Walgreens Boots Alliance Inc (WBA) — Q2 2022 Earnings Call Transcript

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.

Thanks, Tiffany, and good morning, everyone. Walgreens Boots Alliance once again delivered strong results in the second quarter. Sales increased 3.8% in constant currency or high single digits on a core basis, excluding the negative impact of AllianceRx Walgreens and the positive M&A activity in Walgreens Health. Adjusted EPS grew 26.5%. Our good performance reflects execution across each of our business segments. Our U.S. retail sales comp of 14.7% was the highest in over 20 years, above even last quarter's record, and we are seeing significant recovery in our international markets. At the same time, we are building our next growth engine, Walgreens Health, which is on pace toward its long-term target. And of course, we continue to serve communities with COVID testing and vaccinations to fight the pandemic. During the quarter, we also undertook important actions to advance our strategic priorities and to ensure our asset portfolio is strongly aligned. We initiated a review of the Boots business, and this process is progressing well. Looking ahead, we are maintaining our full year adjusted EPS guidance of low single-digit growth, which we raised in January. Our outlook incorporates healthy fundamentals in our core business as demonstrated with robust sales and earnings growth year-to-date, balanced against ongoing investments in our growth initiatives and our people. We are delivering against our Investor Day commitments as laid out in October. We're moving quickly to execute our vision of consumer-centric, technology-enabled health care solutions, which extend well beyond the pharmacy walls. As we began to offer a care delivery experience that improves health outcomes and lowers cost for patients, providers and payers, we are well positioned to drive accelerated sustainable value creation. Next, I want to take a moment to review Walgreens’ initiatives to provide local communities with access to important resources during the pandemic and as we navigate the recovery into an endemic scenario. In the U.S., we administered 11.8 million COVID-19 vaccinations within the quarter and over 62 million to date. Our pharmacy team members are health care heroes. The majority of our patients and customers see their pharmacists more than they do any other health care provider, and we recognize their tireless dedication and contributions to the pandemic response. The Omicron wave in December and January also drove elevated levels of COVID testing, both in-store and at home. We completed 6.6 million in-store COVID tests during the quarter and over 27 million to date. In addition to our drive-thru testing at no cost to patients, we've now launched convenient at-home COVID PCR test collection kits with LabCorp at no cost nationwide. This is particularly important for uninsured, socially vulnerable and medically underserved populations, who continue to be among those most impacted by COVID. And as we all start to resume normal activities, Walgreens will remain a partner to our communities to ensure safer connections and improve mobility. Our leadership in vaccines and testing is just one way that we are becoming the leading partner in reimagining local health care and well-being for all. The second quarter included significant progress towards each of our four strategic priorities. Let me update you on our latest initiatives, and then spend a moment on the drivers of execution at Walgreens Health. First, we are transforming and aligning the core business and building a pharmacy of the future that will enable and support our health care strategy. We saw continued momentum online in the second quarter with digital sales up 38% in the U.S., or 116% on a two-year stack basis. Same-day pickup orders accelerated sequentially to 3.9 million orders. We have also enrolled over 96 million myWalgreens members, up nearly 11 million since the fourth quarter. We are now focused on activating members through personalized omnichannel messaging and offers. Additionally, our alternative profit streams are performing well, including our media advertising business, which launched a year ago and is running ahead of expectations. We continue to see digital media as a significant opportunity for us. Finally, we have three automated micro fulfillment centers open and are on pace to have 22 by the end of fiscal '24, driving significant efficiencies and cost savings over time. We expect these centers to ultimately cover 40% to 50% of prescriptions for pharmacy served, removing routine tasks and excess inventory from the local sites. Second, we're building a platform of technology-enabled health care solutions with the consumer in mind, which is well positioned to fuel our next phase of growth. Nearly half of our store footprint will have a health care touchpoint between our organic Walgreens Health corners and the co-located clinics with VillageMD. VillageMD has now opened 102 co-located clinics, and the rollout has accelerated to an average pace of one opening every three days for calendar year 2022. On the health corners front, we remain on pace to have 100 sites in operation by year-end. Third, we are refocusing our portfolio and optimizing capital allocation. We continue to apply a rigorous strategic lens to our equity investments and explore all options to unlock value. Recently, we have gained full ownership of the AllianceRx Walgreens business and our German wholesale joint venture, creating greater agility ahead. We have also announced the strategic review of our Boots business. This process is progressing well, and we will pursue an outcome that maximizes value. Finally, we are building a diverse winning team that will underpin our strategic priorities. Our deep and experienced bench is executing our strong results today and implementing the bold steps necessary to drive growth ahead. We are making rapid progress towards building out Walgreens Health with a clear path to a run rate of more than $4 billion exiting fiscal year 2022, well on our way to our goal of $9 billion to $10 billion in sales by fiscal 2025. We will improve health outcomes and lower cost for payers and providers by delivering care through owned and partnered assets. The goal is to support the patient journey across the entire care continuum through an omnichannel solution. This is why you see these complementary assets spanning primary care through VillageMD, specialty pharmacy through Shields and post-acute care through our pending care-centric investment. The health corners play an important role in addressing care gaps through our health advisers. Today, Blue Shield California and Kroger members can walk in and have access to clinical services like A1C testing, colorectal cancer screening and blood pressure monitoring. I'm particularly moved by stories of these patients receiving emotional support while navigating what can be an overwhelming and impersonal experience in U.S. health care. Much like our pharmacists, our health advisers are becoming trusted neighborhood sources of education, recommendations and connections that can help our patients better manage their wellness. This is a transformational process to become a leader in value-based care as only Walgreens can do through our trusted customer relationships, local knowledge and deep data insights. We will leverage our strong footprint and independent standing to offer uniquely consumer-centric solutions for our communities. We are executing on our vision today. Our partnership with VillageMD positions them to be one of the largest and most differentiated primary care providers in the U.S. The collaboration is a significant growth catalyst, driving 1,000 co-located clinics across more than 30 markets by 2027. VillageMD is in 22 markets today, most recently expanding to Boston, Jacksonville and Tucson in February; Denver in January; and San Antonio in December. VillageMD's care delivery model is highly scalable with attractive unit economics over time. Shields continues to rapidly expand its platform, representing specialty patients across more than 30 disease states with more than 70 health system partners nationwide. In November and February, Shields inked new deals with two significant health systems with geographic reach in the Northwest and Northeast U.S. Importantly, WBA and Shields are collaborating to identify instances where their networks intersect to combine Shields' operational expertise with WBA's robust nationwide pharmacy network. In our organic Walgreens Health business, we are pleased with the rollout of our health corners with Blue Shield California and Kroger, where we are gathering tremendous insights. We are in the process of signing on incremental partners, and we will initiate the next wave of nine health corners in California in April. We also continued to refine the consumer app, adding new features to increase access, engagement and convenience. Overall, we are tracking well against our key milestones for Walgreens Health and remain very excited about our growth potential. We are executing across our balanced plans for fiscal 2022 as we build a strong foundation for sustainable low-teens EPS growth. We are reimagining health care and well-being for all with a clear path towards accelerated value creation. 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. 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 point 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 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 tests 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 nine 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.

Thank you, James. Let me be brief so we can take as many questions as possible. We are executing well with another strong quarter, marking another step in our transformation. We are making significant progress across our strategic priorities. Our team members continue to amaze me with their dedication and talent as I visit many of our stores and offices across our regions. It's because of their hard work that Walgreens Boots Alliance has been recognized with recent honors such as being named to the Best Company's List of the World's 50 Most Innovative Companies and Time's 100 Most Influential Companies. Our team members, in particular, provide me with deep conviction that we have what it takes to truly reimagine health care and well-being for all and deliver long-term value creation. Now I would like to open the line for questions.

First, I wanted to start, James, with your comment that the quarter was better than you expected. But as I think about the next several quarters, my first question is whether there were things that were advanced into this quarter. Also, regarding your remark about testing, I would assume testing was very strong in January and February, but what have you observed more recently in relation to your increased revenue from testing? Is that attributed to what you experienced in the most recent quarter or your expectations moving forward?

Yes. When I mentioned that we performed better than expected, I believe we exceeded consensus by about $0.20. Compared to our internal forecast, we were approximately $0.08 ahead. The areas that contributed to this positive outcome were retail, which remained strong, especially in the first two months of the quarter, and testing as Omicron peaked. These two factors accounted for our performance exceeding the internal forecast by around $0.08. However, we have noticed a clear slowdown since then. Now, I will turn it over to John Standley for some insights on what he is currently observing.

Well, I guess the part of the big news there really is just we did start vaccinating the fourth shot yesterday. So what was slowing down has kind of picked up a bit here in the last 24 hours as far as the vaccine goes. I think on the testing, it did slow down as we came through the holidays in January into February and now into March. But there has been still a steady business there for travel and most people still needing to test. So down quite a bit, but a nice steady stream still ongoing.

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?

Yes, it's an important point. Recently, we managed to advance legislation regarding equitable pharmacists access. This legislation is focused on provider access and our capability to bill under Medicare Part B for services related to testing and treating conditions like influenza and strep. I believe this represents a substantial market opportunity, which has predominantly shifted from primary care physicians to convenient care. We have a significant chance to offer a convenient solution through our nearly 9,000 locations. Our pharmacists and technicians have demonstrated their capability, especially during the pandemic, to deliver these services. Accessing this market could be a significant game changer for our business growth and the value we can provide to the communities we serve.

So just regarding the Boots business and the ongoing strategic review of that asset, just a couple of interrelated questions. First, can you remind us where this asset stands at the moment just on how much the profitability in fiscal '22 is impaired by COVID versus the pre-COVID baselines? And if I missed this, are you able to disclose how much of the International segment operating profit of $226 million this quarter is specifically related to the Boots' asset that's under strategic review?

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

Okay. Let me just pick the last of your question. Germany doesn't make very much money. It's a wholesale business. It's driving a lot of favorable synergies in the go-forward position. But right now, it's only marginally profitable. So you could presume that the majority of the profitability in the International segment is related to the U.K. business. I'm sorry, the first part of your question?

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.

No, I think we’re still quite a bit below, call it, the 2 or 3-year stacks. Foot traffic hasn’t fully recovered in the U.K. I think it’s like in 15% below where it was 2 years ago, just in terms of foot traffic. The U.K. reacted – so first of all, they have a fabulous quarter given that they had a big spike in Omicron in the quarter, and it’s a very foot-traffic driven business. And the traffic shifts really quickly. So look at the quarter they just have, and foot traffic was actually up 52%, but it still remains about 15% below where it was 2 years ago, right? So it hasn’t fully retired. And I think if you cycle back a couple of conference calls, what we said was we expect the Boots U.K. business to broadly get back to the pre-COVID levels when they’re exiting 2022. I would say that if you actually looked at it on a sales basis, it will be 2023 year before Boots fully gets back to pre-COVID levels. So there’s a lot of good growth ahead in the U.K. and International segment driven by that. They’ve done a spectacular job of cost control. And then secondly, the other part that I don’t think we get credit for is boots.com in the U.K. That’s 60% growth on a 2-year stack basis. And I don’t think there’s many retailers in the U.K. that have a boots.com business that represents 15% of sales. So this is a business that used COVID as a time to really invent itself and exit much, much more strongly than it went into COVID. So this is a business with massive momentum and a small position for the future, has a large and fast-growing dot-com business. So we’re very happy with it. But as I said, your question is a good one. It won’t fully recover until fiscal year ‘23. So there’s a rather positive growth ahead.

You mentioned reinvesting in the health care business while discussing the factors affecting the second half EPS numbers. Could you clarify what those increased investments entail? Additionally, can you provide insights on your labor costs compared to your expectations? I understand you indicated that labor has been a contributing factor to SG&A, and costs are rising as well. I'm looking to grasp how this is trending as we progress through the fiscal year.

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.

Yes, just quickly, Elizabeth. Basically, what we said is we – finally, we maintain guidance. We took up savings on the Boots business, and we increased the investment on health care from 4 percentage points of EPS to 5 percentage points. And one is to send a clear message that we're serious and we're making strong progress. And as we're in the second half of the year, there's a fairly big shift between first half and second half. Second half is about 7% of EPS headwinds coming from the investments in health care. Specifically, what were we doing? We've increased slightly and VillageMD has increased slightly its investments behind the opening of the co-located clinics. You'd recall in the last conference call, we raised the guidance for the full year from 160 clinics in the calendar year to 200. But now we're just aligning a bit the expenses and the phasing of those rollouts. So probably is a longer-term positive just readjusting expenses in the short term. The other thing is we're really doubling down on the organic investments to meet the requirements of Blue Shield California and Kroger. We're making strong progress against both of those. So call it a reinforcement of expenses exiting the year because we're residents here. We want to exit the year stronger than when we entered. So this is all about investing in the future growth of the company. And John, maybe I'll pass it over to you on the labor question.

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 Lisa 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.

I’m curious about the progress with the health centers, both the Walgreens Health centers and VillageMD, especially since many are co-located. Could you provide some insight on how this is affecting retail operations? Are you seeing an increase in prescription volume or foot traffic at the front end that you can attribute to the co-located VillageMD or health centers? How is this changing the profile of the stores that offer these co-located services?

Thank you, A.J., for that question. So first of all, it's still early days for us in terms of the number of VillageMD clinics and to see that transfer of script volume over to the stores. What's more important here is that just to remind everyone that this is a primary care physician practice. And what we're really building are key relationships, the relationship with the consumer between the primary care physician and the pharmacist. And that's where we're seeing the greatest uptick right now is in patient satisfaction and access to health care and neighborhood markets. And so we'll continue to look at this and look at script uplift. But right now, the focus is really on gaining the confidence and creating new relationships in the marketplace. The other thing I will tell you is as we see these expand across the U.S., I will tell you, after having walked several of them and watch the patient feedback, it's comforting to see just how much engagement we're getting with the patient. And also, too, it's actually great for our pharmacists because they are much more engaged with the patient and the customer because they have the information coming over directly from the primary care physician's office just inside the building. So we'll continue to update you as we see those numbers come in from script count growth, but it's still a little bit too early for that.

Yes. To provide some perspective, I want to clarify that you will observe two benefits as we move forward. First, we are confident in the uplift from scripts, although we're not sharing specific numbers on a quarterly basis right now; a more detailed update will come later. The second benefit, which shouldn't be underestimated, relates to Village's performance. Their older practices, where a pharmacist and a doctor collaborate to manage patients, result in lower medical costs compared to a primary care physician working alone. A significant factor that needs time to develop in the co-located stores is the joint effort of pharmacists and primary care physicians in reducing healthcare costs over time. They have strong evidence from their standalone clinics, and we expect this to lead to better performance in the clinics partnered with us. We are closely monitoring several key performance indicators. However, remember that it typically takes two years for a clinic to reach a stable operational level and achieve breakeven. Thus, it takes time for the data to become clear, but we are fully confident that both aspects will move into favorable territory over the next year or two.

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?

Yes, thanks for the question. We had committed to establishing five significant relationships by the end of the year. Currently, we have two: one with Blue Shield California and another with Kroger. We've also recently signed a third agreement, which we will announce shortly. We are confident in our progress with these entities. Additionally, we are expanding health corners in California to support our existing relationships with Blue Shield California and Kroger. These health corners are serving as health advisers in the community, complementing our work with VillageMD. We are actively developing these relationships with our commercial team to ensure that everything comes together, and we are on track to achieve the five contracts we aimed for at the start of the year.

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?

Yes. We learned a lot during the COVID testing process, and I think we talked earlier about the work we're doing with LabCorp to provide at-home COVID testing. So it's giving us a real bright light into what more we can do in this space. I know that John Standley's team is developing a lot of the work around diagnostics and at-home testing through our retail business. I don't know, John, if you wanted to add anything more to that question.

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.

The only other thing I would add to that, too, is that the discussion earlier around being able to test and treat in our stores, it's not only against the COVID virus, but it's also, just imagine if there's a strep throat diagnosis, our pharmacists, hopefully, will be able to test that in store, which we currently do and then treat them, send the patient home. And so while that's not in-home testing, it is creating an opportunity for the patient to take care of themselves and recover in a home setting.

It's Jack Slevin on for Brian. I just want to look at the '22 guidance and really use that and where we stand with the back half of the year as a jumping off when to look at '23. So when you look at what you're implying with the guidance and acknowledging that it sounds like there's some upside maybe from fourth doses or fourth shots, but at the higher end of the guidance, it's about $1.79 of EPS in the back half of the year. Historically, you've done roughly 50% or a little bit lower than 50% of your EPS in the back half of your fiscal year. So when I bridge from, call it, $3.60 to $3.70 of EPS that's implied on a full-year basis from that back half guide, can you just help me look at the back half of this year, bridging to that $5.15 of EPS that you sort of put a stake in the ground around at Investor Day and how we get there based on back half performance?

So Jack, let me begin by discussing '23 and some specifics for the second half of the year, including the guidance we've already provided. First, we are not offering any guidance for fiscal year '23. However, we are entering the year in a strong position. We are executing on our commitments, including the raised fiscal '22 guidance made recently. You'll notice some details in the numbers. We indicated that we would implement some strategic actions and further investments, and we are well positioned in '23 to continue our Walgreens Health investments. The growth in Walgreens Health has reached about 125% in the quarter, and we expect to achieve a $4 billion run rate in sales by the end of the year. Our long-term target remains a $9 billion to $10 billion sales figure by 2025. I want to highlight some details regarding the fiscal '22 guidance. We made additional investments in pharmacy totaling around $158 million, which is approximately $0.14 of EPS above our October guidance. There were minimum wage increases included in the October guidance, resulting in about a 2% EPS headwind for the second half of the year. Additionally, inflation continues to rise, and we anticipate passing through most inflationary impacts in the short term. To summarize, we are not providing guidance for '23, but we exited the quarter strong and are managing through the second half.

Yes, Jack, as you look at it, we previously mentioned that compared to our internal estimates, we exceeded expectations in the second quarter by about $0.08, and we are reinvesting that. We see many exciting growth opportunities, especially in Walgreens Health, which we likely want to support as we approach the end of the year. For the second half, it's important to consider a few factors. In Q3, during the peak of vaccinations, we experienced a 97% growth in EPS, which is significant. In Q4, we saw a 26% growth, leading to an average in the 60% range. This is the environment we are navigating. It should not surprise anyone if you consider the vaccination contributions from last year. In the second half of the year, we will be lapping those vaccinations, which we estimate will create a 20% headwind. Additionally, there are labor investments mentioned before that account for 5 percentage points. The update on Walgreens Health has been communicated in advance, while the only new factor for the second half is the labor investment. That said, we consider our guidance to be conservative, and we have yet to account for the impact of the fourth vaccine dose for those over 50. We are still evaluating its potential impact, which could be between 2 million to 4 million vaccines, with a midpoint around 3 million. This could provide an upside of $0.05 to $0.08. However, many factors can change between now and the end of the year. I am excited to share that we have effectively offset all inflationary impacts, including significant increases in international ocean freight costs, which many retailers are currently facing. We feel we are in a relatively strong position concerning inflation and are optimistic about our model's performance and future outlook. Our front-of-store performance has been outstanding this year, and we have executed our plans very well. John, could you provide some insights into our plans regarding own brands and other areas for next year? We are quite enthusiastic, Jack, as we look ahead to 2023, but we will refrain from providing guidance for '23 in every conference call.

Yes. I'll just add to that. We've made significant progress with myWalgreens and mass personalization, and I believe there's substantial potential for our program. The combination of that initiative and the Walgreens advertising group offers promising growth opportunities. Our omnichannel experience has enhanced our capabilities, and I see exciting potential over the next few years. As James mentioned, we are focused on expanding our own brand, looking to introduce it in new categories and strengthen it within existing ones. We are making strategic investments to enhance our market approach and store positioning, which we find very encouraging. Additionally, we are carefully reviewing our merchandising strategies and planning for the future in our stores. It seems there hasn't been a comprehensive store reset in many locations since their inception, presenting us with a significant merchandising opportunity ahead.

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?

Yes, we should have probably cut the mid up here. It's only due to CareCentrix. We've had some regulatory follow-up questions. And the closing we previously assumed would be actually at the end of the previous quarter. So we're just delayed in terms of closing. There's absolutely no impact on long-term projections here. I would actually say quite the opposite. Just look at the pro forma sales growth that we're seeing on the two businesses, VillageMD growing 145% and Shields which is actually among mature business even and VillageMD growing at 63%. So Shields is probably substantially ahead of the original plan we have in mind and Village is very much on track. And we can't get involved in anything CareCentrix is doing right now because the acquisition hasn't closed, but our understanding is they're doing quite well as well. So we're actually really excited because this pro forma sales growth and business of 128%. That's why we're investing in exiting the year. We may be going in next year with a $4 billion-plus run rate company with a target within three years to be up $10 billion, approaching $10 billion. And the more we get our arms around this and the more we get into it, the more we're convinced these are very easily achievable targets.

So thanks, everyone, for your time and your interest in WBA. I'm really glad we were able to take several questions today and cover a range of topics, including continued success we’re seeing in our core business, particularly vaccinations and testing. I think you've recognized the momentum in our International segment, our significant progress in our health care business and also to new ways that we're serving our patients and our customers even further. So we're really pleased that you recognize that. I couldn't be more excited about where we’re heading right now. And we’re pleased that the great work of our team can be seen in our strong quarter. We'll continue to execute well across our strategic priorities and keep you up to date on those. But we're really confident in our actions and the plans that we have to exit fiscal 2022 in a position of strength much stronger than before the pandemic, which was our plan all along. Thus, we build our growth engine and really try and drive this sustainable value creation we've been talking about. We'll keep you posted. We've got work ahead of us, but we're encouraged and excited. So thank you, and talk to you again real soon.