher value-based lives, expansion of the clinic footprint and increased fee-for-service volumes as clinics mature. CareCentrix sales were up 24% on a pro forma basis, and Shields delivered pro forma sales growth of 29%. Segment gross profit improved 29% sequentially. Adjusted EBITDA was a loss of $30 million, an improvement of $103 million from the prior year quarter. Turning next to the cash flow. We generated $2.3 billion of operating cash flow in fiscal '23, reflecting lower COVID-19 contributions, opioid settlement payments and losses in our U.S Healthcare segment. Fiscal '23 capital expenditures of $2.1 billion increased by approximately $400 million compared to the prior year. This was driven by growth initiatives, including VillageMD and the micro fulfillment center rollout. This resulted in free cash flow of $665 million. We also reduced debt by $2.6 billion in fiscal '23. As Ginger discussed, we are taking a number of actions to drive improvement in free cash flow in fiscal '24, including approximately $600 million in reduced capital expenditures, and approximately $500 million benefit from working capital optimization initiatives. I will now turn to our fiscal '24 guidance. We are guiding to fiscal '24 adjusted EPS of $3.20 to $3.50, down from $3.98 in fiscal '23. Before discussing underlying performance, I want to mention some key headwinds that we will face in fiscal '24. These include lower sale and leaseback contributions, a higher tax rate and lower COVID-19 contributions. We're also assuming continued macroeconomic pressure on the consumer and a weaker respiratory season compared to the prior year. Excluding the impact of these headwinds, our forecast assumes underlying growth which is primarily driven by two factors. First, we expect accelerating profitability in our U.S Healthcare business in 2024 as the segment continues to scale with adjusted EBITDA expected to be at or around breakeven Second, we expect U.S Retail Pharmacy underlying adjusted operating income to be driven by immediate actions to improve the cost base and modest underlying growth in both retail and pharmacy. Let me now illustrate the larger moving pieces as we bridge from fiscal '23 to fiscal '24. I mentioned three notable headwinds to adjusted EPS, sale and leaseback is estimated to have a negative year on year impact of between 11% to 13%. As we have said before, we do not expect any contribution from sale and leaseback beyond fiscal '24. Tax rates will be higher in 2024, increasing by approximately 10 percentage points compared to 2023 due to higher international rates and benefits recognized in 2023 that are not expected to repeat in 2024. Finally, we're projecting lower COVID-19 contributions that result in a 6% to 7% year-on-year impact. Excluding these impacts, we expect underlying growth of 9% to 12% driven by accelerating profitability in U.S Healthcare, and immediate actions to improve our cost base across the company. Let me now walk you through the 2024 guidance in greater detail. Overall, we expect total sales in fiscal '24 to be up 1% to 4% on a constant currency basis. Adjusted operating income is expected to be down 5% to 12% on a constant currency basis. Let me now walk you through the assumptions and guidance for each of our reporting segments starting with U.S Retail Pharmacy. U.S Retail Pharmacy segment sales are projected to be flat to up 2%. AOI will be negatively impacted by approximately 8 percentage points from the lower COVID-19 contributions and roughly 11 percentage points of lower sale and leaseback gains. Excluding these impacts, the underlying business is projected to drive 5% to 10% AOI growth. I will now take you through the key business drivers. First, we anticipate script volume growth driven by overall market growth. On reimbursement, we have roughly 75% of the contract signed for calendar year '24. We do expect reimbursement pressure to be less of a headwind in fiscal '24 than in fiscal '23. We're projecting approximately 5 million COVID vaccinations in 2024. Quarter-to-date, we're well on track and have already administered over 3 million COVID vaccinations. In Retail, we expect margins to benefit from our category performance improvement program and a roughly 1 percentage point increase in on-rent penetration. At the same time, we're adopting a prudent approach. We see a continuation of the challenging trends that impacted the second half of fiscal 2023. We're projecting flat comparable sales due to a milder cough, cold and flu season year-on-year; lower COVID OTC test kit volume and continued consumer pressure. We're also planning a higher level of shrink, which has been increasing in the last several months and continues to represent a serious systemic issue across the retail industry. Within SG&A, we expect to achieve over $1 billion of cost savings during fiscal 2024 as Ginger has already described. Turning next to guidance for the International segment. Segment sales are projected flat to up 4% on a constant currency basis. We expect adjusted operating income of $745 million to $770 million, representing a constant currency decline of 18% to 21%. The year-on-year decline is entirely driven by property transactions during fiscal '23 which will not be repeated and the pending sales of the business in Chile. Excluding those impacts, we expect AOI growth to be flat to up 2% with continued execution within Boots U.K Retail business held back by the impact of inflationary pressures. Now let's turn to U.S Healthcare. We are focused on driving improved financial performance for U.S Healthcare in 2024. We expect fiscal '24 sales of $8.3 billion to $8.8 billion, reflecting first full year of Summit held an ongoing growth in all businesses. On a pro forma basis, we see sales growth of 10% to 17% and expect fiscal '24 adjusted EBITDA to be breakeven at the midpoint of the guidance range. This represents an increase of $325 million to $425 million compared to fiscal '23 driven by growth in full risk lives, fee-for-service volume, optimization of the clinic footprint and realignment of the cost base at VillageMD. Robust growth at Shields and Walgreens health business growth driven by scaling of our clinical trial business and health care services and through cost management. We assume an effective tax rate of approximately 19% to 20% with the year-over-year increase driven by higher international statutory tax rates and benefits recognized in 2023 that are not expected to repeat in 2024. Interest expense is expected to decrease by approximately $80 million. In the first quarter, we will be lapping the prior year quarters adjusted EPS of $1.16. The following five factors are expected to have an outsized impact in the first quarter this year. First, we had a significant tax benefit in prior year period, which will not repeat in the first quarter of 2024. Second, we're expecting COVID-19 contributions to be lower in the first quarter, reflecting last year's Omicron wave and seasonality. Third, we anticipate lower contributions from sale and leaseback activity. Fourth, we're lapping elevated levels of labor investments in our pharmacy staff. Finally, we also expect a more normalized flu season in fiscal '24 peaking in the second quarter versus the early start in the prior year. Moving beyond the first quarter, we will see sequential improvement, and I will discuss the top four drivers. First, we're executing a series of actions to lower our cost base. These will have limited impact on the first quarter, but will start to ramp in the second quarter. There is adjusted EPS benefit of $0.50 to $0.60 in the balance of the year compared to the first quarter. Second, in our U.S Healthcare segment, we expect profitability to improve from optimizing the clinic footprint, growing patient panels and realigning costs. Third, we expect growing contributions from retail initiatives, including sequentially improving retail comps and margin expansion programs. Finally, seasonality plays a role in our business benefiting the second quarter, which is usually the height of the cough, cold, flu season in the U.S and as when Boots U.K sees significant profit driven by the holiday season. With that, let me now hand it over to John to discuss our U.S Healthcare business.

Ginger L. Graham:

Thank you, John. The last several weeks have reinforced my confidence in the company's potential and also crystallized what actions must be taken to achieve it. We are focused on the right things. I am already encouraged by early results from decisions that advance our customer focus, eliminate cost and conserve cash. While we have a challenging year ahead of us, as Manmohan said earlier, our plan anticipates 9% to 12% growth in adjusted operating income from our underlying business. This comes in large part from our aggressive actions to manage costs we control. Of course, none of this would be possible without the hard work and dedication of a vast team of people here at WBA. They are doing the work, and they move quickly to respond to the realities of the business. I'm thankful for their responsiveness and commitment and for the opportunity that lies ahead as we set up WBA for a successful future together. Now I would like to open the line for questions. Operator?

Lisa Gill:

Thanks very much. Good morning, everyone. I just really wanted to understand two things a little bit better. First, John, when you talk about the ramp and the challenges to profitability, one; when we think about that improved profitability, the exit of those markets from the 60 clinics, is that contributing to better AOI as we think about 2024? And then secondly, kind of trying to better understand where you see the biggest opportunities from a talent perspective, you talked about a lot of positives, Pearl, you talked about the turnaround at Village, obviously CareCentrix did really well this quarter, but can you maybe just talk about what are some of the other challenges you feel like you need to overcome to really truly make this a profitable business?

Lisa Gill:

And then does this ties into kind of what everybody is talking about on the retail side, right. And I know you've given some guidance there. But as we think about expectation of scripts coming down, I would think that maybe there's an opportunity for more scripts to be pulled through into Walgreens. I understand respiratory, et cetera. But maybe if somebody can comment, Rick, if Rick is on the call, how do you think about that pull-through an opportunity on the script, excluding what we're seeing on the respiratory side? I know that the talk was 75% of relationships are signed on reimbursement, but reimbursements are expected to be down like what are going to be some of the big drivers beyond the $1 billion of incremental cost saves, that we can actually see drive the operating profit and your core pharmacy business?

Operator:

Your next question comes from the line of Charles Rhyee from TD Cowen. Please go ahead.

Ginger L. Graham:

Thanks, Charles. Let me start off with the process around Tim. We, as a Board, engaged Global Executive Search firm, and spent quite a bit of time with them talking about what we believe were the important characteristics, attributes and experiences of someone who would lead an organization of this impact and magnitude. We did review dozens of candidates, there was quite an extensive search process was undertaken. And we then narrowed it down to a top few where personal interviews were conducted with those individuals. We did a very aggressive background and reference check with the primary candidates, and then have had what I would call very extended conversations, in a broad sense about philosophy, background, experiences, the future, the market dynamics, the capabilities required, and about the ability to manage a very complex global organization. As Tim mentioned in his comments, every single Board member has been involved. I would say that we've done a very extensive evaluation through the process. And we did decide in the process that Tim was a very striking candidate for us on a number of fronts. Obviously, we were clear that we were looking for someone who had extensive background in health care. And Tim brings that pharmacy, provider, payer networks distribution. He really does understand a surround sound of the feedback that we get from the market about Walgreens and its many businesses. He also has managed scale and complexity before, which I think is very important. This is $140 billion business, it's global. It has many possibilities. But someone has to be able to manage the strategic and the operational aspects of that. And I think you heard from him, even in his quick comments, he's very patient and customer focused, which to me is of primary importance because that passion for the business, the understanding we have on human lives, the importance of our disciplines, our safety and compliance, our quality, our personnel, and the love he has of the store, those are big, big wins for the company. So I personally am thrilled I've had I don't know how many hours with Tim. And it's a lot and he and I are not done yet. We actually start together next week in a very extended work session. So I think the Board is excited as Tim conveyed his excitement. And we're all looking forward to him starting obviously, that won't happen again now for till the 23rd. So you -- the second question, you ask, what's his involvement in all of this? Obviously, we've only recently come to this agreement between us. And so Tim has not been involved at all, in the business or the operations. He's not been a party to forming the 2024 plan. Although he and I have had extensive discussions about what the opportunities are the business capabilities and our challenges, I think he mentioned maybe in his comments as well, that he comes in eyes wide open. So I think that's very important. But Tim is not a party to this plan. He is a party to what we believe is possible, and he understands the assumptions we're making. And he can't wait to get here. The third question I think you asked was the Board and its discussions about the dividend. So as you might imagine, this is a very important topic to the company. We have a very thorough process as a Board that we review every year. And at this point, the Board's made no changes to the dividend policy.

George Hill:

Yes. Good morning, guys. This is kind of a two-part question that go together. I guess, can you talk about -- think about the segment's how we should look at apportioning the $1 billion in cost savings. And kind of the other side of that is the cut in CapEx seems pretty severe. Its taking $0.5 billion or so [indiscernible] $2 billion number. How should we think about from a segment perspective, kind of where the CapEx cuts are coming from, and kind of how they're being apportioned. And I don't know if you can kind of give any examples, specifically of big sources of cost cutting savings, where the bigger sources of CapEx savings? Thanks.

Operator:

Your next question comes from the line of Kevin Caliendo from UBS. Please go ahead.

A - Manmohan Mahajan:

Kevin, it's a fair question. I think the way to think about the 60 clinic reductions is that some of them will be closed. In some cases, we're going to transition those to affiliate relationships. But it comes down to how quickly can we unlock profitable growth. And in the Village, City, Summit, it's about concentration of power and relevance within certain markets. Every one of our clinics actually shows month over month growth, but we don't see the growth coming fast enough in certain markets. And so we're going to pivot there and be very focused on where we can drive the most profitable growth. We're growing through the right sizing of our footprint, and some of the changes in our relationships. But our strategy going forward will be really focusing on markets where we see that momentum and scale and at a level that we want to see to drive the profits and the margin expectations that we want. So it's really more of a discipline around focusing on markets where we can go deep and continue to grow in a compounded series way, profitably.

A - Manmohan Mahajan:

Yes, sure. So, look, as at the end of the stand, and as you rightly pointed out, we do not generally provide guidance on the free cash flows. But we have outlined -- we do expect significant growth. And what we did here is we've carved out two significant drivers year-on-year. But having said that, and then we're looking at a third one to that as well just on the U.S Healthcare, we are expecting in fiscal '24 at the midpoint of the range to be breakeven on the EBITDA. And when you look at that year-on-year, that is significant improvement on the cash as well. So having said that, we're also looking at other offsetting items. So, we just wanted to make sure we have kind of the three. We do expect significant improvement and we’ve those three key drivers there.

Brian Tanquilut:

Hi, good morning. I guess, John, just a question of VillageMD, right. You're clearly showing some expectation for meaningful year-over-year improvement there or at least the whole Walgreens Health segment. As I think about the fact that you're opening new clinics, how does the J curve factor into this, right. Because I'm just trying to bridge to that significant improvement when you're opening new clinics, simply [ph] you will lose money?

Operator:

Your next question comes from the line of Elizabeth Anderson from Evercore ISI. Please go ahead.

John Driscoll:

I think on the utilization, utilization is our friend, obviously at City and at Summit, and has been more of a headwind in Village. The good news from a Village perspective is that even with that, increasing in utilization post-COVID, that we are particularly in our mature markets showing an improved margin profile on our full risk lives. And so it's the way we solve for what's a benefit of having a two-part portfolio is continuing to convert more of those fee-for-service lives to full risk lives with a better margin profile, and optimizing our cost base so that we can get the full value of that improvement in revenues.

Operator:

Our final question comes from Eric Percher from Nephron Research. Please go ahead.

John Driscoll:

Yes, maybe let me start with the one-time costs. Look, we have significant savings here that we're going to achieve in fiscal '24. And obviously there is going to be a cost associated with it. But when I look at the cash flow impact in the year within '24, we see a positive impact net-net from a cash flow perspective of cost savings initiative net of the costs associated with it. On the labor cost, yes, look, we have seen investments in last year and a half. If you think about Q1, Q1 would be the last quarter where we would see headwinds from a labor investment perspective. Because most of these investments were in play starting second quarter last year. Apart from that I think normal business course investments and labor will continue.

Ginger L. Graham:

Thanks so much, and thanks everyone for joining the call and your questions. We really appreciate the feedback and the support. We are clear on our challenges and our priorities and we are focused on the future. We're looking forward to your further question. So please reach out to our Investor Relations team. Thanks very much.

Tiffany Kanaga:

Good morning. Thank you for joining us for the Walgreens Boots Alliance earnings call for the third quarter of fiscal year 2023. I'm Tiffany Kanaga, Vice President of Global Investor Relations. Joining me on today's call are Roz Brewer, our Chief Executive Officer; James Kehoe, our Chief Financial Officer; and John Driscoll, President of U.S. Healthcare; Rick Gates, Senior Vice President and Chief Pharmacy Officer at Walgreens will participate in Q&A. All references to the COVID-19 headwind on today’s call include U.S. vaccines, drive-through tests, and OTC tests. As always, during the conference call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on slide two and those outlined in our latest forms 10-K and 10-Q filed with the Securities and Exchange Commission. We undertake no obligation to publicly update any forward-looking statement after this presentation, whether as a result of new information, future events, changes in assumptions or otherwise. You can find our press release and the slides referenced on this call in the Investors section of the Walgreens Boots Alliance website. The slides in the press release also contain further information about the non-GAAP financial measures that we will discuss during this call. I'll now turn the call over to Roz.

James Kehoe:

Thank you, Roz, and good morning. In summary, while we returned to adjusted EPS growth in the third quarter, earnings were below our expectations. As we encountered lower COVID contributions, shifting consumer behaviors, and a recent slowdown in respiratory incidences. Overall, we delivered 8.9% sales growth on a constant currency basis ahead of our plan, led by our U.S. pharmacy business, up 10%. Our Boots U.K. retail business, which delivered a solid 13% comp and our scaling healthcare business, which added $1.4 billion in sales versus the prior year. Adjusted EPS increased 3.6% on a constant currency basis despite a 19 percentage point headwind due to a lower COVID-19 contribution and 8 percentage points from reduced ownership of AmerisourceBergen. These were partly offset by favorability’s from sale and leaseback, incentive accruals, and tax. All of these items net out to be a 4.7 percentage point headwind to EPS growth and this demonstrates overall good quality of earnings in the quarter. As Roz discussed, we are lowering our fiscal ‘23 adjusted EPS guidance to $4.00 to $4.05. This updated outlook reflects consumer and category trends, a lower contribution from COVID and an overall more cautious forward view given the continued macroeconomic uncertainty. Later, I will provide more color around the key assumptions underpinning our revised guidance. But first, let's look at the third quarter results in more detail. Adjusted operating income increased 0.6% on a constant currency basis. This included a 22 percentage point headwind from COVID-19 and a 7% drag from reduced AmerisourceBergen ownership, partly offset by sale and leaseback gains and incentive accruals. All of these items net out to an approximately 6% headwind to AOI growth. GAAP net earnings of $118 million declined a $171 million, compared to prior year. The current quarter included a $323 million after tax impairment charge related to pharmacy licenses in the U.K. Adjusted net earnings increased 3.4% on a constant currency basis to $860 million. Now let's move to the year-to-date highlights. Year-to-date sales increased 4.8% on a constant currency basis. Adjusted EPS was down 20.7%, reflecting a lower COVID-19 contribution of 20 percentage points and reduced AmerisourceBergen ownership of 3 percentage points. GAAP earnings were a loss of $2.9 billion, compared to net earnings of $4.8 billion in 2022. With the current year including a $5.5 billion after tax charge for opioid related claims and lawsuits. Now let's move to the U.S. Retail Pharmacy segment. Sales increased 4.4% in the quarter with comp sales up 7%. Adjusted gross profit declined 3.2% year-on-year, reflecting a 5 percentage point negative impact from COVID-19, a 5% reduction in SG&A expense more than offset the gross profit decline and led to AOI growth of 8.4% before the inclusion of AmerisourceBergen equity income. The sell down of our ABC stake led to a slight AOI decline of 0.4%. Let me now turn to U.S. Pharmacy. Pharmacy sales increased 6.3% and advanced 9.8% on a comparable basis, driven by both script growth and brand inflation. Excluding immunizations, comp scripts grew 2.8%, a slight deceleration from the prior quarter and reflecting broader prescription market trends. As expected, adjusted gross profit declined year-on-year, although excluding COVID, gross profit increased as script growth and lower cost of goods sold more than offset reimbursement pressure. Turning next to our U.S. retail business. Following several quarters of very good performance, the retail business encountered some headwinds in the third quarter as the consumer navigated through a difficult macroeconomic backdrop. Excluding tobacco, comp sales grew 0.2%, held back by 90 basis points due to holiday seasonal weakness as consumers pulled back on discretionary spending and 80 basis points due to lower sales of COVID-19 OTC test kits. We saw solid growth in grocery and household, up 4.7% and beauty, up 3.7%. Cough cold flu sales were flat, but slowed significantly in May, due to a decline in respiratory incidences. IQVIA fan data shows flu, cold and respiratory activity, down 8% in the third quarter, versus a 15% increase in the second quarter with May down in the mid-20% range. Following several consecutive quarters of year-on-year margin expansion, retail gross margin came under modest pressure in the third quarter. We've seen similar trends as the broader market with our promotional units, up around 7% in the most recent 13-week period. However, on a year-to-date basis, gross margin has increased by more than 100 basis points, driven by effective margin management. Turning next to the International segment and as always, I'll talk to constant currency numbers. The international segment continues to perform very well. Sales increased 7% with good growth across all international markets. Boots U.K. was up 10%, and Germany wholesale grew 4%. Adjusted operating income of $208 million increased 21%, despite a $40 million year-on-year headwind from sale and leaseback transactions. Let's now look in more detail at Boots U.K. Boots U.K. sales advanced 10%, pharmacy comp sales increased 6%, and comp retail sales grew 13%. And this comes on top of a 24% comp in the same quarter last year. Boots grew market share for the ninth consecutive quarter with gains across all categories. We successfully launched Future Renew, a range of innovative new skincare with very positive consumer response. This product line was recently launched in Walgreens. Boots.com sales grew 25% year-on-year, and have more than doubled versus the equivalent pre-COVID quarter. Over 14% of our U.K. retail sales now comes from Boots.com. Turning next to U.S. Healthcare. The U.S. Healthcare business continues to rapidly scale with sales reaching $2 billion more than doubling from the prior year, pro forma sales growth was 22%. VillageMD sales were $1.5 billion, up 22% on a pro forma basis. Legacy VillageMD growth was driven by expansion of the clinic footprint, with an additional 93 clinics opened in the past year and the ongoing maturation of existing clinics. Summit Health was, however, impacted by a weaker respiratory season that led to fewer CityMD visits and fewer referrals across the Summit Health Network. Shields delivered another strong quarter, up 35% and driven by contract wins, including the addition of six new health system partners and further expansion of existing partnerships. CareCentrix sales were approximately $360 million with pro forma sales growth of 15%. Adjusted EBITDA reflects weaker-than-expected results at VillageMD and Summit Health, partly offset by continued growth at Shields. CityMD has been impacted by lower visit volume, whereas the VillageMD EBITDA loss reflects new clinic expansions. We anticipate improvement in the fourth quarter as we build patient [tunnels] (ph) and traffic and align the cost profile with sales. Let's now look at some of the key metrics for the U.S. Healthcare Business. VillageMD managed 850,000 value based lives at quarter end, reflecting year-over-year growth of approximately 27% in the legacy VillageMD business and the addition of 309,000 value based lives from Summit. Total value based lives include 179,000 full risk lives. Our clinical trials business continues to expand with eight contracts signed and a robust pipeline. Turning next to cash flow. We generated $1.2 billion of operating cash flow, with free cash flow of $116 million. The year-over-year decline reflected lower earnings due to COVID-19, a lower contribution from working capital and increased capital expenditures related to growth initiatives. Looking ahead, we are reprioritizing capital projects to reduce plan spend and are rolling out of comprehensive set of working capital optimization initiatives to enhance our cash generation. Turning now to guidance. We are updating our full-year ‘23 adjusted EPS guidance $4.00 to $4.05, a constant currency decline of around 20%. Excluding the impact of COVID-19 and ForEx core adjusted EPS is flat to up 1%. The EPS contribution from COVID-19 is $0.23 lower than our original assumptions at the start of the year. At the beginning of the fiscal year, we expected 16 million vaccinations. And despite the spring booster recommendation, we have reduced our full-year expectations to 12.5 million vaccinations. COVID testing has decelerated at an even faster pace. Additionally, we have incorporated the impacts of a more cautious consumer outlook, leading to a $0.20 to $0.25 impact as we realign our fourth quarter sales and margin goals to reflect recent trends. Finally, while reducing our ownership stake in AmerisourceBergen has improved our debt position. It has, however, led to a $0.05 headwind. Let me now walk you through our assumptions for each of our business segments. Starting with U.S. Retail Pharmacy, we now project sales of around $110 billion, up low-single-digits year-on-year. AOI is projected at $3.8 billion to $3.9 billion, a decline of 22% to 24%, reflecting a 23 percentage point headwind from COVID-19 and 3 percentage points from our reduced ownership stake in AmerisourceBergen. Excluding these two impacts, AOI growth is up 2% to 4%. Turning next to the International segment, which is performing well this year. Sales are projected to grow 6% to 8% on a constant currency basis, reflecting strong execution, especially in the U.K. Adjusted operating income of around $900 million, represents constant currency growth of approximately 30%. This performance is towards the top end of our original expectations. Our revised outlook for U.S. Healthcare reflects lower visits at CityMD, the continued ramp up of new VillageMD sites and the slower integration of prior acquisitions into Summit's multi-specialty business. We expect sales of $6.3 billion to $6.8 billion, an increase of $4.8 billion versus prior year and growing approximately 25% on a pro form a basis. We are projecting an adjusted EBITDA loss of $340 million to $380 million, including the factors I mentioned earlier. While the profit performance so far this year has been below plan, rapid correction actions are underway, and we expect to drive sequential adjusted EBITDA improvement in the fourth quarter and beyond. Turning now to our corporate assumptions, our full-year tax rate is now expected to be around 12% and this basically reflects the favorability we have seen so far in fiscal ‘23, with some of the benefits reversing in the fourth quarter. More specifically, we expect the fourth quarter tax rate of around 23%. Full-year guidance of $4.00 to $4.05 implies fourth quarter EPS of approximately $0.70 to $0.75. The result is weighed down by a much higher average tax rate and the fourth quarter typically is the lowest to extrapolate the quarter. As such it would be incorrect to extrapolate the quarter as a proxy for 2024. First, normalizing for the tax rate would result in an additional $0.08 in the quarter. Second, seasonality impacts all of our businesses. Looking back over the past five years, and excluding the impact from COVID-19 and ABC, approximately 20% of our adjusted operating income comes in the fourth quarter. To conclude, adjusting the fourth quarter for tax rate, an accounting for seasonality would result in annual adjusted EPS of around $4 per share. Next, I would like to cover the key factors that will influence 2024 performance. Overall, we expect the long-term tailwinds to outweigh the near-term pressures. Some of the challenges we faced in fiscal ‘23 are expected to continue into ‘24. We do expect to see some continued weakness in consumer spending, together with moderate increases in labor costs. While reimbursement pressure has eased somewhat over the past 18 months, it is not going away and we will continue to identify way to offset the pressure. In addition we expect lower sale and leaseback activity in fiscal ‘24, and the tax rate will be higher as we lap a very favorable fiscal ‘23 performance and higher statutory tax rates are introduced in both the U.K. and Switzerland. However, we have multiple profit drivers and initiatives that will drive sustainable profit growth Our U.S. Healthcare business will be a significant profit driver, including the first full-year of Summit Health, a maturing VillageMD clinic profile and strong actions to accelerate their path to profitability. We expect continued script volume growth and strong contribution from front of store initiatives. These include own brand penetration gains and the further expansion of our successful category performance improvement program. Lastly, the transformational cost management program will deliver at least $800 million of savings next year. Next, let's take a deeper look into 2024. We expect fiscal 2024 adjusted operating income to grow low-to-mid-single-digits, led by the U.S. Healthcare segment and solid execution in U.S. Retail Pharmacy. We are expecting U.S. Healthcare to be the largest driver of total company AOI growth, as the business is rapidly gaining scale, and we will now accelerate the path to profitability. John Driscoll will provide much more color on the immediate actions we are taking to accelerate EBITDA delivery. We expect U.S. Retail Pharmacy AOI to be flat to down slightly, due to lower COVID contributions of approximately $290 million and a $260 million step down in sale and leaseback gains. Absent these items, we anticipate solid core growth led by transformational cost management program savings and expanding gross profit. Finally, we expect international AOI to decline year-on-year as we lap sizable real estate gains and lose the relatively small AOI contribution from the sale of our business in Chile. Core profit growth will be flat as the business manages through high levels of cost and labor inflation. That being said, our International business is well positioned for long-term success with market share gains and an advantaged and growing e-commerce presence. We do expect AOI growth to outpace EPS, due to a higher tax rate and non-controlling interest. Next, we'll look at U.S. Pharmacy in more detail. Excluding COVID, we expect to grow pharmacy gross profit. Underpinning the growth is our differentiated tech enabled operating model, which frees up capacity for pharmacists to spend more time on clinical programs and supporting our expanding pharmacy service offerings. We are projecting solid script growth benefiting from improved operating hours, increased access to lives and growth in specialty. We are integrating AllianceRx community-based specialty pharmacies and Shields under a new go-to-market strategy with a payer agnostic provider-centric approach. In addition, we have launched multiple programs across our pharmacy and U.S. healthcare business and continue to see engagement from payers and partners for clinical quality initiatives that leverage our integrated assets. Moving now to our U.S. Retail business. Gross profit growth will be driven by low-single-digit comp growth and continued margin improvement. We are creating significant value through category performance management, where assortment decisions should deliver at least $200 million of savings in fiscal 2024. We are accelerating our own brand penetration through innovation and increased points of distribution and display, our own brands have margins that are significantly higher than national brands. We are creating more value for consumers as we scale our e-commerce platform and evolve our store formats, including a new digital forward store concept and a health and wellness focused store with favorable early feedback on both concepts. Let me now hand it over to John to discuss our U.S. Healthcare strategy and profit growth drivers.

James Kehoe:

Thanks, John. Capital allocation priorities remain focused on core business investments, debt pay down, and our dividend. We will continue to pursue disciplined returns-based organic investment in our core business. And we are simplifying our portfolio to unlock value and provide financial flexibility. We are very committed to maintaining our investment grade rating and our dividend. Now, let's take a quick look at the transformational cost management program. We are raising the cumulative 2024 savings target $4.1 billion and this is the sixth target increase since the program began. With $3.3 billion saved by the end of this year, we are projecting at least $800 million of savings in ‘24. Let me talk to a couple of the cost saving initiatives. We just completed an organization restructuring, which included transforming our headquarters to better align our resources with our strategic priorities. This led to the elimination of more than 500 roles, representing around 10% of our corporate and U.S. support office workforce. Our pharmacy of the future operating model will drive significant savings we're optimizing the model through our micro fulfillment centers, tech enabled centralization of in-store activities and telepharmacy solutions. These initiatives will also elevate the role of the pharmacists and improve patient engagement. Finally, we will continue to optimize our locations and opening hours and expect to close an additional 300 locations in the U.K. and 150 locations in the U.S. As you have seen, we are accelerating our portfolio optimization to further simplify the business, we have fully exited from our Option Care Health position with overall proceeds of $1.2 billion since August 2022. Let me also highlight our recent monetization of AmerisourceBergen shares using a variable prepaid forward structure. Under the VPF approach, there is no EPS dilution until the contracts mature. We continue to receive dividends and we retain some share price upside. Please note that the remaining stake in AmerisourceBergen is worth approximately $5 billion. With that, let me now pass it back to Roz for her closing comments.

Operator:

[Operator Instructions] And your first question comes from the line of Lisa Gill from JP Morgan. Your line is open.

John Driscoll:

Thanks, Lisa. You know, I think it's utilization is actually, sort of, a mixed blessing for us. We're seeing consistently solid performance in terms of bending the cost curve at Village. I think that positions us better and better as a managed care partner. We were hit with the CityMD utilization, I think that there we're at the early stages of harvesting the embedded profitability of Summit and City, and the City hit on utilization in this quarter also hit our lab and ancillary business a bit. But we think that there's an opportunity on both the value-based side to integrate some of the lessons from Village at Summit and City, because both of them have very high NPS. They are demonstrating the ability to reduce cost over time. And as we get at some of the cost synergies, I think you're going to see a significant improvement, I mean, we are expecting a quarter-over-quarter improvement in healthcare EBITDA of 70% looking at Q4. So I think we've got opportunities on the cost side, but also on the value side to optimize our model.

George Hill:

Yes. Good morning, guys, and thanks for taking the question. James, I guess, a couple targeted at you with OCF running below the dividend through three quarters. And there's lots of moving pieces that OP not expected to grow meaningfully next year. And then we know there's the cash flow ABC. I guess, so can you talk A, how the company is thinking about the dividend? And B, as it relates to Rx reimbursement pressure, I guess, can you talk about what the early expectations are for calendar ‘24? And are we expecting, kind of, the leg down in pharmacy reimbursement pressure to look like prior years? Thank you.

Rick Gates:

Yes. You know, obviously, we're in the middle of negotiations, so we can't comment a lot going into ‘24 at this moment through Medicare Part D and through commercial contracts which are going on currently and into Q4. But, you know, just to reemphasize what James is saying, you know, we're generally in line with expectations on reimbursement this year. We're benefiting from conversations across U.S. Healthcare and Pharmacy as they're looking at us as a holistic solution, within the healthcare ecosystem. And we're continuously working on offsets for reimbursement pressure that we're seeing through improved procurements, increased prescriptions, obviously, are important, ancillary services, but then also reducing cost to fill. And I just want to reemphasize the other point that James said is that we are over performing or performing better in paper performance based contracts, which are obviously part of the reimbursement we get back as well. So I can't comment on ‘24, but we are in line with expectations for ‘23 at this moment.

Ann Hynes:

Great. Thanks. Good morning. So given healthcare is the main driver of growth next year. What do you think is the biggest risk embedded within that guidance? And then secondly, you commented in your prepared remarks that scripts will lower-than-expectations. Can you just decide for what is driven by maybe market weakness versus market share weakness versus maybe pharmacy hours not coming back to what your -- what were in your expectations? Thanks.

John Driscoll:

Yes. Ann, I am really encouraged by the core growth across the portfolio. We've laid out exactly where the challenge is, which is in cost and profit opportunity. And we are laser focused on executing to unlocking that value. So look for us, as I mentioned in the earlier answer, to continue to unlock the embedded profitability of that part of the business. We see positive signs from all of the buyers. It's our responsibility to grow, but also to grow and focus on profitable growth. And we will continue to, kind of, dig in there. And I'm confident that you will see consistent improved performance on that over time.

Rick Gates:

Yes. And I think Ann you're trying to get at the 3% growth that we're talking about through fiscal year ‘23. You know, I think we've always walked through those, kind of four key drivers to that script, kind of, growth for us. One is market growth, and I think what we've seen in Q3 is that we've seen a slowing of aggregate market growth from Q2 to Q3, which is impacting obviously a big part of our underlying performance, it’s there. Roz talked about store hours returning their normal hours, which are lagging a little bit the pace that we had set given what Roz had talked through. But we are seeing some positives as well. The market access that we've contracted coming into this year is flowing through in a very positive way. We continue to have good conversations heading into next year. The adherence and care programs, we are seeing year-over-year growth. They are stagnated a little bit given some of the store hour operation impacts, but we are seeing positive growth year-over-year when you look at access and adherence as well. So although 3% is down from where we earlier guided to, I think, the two things that are most impacting it are market growth, which has slowed quarter-over-quarter and the store hours returning to normal.

Operator:

Your next question comes from a line of Michael Cherny from Bank of America. Your line is open.

James Kehoe:

Yes. And maybe I'll take it from another direction. And if we look forward to the fourth quarter, we've got a bunch of headwinds in the fourth quarter, and you could actually call out COVID, which is probably 20 points of a headwind and sale and leaseback another 20. So the guide we're basically giving is a slight decline in EPS, but the core growth is more like 30%, 40% growth in the fourth quarter. So we're seeing that the flywheel is working. You know, we've had some pressure on margins in the short-term in retail, but the flywheel is starting to perform. Then the second data point is we give -- as we discuss low-to-mid-single-digit operating income growth over the entire course of next year, absorbing sale and leaseback, and absorbing COVID, and any other headwinds that are on the horizon. So if you subtract out those two, the low-to-mid-single-digit is more like a low-teens growth in adjusted operating income. So where we see the flywheel coming back and coming back quickly. If you project that forward, you're right, the sale and leaseback gains run out in ‘24. So it is the last year. But by then, the improved profit prospects on the healthcare business, plus the flywheel working in the U.S. business more consistently should get us to those previous targets of low-single-digit. Now we're not guiding to that. We're not confirming guidance, but we see that the core earnings power is successively improving every quarter. And I think people will be very positively surprised by the quality of earnings particularly in the fourth quarter of this year and then going into next year.

Lucas Romanski:

Hi. This is Lucas on for Charles. I wanted to ask about the U.S. Healthcare Business and your appetite for taking on risk there. Last October, you talked about adding health plan partnerships and how the platform would enable you to take on risk eventually? Now you have four health plan partnerships and you've been able to show the ability to lower MLR from high-80s to low mid-70s in some regions. What are you guys seeing in terms of appetites from health plans in the market now that you have the bulk of your healthcare delivery assets in place? And then two, how are you thinking about increasing your exposure to risk over time and if you see that as a path to driving earnings growth for the U.S. Healthcare segment moving forward?

Operator:

And your next question comes from the line of A.J. Rice from Credit Suisse. Your line is open.

James Kehoe:

Yes. I think on working capital, if you look back over, let's say, a five-year period, we've probably reduced working capital by $2.5 billion. It's not as if we haven't done it, but we're setting on fairly high levels of inventory. We've run a front of store above 90-days, which is on the high side. And the second part on pharmacy, we're above 30-days, and both of those for me personally are quite high. We've put in place big initiatives to address those. One is the micro fulfillment centers, which effectively will take a fair amount of inventory out of the 8,800 stores as we centralize into less than 20 centers. When we put together the program, that was identified at almost $1 billion of working capital opportunity, we've probably captured 40% of that. And, you know, I just want to emphasize, this is a multi-year program we're running, but it's hundreds and hundreds of millions every year on working capital optimization driven by micro fulfillment centers, we have new forecasting systems going in. We're putting in a new inventory management system and perpetual inventory for pharmacy for the first time, and that's rolling out even as we speak. So we have huge initiatives rolling out that will really drive benefits next year. On that, we're targeting investment grade rating. We're not within our metrics right now. The target with Moody's is I think it's 475. And we have worked to do to both improve our operating cash flow, which we just talked about. And then secondly, targeted pay down of debt to get within the metrics, and we expect to do so -- confidently expect to do so during the course of fiscal ‘24.

Elizabeth Anderson:

Hi, guys. Thanks so much for the question. I was wondering if you could talk through how you're thinking about the potential impact of 340b, maybe both on the core U.S. Pharmacy Business and sort of what the potential impact could be there, but then also if you could temporarily talk about how you're thinking about the potential opportunity in fiscal ‘24 from Shield in that business? Thanks.

John Driscoll:

You know, I think the Shields is actually turns out to be an advantage position, because it's not in the contract pharmacy business. It's really a specialty pharmacy services business for hospital based 340b-related specialty pharmacies. And we continued to see strong demand and the sustainability of those contracts. And so we're highly confident that Shields is actually in a great position, because of the just core growth of specialty pharmacy drugs and the need for hospitals to partner with a services platform that delivers a best-in-class adherence and integrates really well with hospitals that are needing to manage those high need chronic patients.

Eric Percher:

Thank you. It's been difficult to piece together the U.S. Healthcare ramp from what was $350 million loss to significant profit next year. Now looking at $600 million to $650 million, can you tell us net of the actions you're taking? How does fiscal year ‘24 look relative to the outlook six months ago when you closed? And then any insight on the contributions which businesses and how they're coming together for the fiscal year ‘24 outlook?

John Driscoll:

I think that's the right way to look at it. I think, Eric, you should expect that we will, you know, we laid out that Q4 target of a 70% improvement over Q3 we're not prepared right now to give extensive ‘24 guidance. And I think we'd probably be a low to give sub-segment, segment guidance, because I think that would even be more confusing. But we are seeing, as I said, the revenue ramp and the demand in each of our markets for each of our companies. And we have taken and are taking swift action to unlock the embedded profitability. And a lot of that is a line of sight. So on cost synergies, integration opportunities with solid demand. So I think you'll -- we'll be comfortable giving you more guidance, I think, in Q4. But we see incremental improvement month-over-month and in each of these categories towards those targets.

Operator:

And we have reached the end of our question-and-answer session. I will now turn the call back over to Roz Brewer for some final closing remarks.

Operator:

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Tiffany Kanaga:

Good morning. Thank you for joining us for the Walgreens Boots Alliance earnings call for the second quarter of fiscal year 2023. I'm Tiffany Kanaga, Vice President of Global Investor Relations. Joining me on today's call are Roz Brewer, our Chief Executive Officer; and James Kehoe, our Chief Financial Officer. Rick Gates, Senior Vice President and Chief Pharmacy Officer at Walgreens; and John Driscoll, President of U.S. Healthcare, will participate in Q&A. Today's call will be approximately one hour in length, including Q&A. Let me note that all references to the COVID-19 headwind include U.S. vaccines, drive-through tests and OTC tests. As always, during the conference call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on Slide 2 and those outlined in our latest forms 10-K and 10-Q filed with the Securities and Exchange Commission. We undertake no obligation to publicly update any forward-looking statement after this presentation, whether as a result of new information, future events, changes in assumptions or otherwise. You can find our press release and the slides referenced on this call in the Investors section of the Walgreens Boots Alliance website. The slides in the press release also contain further information about the non-GAAP financial measures that we will discuss during this call. I'll now turn the call over to Roz.

James Kehoe:

Thank you, Roz, and good morning. In summary, we delivered a strong performance in the quarter. While we saw some favorable phasing, core operating performance was mostly in line with our internal expectations. Second quarter adjusted EPS of $1.16 declined by 25.8% on a constant currency basis, and this was entirely due to a 26% headwind from COVID-19 vaccinations and testing. Strong retail performance in both the U.S. and International and sequential improvement in U.S. comp scripts more than offset 10 percentage points of headwinds from payroll investments in the U.S. and expansion of our healthcare business. Gains from a planned cash mobilization in Germany and sale and leaseback net gains in the U.S. contributed approximately $0.12 to adjusted EPS growth. However, this was entirely offset by reduced ownership of our AmerisourceBergen of $0.05, prior year COVID-related onetime benefits in the UK of $0.03 and currency impacts and investment write-offs of $0.04. Despite a slow start to the quarter, we delivered 4.5% sales growth on a constant currency basis with strong momentum exiting the quarter. February saw core sales growth up high single digits, more than offsetting weather-related challenges in December and a noticeable slowdown in respiratory virus cases in January. Comparable sales in U.S. Retail Pharmacy were up 3.1%, despite lapping a very strong prior year comp of 9.5%. Comp script growth of 3.5% exceeded our guidance of 3%. The International sales advanced 9% led by the UK Retail business, which delivered a 16% comp. And our U.S. Healthcare business continues to rapidly scale with sales exceeding $1.6 billion in the quarter and growing 30% on a pro forma basis. So in summary, we had a solid quarter. And based on the in-line performance, we are maintaining our full year adjusted EPS guidance of $4.45 to $4.65. Let's now look at the results in more detail. Adjusted operating income declined 25% on a constant currency basis and this was entirely due to a much lower contribution from COVID-19 vaccinations and testing, which led to a headwind of 28%. Labor investments in pharmacy and minimum wage were a 9 percentage point headwind, whereas the expansion of the U.S. Healthcare segment was an impact of 5 percentage points. The labor and healthcare headwinds were offset by strong performance across U.S. Retail and International. Excluding COVID-19 OTC test kits, U.S. Retail contributed 12 percentage points of growth and continued strength in International contributed 9 percentage points. Adjusted EPS was $1.16, a constant currency decline of 25.8%, entirely due to a much lower contribution from COVID-19. GAAP net earnings were $703 million, a decline of 20% versus prior year. The current quarter included a $454 million after-tax gain from the sale of ABC shares and a $266 million after-tax charge for opioid-related claims and lawsuits. Now let's move to the year-to-date highlights. Year-to-date sales increased 2.8% on a constant currency basis. Adjusted EPS was down 28% on a constant currency basis, mostly due to a much lower contribution from COVID-19 with an adverse impact of approximately 22%. GAAP earnings were a loss of $3 billion compared to net earnings of $4.5 billion in 2022. The year-to-date period included a $5.4 billion after-tax charge for opioid-related claims and lawsuits partly offset by a $1.4 billion after-tax gain on the sale of ABC shares. Additionally, we are comparing to a prior year period that included a $2.5 billion after-tax gain on the company's investments in VillageMD and Shields. Now let's move to the U.S. Retail Pharmacy segment. Sales declined slightly in the quarter, reflecting a 3% drag from lower COVID-19 contributions and a 2.5% headwind from AllianceRx. The good news is that AllianceRx has now cycled through its contract losses and the COVID-19 headwind will lessen in subsequent quarters. Comp sales increased 3.1% and this comes on top of a very strong prior year comp of 9.5%. Adjusted operating income declined 32.8% year-on-year, broadly in line with our expectations. This was entirely due to a 29% decline from lower COVID-19 contribution and 10% from planned labor investments. Ongoing reimbursement pressure was offset by retail gross profit growth and SG&A savings. We continue to expect AOI growth to accelerate in the second half, due to a lower COVID-19 headwind, less reimbursement pressure, favorable cost of goods sold timing and script recapture initiatives gaining traction. Let me now turn to U.S. Pharmacy. Pharmacy sales increased 0.3% despite a 3 percentage point headwind from AllianceRx and 2 percentage points from lower COVID-19 contributions. Comp pharmacy sales were up 4.9%, lapping a 7.3% comp last year. Comp scripts were up 0.2%. We administered 2.4 million COVID-19 vaccinations in the second quarter, down a significant 80% versus prior year and about 600,000 COVID-19 PCR tests, down over 90%. Excluding immunizations, comp scripts grew 3.5%, exceeding our forecast of 3%. We are encouraged by the 140 basis point sequential improvement, driven in part by ongoing script recapture initiatives, including the return of an incremental 500 stores to normal operating hours. As expected, adjusted gross profit and margin declined due to the lower contribution from COVID-19 vaccinations and testing and ongoing reimbursement pressure net of procurement savings. Pharmacy reimbursement was broadly in line with our expectations and represented a lower level of pressure compared to the prior year. Looking forward, we expect year-over-year growth in the second half as the COVID headwind lessens, script comps continue to build and second half reimbursement is less of a year-on-year headwind compared to the first half of the year. Turning next to the U.S. Retail business. Overall, we were happy with the retail performance in the quarter, with good underlying sales trends and continued margin improvement. While Retail comp sales decreased 1% in the quarter, we were up against a record 14.7% comp in the prior year, which, as you will recall, included strong OTC testing volume related to the Omicron surge. Excluding tobacco, comp sales were down 0.5%. But on a two-year stack basis, comp sales advanced by more than 15%. Looking at the quarter, lower sales of at-home COVID-19 tests led to a 500 basis point headwind, and this massed strong underlying trends, led by a 13% increase in cough, cold, flu, 9% growth in beauty and a 6% increase in consumables and general merchandise. We had a slower start than expected with December weather impacts leading to weak seasonal sales and some seasonal write-downs, and we sold lessening respiratory various cases in January. However, February was very strong with high single-digit comp growth. Retail gross margin performance remained strong in the quarter, reflecting effective margin management including strategic pricing and promotional optimization and improved shrink. Looking ahead, we expect a return to positive comp trends in the second half as we will be facing a smaller headwind from COVID-19 test kits, and we have meaningful opportunities to drive AOI growth from own brands to myWalgreens loyalty program and strategic margin management. Turning next to the International segment. And as always, I'll talk to constant currency numbers. The International segment continues to perform well. Sales increased 9% with growth across all International markets. Boots UK was up 11% and Germany wholesale grew 7.5%. Adjusted operating income was $352 million, up 66% versus prior year. Adjusted operating income benefited from $110 million in real estate gains from the planned cash mobilization program in Germany. These gains were included in our guidance at the beginning of the year, but were initially assumed to be more evenly split between the first and second quarters. Offsetting this, we are lapping COVID-19-related temporary benefits in the year ago quarter of approximately $40 million. Excluding these two items, we estimate that core AOI grew by around 40%. This excellent performance was led by UK retail sales with a successful holiday trading season and strong operational execution in the Germany wholesale business. We are encouraged by our continued positive trends and looking ahead, we expect the International segment to deliver year-on-year AOI growth in the second half of 2023. Let's now look in more detail at Boots UK. Boots UK sales advanced 11%, led by continued strength in retail. Comparable pharmacy sales increased 2%, held back by lower demand for COVID-19 services. Comparable retail sales advanced 16%, which follows on from a 22% comp in the year ago quarter and benefiting from strong execution over the holiday season. Boots grew market share for the eighth consecutive quarter with gains across all categories, led by beauty up 1.8 percentage points, and consumables and general merchandise up 1.7 percentage points. Boots.com sales were up nearly 80% versus the equivalent pre-COVID period. Over 15% of our UK retail sales now come from Boots.com, up from approximately 9% in the pre-COVID quarter. Turning next to U.S. Healthcare. The U.S. Healthcare business is rapidly scaling with VillageMD's acquisition of Summit Health and strong pro forma sales growth at VillageMD, Shields and CareCentrix. U.S. Healthcare sales exceeded $1.6 billion compared to $527 million in the year ago quarter. Pro forma sales growth was 30%. VillageMD delivered sales of over $1.1 billion, advancing 30% on a pro forma basis, driven by growth at existing clinics, expansion of the clinic footprint and Summit Health growth. Excluding Summit, VillageMD grew 48% year-on-year. Shields continues to deliver with sales of $125 million and increasing 41% on a pro forma basis, driven by recent contract wins, including the addition of three new health system partners and further expansion of existing partnerships. CareCentrix sales were nearly $400 million with pro forma sales growth of 25%, driven primarily by new service offerings with existing partners. Adjusted SG&A in the quarter increased by $177 million to $269 million, primarily due to the acquisitions of CareCentrix and Summit which were not included in the prior year quarter. Adjusted EBITDA was a loss of $109 million compared to a loss of $62 million in the prior year. This largely reflects the increased VillageMD clinic count and higher Walgreens Health organic investments, partly offset by positive contributions from Shields and CareCentrix. Let's now look at some of the key metrics for the U.S. Healthcare business. At quarter end, the Walgreens Health organic business had 2.9 million contracted lives, up over 50% year-on-year as existing payer partners added new lines of business. As Roz mentioned, we've also added Horizon Blue Cross Blue Shield of New Jersey as our fourth payer partner. Under this agreement, we will provide preventative health and wellness services to a select group of Horizon's Medicare and commercial members. These services will be available at Walgreens Health Corners and pharmacies across New Jersey, starting this summer. VillageMD managed 806,000 value-based lives at quarter end, reflecting year-over-year growth of 38% in the legacy VillageMD business and the addition of 309,000 value-based lives from Summit. The total includes 177,000 full-risk Medicare lives. VillageMD ended the quarter with 729 locations, including Summit Health and CityMD. The 403 clinics for the legacy VillageMD business compared to 270 at the end of the prior year period and included 210 clinics co-located with Walgreens, up from 94 co-located clinics a year ago. We were seeing benefits on the Walgreens side from our partnership with VillageMD. Roughly 50% of patients had co-located VillageMD clinics opt to get their prescriptions filled at Walgreens. VillageMD co-located sites that have been open for over two years are driving an incremental 40 scripts per site per day, and this is an increase of 35% versus prior year. We will continue to build out our Walgreens Health Corners as we add new lives and partners. We ended the quarter with 117 Health Corners, up from 47% a year ago. In summary, we are moving swiftly to implement our vision, leveraging our integrated best-in-class assets and are excited with recent developments including signing another payer partner in the Walgreens Health organic business. Turning next to cash flow. We generated over $1.2 billion of operating cash flow in the first half of '23, with free cash flow of $560 million. The year-over-year decline reflected lower earnings due to the COVID-19 headwind and increased capital expenditures related to growth initiatives. This was partially offset by ongoing working capital optimization. Turning now to guidance. We are maintaining our full year adjusted EPS guidance. We delivered a solid first half, which was broadly in line with expectations. Our core Retail Pharmacy business has performed well in both the U.S. and International as we lapped very strong prior year comps. We also drove better-than-anticipated U.S. comp script growth in the second quarter. We continue to expect robust and accelerating EPS growth in the second half and have good visibility and strong execution plans against the key drivers. COVID was a major headwind in the first half. And heading into the second half, we will see lower year-over-year impacts. In the U.S., we have clear line of sight to less reimbursement pressure relative to the first half of the year. Additionally, our script volume recovery is progressing and we are benefiting from some favorable cost of goods sold timing. In the International segment, the business is well positioned to extend the second quarter's very good performance and we are moving past the peak investment period for U.S. Healthcare. COVID vaccinations and testing do remain a wildcard as the FDA has not yet issued guidance on spring boosters. In summary, at the midpoint of the guidance range, we expect second half adjusted EPS growth in the mid-20s. With that, let me now pass it back to Roz for her closing remarks.

Operator:

[Operator Instructions] And your first question comes from the line of Adrian Rice from Credit Suisse.

Rosalind Brewer :

Sure. Thank you, A.J. This is Roz. Let me start with your second question about the front end of store and the recession that we're seeing, not only in the U.S. but in the UK. So first of all, the U.S. retail comps at 4.5% and that's excluding our test kits, really show that we're running pretty strong right now. As you know, we've had a lot of work going on with our cost management, and that's played forward for us. Secondly, the work that we've been doing with private label. So we've seen some trade down to private label over a period of time, probably about 100 basis points of improvement in our private label business. And then I would also tell you that we are pretty much a convenient place. So as gas prices go up, where that convenient neighborhood access point. And then lastly, I would tell you, too, that in both our U.S. business and the UK business, we're seeing our online growth above 30% in many of those areas. So where -- people are switching over to online, particularly UK, it is in a deep recession, but we're pretty proud of the work that going on over there, achieving 16 comp. They're one of the top players over there selling pretty nicely in personal care and their over-the-counter business. So we've been fairly resilient. We did take some time, A.J., to go back and look at '08 and '09. And during that time frame, we only saw maybe about a 0.5 percentage point dip and so we think we're pretty resilient at this point, but cost improvement has helped us the trend towards private label and our online business is helping us kind of weather the storm. I'm going to turn it over to John to talk a little bit about the VillageMD business.

Operator:

Your next question comes from the line of George Hill from Deutsche Bank.

Rosalind Brewer :

Yes. So I can't talk much about March, but I will tell you that we saw a good exit rate leaving the second quarter, February was a stronger month for us than December, January. so if that's any indication. I would also mention here around our script comp business, we've got 500 stores returned to normal operating hours. I'd also mention, too, that where we are seeing improvement in our normal operating stores like 6%, there's opportunity as we look at our execution in those stores to go even -- to improve those numbers even better. So operating behind the momentum we're getting in our stores that operate well. And then I would tell you that we're doing a lot of work in terms of inventory in our stores and making sure that our operational efficiencies are happening every day in our stores. So we feel like we're moving in the right direction in that respect. Rick, is there anything you want to add on scripts?

James Kehoe :

Yes. And George, let me just cover the sale and leaseback. But before I do, maybe just a bit of context. First of all, we believe we delivered a good in-line quarter with decent quality, and this gives us the confidence to confirm the full year guidance. And just to point out the key stat is the EPS was down 25.8%, and 26 points is due to COVID. As we look at the sale and leaseback, the program in the U.S. has contributed an incremental year-on-year net benefit of $0.03. And on a full year basis, as we've said before, it will be flat. On a full year, there'll be no incremental benefit. So this is kind of timing within the quarters. The one thing that stands out a little this quarter is a cash mobilization program in Germany, as we harmonize warehouses with an acquisition from more than 12 months ago, and that contributed $0.09. But as I mentioned in the prepared comments, these combined $0.12 are completely offset by other onetime type items going in a different direction. I pointed out that ABC sale of the stock, which cost us $0.05 year-on-year. Some prior year benefits in the UK unit relating to COVID, which was $0.03 and obviously, then we mentioned ForEx and asset impairment. So the way we look at it, we have this sale and leaseback $0.12 and an offsetting $0.12. So we had decent quality in the quarter on onetime items. So just in summary, this gave us the confidence because we're pretty much in line with good quality. It gave us the confidence to maintain full year guidance.

Elizabeth Anderson :

I was wondering if you could comment a little bit more on the payroll investments that you talked about in the U.S. Is that still sort of tracking towards the $525 million that you guys guided to initially? And is there any kind of reaction to some of the other retailers have moved up to $18 now. I just wanted to see if that was something that was helpful. And then secondly, can you talk about what the main drivers are for Summit EBITDA as you think about the back half of the year?

James Kehoe :

And then you had a question then on Summit. I think we don't want to get into specific guidance on any of the individual units. But what I'd say is we're looking forward to strong performance out of Summit in the back half. A couple of items as you consider it is, one is we have four new businesses that were not fully in the base. So they've got coming on stream. They had two acquisitions back at the end of fiscal '21, NJU and Westmed. And these two -- they're basically in the process of squeezing out the revenue and the cost synergies on these two acquisitions. Very exciting as well. They opened a lab -- a new lab at the end of '22, and this lab is the biggest private lab in the U.S. So this is going to be huge and a big driver of growth in the second half. And then the final one, they just closed on an acquisition called Starling, which is quite sizable practice, multi-specialty and will contribute heavily to both revenue and EBITDA growth in the second half. The only item we saw with the acquisition has been -- and we saw it on our front of store business as well. As we look at the first quarter, the only real negative we saw was in January, where we saw a much lower incidence of virus cases. And this impacted our OTC business in front of store in the U.S. And we saw a slowdown in CityMD traffic. So that was the only item of any kind of note on the negative side on the Summit. And overall, the Summit multi-specialty business and the primary care physician business is doing really, really well. And we're very confident in the outlook for the second half. John, I don't know if you have any?

Operator:

Your next question comes from the line of Charles Rhyee from TD Cowen.

John Driscoll :

Thanks for the question. I think just on the -- first on the geographic reach question, we have a relatively small, early-stage set of practices in Florida. So we've got a low exposure there. I think on the risk adjustment and rate changes, we're obviously looking at that carefully. It would be premature to talk about that given the fact that the final rule isn't out, and we don't know when the final rule happens, how that will -- how health plans on the MA side might adjust their benefit designs. But based on the way we are positioned and the variety of levers we have, we are cautiously optimistic that we're in really good shape to manage the changes that we expect may come down the pike. But I think we need to really look at what comes out on April 4. But with regard to Florida, it's a de minimis exposure.

Lisa Gill :

James, I wanted to just start with how should I think about margins in the U.S. Retail business on a go-forward basis? So if I look at the margin this quarter, I know there's like puts and takes and you talked about growth rates and what's happening with COVID, et cetera. But how do we think about a sustainable margin, one, in that business? And two, do you have a longer-term goal of what you'd like the margin to look like? And then just secondly, John, I wanted to follow up to your comments on VillageMD as you think about capitated relationships, I think that James earlier talked about 177,000 fully at-risk MA lives. And I understand we'll wait for the floors and see what the potential is there. But can you maybe just talk about vintages or what you're seeing right now around the profitability of some of those MA lives as we move into the back half of this year and going forward? Are there any key things that we should be looking at or thinking about for moving those members to profitability?

Rick Gates:

Yes. As I'll just give a couple of data points as well just to talk about second half and then I can go back to your first point. But Lisa, we have about 98% of our contracts are accounted for -- or contracted for calendar year '23. And we have good line of sight reimbursements that are, quite honestly, in line with our expectations. So we feel really good about what we're seeing there. We're always looking at improving procurement savings, increasing volume, doing things around pharmacy services, which are obviously offsets into our margin, which we're going to see continue in the second half. And the other thing is pay-for-performance contracts. We're in these adherence based programs really trying to solve for what our and payers are looking for, which has improved outcomes, which is what James alluded to there. We're seeing great improvements in our store performance and how we're actually performing against these contracts, which should obviously come through in pay-for-performance benefits to us as well. So...

Rick Gates :

Just, Lisa, on the Village question, the Village model works, and we've seen it work with some of the legacy businesses in multiple geographies. I think what you'll see us do the bless and learn, is perhaps concentrate our growth and our investments in specific markets where we can be hyper-relevant in a concentrated geography. But we're confident, and we don't see any challenges to the actual model of what we're delivering for patients and with providers in those markets. So the trends are positive. The one thing that I think you'll see us do is really focus our investments so that we can get more of a return on that in specific markets where we can be particularly relevant.

Eric Percher :

A question on International. Just trying to sort through a couple of moving parts here. And I think beyond real estate, and NHS, I would love to hear your views on what the underlying business is running today? And a little bit more on where the NHS benefit or detriment fell in Q1, Q2 versus second half and expectations for second half normalized growth rates?

Eric Percher :

That's perfect. And any...

Operator:

And your next question comes from the line of Justin Lake from Wolfe Research.

Rosalind Brewer :

Yes. Rick, why don't you take that?

James Kehoe :

But I think we are feeling pretty good about the stores that have been reopened and stores currently without any restrictions are probably in the region of 6% growth. And we may actually see some opportunity to that because we are looking at operational improvements, not just restoring the store hours, but how you actually operate within the pharmacy and engage with patients and we probably will not -- we will roll those out across the entire portfolio as opposed to the stores that are unopen.

Operator:

And your next question comes from the line of Erin Wright from Morgan Stanley.

James Kehoe :

Yes. Maybe I'll cover the last question first. I do want to emphasize that the way we looked at this is we delivered a good decent quality in line quarter and that gave us the confidence to confirm the full year guidance. There will always be puts and takes in a business like this, and we covered some of these. We have general outperformance across the retail business, and we have COVID, that's a bit of a watch out. So we kind of balance all of these. And so it's not the moment to go out and change specific guidance on any parts of the business. So we're pretty comfortable right now if we stay out of consensus, which I think is at [451]. We're pretty comfortable with where that's sitting. And many of the vectors that are positive or negative for that case, we can play one off against the others. So that's our confidence on this. You asked about the, call it, the sequence of the quarters if you were plotting out, we've been quite upfront and we expect mid-20s. I would say the growth rate is higher in the fourth quarter than this in the third as we cycle through some of the negative vectors, and then we implement the positive ones. But we're pretty comfortable with the overall profile. Capital allocation, our priority right now is debt and probably tuck-on acquisitions, they would be small in size and only focused on the healthcare business. And then you had a question on Boots, which, do you want to take that one on Boots?

James Kehoe :

Yes. And you would have seen them, Erin, in the quarter that we did dispose just after the quarter, we disposed of a fairly large portion of Option Care. And we've taken our stake below 10%. I think it's 6% something. So we're not -- we're still making progress against all of the portfolio simplification goals. We've taken action like on parts of ABC. Option Care is now down to 6% range. So we're carefully assessing when the right moment is on all of these vehicles on simplification of the company to ensure that we have the firepower to drive and create a successful healthcare services business. That's the goal, and that's the strategy Roz laid out and we're resolute in driving against this strategy.

Rosalind Brewer :

Thanks. So thanks, everyone, for joining us. Let me sum up what you heard today, particularly in the Q&A portion. So just in short, the U.S., we've really achieved a balanced performance. Our core retail sales are up mid-single digits, better-than-expected sequential improvement in our comp scripts. And then internationally, Boots has delivered eight consecutive quarters with strong comp performance which accelerated to 16% this quarter. So we feel really good about leaving this quarter. So when we talk about what are we thinking about recession, inflation? Our business is not only strong, but is showing resiliency. We've been able to absorb various industry-wide shocks such as rising labor costs and the inflationary pressures. So at the same time, though, we're moving beyond our peak investment period in health care, and we've turned the corner on comping last year's COVID demand. So that's what we're referencing in terms of an inflection point. I'm really happy about this team. We're clearly executing against our plans and is showing up in the results. We've achieved a really solid first half performance and broadly in line with our expectations. The investments that you all have been tracking very carefully, they're accelerating, and they're building out our healthcare growth engine as we designed and planned. And then the portfolio simplification is working, and it's unlocking the value that we need and funding our transformation. So I would just reiterate that we're maintaining guidance and pivoting to a strong second half of the year. And I appreciate your time on the call. Thank you. Have a great rest of the day.

Tiffany Kanaga:

Good morning. Thank you for joining us for the Walgreens Boots Alliance Earnings Call for the first quarter of fiscal year 2023. I'm Tiffany Kanaga, Vice President of Global Investor Relations. Joining me on today's call are Roz Brewer, our Chief Executive Officer; and James Kehoe, our Chief Financial Officer; Rick Gates, Senior Vice President of Pharmacy and Healthcare at Walgreens will participate in Q&A. Today's call will be approximately 1 hour in length, including Q&A. Let me note that all references to the COVID-19 headwind include U.S. vaccines, drive-thru tests and OTC tests. As always, during the conference call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on Slide 2 and those outlined in our latest Forms 10-K and 10-Q filed with the Securities and Exchange Commission. We undertake no obligation to publicly update any forward-looking statement after this presentation, whether as a result of new information, future events, changes in assumptions or otherwise. You can find our press release and the slides referenced on this call in the Investors section of the Walgreens Boots Alliance website. The slides in the press release also contain further information about non-GAAP financial measures that we will discuss today during this call. I will now turn the call over to Roz.

James Kehoe:

Thank you, Roz, and good morning. In summary, we had a solid start to the fiscal year. Despite the expected headwinds, the first quarter results were broadly in line with our expectations, and we are maintaining our full year EPS outlook. Adjusted EPS of $1.16 declined by 29.9% on a constant currency basis as we were lapping a very strong prior year quarter when we delivered EPS growth of over 53%. The year-over-year decline was mainly due to a 19% headwind from COVID-19, U.S. Healthcare growth investments of 5% and labor investments of 5%. These were partly offset by good retail performance in both the U.S. and International segments and a favorable tax rate. Excluding AllianceRx and U.S. Healthcare M&A, sales grew 3.2% on a constant currency basis. The core business remained resilient in a challenging operating environment. Comparable sales were up 3.8% in the U.S., despite lapping a very strong prior year comp of 7.9%. International sales grew 4.6% led by the UK and Germany. And our U.S. Healthcare business continues to rapidly scale with almost $1 billion of sales in the quarter and growing 38% on a pro forma basis. With the first quarter broadly in line, we are maintaining our full year adjusted EPS guidance of $4.45 to $4.65 with 8% to 10% constant currency core growth offset by a COVID-19 headwind of around 17 percentage points. Our guidance now includes the EPS accretion from Summit Health and dilution from our reduced ownership stake in AmerisourceBergen. We have raised our full year sales guidance by over $3 billion to reflect the closing of the Summit Health transaction, refreshed currency rates and a good start to the year. Let's now look at the results in more detail. Sales of $33 billion rose 1.1% on a constant currency basis. Despite an adverse impact of 485 basis points from the anticipated decline at AllianceRx. This headwind will stop after December. Adjusted operating income declined 42% on a constant currency basis due to three factors. Firstly, a much lower contribution from COVID-19 vaccinations and testing led to a negative impact of approximately 20%. Secondly, the U.S. Healthcare adjusted operating loss was $139 million higher in the quarter, with an impact of 8 percentage points. The current quarter includes higher Walgreens Health organic investments and a full quarter of results for VillageMD compared to only 6 days of losses in the prior year quarter. Thirdly, our previously disclosed labor investments in pharmacy staffing and minimum wage, are a $100 million headwind, equivalent to 6 percentage points of AOI growth. Adjusted EPS was $1.16, a constant currency decline of 29.9%, due entirely to operating income. This was despite a favorable tax rate which benefited from the release of valuation allowances related to capital losses. GAAP earnings were a loss of $3.7 billion compared to net earnings of $3.6 billion in the year-ago quarter. The current quarter included a $5.2 billion after-tax charge for opioid-related losses, partly offset by a $900 million after-tax gain on the sale of AmerisourceBergen shares. Additionally, we are comparing to a prior year quarter that included a $2.5 billion after-tax gain on the company's investments in VillageMD and Shields. Now let's move to the U.S. Retail Pharmacy segment. While the U.S. performance was impacted by the anticipated COVID-19 headwinds, we do expect year-on-year performance to improve in the second half as the COVID headwind lessens and initiatives to drive script volume gain traction. Sales decreased 3% in the quarter, but if you exclude the negative impact of Alliance Rx, sales increased by 3%. The comp sales increased 3.8% despite lapping a very strong prior year comp of 7.9%. Adjusted operating income of $1.1 billion declined 35%, broadly in line with our expectations. Headwinds from fewer COVID-19 vaccinations and PCR tests and increased labor investments were partly offset by retail sales growth and gross margin expansion and savings from the Transformational Cost Management Program. Let me now turn to U.S. Pharmacy. Pharmacy sales declined 4%, held back by a 7.8 percentage point headwind from AllianceRx and by significantly lower contributions from COVID-19 vaccinations and testing. Comparable pharmacy sales were up 4.8% despite lapping a solid 6.8% comp last year. The sales growth was favorably impacted by branded drug inflation. Comp scripts were flat. And excluding immunizations, comp scripts were up 2.1%, a sequential improvement of over 200 basis points. We administered 8.4 million COVID-19 vaccinations in the first quarter, down 46% versus the prior year quarter. Flu vaccinations were up versus prior year due to higher flu incidences. Season to-date, we have administered over 9 million flu shots. As expected, pharmacy-adjusted gross profit and gross margin declined in the quarter due to fewer COVID-19 vaccinations, a mix shift to lower margin at-home COVID-19 tests and ongoing reimbursement pressure net of procurement savings. Reimbursement was broadly in line with our expectations and represented a lower level of pressure compared to the prior year. Turning next to our U.S. Retail business. We saw good retail performance in the quarter with continued growth in both sales and margin. Retail comp sales increased 1.4% despite lapping a very strong 10.6% comp in the prior year quarter. Excluding tobacco, comps were up 2.1%. And on a 2-year stack basis, comp sales growth was 13.8%. We benefited from a 220 basis point tailwind from cough, cold, flu. However, this was largely offset by a 170 basis point headwind from lower sales of at-home COVID-19 test. Comp sales were led by 4.9% growth in Beauty and a 2.9% increase in consumables and general merchandise. Both categories benefited from own brand offerings and decisions to invest early in inventory availability. We delivered another quarter of strong retail gross margin performance, reflecting effective margin management, including strategic pricing and promotional optimization and favorable shrink trends. Turning next to the International segment, and I'll talk to constant currency numbers. Sales increased 4.6%, with growth across all international markets. Boots UK was up 4.3% and Germany wholesale grew 4.2%. Adjusted operating income was $116 million, down 20% versus prior year. Strong UK retail sales and good operational execution in the Germany wholesale business were offset by lower demand for COVID-19 pharmacy services in the UK, the adverse gross margin impact of NHS pharmacy funding and the expiration of temporary rental reductions received in the prior year. On a combined basis, these three items had an impact of around 27 percentage points. Looking forward, we do expect the International segment to return to strong profit growth in the second quarter. Early indications show that boots had a strong Christmas season with comp sales growth of around 15%. Key categories, including gifting, beauty and fragrance performed extremely well along with an uptick in OTC, cold and immunity categories. Let's now look in more detail at Boots UK. Boots UK sales growth of 4% was led by continued strong retail performance. Comparable retail sales advanced 8.7% and this is coming on top of a 16% comp growth in the year ago quarter. Footfall grew 8% with flagship and travel locations again showing robust improvement. Foods continued to gain market share with personal care and health and wellness performing particularly well. Comparable pharmacy sales declined 0.9% reflecting lower demand for COVID-19 services. Boots.com continues its strong performance with sales more than doubling versus the pre-COVID period. Approximately 18% of our UK retail sales came from Boots.com in the quarter, which compares to roughly 9% in the equivalent pre-COVID quarter. November was a very strong month with Black Friday being our biggest ever online event. Turning next to U.S. Healthcare. We are very excited about developments in our U.S. Healthcare segment as the business continues to rapidly scale. Sales were almost $1 billion in the quarter compared to only $50 million in the year ago quarter, pro forma combined sales growth of 38% compared to 34% in the fourth quarter of fiscal '22. VillageMD had sales of $550 million, advancing 49% on a pro forma basis, with growth driven by existing clinic growth and expansion of the clinic footprint. Shields again showed very strong growth with sales of over $100 million and pro forma growth of 44%, driven by recent contract wins, further expansion of existing partnerships and strong executional focus. In its first full quarter, CareCentrix delivered sales of over $330 million. Pro forma sales growth was 22%. Segment adjusted operating income was a loss of $152 million. This was flat sequentially and compares to a loss of only $13 million in the year ago quarter. Adjusted EBITDA was a loss of $124 million in the quarter compared to a loss of $11 million in the prior year. The year-over-year increase in losses largely reflects a full quarter of VillageMD in the current year versus 6 days in the prior year quarter and higher Walgreens Health organic investments. These headwinds more than offset positive profit contributions from Shields and CareCentrix. Let's now look at some of the key metrics for U.S. Healthcare. As Roz mentioned earlier, VillageMD ended the calendar year with 393 clinics, including 200 clinics co-located with Walgreens. This was in line with our target. VillageMD had 440,000 value-based patients at quarter end, up 46% from 300,000 at the end of the prior year quarter. At quarter end, the Walgreens Health organic business had 2.9 million contracted lives, up from 2.3 million at the end of the fourth quarter as existing payers added new lines of business. We exceeded our original goal of 2 million lives. As we scale our access to lives and add new partners, we will continue to build out our Walgreens Health Corners. We ended the quarter with 112 Health Corners ahead of our goal of 100. Health Corners play an important role in engaging patients, addressing care gaps and improving health outcomes. Since the program was launched, Walgreens Health Corners have facilitated more than 300,000 patient interactions. In summary, we performed strongly against our key objectives and we are well positioned for future success in the coming year. The addition of Summit Health will further enhance our portfolio of leading assets across the care continuum, drive meaningful synergy opportunities and accelerate the path to profitability. Turning next to cash flow. We generated almost $0.5 billion of operating cash flow in the first quarter, while free cash flow was negative $117 million. Operating cash flow was negatively impacted by increased inventories, including successful advance pays to secure product availability in the U.S. and UK holiday seasons. The year-over-year decline in free cash flow was due to lower earnings, some phasing of working capital and increased capital expenditures related to growth initiatives, including the VillageMD footprint expansion, the rollout of micro fulfillment centers and digital and omnichannel investments. Turning now to guidance. Overall, we are confirming our full year EPS guidance. The guidance now incorporates EPS accretion from the recently closed Summit Health transaction and this offsets the dilution from our reduced ownership stake in AmerisourceBergen. Our projection for the total number of COVID-19 vaccinations is unchanged. But we do now expect a slightly greater headwind from COVID-19 testing due to a demand shift from drive-thru testing to lower margin at home test. This has had a negative impact of roughly 1 percentage point of EPS. Currency rates are somewhat favorable, and this has reduced the year-on-year currency headwind from 2% to 1%. Excluding these items, we continue to project core business growth of 8% to 10%. In terms of phasing, at the midpoint of our guidance, we see a balanced 50-50 cadence between the first half and second half versus our original expectations. This assumes a shift of COVID-19 vaccinations from the second quarter into the third quarter with an impact of approximately $0.09. Second quarter earnings growth will continue to be adversely impacted by the ongoing headwind from COVID-19, continued investments in U.S. Healthcare and labor and the higher tax rate. In the second half of the year, EPS will grow around 30% with good visibility into the key drivers. Firstly, we expect significant second half momentum in U.S. Retail Pharmacy, including ongoing script recovery as we normalize store operations and implement marketing win-back initiatives; favorable trends in reimbursement net of procurement, lower levels of shrink and continued strong retail performance. Additionally, while COVID-19 will remain a headwind in the second half of the year, it will be a lot lower. And we expect an impact that is less than 50% of what we saw in the first half of the year. Secondly, International has delivered a strong Christmas trading period, and we expect to see strong ongoing performance through the balance of the year. Our international business, particularly in the UK, has emerged in a competitively strengthened position and is well positioned for growth. Finally, the first half of the year is the peak investment period for U.S. Healthcare. And consistent with prior guidance, we expect the segment to achieve positive adjusted EBITDA exiting the year. The overall segment will flip from being a headwind in the first half to a significant mid-teens EPS tailwind. Let me now provide some additional detail around our segment sales and profit assumptions. We are raising our WBA sales guidance by $3 billion to $3.5 billion. The increase is driven by VillageMD's acquisition of Summit Health, refreshed currencies and better-than-expected sales in the first quarter. Adjusted operating income is unchanged at $4.7 billion to $4.9 billion. The acquisition of Summit is offset by a lower contribution from AmerisourceBergen as we reduced our ownership stake. For U.S. Retail Pharmacy, we have raised our sales guidance by $500 million due to a better-than-expected first quarter, which benefited from brand inflation and broad-based retail strength. The AOI range is lowered by $150 million to reflect the sale of the AmerisourceBergen shares in November and December. These actions have reduced our stake from around 26% to 17%. We have raised our guidance for the International segment to reflect a lower headwind from currencies. We now expect sales of $21.2 billion to $21.7 billion up $800 million versus the prior range. We are also raising our AOI forecast to $870 million to $900 million. For the U.S. Healthcare segment, we expect sales of $6.5 billion to $7.3 billion and an adjusted EBITDA range from a loss of $50 million to positive $25 million. Both of these are consistent with the goals we provided when the Summit Health transaction was announced in November. We continue to expect to exit fiscal '23 with positive adjusted EBITDA for the U.S. Healthcare segment. Moving on to our corporate assumptions. The full year tax rate is unchanged at around 16%. Interest expense is expected to be $560 million to $580 million, an increase of $70 million to $80 million compared to prior guidance, and this is mostly due to the Summit transaction. We are raising our forecast for equity method investments and non-controlling interest with the combined range increasing by nearly $100 million versus our prior guidance. This reflects the Summit Health transaction and the acceleration of the full acquisitions of Shields and CareCentrix. In summary, we are raising our fiscal year '23 sales guidance for WBA and we are confirming our full year EPS guidance. With that, let me now pass it back to Roz for her closing remarks.

Operator:

[Operator Instructions] And your first question comes from the line of Charles Rhyee from Cowen.

Roz Brewer :

Okay. Thanks for that question. I'll start that off and then joining us today is Rick Gates from our pharmacy operations. He will assist in the questions. So we'll add James in there if we need to. So first of all, on our script recovery. It starts with the investment that we've had in our labor position. And let me start by saying that we announced last quarter that we were working to really improve our positions with our pharmacy. So with these investments, our applications are up about 23%, and we've got accepted offers approaching about 40%. So in our minds, the brand remains strong and the intentionality to regain pharmacists in our stores, it's working. Second, I will tell you that stores that are operating without reduced hours had Q1 Rx comp trends including -- excluding immunization in the mid-single digits. And we're seeing about 9 percentage points better growth versus the impacted stores on limited hours. So we feel good about the direction we're moving forward. We continue to make progress on the recruiting. We've got new incentive policies, and we're leveraging the micro fulfillment capacity that we have. And as we improve the store operations for the pharmacists, we're getting better engagement. So we're moving strongly in that direction. We're continuing to see net gains of about 600 incremental pharmacists have joined Walgreens and to the extent that the new pharmacists are being hired, we're seeing these really in some of our more challenged markets. And so as you can imagine, we are focusing on those challenged markets first to regain pharmacy and now we're applying the marketing incentives. And those incentives have been on a one-to-one basis to reengage the consumer back to the store. So we're feeling confident that we're moving in the right direction. So these labor investments have been necessary to move us forward. We like the direction that we see this happening. I will say another thing that's happening in terms of the performance in our stores is also when we look at the balance of the maintenance scripts versus the ongoing scripts. And I will tell you that we are seeing some favorability there. So we feel strongly that this is not a long-term issue for us, but we are regaining the pharmacists back in the stores and reopening the stores accordingly.

Operator:

And your next question comes from the line of A.J. Rice from Credit Suisse.

James Kehoe :

Yes. Just I think from the point of view of funding, we've basically announced anything we intend to do in the short term. So we disposed of ABC, our partial stake in ABC and we raised that to fund the $3.5 billion transaction. We raised about $1 billion. And this puts us in a fairly comfortable place with the rating agencies. Looking at some of it, it's too early to say because, frankly, you can't get involved until the deal closes. So Village and Summit will be moving very, very quickly on the integration and synergies. As Roz pointed out in her material, we have pretty good line of sight to about $150 million of synergies. The cost synergies, we would go after very rapidly. That's about 40% and 60%, which is coming from migration [of] risk, will be over a longer period of time. There were some items not captured in there. For example, we haven't made any assumptions on synergy between Walgreens stores and Summit locations. So there's probably a fair amount of upside to the $150 million. I don't know, A.J., does that answer your question? By the way, we're not considering any M&A type activity in the short term. We're taking a pause. We need to focus on integration activities.

James Kehoe :

I think it still is a priority in the short and medium term, but I think the scale of the acquisition won't even trigger on your radar. So we're more likely to buy smaller companies with specific, call it, capabilities that we need to advance our organic business. So we're not going to go out and do a $2 billion or $3 billion acquisition on a health tech company, we're likely to be very targeted, and it will be in the hundreds of millions, not in the billions.

George Hill :

Also, James, I know that you guys don't provide quarterly guidance, but could you maybe talk a little bit about expectations for cadence this quarter had a good portion of COVID and COVID pull forward into it. Fiscal Q2 seems like it's going to be a little bit below The Street. And maybe the question to focus on here is kind of what inflects the most as you think about the back half of the year? And if we think about earnings risk, like maybe talk about the biggest points of inflection, which we would see as the biggest points of risk.

Operator:

Next question comes from the line of Elizabeth Anderson from Evercore ISI.

James Kehoe :

Yes. I think the shrink is built in the forecast. We're probably -- maybe we cried too much last year when we were hitting numbers that were 3.5% of sales. We're down in the lower 2s, call it, the mid 2.5%, 2.6% kind of range now. And we're stabilized. So -- but we've spent a fair amount, and that could be one of the disconnects in SG&A. We've put in incremental security in the stores in the first quarter. Actually, probably we put in too much and we might step back a little bit from that. But what we're seeing is we're putting in more law enforcement as opposed to security companies. The security companies are proven to be largely ineffective. So we're investing more SG&A to drive the lower shrink. And it's -- actually, we're quite happy with where we are. It's around 2.5% to 2.6%. So that's well below the prior year levels. And we have a fairly good line of sight to new programs going in. The second part of the question? Cough, cold, flu. Yes, we did get a bounce from cough, cold, flu in the quarter. But as you look at our retail business in the first quarter, where the comps came in at cough, cold, flu boosted the result for the tune of, I think it was 220 basis points. But on the flip side is the COVID OTC tests were a headwind of 170. So actually, the way I'd encourage you to think about the first quarter is, if you take out the noise of the two of these, roughly the business is doing a 2% comp. And if you go back to the guidance we gave three months ago, we actually said we expect the retail business to do a 2% to 3% ex COVID. We did see a little bit of weakness in some of the -- some other categories. But I think where we won in the first quarter was we built fairly aggressive inventory levels, and we were extremely well positioned on cough, cold, flu and we've actually gained share in the category. We will get some opportunity on the full year from cough cold flu. It's too early to say what's going to happen in the second quarter. Honestly, we've seen a little bit of a slowdown in the last few weeks. Flu vaccinations are still up, I think, 9% or 10% versus prior year. So there's no issue in cough, cold, flu. It has given us a bit of a boost. But as I said, if you think about cough, cold, flu in the first quarter, it was offset by these cost items in pharmacy that I talked about, and they'll roll out of the system in the second half.

Lisa Gill :

I'm going to take it more from a strategic standpoint. So when I think about your U.S. Healthcare business and Summit, CityMD as well as VillageMD. Can you maybe just spend a minute and talk about how you think about them, integrating and fitting together. As I understand it, both Summit and CityMD today are primarily fee-for-service. I think the reason that VillageMD was at a loss is that they have at-risk lives. So as you think about this over the next few years, is the goal to move more people onto the platform from an at risk perspective. Where do you see those opportunities? Summit is in a single market. Do you think you can replicate some of that multispecialty and other markets? James I know you did some numbers around some of the synergies. But just more conceptually, I want to try to understand how you're viewing this going forward?

Operator:

Your next question comes from the line of Ann Hynes from Mizuho Securities.

Roz Brewer :

James, why don't we start with the free cash flow? And then, Rick, just go into the detail around the script performance on the core script business.

Rick Gates:

And just to -- this is Rick. Just to walk into the 5% script growth, there's actually building blocks that are part of that. And I think you are correct. Part of it is just market growth that we have that is the first part of the building block then it goes into the adherence and services, which are a key part of all the programs we've invested in. So that is a huge part of how we're going to continue to grow scripts -- the marketing win-back plans based off of staffing is the third one, then obviously, core staffing and reopening of store hours is the fourth building block. And I would say that as you look at the cadence of scripts and how it's going to grow into the second half of the year, Roz has talked a lot about the hiring pieces, but it actually goes into -- there's kind of a time line to get there, right? You have to hire. We have to train appropriately, get our pharmacists ready, then we will reopen our stores to full store hours that we have before and then obviously, the win-back program. So there is a timing element to the scripts and how the growth will really start to ramp up in the second half of the year.

Michael Cherny :

I guess one just quick clean-up question and one broader one. First, on the clean-up side, is it possible if you could give us the after-tax proceeds from sale-leaseback transactions for the quarter? That would be great. And then maybe on the international side, I understand the success that you've had on the various different holiday items for the UK. But can you give us a sense whether it's FX oriented beyond that, how to think about the confidence level you have in raising the adjusted OI for segment for the year and all the moving pieces beyond simply the contribution that you got from the Black Friday, Black Thursday, I apologize if I missed a couple of the holidays there, James.

Operator:

And this ends our Q&A session. I will now turn the call back over to Ms. Roz Brewer for some final closing remarks.

Operator:

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Tiffany Kanaga:

Good morning. Thank you for joining us for the Walgreens Boots Alliance earnings call for the fourth quarter of fiscal year 2022. I’m Tiffany Kanaga, Vice President of Global Investor Relations. Joining me on today’s call are Roz Brewer, our Chief Executive Officer; James Kehoe, our Chief Financial Officer; and John Driscoll, President of our U.S. Healthcare segment. Rick Gates, Senior Vice President of Pharmacy and Healthcare at Walgreens will participate in Q&A. Today’s call will be approximately two hours in length, including Q&A. Let me note that, we will be referring to our segments by their new names

James Kehoe:

Thank you, Roz, and good morning. Overall, we had a good finish to the year with fourth quarter results slightly ahead of our expectations. We continue to drive strong execution across all of our operating segments and rapidly expand our U.S. Healthcare business. As a reminder, we are lapping a very strong prior year when adjusted EPS grew 28%, boosted by COVID-19 vaccinations. Year-over-year comparisons are also impacted by higher investments in the U.S. Healthcare segment, including the acquisition of a majority stake in VillageMD. Sales decline 3.2% on a constant currency basis, excluding the negative impact from AllianceRx and the positive contributions from healthcare M&A. Constant currency sales growth was around 2%. Adjusted EPS was $0.80 in the quarter, a constant currency decrease of 30%, entirely driven by the decline in adjusted operating income and partly offset by a lower tax rate. Solid gross profit performance in U.S. Retail and the continued rebound in International were offset by the lapping of peak COVID-19 vaccinations in the year-ago quarter, and planned growth investments in U.S. Healthcare. GAAP Earnings per share was a loss of $0.48, which compares to earnings per share of $0.41 last year, mostly due to a $780 million non-cash impairment charge in Boots UK, and higher charges related to the transformational cost management program, reflecting incremental store closures. Please note that the Boots impairment charges were related to trademarks and licenses, and were mostly due to the impact of higher discount rates. Now, let’s move to the full year financial highlights. Full year sales increased 1.2% on a constant currency basis. However, if you exclude the 5.5 percentage-point negative impact from AllianceRx and positive contributions from U.S. Healthcare M&A activity, core sales growth was a healthy 6%. Adjusted EPS was $5.04, a constant currency increase of 3.4%, and above our initial guidance of flat EPS. Furthermore, the result included a 5.5 percentage-point headwind from the build out of the U.S. Healthcare segment. In summary, full year core sales grew by 6% and adjusted EPS increased 3.4%. Now, let’s look at the U.S. Retail Pharmacy segment. Sales decreased 7.2% in the quarter as we lapped a very strong prior year comp of 8%, and we faced a 7.8 percentage-point headwind from AllianceRx. Adjusted operating income declined 36%, lapping strong prior year results when AOI grew 16%, including significant COVID-19 vaccinations. Strength in U.S. Retail and continued cost savings were offset by higher labor investments and lower results in U.S. Pharmacy. For the full- year, AOI was up slightly, reflecting solid core sales growth. Now, let’s look in more detail at U.S. Pharmacy. Pharmacy sales declined 8.8%, entirely due to a 10.4 percentage-point impact from AllianceRx. Comparable pharmacy sales were up 3%, despite lapping a very strong 8.9% growth last year. Comp scripts declined 3.5% and excluding immunizations, comp scripts were flat, which compares to a 4.2% growth in the prior year. We completed 2.9 million COVID-19 vaccinations in the fourth quarter, well below the 13.5 million vaccinations in the prior year quarter, and this trend was generally in line with our expectations. Pharmacy performance in the quarter benefited from improved trends from seasonal scripts and maintenance medications. However, scripts remain challenged by temporary reductions in store operating hours due to staffing shortages. Operating hour limitations impacted scripts by about 270 basis points in the quarter with a full-year impact of around 180 basis points. As Roz mentioned, actions have been taken to address the staffing challenges and we are encouraged by the positive hiring trends over the past 11 weeks. This gives us confidence that we can recover script volume as we move into next year. Overall, looking on a three-year stack basis, which normalizes for COVID-related volatility, comp scripts excluding immunizations increased 7.7%. We administered 3.4 million COVID-19 tests in the quarter compared to 5.2 million last year. Additionally, with payers now reimbursing OTC tests, we sold 7.8 million OTC tests through the pharmacy. As a reminder, our comp script numbers exclude testing. Finally, pharmacy adjusted gross profit declined, driven by a much lower level of COVID-19 vaccinations and ongoing margin pressure. Turning next to our U.S. Retail business. Overall, we saw good retail performance as we continued to benefit from our omnichannel and mass personalization initiatives. Comp retail sales decreased 1.9%, and this was largely due to lapping a very strong prior year quarter, when sales advanced 6.2%. Overall, our retail business has good underlying momentum with 13% growth on a three-year stack basis. On a full-year basis, comp retail sales were up a strong 6%, the highest in nearly two decades with positive contributions from personal care, beauty and cough/cold, flu, as well as COVID-19 OTC tests, which contributed about 3 percentage points of growth. Retail gross margin expanded throughout the year, reflecting effective margin management, including strategic pricing and promotion optimization, and stabilizing shrink levels. Turning next to the International segment, and as always, I will talk to constant currency numbers. International delivered a strong set of results. Sales increased 6.7%, reflecting growth across all international markets with Boots UK up 6% and Germany wholesale advancing 6.8%. Adjusted operating income was $163 million in the quarter, up 31% versus prior year. The strong finish to the year led to full year sales and adjusted operating income growth of 13% and 65%, respectively. Let’s now look in more detail at Boots UK. Strong retail sales performance more than offset a decline in comp pharmacy sales of 7% as we lapped strong demand for COVID-19 services. Comp retail sales advanced 15%, reflecting a 20% rebound in footfall with flagship and travel location showing robust improvement. Market share increased with personal care and health and wellness driving notable gains. Compared to pre-COVID levels, store footfall remains around 15% lower. However, this was more than offset by a 14% increase in store basket size and Boots.com sales that more than doubled. Over 11% of our total UK retail sales came from digital in the quarter, up from around 6% pre-COVID. Turning next to U.S. Healthcare. Segment sales were over $600 million in the quarter with pro forma combined sales growth of 34%. VillageMD grew in line with plan, and revenue growth is on track as we launch new clinics, scale existing clinics and increase value-based arrangements. Shields delivered another excellent quarter with pro forma sales growth of 48%, driven by annualizing recent contract wins and by expanding their value proposition with existing health system partners. Segment adjusted operating income was a loss of $151 million in the quarter. Organic investments accounted for $45 million. Investments at VillageMD more than offset the profit contribution from Shields and led to a $106 million AOI loss across our majority investments. The clinic rollout at VillageMD continues on pace. VillageMD had 334 clinics at the end of the year, an increase of 82 clinics compared to prior year. VillageMD had 433,000 value-based patients as of the end of fiscal ‘22, up from 326,000 at the end of fiscal ‘21. Fiscal ‘22 was a peak investment year and the fourth quarter loss is not a good indicator for fiscal ‘23 and beyond. VillageMD, Shields and CareCentrix will drive increasingly high contributions as the businesses mature. Additionally, investments in the Walgreens Health organic business will be partially offset by positive contributions from clinical trials expansion and integration synergies. Turning next to cash flow. Operating cash flow was $3.9 billion, and free cash flow was $2.2 billion as we cycled through some exceptional headwinds. First, the sales decline of AllianceRx led to the unwinding of a favorable working capital position with a year-over-year impact of $400 million. Secondly, we benefited from COVID-19 government-related support in fiscal ‘21, whereas this partially reversed as the deferred FICA payments became due in fiscal ‘22. In total, the year-over-year impact was around $400 million. Additionally, we executed an inventory prebuy ahead of an expected strong cough/cold, flu and holiday season. And finally, there were some onetime items, including legal settlements in the U.S. of $200 million. Free cash flow was also impacted by a $355 million increase in capital expenditures to support our growth initiatives, including the VillageMD clinic expansion, rollout of microfulfillment centers and continued omnichannel and digital investments. Before moving on, I want to reiterate that our full year EPS grew 3%, ahead of our original guidance of flat, and we made substantial progress against our goals as we build out our U.S. Healthcare business. I’ll now turn to our fiscal ‘23 guidance and long-term growth outlook. We are guiding to fiscal ‘23 adjusted EPS of between $4.45 and $4.65 compared to the $5.04 achieved in fiscal ‘22. While we expect solid core business growth, looking forward into ‘23, we are facing two key challenges. First, we project a much lower level of COVID-19 vaccination and testing activity, and this leads to an earnings headwind of 15% to 17%. Second, the dollar has strengthened significantly and is a 2% headwind to EPS in reported currencies. Excluding these two headwinds, we expect core EPS growth of 8% to 10% on a constant currency basis, with positive contributions from all segments. This healthy core growth reinforces our confidence in achieving our long-term growth algorithm. And today, we are providing more clarity and raising our U.S. Healthcare targets. Based on execution to date and improved visibility, we are increasing our 2025 sales target for U.S. Healthcare by over 20%, and we are now projecting sales of $11 billion to $12 billion by 2025. Furthermore, we expect the U.S. Healthcare segment to generate positive adjusted EBITDA by fiscal ‘24. Later, I will provide greater detail on the key drivers. Let me now walk you through our 2023 guidance in greater detail, starting with WBA. Overall, we expect low-single-digit sales growth on a constant currency basis. Excluding the COVID-19 headwind, we do expect sales growth of 2% to 4%. This sales growth is also impacted by a 2 percentage-point headwind from AllianceRx, which largely cycles out in the second quarter. So, if you strip out the AllianceRx and COVID-19 impacts, we expect constant currency sales to be up mid-single-digit. Adjusted EPS is projected at $4.45 to $4.65, a constant currency decline of 6% to 10%. Excluding the COVID-19 and ForEx headwinds, adjusted EPS growth is around 8% to 10%. Let me now walk you through the assumptions and guidance for each of our reporting segments, starting with U.S. Retail Pharmacy. Sales are projected to decline low-single-digit. Our lower sales contribution from vaccinations and testing will reduce the growth by 2 percentage points, whereas the low-margin AllianceRx business also has an adverse impact of 2 percentage points. In summary, if you strip out these factors, we expect low-single-digit sales growth. We are projecting 16 million vaccinations in 2023 compared to 35 million in both of the previous years. The 16 million estimate assumes only one booster this year and that around 40% of the population chooses to get one. AOI is projected at $4.5 billion to $4.6 billion, including an 18 percentage-point headwind from the lower COVID-19 contribution. Excluding this impact, core AOI growth is 10% to 11%. Let’s walk through some of the key growth drivers. First, we anticipate script volume recovery as we move through the year. Focused labor investments are already leading to positive net staffing trends, and over the coming months will allow more stores to return to normal operating hours. We expect the ongoing rollout of micro fulfillment centers to continue to drive efficiencies in the pharmacy, easing staffing challenges. Additionally, pharmacy will be boosted by increased contributions from Pharmacy Services and patient acquisition initiatives. We also have good visibility to reimbursement net of procurement savings. Second, we expect continued momentum from the retail business, driven by our digital and omnichannel offerings, the enhancements we have made to our myWalgreens loyalty program and through innovation and growth in owned brands. We are also seeing increasing contribution from alternative profit streams, including financial services and media. Finally, actions to mitigate shrink are well underway, and we are already seeing improved shrink rates. Overall, we expect gross profit to be broadly flat but up around 5% to 6%, excluding the COVID headwind. SG&A is expected to increase by around 1% to 2%, reflecting increased investments in team members and technology, offset by continued strong results from the transformational cost management program. Turning next to the International segment. International had a very strong year in fiscal ‘22, and we expect continued robust growth in 2023. However, the strong dollar will negatively impact reported results and represent a headwind to sales and adjusted operating income of around 11% to 12%. Sales are projected to grow 5% to 7% on a constant currency basis with all markets growing. Specifically, we expect the UK to grow 6% and Germany will grow 4%. We expect adjusted operating income of $830 million to $870 million with strong constant currency growth of 26% to 32%. This follows on from 65% growth in 2022. Sales growth, strong cost management discipline and integration-related benefits in Germany are the key drivers. Now, let’s turn to U.S. Healthcare. We are very encouraged by our progress as we build out our next growth engine. We expect sales of around $5 billion, including a full year of contribution from prior acquisitions and pro forma sales growth of 45% to 55%. We are introducing an adjusted EBITDA metric for the U.S. Healthcare segment. And for fiscal ‘23, we expect an adjusted EBITDA loss of $220 million to $240 million. This is an improvement of $70 million to $90 million versus fiscal ‘22. We have moved past the fiscal ‘22 peak investment period, and the team is operating with agility and efficiency. And we have clear line of sight to positive adjusted EBITDA in fiscal ‘24. Let’s now take a deeper look at the U.S. Healthcare projections. The U.S. Healthcare segment is scaling to $5 billion in sales, and pro forma sales growth of 45% to 55% reflects strong growth across all of our health care businesses. VillageMD sales are projected at $2.8 billion to $3 billion, growing 50% to 60% with the performance driven by growth in value-based patients at existing clinics and continued expansion of their clinic footprint. We anticipate pro forma growth of 20% to 30% at CareCentrix, reaching sales of over $1.4 billion in fiscal ‘23. This performance reflects growth across existing and new payer and provider customers and upsell of innovative new home services. Shields is expected to drive pro forma sales growth of 30% to 40% through new health system partners and an expanding value proposition at existing customers. Given the relatively early stage of development, we expect the Walgreens Health organic business to deliver a modest sales contribution of $120 million to $150 million. Let me now walk you through some of the key corporate assumptions. Our tax rate is expected to be around 16% in fiscal ‘23, roughly 50 basis points higher than prior year. However, we do anticipate an increase to around 20% in fiscal ‘24, largely consistent with our previous expectations. This step-up will be driven by higher tax rates in the UK and Switzerland, and a greater percentage of income from U.S.-based businesses. Interest expense is expected to increase by $100 million due largely to higher interest rates. Our fiscal ‘23 guidance assumes only anti-dilutive share repurchase activity as our near-term capital allocation priorities will be primarily focused on growth investments and debt paydown. However, beyond ‘23, we do expect to have flexibility for a sizable new program. Please note that our fiscal ‘23 guidance does not assume any acquisitions or divestitures. And finally, corporate costs will decline slightly as we tightly manage central costs. While we are not providing quarterly EPS guidance, we see a more balanced cadence between the first and second half compared to current consensus, which appears more first half weighted. In the first half, we will be lapping strong COVID-19 execution and record retail comps. The second half of the year will reflect the pace and timing of script volume recovery and reduced U.S. Healthcare losses as the segment scales up. Let me now turn to our long-term outlook. Looking beyond ‘23, we are reconfirming our long-term growth algorithm with mid- to high-single-digit adjusted EPS growth in ‘24 and building to low-teens growth in 2025. Additionally, I would highlight that 2024 includes a more modest headwind from COVID-19 and the impact of a higher tax rate. Our transformation to a healthcare company will drive accelerated earnings growth as the faster growth and higher-margin U.S. Healthcare business reaches scale. We expect U.S. Healthcare to contribute over half of the annual adjusted EPS growth over the long term, while we continue to assume moderate growth from the core business and increased returns from capital deployment as we exit ‘23 with improved credit metrics. Looking now at our capital allocation priorities. First, we will continue to prioritize organic investment in our resilient core business, and this will drive consistent returns and fast payback. Second, we will prioritize M&A that advances our healthcare ambitions, evaluating all opportunities through a rigorous strategic and financial lens. We intend to further simplify our portfolio to unlock value, and this provides significant flexibility as we execute on our transformation. Third, balance sheet strength is a key focus area for us. We remain committed to maintaining our investment-grade rating. Finally, we will return excess capital to shareholders, including a growing dividend. Beyond fiscal ‘23, we have potential capacity to resume sizable share repurchases. Given the rising importance of U.S. Healthcare, I would like to provide increased clarity on the segment goals over the next three years. With our solid execution to date and greater visibility ahead, we are increasing our fiscal ‘25 sales goal from $9 billion to $10 billion previously to $11 billion to $12 billion, and representing a compound annual growth rate of approximately 50% on a pro forma basis. VillageMD is the largest contributor with growth achieved as existing clinics mature and realize more attractive economics and through ongoing expansion of VillageMD’s clinic footprint. We expect continued strong sales growth at Shields, benefiting from rapid growth in the broader specialty pharmacy market and their unique focus on health system enablement. CareCentrix sales will be driven by increased demand to better manage the needs of patients with complex or chronic conditions as they transition out of the hospital and into other post-acute settings, including the home. Finally, we expect the Walgreens Health organic business to scale rapidly as we add new payer and provider partners and increasingly move to value-based and delegated risk arrangements. We expect the Walgreens Health organic business to contribute over $1 billion in sales by 2025. Moving now to our EBITDA projections for U.S. Healthcare. We have a clear path to profitability by fiscal year 2024, building to a target of mid-teens adjusted EBITDA margin. We are projecting adjusted EBITDA of $125 million to $225 million in ‘24, rising to $500 million to $700 million in 2025. We are confident in this trajectory with several factors expected to drive significant profit growth. Achieving scale across the portfolio is critical as it enhances our ability to cover central overheads and platform investments, including technology. As you have seen earlier, sales will scale from $5 billion in fiscal ‘23 to $7 billion to $8 billion in ‘24 and $11 billion to $12 billion by 2025. Our maturing VillageMD clinic profile is a significant tailwind as a greater percentage of clinics reach positive contribution margin. As a reminder, this typically occurs in year three on a seven-year glide path to very attractive at-scale economics. Within the Walgreens Health organic business, we continue to have productive discussions with existing and prospective payer partners around a shift to risk arrangements. And our margin-accretive Shields business is projected to continue to grow strongly. On top of all this, the U.S. Healthcare team has identified sizable synergy opportunities across our various healthcare assets. And they are operating with speed and agility and driving operating efficiencies on a clear path to profitability. Let me now wrap up the guidance section. I would like to leave you with three key takeaways as to why we are excited about the near-term and long-term outlook for WBA. First, we expect to drive positive core business momentum in fiscal ‘23 as we lap strong COVID-19 execution in 2022. The U.S. Healthcare segment is rapidly approaching positive adjusted EBITDA. The business continues to scale. And we have raised our 2025 sales outlook to $11 billion to $12 billion, representing a compound annual growth rate of roughly 50%. Finally, we remain confident in our long-term growth algorithm, and we are reconfirming our goal of low-teens EPS growth. We are committed to our vision and strategy, and we have and will take action to simplify the business and unlock shareholder value. With that, let me now pass it back to Roz.

John Driscoll:

Thank you, Roz. I have spent my career leading initiatives to reimagine and reinvent healthcare solutions that improve outcomes, lower costs and meet patients where they are. I’m delighted to join you today as the President of U.S. Healthcare. I believe that Walgreens is uniquely positioned with its pharmacy backbone as well as the quality of the assets and teams that we have invested in to start the journey at scale to help health plans and patients lower costs and improve outcomes. Building on our strong foundation in retail and specialty pharmacy, our U.S. Healthcare business expands WBA into significantly larger and faster growing profit pools. We’re gaining access to $135 billion in addressable EBITDA profit pools versus $41 billion today. We focus on market segments that are natural extensions of the pharmacy that create value for our payer and provider partners and again meet consumers where they are. I’m thrilled that WBA has invested in foundational, best-in-class assets with VillageMD, Shields and CareCentrix that together create a platform for us to drive growth in some of the most attractive healthcare markets. Primary care physicians are at the center of managing health and wellness of patients, and we have a market-leading business in VillageMD. As more care moves into the home in the community, we have a natural platform to meet that demand from plans and patients with CareCentrix. Specialty pharmacy is one of the fastest-growing segments in health care, and most specialty spend originates in health systems. We also have an industry-leading provider in health system, specialty pharma services in Shields. Simple convenient access to low acuity health care services is also key to managing the health of our consumers. We’re starting to deliver population health services through our health corners to close care gaps and help our payer and provider partners expand their reach. In the end, scale is critical, but health care is local. We’re creating a nationally scaled health care business, which will leverage our entire portfolio to deliver better care at lower costs. And by focusing our portfolio on these higher-growth markets, we will accelerate the return on our investment and our path to profitability in U.S. Healthcare. Today, most patients and their caregivers are overwhelmed as they try to manage across different health conditions, providers, appointments, bills and medications. They struggle with getting basic access to care and experience a lack of coordination across their health needs. Our consumer-centric tech-enabled model will provide care across the full continuum, bringing together products and services across our portfolio. We see significant opportunities for synergies, allowing us to pursue value-based care and risk arrangements, which will demonstrate the value of an integrated approach. Our focus is on expanding our risk business, supporting integrated care, expanding our pharmacy value proposition and driving operational efficiency. Over the past year, we’ve made strategic investments to rapidly expand the breadth and depth of our portfolio. Bringing together our current individual assets, which are increasingly working together, our U.S. Healthcare segment now covers over 26 million lives, cared for through a network of over 12,000 providers in communities across all 50 states. While the Retail Pharmacy is not part of our U.S. Healthcare segment, it serves as the bedrock of our health care portfolio. We have deep community ties, and demand for healthcare services in our stores has never been higher. And it’s not just consumers looking to Walgreens for help with healthcare. Federal, state and local jurisdictions are increasingly looking to partner with us because we are close to patients, and they know they can count on us to deliver high-quality services that are absolutely critical. Our pharmacy serves 96 million patients through a team of 90,000 care providers. We administered 48 million total vaccines in fiscal year ‘22. And importantly, almost half of our pharmacies are in high need underserved areas, where we can drive health and vaccine equity. Our front-end business is increasingly relevant to health and wellness as we’ve seen with the sale of COVID OTC tests as well as our trusted selection of OTC medications. Both the retail and pharmacy businesses are serving the consumer across channels. We drove 117 million visits to the Walgreens app last year. Lastly, our stores are anchor access points to serve consumers through our Walgreens Health business, which now covers more than 2.3 million lives through three health plan partners. Health advisers in our stores conducted over 200,000 interactions with consumers to tend to their health care needs. Being lost in the wilderness of health care is a big challenge for patients and families. Walgreens Health is perfectly positioned to help consumers navigate what can be a bewildering experience in U.S. Healthcare. Now, let’s turn to VillageMD. Village is a leading asset in the field of risk-taking primary care. Village is uniquely positioned as one of the largest primary care providers in the U.S. We can now leverage the combined power of the Walgreens stores and our trusted brand with primary care. VillageMD providers touched the lives of over 1.6 million patients, covering over 430,000 value-based patients through over 340 clinics in 22 markets. 152 clinics are co-located with Walgreens stores, half of which are in underserved areas. VillageMD has achieved a Medicare STARS rating of 4.0 to 5.0 in their mature markets. It generates material Medicare Advantage cost savings of $2,400 per patient per year. We are also very proud to say that we serve patients across all socioeconomic statuses and are truly payer-agnostic. VillageMD is one of the leaders in the move to value-based care. The move to value is increasing and inevitable, and we expect very attractive growth ahead. There are a number of companies directly or indirectly competing in the value-based primary care marketplace, but VillageMD is differentiated by a faster path to favorable economics, driven by our acceptance of all patient populations and all payer types. We have a unique ability to address all of the ecosystem’s pain points at scale. VillageMD’s payer-agnostic model has enabled us to secure value-based contracts with every major national health plan as well as many of the local and regional health plans in the markets we serve. Our integrated primary care and pharmacy model has driven strong results, especially in combating chronic disease in the Medicare population. 23% of VillageMD’s Medicare patients are on at least 10 medications, making pharmacists critical members of the care teams. And moving forward, we see opportunity for commercial and care delivery synergies with CareCentrix. Now, let me talk about Shields Health Solutions. Shields is not a traditional specialty pharmacy but instead represents an evolution to the model. Shields participates in the specialty pharmacy space by building and accelerating hospital-owned specialty pharmacy programs that are integrated with care providers at the point of care. The idea is simple. 75% of specialty prescriptions in the U.S. originate in a health system, yet those hospitals retain only 10% of those prescriptions. Shields’ mission is to help the health system close that gap by driving a 5 to 7 times higher capture rate of specialty prescriptions for our partners. Today, our network of more than 75 health system partners represents more than 1,000 hospitals nationwide. Our partners include well-known health systems such as UMass Memorial, New York Presbyterian, Ohio State University and UCHealth. Our health system enablement model has three core components

Operator:

[Operator Instructions] Your first question comes from the line of Lisa Gill from JP Morgan.

Roz Brewer:

Hi Lisa, this is Roz. I’ll start that off, and James and I and John might fill in a few little pieces here. You asked a question about value-based arrangements. So, the assets that we have right now, I will talk about a little bit on the Village side. Village has a large amount of their current business that is in a value-based arrangement. And you’ll see that even more of that will grow over time. That is our objective. And then, to think about how we tie our assets together, I want to just talk a little bit about the grounding of what we have in that relationship between the pharmacists and the primary care physician because that’s the real key for us in terms of what we do inside our stores and taking that relationship that we have between our current customer and the patient that comes into a VillageMD and bring those two relationships together between the pharmacist and the primary care physician. When you think about value-based care, John, do you want to say a few words about that?

James Kehoe:

Yes. And Lisa, we -- you asked about the long-term margins. We’ve given a long-term target of mid-teens, and that’s probably even a little bit on the conservative side. And as you’ve seen, we’ve started flipping the metric to EBITDA to emphasize that we’ve already passed the peak of heavy investments. And I think as you look out over the coming years, I think we will -- we have Shields which is immediately profitable, and we’re not breaking out by unit, but it’s at least $100 million profit in the fiscal ‘22. And that is growing like gangbusters. We’ve given you the revenue growth. And you can probably assume that the profit growth in that business will outpace the revenue growth as it scales. And CareCentrix is a new acquisition. I think you can make your own estimates. I think we’ve said in the past it’s like mid- to high-single-digit margins. And we’ve given you a revenue number. We’ve given you a growth number. So, that’s pretty easy. I think the one we -- you’re probably struggling with a bit is VillageMD. We’ve been quite clear on this one that that’s in investment phase, and we actually accelerated the investments in 2022. So, instead of 160 clinics in calendar ‘22, we’ve gone to 200. So, we’re actually doing the smart thing. We’re doubling down. This is a scale business. The unique part of, as John said about the model is, this is not an Oak Street. This is a model that breaks even in year three. So opening clinics for us, yes, it will be painful in the first two years, but then the returns are outsized because we get a very rapid payback, so. But realistically, if you plot out the number of clinics, it will be fiscal ‘25 before we’re EBITDA breakeven and the same goes for the organic business. And just to add on to what John said is there is a lot of excitement amongst the partners we have been discussing with. We do expect to take delegated risk in probably in the near-term, so 6 to 12 months kind of time frame. So, we’re very excited by it. And we’ve called up the revenue guidance as -- and that is basically just coming from better visibility as we went through all the business reviews in the three-year plan. And we’re very excited by the signal that’s sending and for strong operational plans behind each one of those.

Elizabeth Anderson:

I had a couple of questions about sort of just like cash flow. In terms of the debt paydown, can you talk about like how much are you sort of thinking about sort of mandatory versus voluntary paydown over the next couple of years? And then on M&As, I think it was very helpful to hear, obviously, the Walgreens Health outlook. I just wanted to see if there were any other additional assets you felt like you needed. I think at sometimes about maybe a healthcare IT asset there. So, I just wanted to understand how that fits in your current mix of thinking? And then, any other one-off sort of cash flow items, like opioids or anything that might change going forward?

James Kehoe:

Yes. I think on the debt paydown, I think we’ve got exiting the year of $12 billion of debt. Well, we also have a lease liability of $24 billion. So, I think you can do the calculation yourself. Our target is 3.75 debt to EBITDA for Moody’s and 4 times for S&P, and we’re currently running above those levels, and we have taken commitments with the agencies to get them below these levels. So, I’m not giving an absolute number. What I would point out, though, is the tremendous flexibility we have in our portfolio. We have a lot of assets, and a fair portion of them are liquid. So, it gets back to your M&A question. Should we need to do M&A more likely to be EBITDA accretive? And then secondly is we have a lot of firepower to do EBITDA because we have a lot of assets that are not necessarily very close to the core. So, we feel like we’re in a fairly good position. But your question is the right one. We will, in the short term, focus on internal and actually potentially some M&A but not very large. We will focus on investment in the business and debt paydown. And then, as you look forward beyond ‘23, we’ve put it in the materials, our cash flow generation improved substantially when we get into ‘23 and ‘24 as healthcare investments taper off and it turns profitable. At that stage, we probably have fairly significant capacity to return capital to shareholders. But a lot can happen between now and 2024.

Steven Valiquette:

Great. Thanks. So, in the U.S., you mentioned that the comp script growth ex immunizations was flat year-over-year in the fiscal fourth quarter. You mentioned they should start to recover in fiscal ‘23, and you talked about the labor investment starting to pay off. But I guess with that, I wasn’t quite clear whether the labor investments are the key variable in your U.S. growth recovery in fiscal ‘23 or if other factors are more important. So, I guess, I was hoping to just get more color on the expected U.S. script growth recovery in fiscal ‘23.

Operator:

Your next question comes from the line of Charles Rhyee from Cowen.

James Kehoe:

Yes. Maybe I’ll just give you some of the impacts that are already assumed in the P&L. And we’ve essentially planned for a moderate recession, but there are significant impacts in the income statement. We’ve got about $0.08 or $0.10 of higher interest cost. We’ve got lower pension returns in the UK, that’s like $0.04. And the labor investments we’ve talked about are not necessarily directly a recession impact, but we have a very high level of inflation planned in the income statement. So I think the total inflation impact in the U.S. income statement is probably, I guess, $700 million. And we have a significant cost program in the U.S., the TCM program offsetting that, right? And then the other thing is that we do have -- still have some assumptions on supply chain and inflation. I see that a little bit as of an opportunity. We see China becoming less difficult right now and shipments are coming out way faster. And I think there’s a bit of a release in the system. The latest inflation numbers are not particularly encouraging, but we’ve planned the inflation side of the envelope quite in a detailed way. I think your real question is about how do you offset it. And maybe I’ll flip to the retail side of the business, right? So, I think you have to look at track record as you look forward into our plans. And the track record of the U.S. front of store business in ‘22 was we grew overall volume at -- sorry, comp revenue at 6%, of which about 3 points came from OTC test but still a strong 3% across the business for the year, and we increased margins at the same time. So, we could walk and chew gum, right? So, the margins went up. Despite all of the inflation, supply chain, the confusion around COVID and the stress on the stores, we still delivered this kind of performance. So, looking forward, we have planned for inflation. But our offsets are coming from a lot of the levers we pulled in the current year. One is, we are assuming next year a comp growth of about 2% to 3%. So, we’re not expecting a deceleration versus the previous year, we’re expecting repeat what we did in the base here. Two is we have a lot of marketing levers. It’s not just the omnichannel and digital investments that we’ve been making over the last two years. There’s a customer value transformation program that has delivered significant margin enhancement in the -- in 2022. And that will continue into 2023. And the big one is owned brands. We didn’t get entirely to the targets we expected in ‘22. So actually, we see owned brands being an even bigger lever going into ‘23 and ‘24 So, owned brand assortment -- and that will drive tremendous mix. We have strong owned brand positions in some of the health and wellness categories. But have we covered them all? No. Should we be covering them? Yes. And are they very profitable? Yes. So, we’ve got a lot of plans, more of the same and more on top again while we’re very excited by front of store.

James Kehoe:

No, we actually did pretty good in fiscal ‘22 on availability in the stores. It wasn’t in line with prior levels. But I think if the prior years were at 96 or 98, I think we were up 92 or 90, right? So not dramatically different. So I think the supply chain guys here did a really good job on getting stock in. Seasonal was not great in the current year. We missed some of the seasonal. But the core health and wellness products, we generally have stock across the stores. And that’s one of the opportunities we have in the current fiscal year is supply has released -- freed up from China. So seasonal -- all the seasonal holidays will be better than they were in ‘22.

Ann Hynes:

So, my question really has to do with the previous question. Because what really stuck out to me when I saw the guidance for retail, especially the adjusted operating income is for 10% to 11% growth ex COVID, which is, in my sector, one of the probably highest operating growth for next year. So -- and I know you have a lot of confidence in getting the market share back. Maybe can we look at it in a different way? Like when you look at your guidance, what do you worry about most? What would be the risk for the downside? Are you not achieving it? And can we also talk about international. You’re assuming international growth. And sitting here in the U.S., we see a lot of headlines that they’re going into a recession. So maybe if you can give a little bit more details on what would be the drivers of growth over there. Thanks.

Roz Brewer:

I think you said it well. The one thing I would add is I don’t want to overlook the investments that we’re making in our fulfillment centers. That’s a capital investment. And the intention with those eight centers that we have currently that’s supporting 1,800 of our stores, our goal is to take about 50% of the scripts out of the store, put them in a central fill location and feed those back to the store. So, when you see these investments, it’s not only investment in the labor piece. It’s also an investment for better jobs for our pharmacists, so they can lift up and consult, and then also we get better throughput in the stores. And so, that’s part of this equation, to return the script count is that you have better service at the same time, and we’re reducing costs by bringing in the fulfillment centers. And it’s one of those things that’s in the backdrop of our business but really strengthens our operating model inside the stores.

George Hill:

James, I guess, I have a couple of questions related to the portfolio and then a housekeeping question. So, I guess as you guys talk about continuing to streamline the portfolio. Is it safe to assume that we should continue to see moves like you guys have made with the minority investments in other public companies? And I don’t know if you’re willing to talk about timing on that. The flip side of that is, given that strategy, does it make sense to fully consolidate and buy out the remaining interest in VillageMD given the growth profile there? And I wanted to ask the housekeeping question of do you guys have a prearranged purchase price for the balance there. And then, I have a quick housekeeping follow-up, if you don’t mind.

James Kehoe:

Yes. So I think just -- maybe add in a little bit on the portfolio. We can’t say anything about any of our future actions. But I think you should listen to what Roz said that we are -- we’re very, very focused on simplifying the company because it’s too complex for investors. And then, the second piece is, we are focused on our debt and returning value to shareholders. So, we will be in cleanup mode for the foreseeable future.

James Kehoe:

Yes. What all I mean is if you look at absolute in the income statement in 2022, the ‘23 number is about 80% to 85% lower just because certain of the contracts are on a year or two of the contract. And then -- but the most important factor is we have 95% of the contracts closed. So, the volatility in the guidance is reduced, right? So -- because that’s what it all is. It’s all about volatility. And we got the question on ops and risk. The only thing we theoretically can control, we can influence very heavily, is Rx scripts. But the reimbursement rate is not a large concern going into the year.

Michael Cherny:

Maybe James, to pick up on that last comment and some of the commentaries you made around the control of regaining some of that script capture. As you think about the push and pull you have on trying to get some of the scripts that were lost due to the staffing dynamics, can you go a little more granular into some of the specific dynamics that you’re pulling forward to? How much of it is consumer-oriented versus payer-oriented in terms of that outreach? And in the past, especially when there’s been times of script loss, I know it was before a lot of management’s time, but thinking back to the Express Scripts dispute from a decade or so ago, what were some of the activities that worked in order to make sure that you recapture the script growth that you were targeting?

Rick Gates:

Yes. I think it’s the right question. I think as you look at the -- our ability in the marketing space, it’s very much advanced from where it was back in the days of Express Scripts and all the stuff you referenced. And if you look at our ability on the mass personalization side of it and really understanding the dynamics of where consumers are, how do we actually meet them where they are and understanding how to win them back. It’s not just a win back. It’s also trying to engage them in a different way to really get them to leverage our stores for more than just scripts or services and other types of things that we’re doing as well. So I think what you’ll see is a very focused approach on how we leverage our marketing dollars to really have a bigger impact than we would have in the mass personalization -- or the broad-based marketing campaigns we may have had in the past.

Roz Brewer:

So, there’s a couple of access points that we have. It really lies in the space of the digital work that we’ve done over the past couple of years, and it’s mounting. We opened the conversation today and talked about that we had 102 million members right now coming through our Walgreens -- myWalgreens app. Those are customers that come into our stores in various ways. And then, we also are aware of what they purchase. So, a lot of this has to do with the data and analytics that we’re pulling together around the customer and speaking to them on a one-to-one basis, and then we can reach back out to them and then engage -- reengage them back into the process. So, we can track script loss, we can track their activity in the store, and we put that information together and then tie them back into that actual physical location that they had their script at in the past. So, that’s the work that we’re doing and the marketing dollars that come behind this are not the traditional marketing dollars from years past. This is primarily a digital plan.

Kevin Caliendo:

James, the dividend payout ratio is really, really high this year. I think we can calculate it at something like 75%. You’ve talked about growing the dividend. That’s certainly a goal, remaining investment grade and having the cash flow improve dramatically next year. And I guess I want to sort of understand is the cash flow improvement going to come from lower CapEx? Is it better cash flow conversion? Like, I noticed your ratio to net income was really low in fiscal ‘22. And at what point -- like what’s the right payout ratio for Walgreens given now it’s an accelerated growth story, how should we think about that in the context of all the moving parts around investment spend and potential M&A and everything else?

Kevin Caliendo:

It does. It’s really helpful to understand sort of how you’re thinking about this and how we should think about it.

Operator:

Your next question comes from the line of A.J. Rice from Credit Suisse.

Roz Brewer:

So, let me start this off. A lot of questions here on our predictions on COVID levels. It’s hard to predict right now. We saw some recent comments this week about availability of vaccines at different age levels and taking that down. And then that’s something that we hadn’t forecasted in our thinking, and also, too, in terms of what we see in code-cough and flu. We know that people been -- there’s been a flu spin out there. And we know that last year, people were wearing mask. And so after a while, your immunity can get hit pretty severely. So, I’ve got Rick Gates here in the room. I’m going to let him talk a little bit about what he’s seeing out in the industry there and what we’re doing in terms of on-the-shelf products and those kinds of things. Rick?

James Kehoe:

Yes. And then, you had a question on the foot traffic. So, it’s a great question. In the UK, foot traffic is below pre pandemic, but the center of city plus travel locations continue to improve sequentially every quarter. So, there will be improvement over -- but I would say the recovery will not necessarily be absolute, and it will be over a multiyear period. The key question is how many people go back to the office. Central London is very, very driven. There are many people in train stations and many people are actually doing this office trip. And until -- and I don’t think it’s realistic to assume that you’re going to get 100% return to pre-COVID office behavior. So, the flip side of this is that we believe that we’ll continue to capture the larger basket size because that’s a behavioral shift that has changed and it hasn’t been deteriorating and plus the shift to omnichannel. So, I would say that the store will never get back to exactly where it was before in the UK. but we’ve more than compensated by the omnichannel and the size of the online business. So, as I said before, we’re much, much stronger overall in the UK. And our shares -- our share -- the proof is in the share of market. Our share of market is already higher than COVID on a value basis. So, in one way or another, we’ve captured back the value that’s in the UK market and more. And I think that’s the ultimate test. I don’t have three-year stacks in the U.S. on foot traffic.

James Kehoe:

Yes. But I think it wasn’t as dramatic in the UK. The drop was not as dramatic because our stores stayed open, and the UK -- sorry, in the U.S. In the UK, there were actually shutdowns of some of our stores in select locations. So the trough wasn’t as deep in the U.S., and the recovery was much, much quicker in the U.S. But I don’t think it’s entirely recovered to pre-COVID.

Operator:

Your next question comes from the line of Brian Tanquilut from Jefferies.

Roz Brewer:

Okay. So, labor trends in Walgreens Health side, there’s really no impact there. That’s our primary care physician, physicians through VillageMD. We’re continuing to grow the number of primary care physicians. So, we’re really not seeing a labor issue on our Walgreens Health side. It’s primarily in our retail sector and foot traffic in our stores impacted by what we have to do. I’ll give you some examples. We still have emergency callouts as people are diagnosed with COVID. And so that requires us to take a look almost daily at who’s running the pharmacy and the pharmacy technicians. And then, the second part of that is to make sure that some of this is geographically based, too. We’re seeing in the upper northeast, areas like Vermont, in those areas that we’re seeing that really the workplace and people reengaging in work is not happening as quickly. So, we’re working a little bit harder to reengage people to get them back to work, and that’s why you see some of the incentives that we’ve had in getting people to sign up for bonus pay and starting with our pharmacists. So really, what we’re seeing in terms of labor, we made investments over the time frame we announced last year that we would go to $15 an hour on our hourly labor. That has helped us tremendously because we’re competitive in the stores. And that’s rolling out and will be finished in the next -- I think we’ve got another 12 months to roll that across the country. So, the combination of our investments in labor and improving our working conditions in stores, all of those things are driving our employees back to the store. And also, you’re probably seeing some issues with labor in different sectors. But I would have to say that we’re doing our best work in terms of best jobs and best pay for our labor model that we deploy in our stores.

Eric Percher:

I wanted to connect some of the commentary on both labor and COVID to the guidance for the year. You mentioned a little lower first half relative to where consensus is. Is it fair to assume that the COVID benefit, the [16 million] shots will be first half weighted? And at 16 million, is that still larger than your expectation for flu shots in the average year? And then, aside from that, is it fair also to assume the labor benefits will not be in place by the flu season? Those are kind of back half of the year for what we should expect relative to retail?

Eric Percher:

Yes. I guess is the implication that’s really ramp of -- and maybe the U.S. Healthcare contributions that...

Operator:

Your next question comes from the line of Ricky Goldwasser from Morgan Stanley.

James Kehoe:

Yes. Sorry. Go ahead, Roz.

James Kehoe:

Yes. On the recession risk and international, we’ve already built in a fairly -- I wouldn’t say conservative, but a realistic plan. And the -- I would argue, the recession has hit -- if there is one, has hit the UK already. So, they came in with their budgets, and we had a robust discussion on what the outlook looked like. And they’ve probably built a scenario that is a recession, whereas in the U.S., it’s moderate recession stance. So, that covers that piece. And then, on monetization, we can’t speak that much about it.

James Kehoe:

It’s just not -- it’s impacting other people’s share prices. But I think you need to go back to the prepared comments. We want to simplify the Company over a fairly short period of time. But that’s not saying what we’re going to do specifically next year.

Unidentified Analyst:

This is Austin on for Justin. Thanks for squeezing us in here. James, I wanted to kind of return quick to the -- you guys laid out that 8% to 10% core growth. And I know you’ve kind of laid out a lot of moving parts through the Q&A here, but hoping to kind of just consolidate and kind of bridge that in one place. What are the building blocks there around shrink the pharmacist bonuses, kind of working our way through that? And then as a quick follow-up there. Just hoping for any kind of updated color on 340B, if there’s kind of a magnitude of headwind or tailwind that you guys are sort of thinking about there?

Operator:

And your final question comes from the line of John Ransom from Raymond James.

James Kehoe:

Sure. So, it’s actually $0.60. And the two biggest drivers -- well, I’ll give you one is ABC, for example, we sold some of our shareholding. That cost $0.14. So, it’s not a small number. And then, the financial climate, we have lower pension returns in the UK, that’s about $0.05. And then, ForEx is $0.12. So, there’s a lot of corporate type items that have nothing to do with the core business. And then, if you take the core of the business, the pharmacy business is the largest variation. That’s about $0.30 and it’s coming from two things. 340B, it’s not a particular headwind year-on-year, but versus our original guidance, it’s a very large number. It’s almost all of the $0.30. Script volume

Roz Brewer:

So, thanks again to all of you all for joining us today. I personally appreciate the engagement and the relevancy of the questions. We were very intentional about making sure that you knew we were committed to you with as much detail and transparency as possible. And we shared even more information about how WBA is executing well on the four strategic priorities and then how we’re transforming rapidly into a healthcare company. Those are the real takeaways there. But to just recap, as we close this down, I know it’s been a couple of hours is, I want to remind everybody that we’ll be focused on accelerating our growth and profitability in our U.S. Healthcare segment. We’ll focus on optimizing our best-in-class assets and our partners. We’ll focus on driving positive momentum in our resilient core business and making significant progress on talent and capabilities and moving quickly to simplify our portfolio. And we’ll do this at a pace to deliver our long-term growth algorithm. So, we look forward to continue to keeping you fully updated as we build on our success in the months ahead. We hope you have a great rest of your day. And as always, we deeply appreciate all of your support and commitment to the bright future we’ve planned. Thank you so much.

Tiffany Kanaga:

Good morning. Thank you for joining us for the Walgreens Boots Alliance earnings call for the third quarter of fiscal year 2022. I'm Tiffany Kanaga, Vice President of Global Investor Relations. Joining me on today's call are Roz Brewer, our Chief Executive Officer; James Kehoe, our Chief Financial Officer; and John Standley, President of Walgreens. As always, during the conference call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on Slide 2 and those outlined in our latest forms 10-K and 10-Q filed with the Securities and Exchange no obligation to publicly update any forward-looking statement after this presentation, whether as a result of new information, future events, changes in assumptions or otherwise. You can find our press release and the slides referenced on this call in the Investors section of the Walgreens Boots Alliance website. The slides in the press release also contain further information about non-GAAP financial measures that we will discuss today during this call. I will now turn the call over to Roz.

James Kehoe:

Thank you, Roz, and good morning. Adjusted EPS of $0.96 was broadly in line with our expectations. On a constant currency basis, EPS declined 29% versus prior year levels. As mentioned before, we were lapping an especially strong prior year quarter with EPS growth of over 90%. We administered 17 million vaccinations last year compared to 4.7 million in the current quarter, leading to an EPS headwind of around 18 percentage points. We also continued to invest in our fast-growing Walgreens Health business. Sales for the segment grew 65% on a pro forma basis, and the growth investments led to a negative EPS impact of 6 percentage points. Our U.S. retail business continues to execute strongly, and our international markets more than doubled segment AOI compared to the prior year quarter. Sales grew ahead of expectations and cash flow was solid, with year-to-date operating cash flow of $3.8 billion and free cash flow of $2.6 billion. The Transformational Cost Management Program is performing ahead of expectations with an expanding funnel of initiatives, and we are now raising our annual cost savings goal to $3.5 billion by fiscal year 2024. Finally, with our third quarter performance that was broadly in line with our expectations, we are maintaining our full year outlook of low single-digit growth in adjusted EPS. Let's now look at the results in more detail. Third quarter sales declined 2.8% on a constant currency basis, strong growth from Walgreens and the International segment. And sales contributions from Walgreens Health were more than offset by a 720 basis point impact from the sales decline at AllianceRx Walgreens. If you exclude the negative impact from AllianceRx and the positive benefit from Walgreens Health M&A, constant currency sales growth was approximately 3%. Adjusted operating income declined 34% on a constant currency basis, driven by a decline in U.S. pharmacy as it lapped the peak COVID-19 vaccinations in the year-ago quarter and planned growth investments in Walgreens Health. This was partly offset by solid gross profit performance in U.S. retail and continued strength in international sales and profitability. Adjusted EPS was $0.96 in the quarter, a constant currency decrease of 28.9%, driven mostly by adjusted operating income. GAAP EPS decreased 74% to $0.33, reflecting a $683 million charge for the opioid settlement with the State of Florida and higher onetime charges in the quarter related to the Transformational Cost Management Program. Now let's move to the year-to-date highlights. Year-to-date sales advanced 2.7% on a constant currency basis, including a 500 basis point negative impact from AllianceRx. Without this negative impact and excluding the Walgreens Health M&A activity, core sales growth was around 8%. Adjusted operating income increased 13.7% on a constant currency basis, reflecting adjusted gross profit growth across both pharmacy and retail in the U.S. and a continued rebound in international sales and profitability. Adjusted EPS advanced 13.9%. GAAP EPS increased by $3.60 to $5.49, reflecting a $2.5 billion after-tax gain in the first quarter related to the valuation of our prior investments in VillageMD and Shields as well as lapping a $1.2 billion charge net of tax from the company's equity earnings in AmerisourceBergen in the year-ago period. This was partly offset by the Florida opioid legal settlement in the current quarter. Now let's move to the U.S. segment. Sales decreased 7% in the quarter, a solid performance from Walgreens, up 1.7% despite lapping peak COVID-19 vaccinations, was more than offset by an 850 basis point headwind from AllianceRx. Adjusted gross profit decreased 9.6%, with high single-digit growth at retail, more than offset by a decline in pharmacy. Procurement savings and the strong retail performance were more than offset by fewer COVID-19 vaccinations and lower reimbursement rates. Adjusted SG&A spend decreased 0.9%. Lower COVID-19 vaccinations and continued cost discipline were only partly offset by higher labor costs and the timing of marketing spend. SG&A as a percentage of sales increased 110 basis points to 17.9% of sales, and this was almost entirely due to an adverse mix impact as a result of the AllianceRx sales decline. Adjusted operating income decreased 34%, mainly reflecting lower pharmacy performance, including a challenging comparison against peak COVID-19 vaccinations in the year-ago quarter. Now let's look in more detail at U.S. pharmacy. Pharmacy sales declined 9.7%, negatively impacted by an 11.2 percentage point impact from AllianceRx Walgreens. Comparable pharmacy sales were up 2%. Comp scripts decreased 1.8%, but excluding vaccinations, comp scripts increased 2.1%. We completed 4.7 million COVID-19 vaccinations in the quarter compared to 17 million vaccinations in the prior year quarter, and we administered 3.9 million COVID-19 tests in the quarter compared with 3.4 million tests in the prior year quarter. Pharmacy benefited in the quarter from better trends in seasonal scripts. However, while we did see some improvement in the quarter, scripts continued to be challenged by temporary operating hour reductions due to labor shortages. We estimate an impact of around 190 basis points on comp scripts in the quarter. Pharmacy adjusted gross profit declined as procurement savings and volume growth were more than offset by reimbursement pressure, and we lapped peak COVID-19 vaccinations in the prior year. Comp retail sales increased 1.4%, and excluding tobacco, comps were up 2.4%. We saw strong growth across health and wellness, driven by at-home COVID-19 tests and cough/cold flu. Personal care was up 2.6%, but the consumables and general merchandise categories were impacted by strong sales of COVID-19-related items last year and the planned decline in tobacco. Gross margin increased strongly year-on-year due to effective margin management and stabilizing shrink levels, partly offset by supply chain pressures. Turning next to the International segment. And as always, I'll talk to constant currency numbers. International had a strong quarter. Sales increased 9.3%, reflecting growth across all international markets, with Boots UK advancing 13.5% and Germany wholesale growing 6.8%. Adjusted operating income was $174 million in the quarter, more than doubling versus prior year, led by sales growth and tight cost control. The integration of our Germany wholesale business is very much on track with operational synergy benefits running ahead of schedule. Let's now look in more detail at Boots UK. Boots UK sales grew 13.5% in the quarter, led by strong retail performance. Comparable pharmacy sales decreased slightly as we lapped favorable NHS reimbursement timing in the year-ago quarter. Comparable NHS volumes showed modest growth, while pharmacy services advanced 22% in the quarter, with stronger demand for new online health care services. Comp retail sales advanced 24%, reflecting a recovery in footfall and strong commercial execution. Market share increased across all categories with beauty performing particularly well. Despite the strong performance, store footfall in the quarter remains around 20% below pre-COVID levels. Travel locations are now improving, but remain quite subdued. We saw continued strength in basket size, which is up around 14% in the third quarter compared to pre-COVID levels. Boots.com sales more than doubled compared to pre-COVID levels. More than 13% of total UK retail sales came from our digital channels in the quarter, up from around 6% pre-COVID. Turning next to Walgreens Health. Segment sales were almost $600 million in the quarter, with VillageMD contributing $511 million and Shields Health contributing $85 million. Walgreens Health AOI was a loss of $129 million in the quarter. Organic investments accounted for $31 million. Investments at VillageMD more than offset the profit contribution from Shields Health and led to a $97 million AOI loss across our majority investments. VillageMD sales advanced 69% on a pro forma basis, reflecting existing clinic growth and footprint expansion. At the end of the third quarter, VillageMD had 315 clinics, an increase of 97 clinics year-over-year. Shields delivered a strong quarter. Pro forma sales growth was 47% with improved operating margins, driven by growth from recently signed contract wins and by expanding their value-add proposition with existing health system partners. Let's now look at some of the key metrics for Walgreens Health. As Roz mentioned, we have already exceeded our December '22 goal of 2 million covered lives, and we recently announced a strategic partnership with Buckeye Health Plan. The rollout of VillageMD continues, with 120 co-located clinics opened at the end of the third quarter, up from 94 at the end of the second quarter. We are progressing towards our goal of 200 by the end of this calendar year. Our fiscal '22 sales goal is now at $2 billion, reflecting a delay in the closing of the CareCentrix investment. Apart from that, there are no changes to our underlying sales assumptions. And as you can see, VillageMD and Shields are delivering impressive growth with pro forma combined sales growth of 65% in the quarter. Turning next to cash flow. Year-to-date free cash flow was $2.6 billion, $737 million below the prior year, as we cycled through some exceptional headwinds. Free cash flow was adversely impacted by the working capital impact of a decline in the AllianceRx Walgreens business and the year-over-year impact of COVID-19-related government support. Free cash flow also included a $240 million increase in capital expenditures behind our growth initiatives, including the VillageMD footprint expansion, rollout of the new automated microfulfillment centers and continued omnichannel and digital investments. Turning now to full year guidance. We are maintaining our full year guidance of low single-digit growth in adjusted EPS. We have raised our estimate for the base business slightly from 6% to 8% growth to 7% to 9% growth to reflect strong U.S. front-of-store performance and increased testing and vaccinations. We are now expecting 35 million vaccinations this year compared to 31 million previously. Investments in our healthcare business negatively impact EPS growth by around 6 percentage points compared to 5 points previously. In summary, we are executing well, performing in line with our expectations and reconfirming our full year EPS guidance of low single-digit growth in constant currency. I would remind you that this is better than the original guidance we provided at the start of the year of flat EPS growth year-over-year. Next, I will offer some additional color on our fourth quarter outlook. First, let me remind you that we are lapping a strong year-ago quarter with EPS growth of 28%. The prior year growth was driven by strength in COVID-19 vaccinations with 13.5 million administered last year versus an estimated 2.9 million this year. Additionally, last year, we saw strong front-end results aided by at-home COVID-19 tests. Consistent with what we said previously, we anticipate some headwinds in the fourth quarter, and this chart highlights the most important ones. Vaccinations are an expected headwind of 15 to 17 percentage points. Investments to build out our Walgreens Health segment could result in 10% to 12% impact on fourth quarter EPS. Other headwinds include labor investments of around 5 percentage points and lapping prior year onetime gains of approximately 4 percentage points of EPS growth. Combined, these headwinds amount to an expected 34% to 38% year-on-year headwind and leads to full year EPS growth of low single digits. I would caution against any extrapolation of these EPS impacts. For example, labor costs include premiums to address short-term COVID-19 is the single biggest unknown, and it is difficult to predict today how new variants, booster adoption, reimbursement dynamics and underlying health policies will impact consumer behavior. Against this backdrop, we have a strong array of strategic growth initiatives that will drive our long-term growth algorithm. First, we expect script volume to recover as we get back to normal operating hours and launch targeted patient retention programs. Second, our U.S. retail business is demonstrating good momentum through digital and omnichannel growth from myWalgreens loyalty program, owned brand innovation and alternative profit streams. Fiscal 2022 was a strong year, and we have extensive plans and initiatives to drive continued success. Third, fiscal year 2022 has been affected by elevated retail shrink, running at above 3% of sales year-to-date. Trends in the most recent months are more promising as we roll out actions to counteract the rising shrink levels, and we expect shrink to trend downwards in 2023. Fourth, the International segment is achieving very strong results, and it is clear that next year should see continued sales and profit growth. Fifth, the Walgreens Health segment is scaling up and margins will build over time. Additionally, we are aggressively working to capture synergies across our various healthcare investments. Overall, we expect the Walgreens Health EPS headwind in 2023 to be much lower than this year. Lastly, we continue to expand our save to invest to grow program and have raised the overall target savings for the Transformational Cost Management Program from $3.3 billion to $3.5 billion by fiscal 2024. The majority of the increase will benefit fiscal '23. In summary, we are aggressively driving growth initiatives, and we remain fully committed to achieving sustainable low teens EPS growth over the long term. With that, let me now pass it back to Roz for her closing remarks.

Operator:

Our first question is from Lisa Gill with JPMorgan.

Rosalind Brewer:

Lisa, thank you for that question. So let me give you just a few highlights in terms of how we came to this decision to retain Boots. So first of all, as you can imagine, we ran a highly confidential process. We gained early high interest at the very beginning of these discussions back in January. We started off with roughly about 8 to 10 interested parties in the Boots business. And we had very productive discussions, got into a detailed due diligence just as the market began to turn on us, and such an unexpected and dramatic change. So as a result, we made this decision to slow this opportunity down. But at the same time, the Boots and No7 business continue to do well. And our thinking is in any of these situations, the business should be good enough for us to retain as well as to look at strategic opportunities for it. So the business is healthy, and we'll continue to ensure that it remains healthy. As you look at the time line going forward, you need to think about our fuller portfolio. When we talked about doing a strategic review of our businesses, we started off with Boots, but we have other opportunities that we can look at in here. So in terms of the time line, it's important to state is that we are going to stay bullish about moving forward on Walgreens Health and making sure that our investments are prioritized in that direction. We've seen good success in terms of the initial investments that we've made there. So we feel like we're on a good trajectory. So in terms of the time line, we still will continue to make the investments there and move forward. We're committed to building those things. And the most important parts of that business is to make sure that we get our commercial assets up and running. And so that's the work that we're focused on. I will also tell you that in terms of our commitment to looking at the balance of our portfolio businesses, we will continue to do that as well.

Rosalind Brewer:

So Lisa -- go ahead, James, and take us through .

Operator:

The next question is from George Hill with Deutsche Bank.

James Kehoe :

I think, George, I'm not sure we want to give out specific guidance because we have to go through a process with our Board on this. But we will expect lower levels of activity on COVID vaccinations next year. And I think you can form your own assumptions on that. So it does generate a sizable headwind next year. But that's why we laid out the growth initiatives, which are equally sizable tailwinds. And we're going to be working through this over the next few months. We'll come out with the guidance when we issue earnings. But overall, we see as many opportunities as we have risks right now. And maybe I'll pass it to John on 340B, which is embedded in our current year guidance, and we've absorbed a fairly sizable negative. John?

Operator:

Our next question is from Michael Turney with Bank of America.

James Kehoe :

Yes. I would say the only item we see is truly variable. Where we have lesser line of sight is on the vaccinations and testing volume. And we want to see how the next couple of months pan out. I'd even say that even on the challenges, we have a fairly good line of sight. Reimbursement pressure, we're not assuming as we're thinking through this any major change versus the current year. And we're quite happy with the current year. We had a forecast coming into the year, and we're pretty much honest. So we expect -- well, we don't expect anything to get any better in reimbursement. Rising inflation on wages, we have a fairly good level of confidence here, and I'll tell you why. We've had now had 2 quarters where many other players in the market have called down margins. We have had 2 quarters where our margins are actually up on the retail business. We have a combination of mix. And that's one of the growth initiatives on the right-hand side. We've got all of our omnichannel investments coming through, owned brand inflation. myWalgreens has hit almost -- I think that we've actually passed 100 million myWalgreens members, which is tremendous. I think it's one of the biggest membership programs in the U.S. And then alternative profit streams and we have great line of sight to all of those. So we have -- and our ability to offset inflation on wages has been very strong in the quarter. And you'll bear this in mind, international freight is up 200%. And our pricing actions overall as a business, I think we've got zero impact on a full year basis. All the cost increases, shipping increases, goods not for resale, all of that, effectively, we've priced away through very effective margin management. And 340B, John already mentioned. And Walgreens Health, we've got good visibility. We are investing a little bit more as we're exiting the year. And remember what we told you in the Investor Day, we said there would be a spending level this year and one next year. So we will actually probably spend more money, slightly more money on Walgreens Health next year. But the headwind is significantly lower, and we have good visibility to this. So instead of a 6%, as I said, it will go down to 1%, 2% at most. So the change in this is quite visible to us. I'm trying to cover all of these international recovery, we have good visibility to this. You saw the double-digit income in the quarter. It won't be at that rate next year, but there's consistent growth across all markets. And we had every single international market grew revenue in the current quarter. So good visibility there as well. Transformational Cost Management, we've called up $200 million. All of that is next year. And I'll give you a good example of it. The U.S. business has just formed a new entity called Walgreens Business Services. And we have signed a partnership with TCS to ramp up, build our own shared service center in India. And it will take on -- we've already done finance. We've done HR, all the traditional back office. We'll be moving marketing, merchandising, store ops, back office to a more cost-effective offshore service. But we will own and operate the service assisted by TCS, and that will deliver tremendous savings for the business. It's a really big deal. And then over time, we will leverage it as a growth engine to continue to drive costs out of the business. The only one that we have less visibility on, and that's because the actions are happening currently, that's on the script volume. So we've had a couple of quarters where we've been maybe 200 basis points to 300 basis points below where we would have liked to have been. And we called out, specifically in Q3, 190 basis points from the store operating hours. We're putting investments back in the market or in the market now. We haven't -- we've seen that the churn has slowed down of turnover, but we still haven't flipped the switch on more aggressive hiring in the market. So we have a couple of months of experience that we need to get behind us before where we have very good line of sight. So I think it's a good question. We have good line of sight to all of the items here. And the only exception is we've 3 months probably ahead of us on the store operations and getting the scripts bag. I hope that's useful as you think through this.

Rosalind Brewer :

Yes. So I'll take that question. So we remain committed to looking at further opportunities on the acquisition side for Walgreens Health. And I will tell you that we're constantly looking through the marketplace, particularly in tech enablement. And so as we mentioned back early in the year that we would have one additional significant advancement in Walgreens Health on the acquisition side, we still remain committed to that in order to really bring, come full circle in that space. So we should look forward to that. And also, too, in terms of how will we prioritize that. I just want to remind everyone that we have a portfolio that we can look at and still look at how we could fund something like this. So we're still in the marketplace, and we remain committed to investments in Walgreens Health.

Elizabeth Anderson :

I guess maybe on Walgreens Health, I appreciate what you're saying about the sort of pacing of investments and things next year. Can you just help us sort of tie together the performance in the quarter, particularly maybe on the gross margin line and then how we should sort of think about that shifting in sort of the fourth quarter and as we move forward into next year?

James Kehoe :

Yes, this is -- it's basically an investment and timing issue. You got -- I think, we're $21 million negative on gross margin with Shields very strong, and the investments are all in Village. And the best way to look at that is to look at the number of stores, the total number of clinics, 315 versus prior year, it's almost up 100 more clinics. And we gave some indications back in January on the profitability of a clinic. And when you get to full run rate, which is year 7, I think it's like $14 million of revenue and a $2 million clinic contribution. But year 1 is the revenue is $1 million, and you're losing $600,000. Year 2, I believe, is probably $200,000 to $300,000 loss. So you've got 2 years of losses, right? And you're only turning profitable in at the beginning of the third year. So you've got 90 -- 100-plus clinics that are unprofitable to the tune of around $600,000. You got the ones in the previous year that are unprofitable to the tune of $200,000 or $300,000. So what this is, it's the -- and bear in mind, Elizabeth, when you look at a gross margin in Walgreens Health, it includes the entire cost of the clinic. So it's got the rent. It's got the doctors. It's got the depreciation and amortization. So it's fully loaded. So moving forward, as more and more clinics achieve profitability, the first 100 will turn profitable next year, right? So you've got more profitable ones coming on. And then I think that basically covers it. So it's a temporary thing, and it will turn profitable next year is the way to think about it.

Rosalind Brewer :

Right. You're right about that, Elizabeth, the way you're thinking about it. And we're looking forward to the closure of that deal. We're still in process with that, but you're thinking about this in the right way.

Operator:

The next question is from Steven Valiquette with Barclays.

Rosalind Brewer :

Sure. Thanks, Steve. And I'm going to start off with that, and then I'm going to ask John Standley to fill in on some of the details there. So you mentioned about the front end of the store and what are we seeing in terms of our exposure there. So first of all, I want to make one clarifying point. When you compare us to maybe some of the other retailers in terms of our in-stock position and also to with what we're seeing from a supply chain standpoint, we have some categories in our stores that are dramatically different. There are other retailers that are facing long lead items like apparel, kitchen furniture, televisions, large items in that respect. We are working very quickly, strongly against moving towards our private-label business and trying to get to roughly a percentage of about 22% of our private-label opportunities in our store. We run roughly about 16% to 18% right now in private label. So moving to 22% gives you an idea of some of the cost benefits that we could share later on. Also, along with that comes some innovation in bringing in new categories. So when I think about front of store and what we're facing in terms of being a little bit more recession-proof and also to looking at supply chain issues that impact our business and those kinds of things. But I'll let John go into some detail in terms of what he's seeing in front of store.

Operator:

That will conclude our question-and-answer session for today. I'll now turn it over to Roz Brewer for any closing remarks.

Operator:

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

Tiffany Kanaga:

Good morning. Thank you for joining us for the Walgreens Boots Alliance earnings call for the second quarter of fiscal year 2022. I'm Tiffany Kanaga, Vice President of Global Investor Relations. Joining me on today's call are Roz Brewer, our Chief Executive Officer; James Kehoe, our Chief Financial Officer; and John Standley, President of Walgreens. As always, during the conference call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on Slide 2 and those outlined in our latest Forms 10-K and 10-Q filed with the Securities and Exchange Commission. We undertake no obligation to publicly update any forward-looking statements after this presentation, whether as a result of new information, future events, changes in assumptions or otherwise. You can find our press release and the slides referenced on this call in the Investors section of the Walgreens Boots Alliance website. The slides and the press release also contain further information about non-GAAP financial measures that we will discuss today during this call. I will now turn the call over to Roz.

James Kehoe:

Thank you, Roz, and good morning. We had an excellent quarter with focused execution across all of our businesses. Adjusted EPS was $1.59, ahead of expectations and on a constant currency basis, up 26% versus prior year. We continue to execute strongly in COVID vaccinations and testing. Our U.S. retail comps were the highest in 20 years, and our international markets continued to recover nicely. And we increased our investments to build out our Walgreens Health business with an EPS impact of 5 percentage points in the quarter. Operating cash flow was $1.1 billion in the quarter with free cash flow of $669 million. And finally, we are maintaining our full year outlook of low-single-digit growth in adjusted EPS. Let's now look at the results in more detail. Second quarter sales advanced 3.8% on a constant currency basis. Strong growth from Walgreens and the International segments and sales contributions from Walgreens Health more than offset a 570 basis point impact from the sales decline in AllianceRx Walgreens. Overall, if you exclude the negative impact from AllianceRx and the positive M&A activity in Walgreens Health, total sales growth was high single digits. Adjusted operating income increased 35.9% on a constant currency basis, driven by strong gross profit performance in both pharmacy and retail in the U.S. and a continued rebound in international sales and profitability. Adjusted EPS was $1.59 in the quarter, a constant currency increase of 26%, driven entirely by adjusted operating income. The result was held back by a higher tax rate, which reduced EPS growth by 15 percentage points. GAAP EPS decreased 4.1% to $1.02, reflecting a charge to the company's equity investments related to the impairment of minority investments as well as lapping a $191 million gain from the partial sale of our investment in Option Care Health in the year-ago quarter. Now let's move to the year-to-date highlights. Year-to-date sales advanced 5.7% on a constant currency basis, including a 400 basis point negative impact from AllianceRx. Without this impact, year-to-date sales growth was 9.7%. Adjusted operating income increased 42% on a constant currency basis, reflecting strong adjusted gross profit growth across pharmacy and retail in the U.S. and the continued rebound in international segment sales and profitability. Adjusted EPS advanced 39%. GAAP EPS increased by $4.54 to $5.15, reflecting a $2.5 billion after-tax gain in the first quarter related to the valuation of our prior investments in VillageMD and Shields as well as lapping a $1.2 billion charge, net of tax, from the company's equity earnings in AmerisourceBergen in the year-ago period. Now let's move to the U.S. segment. Sales increased 1.2% in the quarter, with a strong performance from Walgreens more than offsetting a 680 basis points headwind from a 43% sales decline in the AllianceRx specialty business. Comparable sales advanced 9.5% in the quarter. Adjusted gross profit increased 13.7%, with both pharmacy and retail growing in the low teens. Strong sales growth and favorable mix was only partially offset by lower reimbursement rates and higher shrink in distribution costs. Adjusted SG&A spend increased 8.3%, primarily due to investments relating to vaccinations and labor, partially offset by savings from the transformational cost management program. SG&A as a percentage of sales increased 120 basis points to 18.3% of sales, and this was almost entirely due to an adverse mix impact as a result of AllianceRx. Adjusted operating income growth of 37% was entirely due to strong gross profit performance. Now let's look in more detail at U.S. pharmacy. Pharmacy sales declined 3.3%, held back by a 9.1 percentage point negative impact from AllianceRx. Comparable pharmacy sales were up 7.3%, while comp scripts increased 4.7%, with COVID-19 vaccinations accounting for 275 basis points of script growth. We completed 11.8 million COVID-19 vaccinations in the quarter and administered 6.6 million COVID-19 tests. Pharmacy benefited in the quarter from improved seasonal scripts as well as higher-than-expected flu immunizations. However, scripts continue to be challenged by temporary operating our reductions due to labor shortages and a surge of Omicron-related absences. Pharmacy adjusted gross profit grew nicely as strong sales growth at Walgreens and favorable profit mix more than offset reimbursement pressure. Turning next to our U.S. retail business. Comp retail sales increased 14.7%, the highest increase in more than 20 years. Excluding tobacco, comps were up 15.7%, and with OTC test kits contributing approximately 690 basis points of growth. Compared to the second quarter of 2020 pre-COVID levels, comp sales were up mid-teens. We saw broad growth across all categories, led by a 43% growth in health and wellness, driven by at-home COVID-19 test and cough, cold and flu. Transactions were up 9.5% and discretionary categories performed well, with personal care comp sales growing 9.7% and beauty growing 6.5%. While gross margin declined slightly, strong sales growth drove low teens growth in gross profit. Turning next to the International segment. And as always, I'll talk to constant currency numbers. Sales increased 7.5% in the quarter, reflecting the ongoing recovery and strong execution across our retail portfolio, particularly in Boots U.K. where sales advanced 15%. Adjusted operating income was $226 million in the quarter, up 60% versus prior year, led by sales growth and tight cost control. In Germany, the integration of the McKesson wholesale business is very much on track, with operational synergy benefits running ahead of schedule. Let's now look in more detail at Boots U.K. Comparable pharmacy sales increased 3.6%. Stronger demand for services contributed to the increase with sales up almost 75% year-on-year, benefiting from COVID-19 testing and vaccinations as well as new online health care services. Comp retail sales increased 22% despite the headwind created by the Omicron variant. This reflected strong commercial execution and a recovery from the restrictions in the comparable quarter. Market share strengthened across all categories, with beauty performing particularly well. Boots.com sales declined in the quarter as footfall at our physical stores increased 52%. However, the boots.com business remains in a very strong position, with sales up 60% compared to the pre-COVID levels. More than 15% of total U.K. retail sales comes from our digital channel, up from around 9% pre-COVID, with an increasing proportion of sales originating from our mobile app. Turning next to Walgreens Health. As mentioned last quarter, our majority investments in Shields and VillageMD closed on October 29 and November 24, respectively. Segment sales were $527 million in the quarter, with $446 million from VillageMD and $81 million from Shields Health. Walgreens Health AOI was a loss of $77 million in the quarter. Organic investments increased sequentially and accounted for $31 million of the $77 million operating loss. Investments at VillageMD more than offset the profit contribution from Shields Health and led to a $46 million AOI loss from majority investments. VillageMD sales advanced 145% on a pro forma basis, and they are executing against the planned investments to grow the business and to quickly expand the clinics . Shields delivered a strong quarter. Pro forma sales growth was 63% with improved operating margins, driven by growth from new and recently signed contracts and from expanding our value-added proposition with existing health system partners. Let's now look at some of the key metrics for Walgreens Health. We are on track to meet our December 2022 goal of 2 million lives and more than 100 Walgreens health corners, with 47 already up and running. The next wave of 9 locations is scheduled to launch in California in April. The rollout of VillageMD continues with 94 co-located clinics opened at the end of the second quarter, up from 81 at the end of the first quarter. As of today, we have 102 co-located clinics opened, progressing towards our goal of 200 by the end of calendar year 2022. Our fiscal 2022 sales goal is now at $2.2 billion, given the delay in the closing of the CareCentrix investment. There are no changes to our underlying sales assumptions. And as you can see, VillageMD and Shields are delivering impressive growth with pro forma combined sales growth of 128% in the quarter. Turning next to cash flow. We generated $1.3 billion of free cash flow in the first half of the year, $550 million below prior year, as we cycled through some exceptional headways. Strong growth in operating income was offset by the working capital impact of a decline in the AllianceRx Walgreens business, the year-over-year impact of COVID-19-related government support and increased capital expenditures behind key growth initiatives, including the rollout of new automated micro fulfillment centers, the VillageMD footprint expansion and continued omnichannel and digital investments. Turning now to full year guidance. We are maintaining our full year guidance of low single-digit growth in adjusted EPS. We have, however, raised our estimate for the base business from 5% to 7% growth to 6% to 8% growth to reflect strong U.S. front-of-store performance and increased testing revenue. This upside is being reinvested in building out our health care business, which now represents an estimated 5 percentage points headwind to EPS growth compared to 4 percentage points previously. In summary, we are confirming our full year EPS guidance of low single-digit growth. And I would remind you that this is better than our original guidance provided at the start of the fiscal year. With that, let me now pass it back to Roz for her closing comments.

Operator:

Our first question is from Lisa Gill with JPMorgan.

James Kehoe:

Yes. So no, when we -- I made the comment about ahead of expectations. I believe we're maybe $0.20 ahead of consensus. But versus our internal forecast, we were about $0.08 ahead. And where we saw continued buoyancy was on retail. Front of store had continued, particularly in the first 2 months of the quarter, and then secondly, on testing, as Omicron was peaking. So there were the 2 items that drove our beat versus internal forecast, which I said was about $0.08. Now we've seen a fairly -- we've seen a slowdown, obviously, since then, and maybe I'll pass it over to John Standley for a couple of comments on what he's seeing currently.

Lisa Gill:

And John, just as a follow-up. We hear pharmacists as a provider, and I know you've been a big proponent of this, and we absolutely agree that throughout the pandemic, that the pharmacists have been on the front line. But what does that really mean? Does that change reimbursement? Does it change their role when we think about them from a health care perspective?

Operator:

Our next question is from Steven Valiquette with Barclays.

Rosalind Brewer:

James, I'll turn that one over to you on Boots.

Steven Valiquette:

Yes, James, you might have alluded to this a little bit during the prepared remarks. But as we think about just the profitability of that segment in fiscal ‘22, where does it stand like your profitability on pre-COVID baselines? Are we well above? Are we still a bit low? Are we kind of in line? Just any rough percentage around that might be helpful just to frame it.

Operator:

The next question is from Elizabeth Anderson with Evercore.

Rosalind Brewer:

Elizabeth, thanks for the question. I'll start off with Walgreens Health, and then I'll ask members of the team to join in. But from a Walgreens Health perspective, we continue to invest. As you all know, we made the investments in VillageMD, CareCentrix and Shields. We're pleased with where we are with those investments, and we're integrating where it would make sense in our health care continuum. So that work is ongoing, and we're satisfied in that respect. We did mention when we were at our Investors Day back in October that we would continue to invest in the business, and we'll continue to do that. And I will also mention that we're seeing really good performance, particularly in our specialty pharmacy area with Shields, and so that would be ongoing. I'm going to ask James to talk with any further detail on Walgreens' Health with the investments. And then, John, if you could take it from there.

John Standley:

Yes. I think I'd just make a couple of comments. One, I'm really excited about the investments that we're making in the Walgreens business. We're really deep into our micro fulfillment strategy and rollout. And as we've talked about previously, this is really a program we're rolling out to support our pharmacists and get work out of our store and free up team member time to really provide additional services in the pharmacy. So I'm really excited about that investment and the progress that we're making there. And we touched on with Liza earlier about some of the potential value drivers there. I think there's just a lot of upside there for us in the future. So super excited about that. And there's other investments that we're making in the business in addition to that, around pharmacy with automation in our call centers and things like that to improve the experience and take other work out of the stores and out of the pharmacy. On the labor side, as we've talked about over several quarters, have made some really significant investments here. We raised our starting wage across the company to $13 last fall and we moved up to $15 in the fall of '23. And we also made changes to our tech. Starting wages went to $15 in the fall into $16.50 this coming fall. And I think we talked about where we were with some investments. Last quarter, we had about $120 million of investments that we've made for wage premiums and hard de-stackers with pharmacists as well as recognition bonuses that we paid to really recognize our team members for really the hard work and dedication that they've shown here through the pandemic. And I think as we look forward on where we are versus our expectations related to all of that, I think we included in our updated guidance here about a $40 million of additional expense in the back half of the year. So pretty close to what we expected.

A.J. Rice:

I wondered, obviously, you're rolling out at a nice pace, both the health centers, the Walgreens Health centers as well as the VillageMD, and you've got a number of that are co-located. I wonder if you could -- if it's possible to start to talk or provide a little more information on how that is impacting the retail operations. Can you point to increased scripts volume or increased foot traffic in the front end that you can attribute to, either the co-located VillageMD or the health centers, how that's changing the profile of the stores on those ones that have the co-located offerings?

James Kehoe:

Yes. And just to add on to that, just to give you some perspective, I want to clarify. You'll see 2 benefits as we go forward. One is we're absolutely convinced on script up mix. We're just not providing the number on a quarterly basis, and we'll do a more comprehensive update in the future. The other one not to underestimate and this is more an impact on Village's performances. They have a lot of older practices where a pharmacist and a doctor together managing the patients, deliver lower medical costs than just a primary care physician by themselves. So the other big hiccups that has to play out in the co-located stores is the combined effort of pharmacists together with a primary care physician in managing down the cost of time care over time. And as I said, they have strong evidence on their stand-alone clinics, and that will translate over time to improved outperformance on the clinics they've collocated with us. So there's a bunch of KPIs we're watching very, very closely. But bear in mind, it takes 2 years for a clinic to get up to kind of a reasonable level of operations, so -- and achieve a breakeven. So it does take time for the statistics to come through. But we're absolutely convinced that both of these would be in great territory over the coming year or 2.

Charles Rhyee :

Maybe I want to ask, as you previously kind of talked about that, in addition to Blue Shield California and Kroger, that you're engaging with a number of interested parties to get to the 2 million lives goal by the end of this year. Can you kind of give us a sense of what type of folks you're speaking with? And kind of characterize where you are in those discussions? And perhaps how close you might be to signing some?

Charles Rhyee :

Great. I appreciate that. And just a follow-up. If we think about the work you do with health corners, the partnership with Blue Shield, VillageMD, Clearly, we saw with COVID testing a real rise in people doing at-home testing. Have you thought about the role of at-home diagnostics has? And how that would fit within sort of the Walgreens Health business that you're building?

John Standley:

No, I do think it's a big opportunity and an excellent way for us to engage with our chronic patients to help them manage their disease states. So I think there's plenty of good upside here, and more of these types of tests are becoming available all the time. So we are working closely with a lot of pharma and manufacturers to turn and gain access to those capabilities as they come to market.

Operator:

The next question is from Brian Tanquilut with Jefferies.

Rosalind Brewer:

So Jack, let me start off by -- I'm going to start really talking about '23 and then any specifics on the second half of the year and the guidance that we've already provided, maybe just so create a broader discussion for us. But first of all, we're not providing any guidance for fiscal year '23. But we are exiting the year with a real position of strength. We're executing on what we said we would do, including the raising of our fiscal '22 guidance that we did just not too long ago. You'll see a few things in the numbers here. We indicated that we would make some strategic moves here and make some further investments, but we're really positioned in '23 to continue to deliver on our Walgreen-s Health investments. When you think about it, the growth in Walgreen-s Health is about 125% in the quarter. We'll hit a $4 billion run rate level of sales as we exit the year. And we still have long-term plans to hit a $9 billion to $10 billion number in 2025. But the one thing I do want to mention is around -- if you look at the fiscal '22 guidance, there's some additional detail in there. We had incremental people investments in pharmacy, around $158 million. That's roughly about $0.14 of EPS above our October guidance. We had minimum wage increases in the October guidance. And with just looking at that, that's about a 2% EPS headwind in the second half of the year. We also -- just looking at inflation, inflation is on the rise. So we expect to pass through most of that and inflationary impacts and some impacts in the short term also. So when you look at this, I just want to summarize that we're not going to give guidance for '23. We came out of the quarter strong, and we're managing through the second half. James, anything you want to add on the second half?

John Standley:

Yes. I'll just pick that up. I mean, I think a couple of things. We're -- obviously, we talked some about myWalgreens and mass personalization. I think we've done a great job here. We have a lot of upside with our program here and kind of where we're going between that program and the Walgreens advertising group and the different things that we're working on there. So I think just from an omnichannel experience, some of the capabilities we've built and where we can go here over the next couple of years, I think a lot of potential and exciting upside for us. As James mentioned, we're very focused on our own brand. We think we have an opportunity to expand in additional categories in the store, but also develop in existing categories, the own brand offering. And we're making some good investments there in terms of how we go to market and how we position it within the store. We're pretty excited about the things that we're doing there. And then I think we talked a little bit about the fact that we are taking a very careful look and a lot of our merchandising and where we're going for the future inside the box from a front-end perspective. So if we look at that, there hasn't probably been a full store reset in most of these stores, maybe ever since they were built. So we have a pretty big, we think, merchandising opportunity ahead of us on the front end as well. So it'll just be a couple of things, James, I'd call out.

George Hill:

I guess I was going to ask another question about Walgreens Health. If I look at the presentation versus the prior quarter, it looks like you guys are ratcheting back full year revenue expectations pretty sharply despite increasing the number of co-located clients. I was wondering if you could just put a little more color around the expectations there and kind of what's driving the revision?

Operator:

That will conclude our question-and-answer session. I'll turn the call over to Roz Brewer for any closing remarks.

Operator:

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.

Tiffany Kanaga:

Good morning. Thank you for joining us for the Walgreens Boots Alliance earnings call for the first quarter of fiscal year 2022. I’m Tiffany Kanaga, Vice President of Global Investor Relations. Joining me on today’s call are Roz Brewer, our Chief Executive Officer; and James Kehoe, our Chief Financial Officer. As always, during the conference call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on slide 2 and those outlined in our latest Forms 10-K and 10-Q filed with the Securities and Exchange Commission. We undertake no obligation to publicly update any forward-looking statement after this presentation, whether as a result of new information, future events, changes in assumptions or otherwise. You can find our press release and the slides referenced on this call in the Investors section of the Walgreens Boots Alliance website. The slides and the press release also contain further information about non-GAAP financial measures that we will discuss today during this call. I will now turn the call over to Roz.

James Kehoe:

Thank you, Roz, and good morning. In summary, we had an excellent start to the year with focused execution across all of our businesses. Adjusted EPS was $1.68, well ahead of expectations and up 53% versus prior year on a constant currency basis. We executed strongly in COVID vaccinations and testing, U.S. retail accounts for the highest in 20 years, and the international markets continued to recover nicely. Operating cash flow was $1.1 billion in the quarter with free cash flow of $645 million. The strong first quarter performance allows us to increase our full year adjusted EPS guidance from flat to low single digit growth. Let’s now look at the results in more detail. First quarter sales advanced 7.6% on a constant currency basis, reflecting strong comp growth in Walgreens and the international segment. Adjusted operating income increased 48.5% on a constant currency basis, driven by strong gross profit performance in both pharmacy and retail in the U.S. and the continued rebound in international sales and profitability. Adjusted EPS was $1.68 in the quarter, a constant currency increase of 53%, driven almost entirely by adjusted operating income. The result was aided by around $0.10 or 9 percentage points of phasing benefits. GAAP EPS increased by $4.58 to $4.13, reflecting a $2.5 billion after tax gain in the current quarter related to the valuation of our prior investments in VillageMD and Shields, as well as a $1.2 billion charge net of tax from the company’s equity earnings in AmerisourceBergen in the year ago quarter. Now, let’s move to the U.S. segment. Sales increased 3.2% in the quarter with a strong performance from Walgreens more than offsetting the 270 basis-point headwind from a decline in the AllianceRx Walgreens Prime business. Adjusted gross profit increased 12.3% with both pharmacy and retail growing nicely. Strong sales growth was partially offset by lower reimbursement and higher shrink costs. Adjusted SG&A spend increased 4.2% in the quarter to 17.2% of sales, 20 basis points higher than last year. The year-on-year increase was primarily due to investments relating to vaccinations and labor, partly offset by savings from the transformational cost management program, and some phasing benefits. Adjusted operating income increased 46.3% as the strong gross profit growth more than compensated for higher costs associated with the COVID-19 vaccination program. Now, let’s look in more detail at U.S. pharmacy. Pharmacy sales grew 1.1%, including the negative impact from AllianceRx Walgreens Prime. Comparable pharmacy sales were up 6.8%, while comp scripts increased 6.2% with vaccinations accounting for 535 basis points of the script growth. We completed 15.6 million COVID-19 vaccinations in the quarter and administered 6.5 million COVID-19 tests. We are now administering COVID-19 tests at around 7,000 stores. Flu shots were down as we saw a return to more normalized levels compared to the record levels last year. Additionally, underlying scripts were challenged by staffing shortages and temporary operating hour reductions. Adjusted gross profit grew nicely as strong sales growth at Walgreens more than offset reimbursement pressure. Turning next to our U.S. retail business. Comp retail sales increased 10.6%, and excluding tobacco, comps were up 11.7%. Compared to pre-COVID levels on a two-year stack basis, comp sales were up low-double-digits. We saw broad growth across all categories, led by 24.7% growth in health and wellness, driven by at-home COVID-19 tests and cough, cold, flu. Transactions were up 9% and discretionary categories performed well with beauty comp sales growing 16.6% and personal care up 11.6%. Strong sales growth drove an increase in gross profit. However, gross margin declined slightly, constrained by higher shrink from organized crime and theft increased import freight costs. Turning next to the international segment, and as always, I’ll talk to constant currency numbers. Sales increased 34.2% in the quarter, including the 25.6 percentage points up lift from the formation of our wholesale joint venture in Germany. We are lapping the formation of the Germany JV on November 1, 2020 with the prior quarter including only one month of sales. Excluding this impact, sales were up 8.6% reflecting the ongoing recovery and strong execution across most international markets, particularly in the UK where sales advanced 13.4%. Adjusted operating income was $164 million in the quarter, up 89% versus prior year, led by higher sales and tight cost control. Let’s now look in more detail at Boots UK. Comparable pharmacy sales increased 8.8%. Stronger demand for services contributed to the increase with sales up more than 200% year-on-year, benefiting from COVID-19 testing. Flu vaccinations were also up, and we recorded our largest ever season with 2 million vaccinations during the first quarter, up 150% compared to last year. These positive developments were only partially offset by the non-repeat of favorable prior year phasing of NHS funding. Comparable retail sales increased c%, reflecting a recovery in footfall and strong commercial execution. Market share strengthened across all categories with beauty performing particularly well. Despite these strong results, footfall in the quarter remains around 20% below pre-COVID levels with particular challenges in travel locations. We do however see continued strength in basket size, which was up around 12% in the first quarter, compared to pre-COVID levels. Finally, food Boots.com continued to do very well. Digital sales almost doubled compared to the equivalent pre-COVID quarter and now account for more than 15% of total retail sales. Looking ahead, we are monitoring the impact of Omicron. The UK government announced the move to slightly tighter restrictions, which started on December 13th. We expect that footfall will remain sensitive to new COVID variants. Turning next to Walgreens Health. This is our first quarter reporting results for our new Walgreens Health segment. Our majority investments in Shields and VillageMD closed on October 29th and November 24th, respectively. Shields is immediately accretive with sales of $25 million and adjusted operating income of $10 million in the quarter. Reflecting six days of ownership, VillageMD had sales of $26 million and an adjusted operating loss of $3 million. For this fiscal year, we anticipate VillageMD to be dilutive to EPS, consistent with our October statements. Organic investments in Walgreens Health were slightly lower than expected due to the timing of expenditures. We expect to see rising investments over the course of the year. Let’s now look at some of the key metrics for Walgreens Health. In addition to Clover and Blue Shields, we continue to work with other interested partners and we are approaching our December 2022 goal of 2 million lives. As we scale our access to lives and partnerships, we will continue to build out our Walgreens Health Corners with a goal of more than 100 by the end of 2022, with 47 already up and running. We continue to expand the VillageMD footprint, and we’ll be in expansion mode for the foreseeable future. VillageMD currently has 257 locations across 18 markets, 81 of which are co-located with Walgreens stores, up from 55 at the end of fiscal ‘21. The goal is to have at least 160 co-located clinics in place by the end of ‘22. Both VillageMD and Shields are on a high growth trajectory. On a pro forma basis, they delivered strong sales growth in their most recent quarter with VillageMD advancing 182% and Shields growing 62%. Overall, we are very excited about our growth potential. Turning next to cash flow. We generated $645 million of free cash flow in the first quarter, $118 million below prior year. Strong growth in operating income was more than offset by the phasing of working capital, prior year one time benefits associated with the passing of the CARES Act and increased capital expenditures behind the key growth initiatives. Turning now to full year guidance. We are raising our adjusted EPS guidance from flat to low single digit growth. We now expect higher growth from our base business, reflecting a strong first quarter and higher levels of vaccinations and testing. We expect 30 million vaccinations this year, 5 million higher than our previous guidance. Our Walgreens Health segment is tracking well against its key milestones with both, the Shields and VillageMD transactions closing in the first quarter and the Walgreens Health organic business continuing to invest in future growth. Within this guidance, we’ve reflected our decision to increase investments in our team members by an incremental $120 million. As highlighted earlier by Roz, without this investment, our full year adjusted EPS growth would have been 3% to 5%. Let me now provide some additional color on the guidance raise, including puts and takes versus prior guidance. As mentioned, we’re planning for higher vaccinations in the fiscal year. Additionally, our U.S. retail comps were very strong in the first quarter, and we have seen this momentum continue into the second quarter. And we are also driving tight cost management across all of our segments. Balancing this, we made a decision to increase our labor investments. Recent labor challenges led to somewhat softer script volumes in the first quarter, and these investments should help improve the situation. Additionally, as with many of our peers, we are experiencing higher rates of shrink loss due to organized crime and theft. Inflation is also on the rise. And while we expect to pass through the majority of these higher costs, there may be some short-term impacts. In summary, we are raising our adjusted EPS guidance to low-single-digit growth, driven largely by our U.S. segment. And let me now update you on some of the guidance metrics we provided during our recent Investor Day. Sales in the U.S. are now expected to be around 2 percentage points higher than previous guidance, driven by strength in both, pharmacy and front of store. As a result, adjusted operating income is anticipated to be flat to up slightly, better than our previous guidance. Sales projections for international have also improved to 9% to 11% growth, mainly due to improved market growth for our German wholesale business. We still expect international adjusted operating income growth of more than 50%. Walgreens Health remains on track. Sales will be slightly lower due to the timing of regulatory approval related to CareCentrix. However, this has an immaterial impact on earnings. Finally, we expect an adjusted tax rate of around 16%, consistent with prior guidance. With that, let me now pass it back to Roz for her closing remarks.

Operator:

[Operator Instructions] And your first question comes from Eric Coldwell from Baird. Please go ahead.

Roz Brewer:

Thank you, Eric. Let me start out first by asking James to give a little bit of color on your second question, and then we’ll go into the AllianceRx after that. Thank you.

Roz Brewer:

We actually have John Standley on the call. John, is there anything you want to add to that response AllianceRx?

Eric Coldwell:

John, you actually answered my follow-up on just sizing the specialty business in total. So, thanks very much.

Operator:

Your next question comes from Lisa Gill from JP Morgan. Please go ahead.

Roz Brewer:

I’ll let James get started on testing.

Lisa Gill:

Yes, you covered all my questions on that side. Thank you so much.

Roz Brewer:

So, Lisa, let me talk a little bit about how we’re thinking about our growth in Walgreens Health and how that really leverages our core business, and Walgreens managed by John Standley. So, here’s a way to think about this. We are creating an entity here that does much more than just dispensing of pharmaceuticals. So, the way to think about this is the number of VillageMD units that we plan to bring together, when we think about this investment of $5.2 billion, we’ll be opening at least 600 of those village medical clinics within our entity and then adding the Health Corners. We’re trying to put the consumer in the middle of this and also giving them the visibility of what it costs to manage their healthcare over their lifetime. When we think about where does the profitability come from in this, it is much beyond the prescription usage. I think about a customer coming into VillageMD and actually understanding more about their healthcare needs, it will help them understand the spending. And then also two, what comes from operating a primary care physician practice within our entity. And then, I think about the work that can happen between optimizing for that patient, between understanding what the pharmacist is applying to that customer or patient’s healthcare needs, and to get that repeatability and also giving the customer or patient the opportunity to come into one of our units and utilize the Health Corner. And so just managing their care over time, for instance, looking at their A1C levels and things like that over a period of time will hopefully bring their cost of care down and keep them out of the healthcare system and returning to emergency rooms and hospital settings. And so, we’ve not really articulated a clear view on profitability going forward. But, what I would tell you is that this does take us well beyond just the additional script. It’s much larger than that.

A.J. Rice:

Thanks. Hi everybody. The front of store in the U.S., sales were really strong. And I just wondered if we could delve into that a little bit. As you look at that, clearly at-home testing probably had a component. Can you parse out how much that helped and how, as you look at the rest of the year, with the administration, talking about sending out 500 million at-home tests, does that have implications for you in terms of your ability to get those tests yourself to sell them or -- and your expectations around that testing? And if there’s something beyond testing that’s really strong, can you comment on that as well on the U.S. front end sales?

A.J. Rice:

Okay...

A.J. Rice:

Okay, great. Thanks a lot.

George Hill:

Yes. First, I’d like to welcome Tiffany aboard. So, Tiffany, look forward to working with you. And I guess, Tim and John, I kind of have two questions around, one is around what I would call underlying Rx? As you talked about the comp on the front of the store in 2019, I guess can you talk about where you feel like the, what I would call, the acute care script or the regular way script comp looks like versus 2019? Cause there seems to be some debate about how close back to baseline we’ve gotten? And I guess if we could -- if I could just sneak in a follow-on, on the front of the store, James. A.J. asked a question about the in-home testing -- I’m sorry. Yes, the in-home testing. Can you talk about the impact that that’s had on the average…

John Standley:

Sure. I mean, I think the -- I would just say on Rx, I think we saw script count growth above and beyond what we saw in vaccinations, but we think there’s more opportunity for us there just looking broadly at the marketplace. We are, as James and Roz talked about making significant investments in the business, both from a staffing perspective as well as with project nucleus and other capabilities we’re putting into to really drive that pharmacy experience in store. So, I think we still see a ton of upside and growth opportunity just in the base pharmacy business, just to grow our market share and to push that forward.

Operator:

Your next question comes from Elizabeth Anderson from Evercore. Please go ahead.

James Kehoe:

Maybe I’ll tag team with John on this. There is a fair amount of talk about free testing. That’s still to be determined when that will be in the market. As far as I know there isn’t a website set up and there isn’t a defined procedure of how it’s all going to work. So, I think it’s a couple of months away. I think that the critical one right now is stock availability. And I give you an interesting statistic. Our health and wellness share in the market generally is around 17%, 18%. Our share of the at-home test is 40%, 45%. So, I think what we’ve superbly executed against is supply chain fulfillment and partnerships with suppliers. Right now, we’re a little spotty in places on availability. We’re at about 70%, but we clearly sold the majority of the at-home test in the channel. So, it’s been a huge success. So, the 200 million didn’t come just magically. It came because of stock availability. And we had much more of -- I think we had seven different types of COVID at-home tests in our stores in various places. So, we’ve I would say executed on this one and that’s why we have such a big contribution in the first quarter. We think we will continue to out execute. We see our stock availability levels going up significantly by mid month. So, we’re feeling in a pretty good place in the next three months. Beyond that, nobody can tell. It’s all on what’s the -- where are the variants at a particular point in time? I think testing is here to stay for a considerable amount of time, but our full year forecast is now riding on this. I can assure you of that.

John Standley:

No, not really. I think it’s a little bit soon. I think we need another quarter behind us. We’ve got, I think 81 clinics open. We still need -- I was on the phone to some of the Village guys yesterday, we still need to get the same kind of stats. They already have stats to prove that a pharmacist working with a doctor produces tremendous benefits in terms of outcomes. We need to replicate those statistics in the co-located. We’re convinced that will happen. It’s just a timing difference. I think as you look forward on village -- sorry, if you look forward on our segment, one thing I’d ask you to have in mind is, the revenue is pretty small in the quarter, because we’re just closing the acquisitions. A good way to think about these acquisitions is both -- if CareCentrix closes at the beginning of the third quarter, we essentially will be doing a little over a $1 billion a quarter in terms of revenue in the segment. So, if you think about Q4 and you do a simplistic run rate, by the time we finish Q4, we’ll have a run rate of about $4 billion, probably north of $4 billion in terms of call it 12 months run rate on the segment. That’s the only kind of new insight we would give, because a little bit -- analysts' models are a little bit all over the place in terms of expectations. So, I don’t think you’re going to see stability on revenue as we get into Q3. And it all depends on closing time on CareCentrix. But once that’s closed, you’re looking at $1 billion a quarter for the remainder of the year.

Operator:

Your next question comes from Michael Cherny from Bank of America. Please go ahead.

James Kehoe:

Yes. I’m not sure we want to start getting into next year, but I would say that -- let’s talk about shrink for a minute because you could actually argue that shrink is somewhat correlated with COVID in terms of it is something that has started to tick up post COVID. So, what are -- I’m not trying to get a direct correlation with it, but I’ll give you a number. The shrink issue for us this year is in excess of $0.15 a share. So, we don’t anticipate that that will continue longer terms. So there -- as you said, there’s many puts and takes in both directions. So, testing is a big number, but so is shrink. We’re going to have to redouble our efforts on shrink to get this number in a different direction. And honestly, I think Congress needs to step up a little bit here because the magnitude of the problem is -- it’s enormous. We’ve had, I don’t know, 10 years where shrink is at -- and I’m not going to -- it sounds precise. It’s not the exact number. It’s a little over 2% of shrink, 2.25%. It’s currently running at 3.25%. That’s a 40. We estimate that shrink is about 40% to 50% higher on a percentage basis than it was prior to -- sorry, prior to ’19 -- sorry, prior to ‘20. So, this is over the last two years, we’re absorbing a 52% increase in shrink and it’s organized crime. This is not petty theft. It’s not somebody who can’t afford to eat tomorrow. These are gangs that actually go in and empty our stores of beauty products. And it’s a real issue for -- as with all of our peers, it’s a real issue. The other one is inflation. Honestly. I think we’re doing a very good job on managing that. We have some -- we’ll have minor ups and downs quarter-to-quarter, but generally we’re offsetting inflation, might be $0.03 negative on the full year. So, we’re not talking about big numbers. But, I think we have to wait and see how the year evolves. There’s too many moving pieces, honestly, in terms of what is the final vaccination number in year? What’s the final testing? And maybe I’ll ask John to step -- come in a bit, because we have an intention to build a diagnostics business longer term, and that will provide partial offset as we get into next year. John or Roz, do you want to add on anything, and maybe labor costs?

Roz Brewer:

Mike, this is Roz. Can I just add a couple of things here just for clarity? So, you also noticed that we made a significant investment in labor. And as we are all involved in this uncertain labor market, we’re not quite sure how much more investment we’ll need to apply there. But what we’ve done so far, applying it very directly against regaining our script business, which could turn the numbers around in that area. And also as the potential for a fourth dose to come online, we’re managing through that. So, the uncertainty here is the other part that we need to think about. And then I just wanted to mention the piece on shrink, is that we're managing this on a couple of different levels. It's happening at store level, but myself personally and our government relations team has been in the Washington DC area, having conversations with our national leaders on how do we get around this shrink issue? And what we’re seeing is goods leaving from our store and ending up online applications. So, we’re working with our partners that are in the online business pretty heavy to make sure that we can monitor this situation. So, it’s that level of certainty and the enormity of some of these issues that is there more to be had here. But, it’s the uncertainty piece that we’re managing, Mike, if that’s helpful.

Steve Valiquette:

So, just a quick question on the quarterly cadence of earnings in the remainder of fiscal ’22. The adjusted operating profit for the company has always been up sequentially in fiscal 2Q versus fiscal 1Q in each fiscal year, historically. Is there any reason why that would not be up sequentially in fiscal 2Q versus fiscal 1Q this year, just on the sequential adjusted operating profit? Also, what are your latest thoughts around the flu benefit for the Company in fiscal 2Q as well?

Steve Valiquette:

Yes. Just as far as the updates on the flu.

Operator:

Your next question comes from John Ransom from Raymond James. Please go ahead.

Roz Brewer:

John, thank you for that question. I’m going to ask our John Standley to talk a little bit about the impact of 340B. And if there’s any other numbers, James will close out the question. John?

James Kehoe:

I would just summarize, it’s not material year-on-year. I think it’s tracking slightly behind the budget. But it’s not material enough to talk about. And then year-on-year, I’d call it kind of neutral.

Roz Brewer:

John?

Operator:

And the last question for today comes from Eric Percher from Nephron Research. Please go ahead.

Roz Brewer:

Thanks, Eric, for the question, John Standley, do you want to take that one?

Eric Percher:

And is it fair to assume that as you’ve had to deal with fees that maybe don’t make sense they’re penalizing you and that has fallen to the bottom line fairly directly, or have there been offsets?

Roz Brewer:

All right. Thank you. I just want to mention to everyone, thank you for joining the call this morning. I hope your takeaway from this call is that you see that we’re making meaningful progress towards our strategic priorities. We’ve been delivering against our Investor Day commitments that we laid out just as early as October. It’s still early days, but it’s clear that we are creating sustainable values for our shareholders, and we’re off to a strong start for the fiscal year. Raising our full year adjusted EPS guidance is important for us, as you continue to track us and, see the road that we’re on, to really try and achieve these attractive low-teens earnings growth over the long term. So, I appreciate your time today and look forward to those who will join us at the conference next week. Thank you.

Rosalind Brewer:

Thank you, Jay. Hello, everyone, and thank you for joining us today. It's really great to be with you. I have to say, I'm definitely looking forward to sharing what we have in store for you in the next 2.5 hours. As you know, I recently passed my first six months at WBA. And I'm even more excited about this Company's potential than when I first joined. I took this job based on deeply personal reasons. At the time, I was really enjoying selling coffee out in Seattle. So, it was a big decision to leave that gig. But honestly, like many of us during the pandemic, I was thinking a lot about how I could contribute even more to the world. When I was approached about the CEO role at WBA, I thought, here's a chance to join a Company right in the center of fighting COVID-19 and bringing hope and a helping hand to do so in many different communities. I also saw how we can make meaningful progress on addressing some of the social determinants that lead to disparities in health among different ratios and socioeconomic groups resulting in food and care gaps. And frankly, now that I'm at WBA, there's so much more promise ahead than I could ever anticipate. The pandemic definitely gave WBA a chance to step up, like never before and we delivered in so many ways. But we're absolutely just getting started in terms of how we can mobilize to solve big, complex problems. And we definitely believe that this momentum will accelerate our path to sustainable, profitable growth moving forward. So, during my entire life, I've been an avid learner. Some of you may remember, that my undergraduate degree is in chemistry, and I've applied what I've studied then throughout my entire career. That discipline is about the hands-on investigation and rigorous research. It will come as no surprise that since I've been at WBA, I've been taking a deep dive to really understand the business, and speaking with our leaders and team members in all corners of the Company, as well as many outside experts. I conducted listening sessions and spend time in our stores, vaccine clinics, and back-office operations. I've identified many gifts that were waiting for me when I arrived based on some strong work that had already been done. And I pinpointed where we've taken some wrong turns and haven't executed as well as we could have. I've also been very glad to see the many new ways we can capitalize on our core strengths. I believe we have some tremendous underlying momentum within this business, and the pandemic has further proven the importance of pharmacies in local communities around the world. I promise to you that after an extensive study, I wouldn't waste any time getting back to you about my assessment and where we're heading next. During this time, we'll clearly articulate the direction of our Company. And we'll provide what we hope leaves you feeling a greater sense of understanding in terms of our strategic direction. We'll share our learnings, present our opportunities, and layout our path forward. So let me start by saying that we just announced positive fourth-quarter results this morning. We exceeded expectations across all of our business segments, reflecting strong operational performance and surpassing our vaccination goals. James will be going into much greater detail with you on that soon, including our guidance for this year. Hopefully, you see these earnings as an indication among many others today, of a renewed, revitalized, and re-energized Company. Also, I'm very excited to share some important strategic investments later in today's session. We'll tell you more throughout the course of our time together this morning. Today, I'm going to make good on my commitment to you. And we're going to take you on a journey that includes 3 things transparency, accountability, and an extremely well-thought-out strategy. But let me be clear this isn't our everyday Walgreens strategy. Instead, it's about acceleration, execution, accountability, and long-term growth. Strategy is also about mobilizing across the organization, uniting behind values-based culture, enabling strong alignment, leveraging momentum, and having clarity on the end-game. And it's also not just what you plan to do, but it's also what you plan not to do. We will make trade-offs and eliminate some work to focus on what matters most. And we're going to hit on these same points again, and again, and again to hammer home just how much we've internalized this into our mindset. So, on that note, here's our agenda for today. First, I'll go into detail on our strategic priorities with a particular emphasis on the role we believe we are rightfully positioned to play within the healthcare ecosystem. Our CFO, James Kehoe, and President of Walgreens, John Standley, will join me during these portions of the meeting. James will discuss the financials, both the numbers reported today, and also our immediate and long-term growth model in Fiscal year '22 guidance. Finally, we will end with a Q&A session where we will look forward to engaging directly with you on our strategy and performance. And again, we hope this will signal the change to come. More of an ongoing dialogue with our investor community and more visibility into what we're doing and how we're performing against our most important KPIs. So, to lead us more into that discussion, I thought I'd share a brief video highlighting who we are. What is a Company's history? It's legacy? For most, it marks where you've been. For Walgreens Boots Alliance, our history is more than that. It's the strength and resilience that will allow us to meet any challenge to be there, to be ready. It's our 170-year history of helping and healing, day in and day out, year-after-year. That enabled us to be here for our communities during a time like no other. A time that challenged us to do our very best, a time when we needed to step up in even more ways to reach out and lend a hand, to go beyond, to connect in new ways to tens of millions of customers every single day. And whenever possible, to simply bring beautiful joy into people's lives. Now, as the world begins to turn a corner and turn a page, Walgreens Boots Alliance is ready to deliver more. With the combined talents of all of our team members, we're ready as people around the world re-imagine healthcare. We're ready as people make well-being central to their own lives and their families. We are already there for our customers around the clock, around the corner, around the world. We're ready to bring about healthcare that means lower costs for our customers, better outcomes, more convenience, equitable access for all. We're ready to lead. Because we'll never be outpaced or outworked. Because after 170 years, we've learned a thing or two about health care and being there for communities where we live and serve, because we've invested in our future. And partnering with others who share our volumes, and our commitment to do what's right. Walgreens Boots Alliance, a healthcare Company from the start. Now, we are reimagining healthcare for our customers for the next era. That of course was just a brief snapshot of WBA and the vital work we do. With that in mind, I want to tell you a little bit about what we've been working on and why I'm so optimistic about the opportunities ahead. These opportunities have everything to do with what you see on the screen right now. As we move forward, we plan to be customer-centric with a relentless focus on what they need and what they want. Hyper-localized, knowing that the best healthcare is deeply rooted in local communities. Improving outcomes, since we're absolutely convinced, we can further improve the health of our patients. Scale and momentum, which we've seen most prominently during our response to the pandemic, lowering the cost of healthcare, since there are enormous inefficiencies in the healthcare system today. Delightful customer experiences, so that our brands exceed expectations and leave lasting positive impressions. Transformational partnerships, which will allow us to achieve the quality and speed we want. And pharmacy; pharmacy at the center, since this has always been and will continue to be our foundation and our key differentiator. These things will appear throughout the presentation today. And we hope that you will see how these strategies interconnect and how we intend to leverage our strengths to build our future. As I mentioned, I came to this role with a very open mind about what the Company needed and what is needed for me. Of course, based on my direct experience as a customer, a patient, a parent, and a caregiver, I already had a view. And the reactions of others when they heard I was joining the Company, gave me additional insight into the deep emotional connections our brands have. What has impressed me most are the genuine areas of strengths we have. Anyone who has had a recent experience with our services will understand. They will understand it when I say that our greatest friends are our people and our presence in local communities across the world. We have deep relationships with our customers and patients, including chronic patients who are most in need and struggle to manage the complexity of their conditions. And we are often the first-place people turn for their well-being. The scale, the reach, the ambition of this Company is extraordinary. And the skills, the experience, and the commitment of our people are even more extraordinary. I think it's fair to say, I have never seen anything like it. These are truly powerful brands that resonate around the world but to survive and thrive, we need to be able to show we are more and more relevant. And we must be able to deliver what our customers and our patients need, how and when they need it. The Company is making significant progress in this respect. We have already achieved a lot recently, which is both driving changes internally and being recognized externally but we have a lot more work to do. We also, of course, have a phenomenal history and legacy. That gives us a strong foundation on which to build and rebuild. And our expertise fits squarely in one of the most important and expanding industries out there right now. But I also can't deny that we face stiff challenges. We operate in a highly competitive arena, and the scale of our markets and nature of our business means it's very cost-sensitive. And we continue to need to manage margin pressure in our core pharmacy business. In many areas, we have little room for error. As we're dealing with people's health, and in many cases, very lives. We are operating in markets that can and do change rapidly through regulation, innovation, or just simple necessity. And we need to be on top of our game to meet those challenges and deliver on the opportunities they bring. On balance, however, I see more opportunity for us than headwinds. And we have tremendous momentum and future potential. I hope that by the end of our event today, you understand why and see how we're pursuing a strategy to deliver our very best. As I mentioned before, nothing demonstrates us at our peak performance more than our response to the pandemic. As you know, we've played a key role in testing and vaccine administration both across the U.S. and around the world. We acted swiftly to ensure those programs reached every part of our communities. We reached out into the most remote, underserved, and reluctant communities to administer vaccinations, to educate, and to support. We changed our pharmacy and retail model to offer new services, new ways to access advice, medicines, and provisions safely and conveniently. We work tirelessly, as not just a service provider or retailer, but as an advocate, a comforter, and advisor, a friend to those who needed us. We rerouted our resources, financial, technological, and people to the things that matter most. And we did this all the way from the White House and Capitol Hill, right to long-term care homes, schools, and community centers. As you can see here, the statistics of what we've delivered are truly impressive. They show how quickly and effectively we can act when we need to. And they demonstrate how we deliver expanded healthcare services into the very heart of the community. This was a great lesson for us. Historically, we would have had the tendency to move a little slowly. We've proven that our pace can change and can be rapid. And much of this infrastructure, momentum, and mindset will be preserved in our new operating model. We should not forget that it's the size and underlying strength of our business that allowed us very short notice, to deploy the training supplies and some $500 million in funding to support our people in the field in fulfilling their mission. I can spend hours with stories of the great work of our team, but let me just give you a quick window into that world. Walgreens partnered with the federal government, the White House, HHS, and CMS to set up drive-through testing. It's never too late to get involved. If you really want to make a difference as far as giving back to your patients, you're already doing that near. You are on the front lines talking to them, trying to keep them calm, just keep doing that. That's all to makes a huge difference in the WBA, we started with providing COVID testing, and this was before vaccines were even available. But then we took it upon ourselves to create the best model to deliver vaccines to our communities. Following the approval from the FDA, obviously, when states have it will be in long-term care facilities within one to two days tops to start vaccinating those that are in need obviously. We need to be patient. We know that there's only a limited vaccine and it's going to be really important that those that are at the highest risk get the vaccine. We've finally arrived at the distribution and administration phase, which is what Walgreens will do. We're going to bring this across the finish line. This is the first time Walgreens is administering the vaccine to a nursing home resident. And at this long-term care facility, it happened to be that his grandmother was at the facility. It was a very beautiful, very touching scene. Sorry. But thank you so much for this. My family and I cannot have thanked you enough. This doesn't feel like work to me. It's wonderful that we're able to help these people. As Walgreens Boots Alliance, we thought it was our commitment to getting into these communities, to make sure that they had access to the vaccine and understood the importance of taking a vaccine. Getting everybody vaccinated against COVID-19 means getting back together. This is our shot to return to the faces and places we love. We've contacted our vulnerable patients, and we're making sure that they're getting their medication, whether it's through the Boots delivery service, or I take it right to them at lunchtime, we're providing that reassuring message to our community. You must reach it when cool for your second jab, for even better and long-lasting protection that comes from that second dose. My philosophy was giving the shots for the pandemic. I'm thankful that I'm able to be part of something bigger, to actually be able to get back and hopefully help in this very . I was really hoping today to try to get my first dose. I've been wanting to get it for a while now since it opened up for teens. And I was just really glad that this was right here when I needed it. This is one of my most wonderful experiences of being a pharmacist over the past 23 years, where we are really helping one-on-one with the community. Walgreens is doing some of the most important work they could possibly do. What we really should do is take a deep breath and think about the path ahead and how much more we can be a service to our customers. I just feel safe now. Happy tears. Happy tears. A key element of our response to the pandemic was to respond rapidly to changing customer behavior. Driven by the restrictions that COVID protections placed on people, one key enabler here was the deployment of a personalization engine at the heart of an entire ecosystem. It was designed to deliver an elevated customer experience, revolutionize our customer interactions, drive improved pharmacy outcomes, deploy our vast resources more effectively, and integrate our omnichannel retail experience. At the same time, this ecosystem rapidly builds on our existing data resources and customer understanding to help drive further growth across the business. We've made tremendous progress scaling our technological and customer assets. And we've announced previously, we have partnered with the absolute best technology innovators across the industry to accelerate our ambitions. The early impact of this work has been seen throughout the year. But in recent quarters, we really began to see the flywheel effect kick in, as the number of people using our customer engagement platform became significant. This cycle of delivering growth from insight-driven personalization, in turn, provides even more insight, forming a core element of our customer-focused future strategy. In the U.S. alone, we have one of the largest and farthest-reaching physical networks in the country, with a huge body of highly-trained and capable staff. Our team includes over 26,000 licensed pharmacies with regular and frequent interactions with some of the highest cost and highest dependency patients in the country. We have relationships with all the main payers across all the areas of pharmacy, and we operate on most of the best corners of America. We also have over a century of experience as a credible, independent expert when it comes to health and well-being, products, services, and advice. Our neutrality in the broader healthcare ecosystem is a tremendous asset, and it's one we intend to deploy going forward. In the past few years, we've invested to develop our capabilities in healthcare services, both within the Company and through strategic investments. This allows us to offer a range of services in a variety of ways that simply could not be provided through the pharmacy alone. Now, of course, it's important to ensure that our offering and strategy are relevant and move with the needs of the market, so the skills and experience we need to drive the Company must also change over time. We're working hard to complement the huge range of experience and expertise we have in our management and our executive team by infusing new talent, new skills, and fresh ideas. And I guess, I'm a prime example of that. And this combination of existing and new will form a key part of the real magic that will deliver the transformation of our business and our business model. Additionally, we have a strong understanding of our customers. The challenges they face, and the hopes, the fears, the passions, and the problems, and those problems that influence their healthcare and lifestyle decisions. In fact, I'm confident that this is the secret sauce that will allow us to elevate all of our other strengths and assets to the next level of delivery and operational excellence. It's the deep relationships that we have with our patients, whether they're looking for help in managing complex and awful debilitating health conditions or seeking advice and resources to help them effectively manage their well-being. Or trying to balance their own health with those they love and care for. These people turned to us week-after-week, year-after-year and we know that we can profoundly change their lives for the better by integrating their care, improving health outcomes, providing lower costs than the existing health system. We're uniquely positioned to play a larger role in the healthcare ecosystem, something I'll talk to you about a little bit later this morning. So, to summarize what we've covered so far, as we head into our new fiscal year, we're going to focus on cultivating our strengths, sharpening our execution, and investing in our future. And of course, today, our aim is to give you a view of how we see our business developing and growing this year, but we'll also go well beyond that with our long-term growth algorithm, which James will cover more with you later. And how we're going to get there has everything to do with the purpose and vision that unite us, which we're going to speak a little bit more about now, and then go into our strategic ambitions, fiscal year '21 earnings, fiscal year '22 guidance, and future growth. I believe this will be the first time we've given this level of insight into our longer-term thinking. But I believe it reflects the extraordinary level of detail we've gone into with our review, with our planning and our analysis, and the confidence we have in the strategy we're pursuing. It also shows our ability to transform this business and deliver sustainable growth. We have an overall plan that will deliver sustained growth and profit, based on robust, prudent, and perhaps most importantly, integrated healthcare, pharmacy, and retail strategies. We've been actively working on our new healthcare initiative. And we are well on our way to delivering on our ambitions for this new business area. We are actively putting in place the capabilities we need to deliver on our new operating model and to drive growth in our business. We are committed to enhancing communication and transparency to all our stakeholders, including you, our investors, and the financial community overall. And all of this will be delivered through a revitalized strategy, underpinned by an intensified focus on outstanding execution to drive strong growth and economic returns. So, let's turn now to talk briefly about the work we've done on the culture at our Company. And what do I mean by that? Basically, I mean, how does it feel to work here? How do we interact with each other and with our stakeholders? And what are the principles that unite us and inform our actions? I am a firm believer that every truly great Company understands that culture needs to be at the center of their success. The legendary Management Consultant, Peter Drucker, once famously said, culture eats strategy for breakfast. And what he means by this is you can have the best-laid plans in the world, but if you can't retain and recruit high-caliber talent, and if they're not motivated to work hard and together as a team towards shared goals, you'll never accomplish much. Years ago, Company culture was sometimes viewed as the light and fluffy stuff. But when done right, we know now that it can drive so much more than that. Strong cultures drive performance. Performance since companies that are united by purpose has been proven to outperform the general market 15 to 1 and with recruitment, with 52% of job candidates saying that they will only accept a job offer if they know and agree with the Company's purpose, vision, and values. Employee satisfaction, because 9 out of 10 people are willing to trade a percentage of their lifetime earnings for greater meaning at work. Customer retention, which is proven by the fact that 87% of consumers would purchase a product based on values and because the Company advocated for an issue they cared about. With this in mind, one of my first goals, when I joined WBA, was ensuring that we are known among the world's best companies for our culture. So, in the last six months, we brought in some leading experts in this field to assess where we are today and where we need to be. We implemented initiatives where we listen closely to team members at all levels and in all corners of the Company, all around the world. As a result, we evolved and updated our Company's purpose, vision, and value to be our guiding light as we move forward and to influence our decisions, both big and small. As you see here, our new purpose statement, more joyful lives through better health. We're referring here to physical, mental, and emotional health. And that can come in the form of a life-saving vaccination or can just be as simple as providing a great shade of lipstick that lifts one's spirits. Our purpose is our why, our enduring reason for being, and the difference we want to make in the world. Next, our vision. And that is, to be the leading partner in well-being for all. This is the what? a Company-wide aspiration over the long term that is measurable, unifying, and delivers on our purpose. Our vision is designed to be built on our core strengths as a Company and expand on what we can offer our patients and customers in the future. And when we say, all here, that means across every neighborhood, among every community. As you can see, we looked at this statement word by word to make sure this is something simple, tangible, and most importantly, relevant. Relevant for our colleagues every day. It allows them to measure their work against an overarching Company target. And of course, our purpose and vision are also the foundation that we've built our core strategy. We've distilled our strategy into 4 priorities, all of which worked together towards one central aim, to deliver advantage growth in community healthcare while transforming our core business. We have defined the four strategic priorities as you can see here. First, we will transform and align the core businesses. John Standley is going to take you through this in detail. And while our international leaders Sev James and Annie Murphy will be joining us remotely for the Q&A. In the interest of time, I've asked John to talk you through the transformation work in the international businesses, as well as his own business areas. J ames will then give an update on the transformational cost management program as part of this element of the strategy. We've seen tremendous success and momentum within that program and it will be critical as we continue to fund our journey. The second strategic pillar is our ambition to build a range of consumer-centric healthcare solutions, which will form the engine for our next phase of growth. I'm excited to take you through our plans, including some of the latest news on investments, partnerships, and the work we've done internally to build out our healthcare strategy. We'll also cover the evolution of the business model of these services and how we will see them developing in the coming months and years. We have a strong view of how our assets can help connect this ecosystem together, creating a unique position for Walgreens and helping to demystify healthcare for consumers. Next, given the amount we have to do and the need to focus our resources, our third strategic priority is to refocus our portfolio of business interests. This will help us optimize the use of our resources, most notably, our management and executive time and our financial assets. It's absolutely critical that our portfolio of assets strongly connect back to our overall strategy. I spoke with you earlier about focus; focusing on how and where we spend our time and resources is a critical enabler of our strategy. James is going to take us through the work already underway on this. We've made some tremendous progress already, but more work remains. I've already touched on our final core strategic priority; to build a high-performance culture and a winning, diverse team within the Company. I'm very excited to share with you several key highlights that I believe will help us build upon our momentum and accelerate our growth ambitions. So, let's ask John now to take us through the first strategic priority to transform and align the core businesses. John.

James Kehoe:

Thank you, John. I am delighted to report that our transformational cost management program has delivered very strong results. We have already achieved cumulative cost savings of over $2 billion, and this is one year ahead of our original goal. As a result, we are expanding the TCM program and raising the savings goal to $3.3 billion by 2024. Let me give you a little bit of history. We originally announced the program in December 2018 with a savings goal of $1 billion, and the savings were intended to offset inflation and volume impacts and to fuel long-term growth investments. We have consistently delivered strong results, raising the goal for targeted savings a number of times, with the most recent target being in excess of $2 billion of cost savings by Fiscal 22. As you can see, we have already delivered savings of $2.1 billion with around $800 million of savings in the most recent fiscal year. Over the period, SG&A efficiency has improved by approximately 190 basis points to 17.7% of sales. We are now expanding the program and targeting commuted savings of over $3.3 billion by fiscal year 24. We have a number of in-flight initiatives that are showing strong momentum. And we have built out a comprehensive funnel of new and innovative initiatives. We have also updated our projected implementation costs to a range of 3.6 to $3.9 billion. Here you can see the broad scope of initiatives that we are driving across the business. I won't this slide, but I will highlight one example just to give you a sense of the evolution. We have made good progress in establishing global business services in more traditional areas, such as IT, finance, and HR. And in all cases, we're delivering both cost savings and capability advancements. We're now expanding the business services concept across a wider scope of our business. We are reinventing how we operate. And this will make us more effective and efficient, as we build out more advanced capabilities and technology. In summary, we are raising our cost-savings goal to $3.3 billion by 2024. And we have identified a comprehensive set of initiatives, to deliver or exceed this goal. And with that, let me pass you back to Roz.

James Kehoe:

Thanks, Ros. Our third strategic priority is to refocus the portfolio and optimize capital allocation. Ultimately, we aim to maximize long-term shareholder returns. We have refined our capital allocation principles and approach, with a much sharper focus on both the U.S. and healthcare markets. Our portfolio transformation started earlier this year with the successful divestiture of our Alliance Healthcare business for $6.5 billion, achieving an attractive 12 times EBITDA multiple. Our focus has now shifted to two key areas. Firstly, we are optimizing our portfolio of equity investments. One recent example was the decision to increase our stake in Shield's Health to 71%. Secondly, acquisitions must be aligned with strategy and prioritize our Healthcare ambitions. You heard earlier from Ros, that we are announcing 2 investments today. We have acquired an initial 55% stake in CareCentrix, and we have taken a majority stake in VillageMD. Both of these investments are targeting sweet spots in care delivery and value-based care and are fully aligned with strategy. As we look at our capital allocation priorities, we expect to see a healthy balance of organic investments and strategic M&A. We remain committed to a growing dividend and returning excess cash to shareholders. And finally, we are very focused on optimizing our attractive portfolio of equity investments. We will assess M&A with an operational and financial lens. While we continue to seek attractive returns, ultimately, we will prioritize quality healthcare assets that accelerate growth and enhance capabilities or talent. Nothing new on our leverage goals, we will continue to target solid investment grades. However, we may temporarily flex upwards for the right strategic acquisition. Looking forward, there is a clear opportunity to optimize our equity investments. We have already assessed each investment in terms of strategic fit, synergy with WBA, and potential for future financial returns. Obviously, we cannot share our conclusions. But our first actions do show a tendency to take majority positions when we're convinced that the investments are aligned with strategy and offer attractive long-term financial returns. In the case of Shield s, we took an initial 25% stake in July 2019 for an investment of $165 million. We have now invested a further $970 million to increase our stake to 71% with a future path to full ownership via structure. The acquisition of an initial 55% stake in CareCentrix and the $5.2 billion investment in VillageMD are key steps in bringing to life our healthcare ambitions. Looking forward, we do expect to make further changes to the equity investment portfolio. And we will communicate each strategic move as we get closer. Let me now provide a little more information on the VillageMD and CareCentrix transactions. As Ross highlighted earlier, VillageMD is an incredible opportunity. It is a leading value-based primary care provider with 230 clinics in 15 markets. It operates in a vast market with a unique operating model and it is poised for explosive growth as it builds out 1,000 VillageMD at Walgreens ' clinics over the next 6 years. WBA is investing $5.2 billion to raise its stake in VillageMD to 63%. Fiscal year '22 revenue was estimated to be around 1.3 to $1.5 billion depending upon the transaction closing date. We expect the transaction to be dilutive with an impact of $0.8 to $0.15 depending upon the closing date and the pace of their investments. Finally, we expect that VillageMD will proceed with their IPO later in Calendar 22, with WBA remaining the majority shareholder. CareCentrix is an industry leader in the post-acute and home care sector, providing care coordination and outsource benefit management services. The U.S. post-acute care market represents approximately $75 billion in healthcare spending annually and is considered one of the fastest-growing segments in healthcare. The $330 million investment is for an initial 55% stake with an option to acquire the remaining equity interest in the future. Fiscal year '22 revenue is estimated to be around $1.2 to $1.4 billion. And we expect that transaction to be slightly EPS dilutive in fiscal '22 and accretive thereafter. My final slide brings it all home. This lays out the tremendous value of our equity investments. We estimate a valuation range of around $21 billion, the majority of which are healthcare investments. The investments range from majority stakes in VillageMD, Shields, CareCentrix NIA, to minority positions such as our 28.5% shareholding in AmerisourceBergen, and our 21% shareholding in Option Care. In total, this attractive healthcare portfolio is valued at around $20 billion. Given the large value of our equity investments. And the launch of a new fast-growing Walgreens Health segment. Moving forward, it will be increasingly important for the market to value WBA as the sum of the parts. Given the upfront healthcare investments, it may also be more appropriate to use revenue multiples to value the Walgreens Health segment. And on that very positive note, let me hand it over to Roz for our fourth and final priority.

James Kehoe:

Thank you, Ros. Before getting into our long-term growth model and guidance. Let me first give you some color on the fourth-quarter and full-year results. In summary, we had an excellent quarter. Adjusted EPS was $1.17, well ahead of expectations, and up 28.1% versus the prior year on a constant currency basis. Full-year adjusted EPS was $4.91, an increase of 13.7% in constant currency. Overall, this result exceeded the guidance we provided at our third-quarter earnings call. Driven by higher COVID-19 vaccinations, strong U.S. retail performance, and good execution across most markets. We administered 34.6 million COVID-19 vaccinations in fiscal year '21, 6.6 million doses higher than the guidance we provided at our third-quarter conference call. Demand for vaccinations accelerated as the Delta variant cases spiked, and we executed strongly, achieving a fourth-quarter market share of around 21%. Free cash flow increased to $4.2 billion and following the completion of the Alliance Healthcare divestiture, we de -levered the Balance Sheet by $6.5 billion compared to last year. Strong execution was fundamental to the quarter. In the U.S., comp scripts grew 8.8%, including a 485 basis points uplift from COVID-19 vaccines. Underlying scripts grew by 4% driven by seasonal scripts. U.S. retail comps grew 6.2% with broad-based growth across most categories, fueled by our omnichannel and mass personalization initiatives. The UK recovery is very much on track. COVID-19 restrictions were lifted in the middle of July and we drove strong market share gains especially in Beauty, which grew sales by 24.8%. Now let's look at the fourth quarter and full-year financial metrics. Fourth-quarter sales advanced 11.8% on a constant currency basis, reflecting strong growth from both the international and U.S. segments. Adjusted operating income increased 22.1% on a constant currency basis, driven by strong gross profit growth and this led to adjusted EPS growth of 28.1% in the quarter. In summary, EPS growth was of high quality. Full-year sales increased 7.5% on a constant currency basis. Adjusted operating income increased 7.7% on a constant currency basis again, reflecting strong adjusted gross profit growth across both segments and savings from our transformational cost management program. Fiscal year total EPS was $5.31, a constant currency increase of 11% over the prior year despite the divestment over Alliance Healthcare business on June 1st, and the loss of three months of profit contribution. On a continuing basis, adjusted EPS was $4.91, a constant currency increase of 13.7%. As a reminder, our EPS guidance at the start of the year was low single-digit. Lastly, on a continuing basis, GAAP EPS increased by $2.10 to $2.30. And this also reflects a prior year impairment charge of $2 billion and investment gains this year related to our holding in Option Care Health. Now, let's briefly look at segment financial performance in the fourth quarter. U.S. sales advanced 6.6% in the quarter with comp sales increasing 8.1% driven by 8.8% growth in comp scripts and 6.2% in comparable retail sales. U.S. adjusted gross profit increased 13.7% due to strong sales growth, improved pharmacy margins due to favorable mix, and retail volume and margin growth. Adjusted operating income increased 16.4% as the strong gross profit more than compensated for costs related to the COVID-19 vaccination program on higher growth investments. Turning to the international segment, and as always, on top of the constant currency numbers, Sales increased 52.6% in the quarter, including higher sales from the formation of our wholesale joint venture in Germany. Excluding this tailwind, sales were up 9.3%, reflecting ongoing recovery and strong execution in the UK market. Comparable retail sales increased 15% in the UK, driven by a recovery of footfall, strong commercial execution, and a successful marketing campaign. Adjusted operating income was $140 million in the quarter, up to $129 billion versus the prior year, reflecting 32.7% growth in adjusted gross profit. Let me now turn to our long-term growth algorithm. Before starting, please note that all references to EPS refer to adjusted EPS, and all growth rates are on a constant-currency basis. Our long-term growth will be highly influenced by the pace of healthcare investments. And over the long-term horizon, we see a clear path to a growth model that aims for an EPS growth of 11% to 13%. Starting in fiscal '22, we will ramp up healthcare investments to build out our long-term growth engine. And over the next 3 years, we expect EPS growth of around 4% with growth accelerating each year as the healthcare investments generate increasing returns. EPS will be flat in '22, rising to mid-single-digit in '23 and accelerating further to mid to high single-digit in '24. Beyond '24, the long-term growth algorithm calls for EPS growth in the low teams as the faster growing and higher margin healthcare business hit scale. Let me first bring you through some of the key assumptions. We do expect a gradual increase in our tax rate and this is largely due to adverse mix, due to a growing proportion of higher tax rate U.S. income. Please note that we have not considered any impacts from the current legislative proposals. While share repurchases are not a priority in the initial years, our long-term growth algorithm does assume sizeable capacity for repurchase activity. As you have heard earlier, we have very good visibility into cost savings over the coming years. Turning now to the international segment, we expect international AOI growth of more than 50% in fiscal '22 with a 3-year compound annual growth rate of 25% to 30%. This will be driven by mid-single-digit sales growth with Fiscal '22 especially strong, that 8% to 10% sales growth. Longer-term, the growth algorithm assumes sales growth of 3 to 4% and mid-single-digit AOI growth. In the U.S., the long-term growth model is based on sales growth of 3.5 to 4%, with pharmacy growth of around 4.5%, and front of store growth around 2%. Gross margins will trend slightly lower with continued pressure from pharmacy reimbursement only partly offset by continued gross margin gains from U.S. retail, and the gross margin accretion coming from new businesses. SG&A growth will trend below inflation and well below sales growth as we continue to prioritize cost optimization and reinvention. Overall, this stroke model leads to AOI growth of around 3%. Fiscal '22 will be an outlier. As the U.S. business will face some unique headwinds in the short term, including lower vaccinations, minimum wage, and the loss of contracts and our Alliance OREX specialty business. Fiscal '22 sales will decline by around 8%, with 7 percentage points due to AllianceRx and 60 basis points due to lower vaccinations and testing. This leads to an NOI outlook of flat to slightly down for 2022. However, we do anticipate a return to revenue and AOI growth in the following fiscal year. Let me now turn to Walgreens Health. We see considerable sales potential and we expect the segment to post strong sales growth over the short, medium, and long term. In 2022, we expect sales of around $3 billion, mostly from our recent M&A activity. And we expect the acquisitions to grow very quickly and achieve sales of around $10 billion by fiscal '25. Ros has already provided insights into our healthcare goals and objectives and our organic developments are moving ahead of pace. We expect the organic revenue opportunity to build over time to at least $3.5 billion. Although, it will take time to achieve scale as we build out our offering and partner with more and more players and providers. Beyond '24, the long-term growth model assumes sales growth in the high teens. The margin structure will be attractive and higher than our current business, but it will take time to achieve optimal scale. Most of you will have a good understanding of the potential long-term margin levels for businesses such as VillageMD, Shields, and CareCentrix. Over time, our Walgreens Health organic developments will trend to margins of over 25%. The next three years will be an investment mode and this will drive significant revenue growth as the segment grows quickly. We are providing specific AOI investment projections for Walgreens Health's organic development. In fiscal '22, we anticipate an AOI loss of over $200 million, rising to around $300 million in '23 before falling back to around $117 million in 2024, as investments subside and sales expand. In terms of EPS accretion, Shields is immediately accretive to the tune of around $0.03 in fiscal year '22. CareCentrix is neutral to slightly negative in fiscal '22, and EPS from 23 on-wards. VillageMD will continue to be an investment mode for the foreseeable future with more than 800 clinics targeted by 2025. We anticipate fiscal '22 dilution of $0.8 to $0.15, depending upon the closing timeline and the pace of investment. Beyond '24, the new healthcare segment, should generate material, sales, and AOI and contribute around 7 percentage points of EPS growth. These assumptions underpin our long-term growth algorithm. So let me now summarize. Post 2024 the EPS growth potential is solidly in a range of 11% to 13%. The base business will contribute around 3%. The healthcare segment contributes 7 percentage points of growth and share repurchases contribute around 3%. In the near term, we anticipate EPS growth of around 4%, principally coming from the base business with the healthcare segment contributing 0.5%. Turning now to our specific guidance for the fiscal year 2022. As I laid out earlier, we expect flat EPS with the base business growth of 4% offsetting a 4-percentage point headwind from the newly established healthcare segment. The base business growth of 4% includes headwinds of 8 percentage points, mainly from lower COVID-19 vaccinations, and higher core investments. These are offset by strong growth from international higher ABC earnings and moderate growth in the U.S. The AOI impact of our organic healthcare business is projected to be a loss of $200 million in fiscal '22, reducing EPS growth by 3% points. And our healthcare M&A will lead to EPS dilution of $0.05 to $0.10 entirely due to VillageMD. Revenue was projected at $3 billion to $3.2 billion, but this does depend upon closing timing for the three transactions. Turning now to phasing. We are projecting a strong start to the year due to higher vaccinations in the first half of the year, and a weak prior-year flu season. Overall, we expect first-half EPS growth of 15 to 18%. In the second half of the year. We will be facing tough prior-year comps due to COVID-19 vaccinations. higher healthcare investments. This leads to a second-half EPS decline of 14% to 17%. Beyond Fiscal '22, we project accelerating growth. EPS will grow mid-single-digit in 2023, and mid to high single-digit in 2024. Beyond 2024, EPS growth will accelerate again from 11% to 13% growth, largely driven by our new Walgreens Health segment. With that, let me now pass it back to Roz for closing comments.

A - Jonathan Spitzer:

Welcome back. I'm excited now to open up to Q&A. Before we start taking Zoom questions, I like to kindly ask that you keep questions to one, plus a follow-up, so we get as many of you as possible. With that, our first question comes from Lisa Gill of JPMorgan. Lisa?

Rosalind Brewer:

Yes. Lisa, I look forward to seeing you too in January. Let me first -- I'm going to start this off and then I'm going to pass it over to James. So, I think it's important to think about what we announced today around Walgreens Health. This is about a healthcare ecosystem and its customer-focused with tech enablement right in the center. And then when you think about the continuum of care and the investments that we've made, you can see that we are bringing those investments forward for a couple of reasons. First of all, it allows us to accelerate and that is important to us. It also really concentrates on when we start with well-being, all the way to post-acute care, you can see how each -- one of these investments plays a role. The other thing I will mention to you is that we've already got a little bit of momentum in the business right now, you saw our fourth-quarter results. And then I would tell you that in some of the relationships we have, we know them very well. So, it gives us a little bit of an edge and a way to really get this new opportunity moving forward. The other thing to think about is that think about Fiscal year '22 being our year of investment. And beyond that, you've seen the numbers where we see growth coming beyond those years. So, this is a year of investment and then being very, very focused about where we will invest and what makes sense to go towards this strategic intention that we have. We've been very deliberate about that, Lisa, and so when you talk about it -- should it be partial investment, full stake? We're just being very strategic about that and we're looking very detailed in terms of what's going to get us to that next level. I want to turn it over to James so he can address your question on ABC and any other financial questions.

Lisa Gill:

Thank you.

Lisa Gill:

Thank you.

Jonathan Spitzer:

So, our next question is going to come from Ricky Goldwasser of Morgan Stanley. Ricky?

Rosalind Brewer:

Thank you, Ricky, for that question. Let me first start off with who will lead, and how are we thinking about our new segment, Walgreens Health. And you've seen that we have added new executives to the company. If you dig a little deeper in their background, you will see that they have -- we're trending a little bit more towards health care experience. We will take advantage of our internal talent and external talent to identify the new leader for Walgreens Health. So that is yet to come. When you think about my background in retail pharmacy, having run stores for Walmart and running the Sam's Club business that had pharmacies attached to them. It does give me a little bit of insight in terms of how we run the day-to-day. But your question around our retail footprint and the work that we want to do in WBA Health, they're interconnected. This venture that we are going into is about local healthcare, and we have 9,100 units across the U.S. and they are closely aligned to some of the most critical zip codes across the U.S. When you look at VillageMD and the clinics that we plan to add, it's interesting to note that 50% of those will be aligned in medically underserved areas where we already currently have stores. So, our current store footprint is critical. And not only is the store footprint critical, but we already have the digital and physical assets. Learning, knowing our customers, those who will take advantage of WBA Health or Walgreens Health, our new business venture, they're already our customers. And so, the customer relationships we have from our retail footing that we currently have, the physical assets that we have, our digital build is really in the center of what's in the plans for Walgreens Health.

Michael Cherny:

Great. Thanks, Jay, and good morning. Thanks so much for all the color. Maybe just quickly a question for James ' technical question. Will you be reporting out Walgreens Health as a segment starting in the next fiscal quarter? And then along the lines of the broader strategy, a lot of commentaries today around the building, growing, expanding. One of the things you didn't address as much outside of the short part of the updated transformational cost component is the future of the current store base as you have it. In the past, managements talked about the potential for closing stores, co-locating, whatever it may be. How do you factor in terms of that long-term growth algorithm, what the store base is expected to look like over the next 3, 5, 7 years?

John Standley:

Thank you, James. So just really quick. Roz mentioned it during her talk. The relevance of our physical network, I think it really -- has really stood out here through the pandemic, through our vaccine and testing efforts. And so, I think our footprint is really a key part of who we are, our national network of convenient and community-based care locations. And so, as we think about the strategy going forward, those locations are really critical to where we're going and what we can do with them. VillageMD is our great example of getting those into 800 locations. What we're talking about with Health Corners and Walgreens Health is another great example. So, we see a lot of potential in the network we have. As part of TCM, of course, we're always looking to make the store base as efficient as we can, and we have opportunities to grow in smaller formats which we've tried here. We'll have 100 of those by the end of the fiscal year, and those have done extremely well. So, I think the store network will continue to play a critical role in the strategy as we go forward.

Steven Valiquette:

Great, thanks, and good morning everyone. So, we showed in the slide deck that the level of COVID vaccines and testing combined will likely be about 4% diluted to the EPS growth in fiscal '22 versus fiscal '21. So, I'm just curious to hear more about the variables within that. Should we expect that the margins on the 25 million doses for next year will be about the same as 34.6 million? And also, you previously increased the staffing levels to administer the vaccines. Do you have the ability to flex that down or do you have to maintain those same levels? Just curious to hear more about the components of that 4% that Thanks.

John Standley:

Yeah. I mean, we have -- I think we've done an amazing job. I think it's not just about probably the 25 that we're going to do this year, the 25 million vaccines for Fiscal year '22, but also about the opportunity in these businesses to really grow over time. So not just with vaccines, but also with testing. And I talked a little bit about in my talk how I think testing can really open some new doors for us, in closing gaps in care and providing tests and treatment in certain markets. So, I think we're starting to see our business really evolve here. And I think vaccine and testing are two great ways that are going to happen. As we think about the business model, we do have the opportunity to efficiently manage labor as volume changes, but we also see the opportunity to invest in some of these other areas as well to continue to triumph and grow the business also. So, I think that's how we're thinking about it. In terms of margin, we'll be negotiating on vaccine reimbursement and other reimbursements throughout the year, so we'll just have to see how that kind of plays out.

Steven Valiquette:

Yeah, thanks.

Jonathan Spitzer:

Our next question is going to be coming from the line of Elizabeth Anderson of Evercore ISI. Elizabeth, over to you.

Rosalind Brewer:

Sure. I'm going to turn that question over to James to cover a little bit about our numbers going forward.

John Standley:

I'm really excited about the opportunity. It's a great question and I think it's going to just open a ton of doors for us in the pharmacy business to gain access to additional patients and services. So, we're really excited about where we're heading and the opportunities it's going to create in the core Walgreens business.

Rosalind Brewer:

Thank you, Elizabeth.

Justin Lake:

Thanks. Good morning. Can you talk a little bit about the assumptions on the VillageMD business in terms of how -- if you have any kind of script numbers, margin numbers, you've had stores open for a while now, what do you expect to be the downstream impact there to the pharmacy business? Is there anything you -- any numbers you can put around that or give us an idea of when you think you might be able to communicate that? And then secondly, can you talk a little bit about what you expect from the international business within 2022. Thanks.

James Kehoe:

prospects using the scripts, but international we were -- we're expecting a really, really strong upcoming couple of years, particularly driven by the next year, we expect international to grow by about 50%. The UK business has been -- it's been a big success over the last year when it already doubled profit once. So, it was coming off a fairly low base. But what the team has done a fabulous job on is resizing the core structure. The second big one is shifting the company online. So, we have a current online penetration of about 22% of the total business is online. And it's growing extremely quickly. So, the business has been redesigned for the future. And once the sales come back next year and the sales growth is around, somewhere in the 8% to 10% kind of range in the UK, once it comes back, it's coming back on a very efficient model, very limited incremental overheads. So, we're -- we have a very fit company. It's exiting prior-year very, very strongly. So, we did a very good fourth quarter. We had the biggest marketing campaign in many, many years in the UK. Strong -- so we have strong momentum, a resized cost structure, a really strong online presence, and foot traffic have finally come back in the U.S., but it's not come -- sorry, in the U.K, but it hasn't come back as quickly as we'd like. So, we will see improving trends over the next 12 to 18 months. And the way we think about it in the UK will be fully recovered from COVID only in 2023. So, if you want to think about the horizon, it gets back to pre - COVID levels by that time. So, it's been a tough journey for them, much easier and not easier in the U.S., but U.S., for us, we had a very, very buoyant Q4. I think you're seeing the front of store comps up 6%, that's really, really strong.

James Kehoe:

The pharmacy business was up 8% on scripts. John, do you want to talk about the other piece?

Jonathan Spitzer:

Perfect. Thank you, Justin. Our next question is coming from Ann Hynes of Mizuho and I'll kick it over to you now.

Rosalind Brewer:

So, thank you for that question and I'm going to start off with one part of that and then pass it onto my partners here. So first of all, just starting with inflation, so you're right, we're seeing some inflationary indications in the marketplace. In some instances, we've been passing some of our cost increases on. We'll continue to do that and look at it carefully. While we are starting from a very good point of the transformational cost management that you've seen us apply against the business, which is why we've extended that into the future years, we're seeing some success there, so we can offset what we're seeing in the increased pricing. The other thing I would mention to you in terms of our labor position, I think that this team has done a fantastic job of engaging our team members at the store level. In addition to our fulfillment centers. And a lot of that has been the work that we've done around our labor position and increasing wages and then recognizing the hard work of our pharmacists. And John and his team have just done a fantastic job of not only engaging our own labor issues in terms of just engaging every day with our team members, providing development. And I think the most important work that we're doing in this space. And it's to make their jobs easier. John and his team have been working very hard in putting in some of the work that we're doing around our central fill opportunities and automating the process behind the scenes of what one customer might see when they come into our store. So, I'm encouraged that, as inflation happens, we'll still continue to try and pull our costs down and deliver as best we can on behalf of the consumer. I don't know, James, if you want to add to that.

John Standley:

I feel good about the plan, and the guidance that we're giving. And you touched on reimbursement rate, that -- we look at that pretty carefully, and we've done some modeling on it just to try and get a sense of the kind of where it goes. And clearly, there's going to be -- there's been reimbursement discussions. There are going to be ongoing reimbursement discussions. But as I kind of start -- as we start to look out and do a little bit of modeling into the future, it seems to us that if reimbursement rate trends continue kind of into the medium to long term, it probably does start to cause some contraction in terms of access in the marketplace. That may be potentially some issue for us in the medium to long-term as we lookout. I think it's we just continue to work within.

John Standley:

Yeah

Rosalind Brewer:

I'd agree with that too.

A.J. Rice:

Thanks. Hi, everybody. Maybe just two quick questions here. One, when you think about the new healthcare business, I'm trying to understand how that infrastructure is going to be set up. You've got entrepreneurial companies like Shields and CareCentrix and VillageMD in there. Are they -- are you seeing those running in sort of a collection of businesses or will there be a significant Walgreens overlay of management infrastructure and how much can you integrate those and realize synergies at the G&A level or do they have to stay separate over time? And then my follow-up question would just be, we've heard a lot about supply chain lately. Are you having sort of near to intermediate-term issues around the supply chain or anything worth calling out there?

James Kehoe:

Yeah.

James Kehoe:

And just to re-emphasize that, we actually have a CFO already for the segment. We have selected parts of the management already in place, so we're not starting from zero, but we still have some development to do on the organization. But you can be guaranteed, there are -- there will be mechanisms to generate mutually beneficial synergies between all the entities in a very structured way.

John Standley:

Yeah. Our team is working extremely hard with all of our supplier partners to tackle supply-chain issues. So, we are meeting regularly top-to-tops and having discussions to work through some of the challenges that have arisen. But I think we've generally done a very good job. But there are spots in our supply chain where there are some challenges, that we're working through. We've increased lead times in terms of how we order products, particularly it's coming from overseas. We've been creative I think, in finding ways to tackle some of those issues with our partners. And we continue to push hard here to try and have the best experience we can in stores for our customers.

Rosalind Brewer:

Thank you.

Charles Rhyee:

Thanks for taking the question. Just wanted to follow up maybe on Lisa's question at the beginning, James, I understand your comments around the strategy in making investments first with a path towards 100% ownership and wanting to keep the agility of those companies to really pursue their -- the strategies. But as it relates to your discussion around entering into value-based arrangements, can you talk about how you think about where Walgreens will be within these types of value-based arrangements going forward? And how do you manage all these partnerships in that sense, at least over the near term before maybe full ownership to keep everyone aligned so that you can progress towards your goals? And then as a follow-up, maybe on the supply chain costs from A.J., I think in the guidance, you only noted about 1 percentage point on labor costs as it relates to those other supply costs. What are your assumptions in terms of impact on earnings? Thanks.

Rosalind Brewer:

Yeah.

Charles Rhyee:

Right.