Walgreens Boots Alliance Inc (WBA) — Q4 2023 Earnings Call Transcript

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.

Thanks, Tiffany, and good morning, everyone. The good news you heard yesterday is that Tim Wentworth has agreed to join WBA as our new Chief Executive Officer effective October 23. We are thrilled to have Tim and believe he will make a meaningful contribution to the future of the company with his deep knowledge and expertise in health care. We’ve asked him to make a few comments this morning and I would like to turn it over to him now.

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, 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.

Thanks, Tim. I'm excited and looking forward to working with you. While Tim won't be on the Q&A, I'm sure he will be talking with all of you soon after he joins the company. With that let me turn to our business results. My time here has been very focused on stabilizing our talent, addressing our level of spending relative to the scale of our business, and critically reviewing our capital allocation across the business. With the benefit of having been on the Board, it has accelerated my ability to work with the team and make swift decisions and implement changes across many areas of our operations. We have focused on three near-term operational priorities. We must support our customer facing activities, scrutinize every penny of spend that does not directly benefit the customer, and improve cash management. I will restate what we know and is critical to our future. We believe the fundamentals of our core business remain strong. We dispensed over a billion prescriptions annually across our retail and specialty pharmacies. We play a key role in health care delivery in this country. 78% of Americans live within 5 miles of a Walgreens or a Duane Reade and 58% of us are likely to visit a local pharmacy as the first step for a non-emergency health need. Our trusted brand, deep community relationships and convenience form the foundation of our pharmacy business and our platform for growth as we expand throughout other areas of health care. I see significant opportunity to improve the cost base of this business. During the last 6 weeks, we have taken decisive actions to right size our cost structure. We expect over $1 billion of cost savings during fiscal year 2024 based on the actions we have already taken and are in progress. Examples include reducing our headquarters cost going line by line, expense category by expense category and reducing all non-essential spend. We've reviewed and are reducing areas for contracted or project work. We are altering our store operating hours based on local market trends. We are closing unprofitable stores. We're driving supply chain efficiencies including using AI to more accurately forecast demand and optimizing our transportation network. We're also implementing centralized services that control inventory, reduce workload and provide better customer support. We're taking a hard look at all projects and stopping those that are not essential. These actions reduce expenses, but more importantly, they help focus our energy on the most important needs for the business and for our customers. We are more aggressively managing decisions that impact cash. This includes working capital management, targeting over $500 million of improvement and defining near-term capital expenditure reductions, which we expect will bolster our balance sheet and support our priorities. Let me give you some examples. One major effort at Walgreens has been to introduce a perpetual pharmacy inventory system across the chain. As of last week, it is available to all 9,000 of our stores. This provides complete visibility of our inventory in the pharmacies, and supports our work to reduce excess inventory and free up working capital. It also has many benefits for the pharmacy staff and feedback has been overwhelmingly positive as it simplifies workflows reducing store level activities. Another area where we have reduced working capital and impacted our workflow at the store level is related to regional micro fulfillment centers. These centers allow us to improve product availability, while at the same time reduce total inventory levels. Our 11th Micro Fulfillment Center opened 3 weeks ago. These centers currently support more than 4,300 stores, filling over 2.3 million prescriptions each week across 29 states. As we fill more prescriptions centrally, it frees up our staff to spend more time with customers offering other health related products and services, and it relieves some of the pressure on store staffing. It is important to note that we have paused further expansion of our fulfillment centers to first drive improvements in the rollout so we may fully realize the many benefits the centers offer; working capital reduction, inventory tracking and control, customer service enhancements, workflow improvements and reduction in cost of sale. The team has defined threshold requirements of performance before we move to implement the final five locations. There is significant opportunity to reduce retail inventory and optimize our retail product mix. We are reducing SKUs, addressing slow moving product categories and moving eCommerce shipments to fulfillment by our stores, getting the delivery to the customer in most cases in less than 1 hour. This is augmented by real progress on our own brands, which offers a big opportunity that we have been slow to capture. All of these working capital improvements yield customer service benefits and workflow improvements for our staff. Cash is also influenced by our capital expenditure budgets. And we are reducing our capital expenditures in fiscal year 2024 compared to last year, down approximately $600 million. We have already identified many of the actions required to deliver this improvement and to ensure that we execute all capital and project expenses are now being reviewed and approved centrally. One other important action I want to mention is our return to the office. I have recently communicated that our leaders are expected to return to the office this month, and all other team members are expected back in late November. We're convinced that our ability to act quickly, deliver priority projects and respond to business demands will be improved by being together. With that, I'll hand it over to Manmohan to review our financial results and our outlook for fiscal year 2024.

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 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 a 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 contracts 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 and 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 an 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.

Good morning, and thanks Manmohan. Over the past 2 years, we've acquired or launched new businesses in primary care, multi-specialty, post-acute care, urgent care, specialty pharmacy services, population health and provider enablement. Each of these businesses builds upon our strong foundation in retail pharmacy to tap into high growth health care services. Walgreens uniquely has an advantage in convenience, consumer traffic, independence and trust that will help us with our health plan and provider partners create solutions that deliver better outcomes at lower cost. We connect daily with many of the patients that our plan and provider partners struggle to reach. Our goal is to be the independent partner of choice, not just in pharmacy, but also in health care services, where we can lower costs and help patients. Today, most of our customers come to Walgreens to meet their pharmacy needs. Increasingly and in the future, our pharmacy teams will be a critical part of how our plan and provider partners bend the cost curve. So whether you're a health plan or a health system, you're dealing with one Walgreens and a suite of capabilities and services. Here are some of the ways that our U.S Healthcare assets work with Walgreens to better serve our customers and payer provider and pharma clients. Shields is working with our Walgreens Specialty Pharmacy to convert Walgreens locations to Shields partner sites, collaborating with our contract pharmacies and delivering better adherence for patients on complex specialty drugs, and better value for hospitals. Walgreens Health and CareCentrix are partnering with Pearl Health to support providers who'd like to transition from fee-for-service to value-based care by leveraging Pearl's tech solutions with Walgreens healthcare services, will accept full medical risk as we support physicians and patients by providing post-acute and home health solutions from CareCentrix and population health services for more green, all of this is underpinned by Walgreens engagement of our customers, ensuring them access to better care. Our clinical trials business, which launched just last year, leverages our pharmacy capabilities and data to recruit and execute on clinical trials for our pharma clients. We will engage patients in all markets, including underserved communities. To date, we've signed 15 contracts and continue to see increasing demand for our services. CareCentrix provides an increasing number of post-acute services to health plans. Combining Walgreens convenient locations, and CareCentrix health plan relationships, and patient management opens the door for a significant opportunity in durable medical equipment sales in our stores. The U.S Healthcare segment has ramped to an $8 billion sales run rate in just 2 years. Our health care services aim to deliver better value for our payer and provider partners. We meet patients where they are in order to improve access to lower-cost solutions. While we have made progress on the build out of our health care business, we are not satisfied with the near-term returns on our investments. We will continue to grow in 2024, but with a renewed focus on more profitable growth. We have seen some improved performance in the fourth quarter with adjusted EBITDA sequentially increasing by $83 million. Our results reflect gross profit growth with each quarter this year building on the prior with an enhanced focus on expense discipline. We are taking swift action to unlock the embedded profits at Village and already see the benefit of improved capital and expense management with the addition of our new CFO at Village, Rich Rubino. VillageMD, Summit Health and CityMD will be the most meaningful drivers of growth in fiscal 2024. It has taken us longer than anticipated to realize the cost synergies across the combined assets. We also need to solve for a less efficient cost profile and excellence in execution. We believe that we can best enhance VillageMD growth and value by focusing on increased density in our highest opportunity markets and expanding integration of our digital assets. As we grow, we are constantly evaluating our footprint. With that, we plan to exit approximately five markets and approximately 60 clinics in fiscal 2024. These exits may take a variety of forms, including outright sales and hybrid equity arrangements as examples. As we exit these non-strategic markets, our long-term focus will be on achieving density in those regions with the greatest potential to drive future profitability growth and where we can best serve patients with our consolidated set of assets. The VillageMD model works as evidenced by the consistent performance of reducing total cost of care and improving outcomes in our more mature markets. VillageMD has a net promoter score of 89 which is one point higher than what I shared a year ago. We are also launching new virtual and less capital intensive models. In August we launched a pilot program with CityMD and Duane Reade, where a Duane Reade Walgreens customer can click a QR code and set up a visit at CityMD or a virtual telehealth visit with a clinician. We plan to roll out this digital partnership across Manhattan in the fall. Our VillageMD business is a primary care led risk bearing platform serving all customers and payers focusing on utilizing their technology platform to deliver the best health outcomes and a lower total cost of care. Growth in clinics translates into growth and full risk lives as evidenced by the growth in member months in all markets and mature markets. From fiscal year 2022 to 2023, VillageMD has grown full risk member months by 40% across all markets and 24% in our mature markets. Even with the rapid growth of VillageMD clinics, we're seeing positive proof points of the business's ability to perform in full risk arrangements. For our full risk MA population in three mature markets, we've seen Village bend the cost curve across multiple payers. Going forward as we focus on more profitable growth, we will build on positive clinical margin to deliver contribution margin on a consolidated basis. Next, I'd like to discuss our latest Walgreens Health partnership. We're partnering with Pearl Health, a provider enablement company that can help Walgreens expand our risk offering to more community based primary care providers. Walgreens and Pearl together will provide a management services offering with Walgreens providing prescription fulfillment, medication adherence, immunizations, care gap closures and diagnostic testing. Integrating local Walgreens pharmacies translates into more access to members with chronic illness, and more opportunities to influence better patient outcomes. This partnership enables physicians and health systems to work with us to manage the chronically ill in a much more targeted fashion. Pearl's access to doctors through the ACR reach program creates a care, traffic control system that can deliver on our commitment to provide better health care at a lower price for plans and patients. This model is also capital efficient, scalable and configurable nationwide. With this partnership, we are initially assuming risk for 9,000 lives in 12 markets. Our existing Walgreens health payer relationships have started with deeper service arrangements tied to care gap closures, clinical quality services and screening. Successful performance with these services provides a sound foundation for moving up the risk continuum. We expect to develop a range of risk arrangements that will leverage our assets across the care continuum, including VillageMD, Summit and CareCentrix, all building on our suite of clinical services available at Walgreens. With that, I'd like to pass it back to Ginger for closing remarks.

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 costs 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?

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?

Sure. I think, Lisa, thanks for the question. If you think about the cost reduction, that's only one piece of what we're doing at Village, City and Summit. It's really a three prong strategy. We are right sizing the footprint and getting our expenses in the right place. There are revenue synergy opportunities and we are seeing consistent growth in core revenues, which indicate that there's some opportunity on the margin side, which we are quickly getting after. And then the rest of U.S Healthcare, actually, we're seeing substantial growth and building profitability and CareCentrix, Shields, our Analytics Business, or U.S Healthcare business. So we're seeing substantial demand clinical trials is doing quite well. And so I think as a portfolio, we are very confident in our ability to perform in '24. If you look at those revenue numbers, we've got the revenues. Now we're going to get at some more effectively some of the embedded profits.

And then does this tie 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 the 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?

Yes. And, Lisa, this is Rick, it's a great question. And I'll kind of give the building blocks to script growth that we're expecting this year. Obviously, we saw a weaker end of the fiscal year from market growth, specifically around cough, cold, flu, some of the respiratory and some of the Medicaid redetermination which showed some lower utilization from consumers. So the primary driver is the market coming back in line with what the expectations are from IQVIA and others. And so that's really what we've seen as we've started into the first quarter of the fiscal year. And market is going to be a big underpinning to what we do. But we continue to advance our adherence programs that are really driving incremental script growth, partnering with health plans and others to really drive better adherence. And obviously, that does help on the script side. You're also going to see some access initiatives, especially going into calendar year '24, which should be some tailwind for us. I think some change in dynamics in the marketplace or having individuals choose more open access and things that should give us access differently than what we've seen in the past. And the last one would be that we're really focused on potential profile buys and opportunities, given some of the changes in the marketplace. So I think there's a bunch of drivers that really give us confidence that we have tailwinds behind us in the script growth.

Thank you for the question. I would like to ask about Tim joining the team. It appears that the hiring process was relatively quick. Could you provide more details on when he was identified? Additionally, since he will be starting in about a week and a half, how involved will he be in the business planning for the upcoming year? Also, you've shared extensive information on enhancing cash flow through working capital reduction. What are the Board's thoughts on the current dividend policy?

Thank you, Charles. I want to begin with the process regarding Tim. As a Board, we collaborated with a Global Executive Search firm and spent considerable time discussing the key characteristics, attributes, and experiences needed for someone to lead an organization of this size and influence. We reviewed numerous candidates, undertaking an extensive search process. We ultimately narrowed it down to a few top candidates, with personal interviews conducted. We performed thorough background and reference checks on the primary candidates and engaged in broad discussions about philosophy, experiences, future aspirations, market dynamics, necessary capabilities, and the ability to manage a complex global organization. As Tim mentioned, every Board member has participated in this process. We believe we've conducted a comprehensive evaluation and concluded that Tim stands out as a remarkable candidate in many ways. We were particularly focused on finding someone with a deep background in healthcare, and Tim brings experience from pharmacies, provider networks, and payer distribution. He has a strong understanding of the feedback we receive from the market regarding Walgreens and its diverse businesses. Furthermore, he has experience in managing scale and complexity, which is crucial for a $140 billion global business with many opportunities. Effective management of both strategic and operational aspects is essential. In his brief comments, it is clear that he is patient and customer-focused, which is of utmost importance. His passion for the business, the understanding of human lives, the significance of our work, and the dedication to safety, compliance, and quality are significant advantages for the company. I am personally excited, having spent many hours with Tim, and we are continuing our discussions. We will start working together next week in an extended session. The Board is enthusiastic, reflecting Tim's excitement as well, and we all look forward to his start on the 23rd. Regarding your second question about Tim’s involvement, he only recently reached an agreement with us, so he has not been involved in the business or operations and was not part of forming the 2024 plan. However, we’ve had extensive conversations about our business opportunities and challenges, and he is coming in with a clear understanding. He is not part of this current plan, but he is aware of the possibilities and our assumptions and is eager to get started. Your third question concerned the Board's discussions about the dividend. This is a crucial topic for the company, and we have a comprehensive review process that we follow every year. At this time, the Board has made no changes to the dividend policy.

Yes. Good morning, guys. This is kind of a two-part question that go together. I guess, can you talk about 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. It's taking $0.5 billion or so. 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?

Yes, absolutely. Let me begin with the cost savings. We anticipate achieving at least $1 billion in savings, primarily from our U.S. Retail Pharmacy division. There are several components to consider. We're reviewing all expenses related to headquarters support, examining each line item closely. Additionally, we are closing unprofitable locations, which will positively impact our results this year. We have also adjusted store hours in select areas to better align with local market demand. Another significant aspect involves assessing all project expenditures across the company; our goal is twofold. First, we want to enhance our focus on customer-centric initiatives to create more value. Second, we aim to reduce expenditures reflected on the income statement. On the capital expenditure front, if we look back to fiscal year '22, we recorded around $1.4 billion. This increased by $300 million over a previous year, reaching a peak of $2.1 billion last year. Our objective now is to return to more typical levels of CapEx. Two factors will contribute to this reduction. First, as John mentioned, we're concentrating on profitable growth within our healthcare segment, which will lead to lower capital expenditures in that area. Second, for the U.S. Retail Pharmacy, we have initiatives like Micro Fulfillment Centers and our digital transformation, with some of these efforts beginning to yield results. Ginger noted that we are pausing the Micro Fulfillment Center project to enhance productivity and achieve the desired outcomes. These are some key elements influencing our CapEx reduction.

Thanks and thanks for taking my question. The 60 clinics that are closing, sort of what was the driving factor there? Why were they not successful? Was it competition in the marketplace? Was it payer relationships? Like why weren't you able to drive volumes in those markets? What happened there? What can you learn from that?

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.

Okay, that's helpful. Can I just ask a quick follow-up on cash flow? Is the right way to think about it? I know you didn't provide fiscal '24 free cash flow, but should we take the $655, add the $600 million and reduce CapEx? A $500 million benefit in working capital and then adjust for net income, is that like a rough range of where you think it should come out for fiscal '24?

Yes, certainly. At the end of the meeting, it's important to note that we typically do not offer guidance on free cash flows. However, we do anticipate significant growth. We've identified two major drivers year-on-year and are also considering a third related to U.S. Healthcare. For fiscal '24, we expect to break even on EBITDA at the midpoint of our range, which represents a noteworthy year-on-year improvement in cash flow. Additionally, we are examining other offsetting factors. Overall, we expect meaningful improvement with these three key drivers in mind.

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 you will lose money?

Sure. First of all, we have essentially stopped opening new clinics. However, the J curve primarily applies to Village. With Summit and City, we have consistent revenue growth that balances the situation and helps improve our profit profile. Additionally, we are experiencing solid growth quarter-over-quarter from Shields, CareCentrix, our Analytics Business, our Clinical Trials business, and U.S. Healthcare. It's important to view it as a portfolio. The J curve specifically affects the new clinics, especially at Village, but we have several other opportunities and advantages in momentum and an improving margin profile across our other businesses.

Hi everyone. Thank you for the question. A significant topic this year has been utilization. You have a mixed model that includes both fee-for-service and value-based care. Can you explain how you see changes in utilization affecting the overall business at VillageMD? Additionally, could you share any more information on your plans for deleveraging this year? Thank you.

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.

Yes, and I think on the question around deleveraging, couple of thoughts there. Number one, we're absolutely committed to our investment grade reading. And as we've said, one of the key areas of focus here in the last 6 to 8 weeks for me and Ginger has been cash management. I've gone through that as to how we're going to drive the improvement there. And last I would point out is we continue to have a portfolio of investments which we look at simplification and optimizing that provides us flexibility.

Thank you. I'd like to turn to the topic of labor and ask to what extent you're seeing headwinds from labor cost? And I think there's probably a bit of a reminder on the one-time costs you saw on fiscal year '23 versus fiscal year '24?

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.

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.