Walgreens Boots Alliance Inc (WBA) — Q1 2022 Earnings Call Transcript

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.

Thanks, Tiffany, and good morning, everyone. We are off to a very strong start to the fiscal year. First quarter sales increased 7.6% in constant currency. And adjusted EPS grew 53%, well ahead of our expectations. This strong performance was underpinned by enhanced execution across all of our business segments and supported by ongoing contributions from vaccinations and testing. Our testing and vaccinations are tailwinds for our business. I am very proud of the continued success of our core businesses, with strong growth in U.S. retail and robust recovery in our international markets. We are raising our full year adjusted EPS guidance to low single digit growth versus flat previously. We are capitalizing on our first quarter performance and overall business momentum to make incremental investment of roughly $120 million in our people, or 2 percentage points against EPS. As a reminder, building a high-performance culture and winning team is one of our four key strategic priorities and is foundational to the other three: first, transform and align the core; second, build our next growth engine with consumer-centric healthcare solutions; and third, focus our portfolio and optimize capital allocation. Absent these incremental investments, our revised adjusted EPS guidance for fiscal ‘22 would have been 3% to 5% growth. You may recall that our original guidance already included a 4 percentage-point headwind from investments to build out our healthcare growth engine, investments that we strongly believe will position the Company for attractive low-teens earnings growth over the long term. As we will show you today, we are delivering well against our Investor Day commitment as laid out in October, and making meaningful progress towards our strategic priorities. While it remains early days in implementing our vision, the bold steps we are taking are clear, and we are committed to creating sustainable value for our shareholders. I want to take a moment to discuss our role in the fight against the pandemic, which demonstrates Walgreens’ leadership in promoting the health of the consumers who live in our community. In the U.S., we administered 15.6 million COVID-19 vaccinations within the quarter. This achievement was made possible through the extraordinary work of our pharmacy team members. We recognize their dedication to supporting our patients, our customers, and our community as we continue to help lead the nation’s efforts in combating the pandemic. Nearly one year after we began our vaccination program with one COVID shot at a long-term care facility in Columbus, Ohio, we reached an important milestone for Walgreens at the end of the first quarter, 50 million COVID vaccinations administered to members of our communities. As of Monday, we had administered over 56 million COVID vaccinations, and we are not slowing down in our efforts. Walgreens began offering COVID vaccine boosters in September, and to date, we have administered over 9 million doses. As of November, we started administering COVID vaccinations to children, ages 5 to 11, in thousands of stores across the U.S., just in time as many families prepare to travel and gather for the holidays and variants continue to emerge. We are particularly proud of being the largest pediatric vaccine provider in the pharmacy channel as a powerful testament to the trust that families are placing in our Walgreens pharmacy team members. Importantly, about 40% of Walgreens stores offering the Pfizer COVID vaccine to children ages 5 to 11 are located in areas with a high social vulnerability index score. Our testing and diagnostics business has also accelerated, with over 22.9 million COVID tests completed to date. Not only will we continue to grow this vital service as part of our pandemic efforts, but we are building on this platform as we are developing a wider range of testing and diagnostic solutions for our customers. Our execution in vaccines and testing, our outperformance in the first quarter, and our healthcare investments are clear steps towards fulfilling our vision to be the leading partner in re-imagining local healthcare and well-being for all. We are making significant progress toward the broader commitments we established in October, along our four strategic priorities. Let me provide you with some details on several important initiatives. First, we are transforming and aligning the core business and building a pharmacy of the future that will enable and support our healthcare strategy. We had an especially strong first quarter online, including buy online pickup in-store. Digital sales were up 88% in the U.S., driven by 3.6 million same-day pickup orders. Walgreens saw its biggest Cyber Monday ever. And importantly, average order value is about $30 online versus $20 in stores, expanding our overall basket size as the digital channel continues to mature. We are in the early innings of possibilities for Walgreens’ digital platform. We’ve enrolled over 92 million MyWalgreens members, up 7.2 million since the fourth quarter. Additionally, our alternative profits businesses are growing nicely, including media advertising and financial services. Second, we’re building a platform of consumer-centric healthcare solutions, which we expect to fuel our next phase of growth. We closed in our Shields and VillageMD majority investments in October and November, respectively, and our CareCentrix investment is scheduled to close by the end of the third quarter. We have 81 VillageMD co-located centers now open as the rollout has accelerated to a pace of a new opening every four to five days for calendar year 2022. Our consumer health app is live with our Blue Shield California and Clover partners for their qualifying members. We are operating 47 Health Corners, including 10 recent openings in California. We’re looking at a rapid cadence of adding a new Health Corner every week on average in 2022. Third, we are refocusing our portfolio and optimizing capital allocation. We are applying a rigorous strategic lens to our equity investments and exploring all options to unlock values. Most recently, we have agreed to acquire 100% ownership of both AllianceRx Walgreens Prime and our German wholesale JV, creating greater agility ahead. Finally, we are building a diverse winning team that will underpin our strategic priorities. We’re getting even closer to the consumer by adding Tracey Brown as our Chief Customer Officer on the back of her innovation at the American Diabetes Association and Sam’s Club. Our Chief Transformation and Integration Officer, Anita Allemand, is applying her experience at Optum and CVS to drive alignment across our initiatives. We’re forging ahead in healthcare with Dr. Sashi Moodley as our Chief Clinical Officer; and Ramita Tandon as our Chief Clinical Trials Officer, drawing on their experiences in care delivery and clinical solutions while at Anthem, Icon, and CareMore. Holly May is our Global Chief Human Resources Officer who is driving our high-performance culture. I’m excited to share even more news with you in the weeks to come as we continue to round out the team. As our results and progress demonstrate, we have a deep and experienced bench in place to drive our strategic priorities today. And I’m pleased to say we are in the final stages of welcoming a leader for our Walgreens Health segment. To bring a little more of what I was describing to life, let me share with you an anecdote from one of our new Health Corners in California. On just its first day of operation in November, we saw the value proposition in action. Our Blue Shield California member introduced himself and told us he’s diabetic and struggled to make his visit to his primary care physician for his A1C testing. He was thrilled to learn he can do that here, along with his family. This is just one example of how we can care for guests through our convenient offering. As the Health Corners roll out, I have increased confidence that when executed at scale, its innovative and consumer-centric strategies will drive significant growth and value creation ahead. We are connecting our physical Health Corners with our digital platform and our other unique complementary assets to meaningfully reduce costs and improve health outcomes and equity. And when you factor in the continued expansion of co-located clinics with VillageMD, nearly half of our footprint will be covered. We are building community engagement today as only Walgreens can do, through our trusted customer relationships, our local knowledge, and our deep data insight. With that, I’ll hand it over to James to provide more color on our results and our outlook.

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 uplift 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 significantly, 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, 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. 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.

Thank you, James. To summarize, we are executing with a very strong start to the year and an increased fiscal 2022 outlook. WBA’s transformation is underway, and I am pleased with our rapid progress along our strategic priorities. I’m looking forward to continuing this dialogue with you about our execution and progress next week at the JP Morgan healthcare conference. We are energized and focused on re-imagining healthcare and wellbeing for everyone with a clear path toward accelerated value creation across all our stakeholders. Now, I’d like to open the line for questions. Operator?

Thanks very much, and good morning. I’m first hoping you can provide a little more color on what’s going on with AllianceRx Walgreens Prime. We saw the headlines earlier this week that Prime appeared to be dropping the contract and the fiduciary breach claims. But, I guess, bigger picture, what’s happening with that business? Number one. Number two, is there any impact on guidance that we should note from taking the holding from 55% to a 100%? And if you don’t mind, I might have a follow-up. Thanks.

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.

Yes, we have increased our stake from 55% to 100%. There won't be any change to our adjusted operating income because we already consolidate at 100%. However, there will be a below-the-line adjustment for the minority interest of 45%. As we mentioned at the beginning of the year, we anticipated a 7% decline in U.S. revenues due to an approximately $8 billion drop in the AllianceRx Walgreens Prime business. We recognized that this decline necessitated restructuring, and we believe it's better to handle this under one ownership to expedite the process. We're currently developing a new specialty strategy and believe that by combining the Shields assets with our specialty pharmacies and the AllianceRx Walgreens Prime business, we can create a fully integrated specialty business. More information will be available soon. While the acquisition resolved some legal disputes between the two parties, our guidance will reflect a slight negative impact since we will now be recording 100% of the income decline rather than 55%. However, this only affects our projections by a few cents for the full year, so it shouldn’t be a major concern regarding the guidance. We expect to roll out a more dynamic specialty strategy in the next six months, integrating services for potential partners. Our partnership with Prime remains strong, and we will continue providing them with specialty services as needed.

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

No, James did a great job summarizing it. Specialty is a huge part of our business. We do $20 billion-plus of specialty, and we’re excited to bring these assets fully back into the portfolio, as James described. So, big opportunity for us. We’re really excited.

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

Thank you very much, and good morning. Roz, I'm looking forward to seeing you and James virtually next week. I want to start with a clarification, James. I’d like to understand your expectations for vaccination and testing in the updated guidance, particularly since you mentioned that the vaccination rates this quarter were higher than we expected, especially with the availability of boosters for those 12 and older in the U.S. Additionally, I have a broader question for you, Roz, regarding our strategy and the Health Corners. How should we approach profitability in that area? Is there potential for long-term initiatives, like a shared savings program or other approaches, because while acquiring an additional prescription is beneficial, the real opportunity lies in reducing overall costs and possibly sharing those savings. I would appreciate your insights on this.

I’ll let James get started on testing.

Thank you, Lisa. You have several questions. The first one relates to vaccinations. We’ve updated our estimate from 25 million to 30 million, largely due to high activity levels in the first quarter. It's important to note that this 30 million figure is just a snapshot we've taken at this moment. As variants evolve and with guidance from the CDC and others, this estimate could change significantly, potentially leading to some upside. Specifically, we increased by 5 million, which amounts to about $0.09. Regarding testing, we see a significant opportunity there, as it was actually the main driver in the first quarter, likely more so than vaccinations. For the full year, this is expected to be in the range of 12 to 15 cents. So, to summarize, we’re looking at $0.09 from vaccines and testing could contribute around $0.12 to $0.15, which is a considerable addition for the year. When we look at the 30 million, we estimate that approximately 19 million will be boosters, with pediatrics around 2 to 2.5 million. The remaining figures involve individuals aged 12 and older. I can't provide much more detail from memory, but those are our base assumptions. We're not releasing profitability numbers, but you can calculate that from the cents per share I just mentioned. I hope I covered all your questions.

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

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.

Thanks. Hi everybody. The sales at the front of the store in the U.S. were very strong. I would like to discuss that further. It seems that at-home testing likely contributed to this. Can you explain how much that helped and what implications it might have for the rest of the year, considering the administration is discussing sending out 500 million at-home tests? Will this affect your ability to obtain those tests for sale, and what are your expectations regarding that testing? Additionally, if there are other factors contributing to strong sales on the U.S. front end, could you provide insight on that as well?

I’ll take a shot at that and maybe John can add to it. The growth at the front of the store was 10.6%, the highest in 20 years. The contribution from COVID-19 screening tests was about 320 basis points, which accounts for about 29% to 30% of the growth rate. There’s strong core performance in the front of the store, not just from at-home testing. In this quarter, it’s roughly over $200 million in revenue, contributing around $0.06. It’s not a very profitable sector, as it’s below the average for the health and wellness sector on a gross profit basis. Is that what you were looking for A.J.?

Yes. I think, I’ll just comment, James. We saw really strong performance in OTC, beauty, personal care, all very strong categories, good success with our mass personalization efforts and a little bit of halo from the vaccine and testing. So, I think those were all good contributors to the strong performance in the quarter.

Okay, great. Thanks a lot.

Yes. First, I’d like to welcome Tiffany aboard. Tiffany, I look forward to working with you. Tim and John, I have two questions. One is about underlying prescriptions. You mentioned the comparison on the front of the store in 2019. Can you discuss how you view the acute care script or regular script comparison looks compared to 2019? There seems to be some debate on how close we are to returning to baseline. If I could also add a follow-up regarding the front of the store, A.J. brought up the in-home testing. Can you share the impact that has had on the average?

Do you want to take a shot John on the Rx?

Certainly. Regarding prescriptions, we've observed script count growth that outpaces what we experienced with vaccinations. However, we believe there is still significant potential for us in the market. As James and Roz mentioned, we are making considerable investments in our business, specifically in staffing and through initiatives like project nucleus, aimed at enhancing the pharmacy experience in-store. We continue to see substantial upside and growth opportunities within our core pharmacy business to increase our market share and advance our efforts.

Yes. So, George, the Q1 was excluding immunizations was up 1.8%, and it was a little softer than where we would have liked to be. One of the big drivers was Medicaid where the market grew strongly in both Medicaid and discounted products. And we like the market in Medicaid because we have a lower percentage overall share in the category. That being said, there is a fairly strong connectivity between the scripts and the amount of vaccinations and testing done in the quarter because the pharmacists are doing both jobs and there has been high level investments. So, I think what has happened a little bit is because of staffing shortages, we’ve had to reduce operating hours in some locations. And then two is some of those phone calls that happen to say, adherence follow-ups they take in the medication, those phone calls were not priority number one during the administration of the vaccinations. So, we got to get a bit of a rebalance in the year to go, and we are reasonably confident that the actions we’re taking are definitely in the right direction. So, we should see an uptake in scripts in the coming months.

I just wanted to follow-up maybe on A.J.’s question when you were talking about at-home testing contribution of the quarter that was super helpful. I guess, in terms of like how you’re thinking about that on a go-forward basis with some of the administration’s changes, et cetera? How are you thinking about that in the broader context of the new guidance that you put out?

I might collaborate with John on this. There's been quite a bit of discussion regarding free testing, but when it will actually be available in the market is still unclear. To my knowledge, there isn't a website established or a clear process outlined for how it will function. So, I believe that it is a couple of months away. The key issue right now is stock availability. Here's an interesting statistic: our health and wellness market share is generally around 17% to 18%, while our share of the at-home test market is between 40% and 45%. We have successfully managed supply chain fulfillment and built partnerships with suppliers. Currently, our availability is somewhat inconsistent, standing at around 70%, but we have clearly sold the majority of at-home tests in the channel, making it a significant success. The 200 million units didn't appear out of nowhere; it was a result of effective stock management, and we had seven different types of COVID at-home tests available in our stores at various locations. I would say we have executed well in this area, contributing to our strong performance in the first quarter. We anticipate that we will continue to outpace expectations. We expect our stock availability levels to improve significantly by mid-month, and we feel optimistic about the next three months. However, beyond that, it's uncertain and depends on the status of variants at that time. I believe testing will remain relevant for a considerable period, and our full-year forecast is now contingent upon this assurance.

That's very helpful. I appreciate your updated thoughts on the longer-term outlook with VillageMD. I was curious if you have any data from the quarter regarding sales increases at Walgreens, whether in finance, pharmacy, or any other relevant information you could share.

No, not really. I think it’s a little bit soon. We need another quarter behind us. We currently have around 81 clinics open and we still need to gather the same kind of statistics. The Village team has data showing that collaboration between pharmacists and doctors leads to significant improvements in outcomes. We need to replicate those results in the co-located clinics, and we believe that will happen; it's just a matter of timing. Looking ahead at our segment, I want to emphasize that the revenue for this quarter is quite low since we are still finalizing acquisitions. A useful way to view these acquisitions is that if CareCentrix closes at the beginning of the third quarter, we anticipate generating a little over $1 billion in revenue for the segment per quarter. So, if you consider Q4 and take a simplified approach, by the end of Q4, we should have a run rate of about $4 billion, likely exceeding that figure in terms of a 12-month run rate for the segment. This is the only new insight I can share, as analysts’ projections appear to vary widely. I don’t expect revenue stability as we approach Q3, and it all hinges on when CareCentrix closes. However, once that transaction is complete, we would be looking at $1 billion a quarter for the rest of the year.

Got it. That’s super helpful. Thank you.

Good morning and thank you for the insights shared so far. I apologize for returning to this topic, but I want to ensure I fully understand the various elements of your guidance, particularly how they relate to the multi-year growth outlined during the Investor Day in October. From what I gather, James, the positive factors you mentioned, especially concerning the testing benefits, seem to outweigh the negatives in terms of the EPS guidance, and I might have anticipated a slightly higher figure. In relation to the labor investments and how they compare to the impacts of shrink or inflation, is there anything we might be overlooking concerning these variables? Given that many of the benefits are tied to COVID, while we can't predict the future of COVID in fiscal '23, does this alter your expectations regarding the starting point for earnings growth compared to your earlier projections?

Yes. While I’m hesitant to discuss next year too much, I want to address shrink for a moment. It appears that shrink is somewhat linked to COVID, having started to increase after the pandemic. I’m not suggesting a direct correlation, but I can tell you that the shrink issue for us this year exceeds $0.15 a share. We believe this trend won't persist in the long term. As you mentioned, there are various factors at play in both directions. Testing is a significant number, but shrink is equally important. We need to intensify our efforts to reduce shrink. Moreover, I feel that Congress needs to take action because the extent of the problem is substantial. Over the past decade, shrink has averaged just over 2%, currently sitting at 3.25%. This represents a 40% to 50% increase in shrink as a percentage compared to prior to 2020. In the last two years, we have seen a 52% rise in shrink, primarily due to organized crime, not petty theft. Gangs are stealing large quantities of beauty products from our stores, posing a serious issue, similar to what other companies are facing. As for inflation, I believe we are managing it effectively. There may be minor fluctuations from quarter to quarter, but we generally offset inflation, possibly facing a $0.03 negative impact for the full year. These are not substantial numbers. However, we need to wait and see how the year develops as there are many unpredictable factors, such as final vaccination and testing numbers. I’d like to invite John to contribute, especially since we are looking to build a diagnostics business in the long term, which will help offset some challenges as we move into next year. John or Roz, do you want to add anything, particularly regarding labor costs?

Yes, absolutely. I mean, I think, where we’ve gone with diagnostic testing now, just with COVID testing in over 7,000 stores, we’ve got some good green shoots in A1C testing that are underway right now. It’s very early stages, but I think that’s a big opportunity for us. And in our COVID testing, we do clear rapid testing in our stores in over 4,000 locations. So, I think that’s one example of some of the changes to our business, so come out of COVID as we move forward that are big opportunities for us.

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 in online applications. So, we’re working with our partners that are in the online business pretty heavily 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.

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?

I don’t have the sequential figures at hand, but I believe we will see positive year-on-year EPS growth due to low vaccination levels in the previous quarter. We can expect a strong second quarter, although there are uncertainties regarding the shift of vaccinations from Q2 to Q1. We are continuously assessing the yearly estimates, including how many people will receive boosters and the pediatric vaccination numbers, which require detailed analysis. However, we anticipate a good second quarter. What was the second part of your question?

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

Yes, we experienced a very strong flu season in the UK, with an increase of 150%. However, the flu season in the U.S. was fairly weak, and overall flu incidences were lower compared to a record season last year. So, it didn't perform exceptionally well. The precise impact was an 80 basis-point headwind on vaccinations. In fact, the numbers for the first quarter reflected an 80 basis points negative impact due to a weaker flu season.

Good morning. You mentioned 340B as a risk, and we've seen manufacturers winning a few rounds, leading to decreased support for this program concerning contract pharmacies. How does this compare as a headwind this year versus last year? What is the long-term outlook on this issue? Thank you.

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?

I don’t think it’s a hugely material issue for us at the moment. We’re obviously watching the situation. We feel the administration is actually very supportive. And the idea here is obviously to get access to medications to as many folks who should have them as possible. And that’s really our objective as well. And obviously, Shields gives us a whole another approach here as well, as you look at the 340B space, but it’s also an important part of our specialty business, and again, just making sure that we can get patients access to the medications that they should have. So, I think as far as what we can see in exposure so far, that’s reflected in the guidance that we’ve given.

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.

Okay. As a broader question, we've been conditioned for 20 years to believe that the CDM has completely dominated the specialty market due to their benefits structure. UnitedHealthcare has recently brought Diplomat's involvement to a standstill, and many people are choosing to use mail order services. At a high level, and understanding that this is still in the early stages, how do you intend to disrupt the PBM benefit structure that resembles a cartel in the specialty market, given that you don't directly own a PBM?

John?

Yes. I was going to jump in if that’s okay. So, I think what’s important about us is access. So, between what we have in community pharmacy today, what we have in hospital pharmacies, what we dispense in our retail pharmacies and what we have today through our central, so we bring I think a great network of access to the marketplace with really strong clinical capabilities. And just as an important part of that is our relationships with pharma, and just over the last few months, we brought in 10 new limited distribution drugs to our portfolio now of probably just over 200 limited distribution drugs. So, we actually do business with all of those large PBMs that you mentioned and support them in their efforts. They’re important partners to us, as well as direct contracting. So, I think there’s a space force in this market. And you’ll hear us talk about that as we bring our strategies for the integration of all our capabilities that we have.

Thank you. I’ll stay on the pharma macro front. I know that the Biden administration is considering taking administrative action on DIR fees, and these fees we understand to be significant for independent retail and specialty pharmacies. I’m interested in to what extent they’ve been meaningful as a reimbursement pressure for Walgreens. And would it be material if we see limitations to DIR fees look forward?

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

We are collaborating with industry groups across different states to ensure that performance fees are fair and equitable, as many DIR fees currently are not well-structured. Supporting a fee structure that fairly compensates community and retail pharmacies for their services is essential. We will need to see the specifics of any regulations and how plan sponsors or others may adjust the dynamics before assessing the quantitative impact of any changes. However, it's clear that many of these fees do not make sense.

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 value 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.