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G500-2023-Walgreens Boots Alliance

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Modern Board 2023-Walgreens

The parent company of drugstore chain Walgreens fell seven notches from No. 3 in 2022 to No. 10. But it still made the top 10 thanks to its keen ESG focus and gender parity. Women represent five of its 10 board members. Although CEO Rosalind Brewer sits on the board, it's chaired by Stefano Pessina, former CEO of the Illinois-based retail pharmacy company. Board members include IBM’s global chief data officer, Inderpal Bhandari; former president and CEO of Amylin Pharmaceuticals Ginger L. Graham; and the CEO of the Obama Foundation, Valerie Jarrett. For the second quarter of this fiscal year, the company’s sales increased 3.3% year over year to $34.9 billion—although its net earnings dropped to $703 million compared to $883 million the previous year, which it attributed to lower operating income.

Fortune Modern Board 25

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F500 2023-Walgreens

The pharmacy and health care provider dropped nine spots on the list this year, as demand for services related to COVID—including vaccines, testing, and treatment—dropped sharply. But profits rose by 70%, to $4.3 billion, in the company’s second full year under CEO Rosalind “Roz” Brewer. 
<ul> 
 	<li>In its continuing efforts to expand into health care services, Walgreens announced in October 2022 that it would acquire in full home-health-care company CareCentrix, purchasing the remaining 45% stake.</li> 
 	<li>Like other health care companies, Walgreens has faced intense scrutiny for its alleged role in the opioid crisis. Under a settlement announced in December 2022, Walgreens will pay state and local governments up to $5.5 billion over 15 years to resolve lawsuits that accused its pharmacies of overprescribing opioids. (The company did not admit wrongdoing.)</li> 
 	<li>In March 2023, Walgreens announced that it would not fill prescriptions for mifepristone, a drug commonly used in medical abortions, in states where lawmakers were threatening legal action against use of the drug. That decision drew angry responses from pro-choice lawmakers and activists.</li> 
</ul>

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Aggregate sales hit $37.8 trillion last year—an increase of 19%, the highest annual growth rate in the list’s history.

G500 2022-45-Walgreens Boots Alliance

Rosalind “Roz” Brewer, who stepped in as CEO in March 2021, had plenty to celebrate after her first year in the job. Walgreens Boots Alliance’s profits increased by a whopping 457.5% over the prior year, to $2.5 billion, as the drugstore chain became a major point of sale for at-home rapid COVID tests and COVID vaccines. In October 2021, Walgreens intensified its involvement in the primary care business, investing $5.2 billion to acquire a majority stake in VillageMD. With pharmacists experiencing increased burnout, the company has begun to embrace A.I.; it is on track to open 22 robot-powered prescription-refill hubs. Like other major drugstore chains, the company faces ongoing litigation alleging that its pharmacies helped worsen the opioid crisis; Walgreens’ attorneys have said the company’s pharmacists acted in good faith in filling opioid prescriptions.

Modern Boards 2022 Walgreens

Former Walmart executive and Starbucks COO Roz Brewer took over as Walgreens Boots Allilance’s CEO in March 2021. The company’s lead independent director is William C. Foote, former chairman and CEO of USG Corporation, a building materials manufacturer. Stefano Pessina, the company’s former CEO, is the current executive chairman.  
 
Walgreens earns the No. 3 spot on the strength of high scores for board independence, age dispersion, ESG, and having senior independent nonexecutive directors. (A nonexecutive director is a board member who is not currently serving as an executive at the company. Having a high percentage of nonexecutives on the board is considered a best practice, according to Diligent, because it’s easier for such directors to offer objective advice to the management team.) 
 
Walgreens has won over some analysts and investors with a long-term strategy that includes investment in primary-care clinics, a move meant to increase convenience for customers and further expand the company’s role beyond retail and pharmacy services. The two other former CEOs <a href="https://www.walgreensbootsalliance.com/about-us/leadership-team">on the Walgreens board</a> reflect key areas in which its business is focused. Ginger L. Graham is the former president and CEO of Amylin Pharmaceuticals, and Nancy M. Schlichting is the former CEO of the Henry Ford Health System. Valerie Jarrett, senior adviser to President Barack Obama from 2009 to 2017, is also a director.

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F500 2022 Walgreens

Rosalind “Roz” Brewer, who stepped in as CEO in March 2021, had plenty to celebrate after her first year in the job. Walgreens Boots Alliance’s profits increased by a whopping 457.5% over the prior year, to $2.5 billion, as the drugstore chain became a major point of sale for at-home rapid COVID tests and COVID vaccines. In October 2021, Walgreens intensified its involvement in the primary-care business, investing $5.2 billion to acquire a majority stake in VillageMD. With pharmacists experiencing increased burnout, the company has begun to embrace A.I.; it is on track to open 22 robot-powered prescription-refill hubs. Like other major drugstore chains, the company faces ongoing litigation alleging that its pharmacies helped worsen the opioid crisis; Walgreens’ attorneys have said the company’s pharmacists acted in good faith in filling out opioid prescriptions.

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G500-2021-036-Walgreens

Walgreens Boots Alliance should have been one of the pandemic’s big winners. But the health care and pharmacy company saw revenue rise only 2% last fiscal year as its main retail businesses in the U.S. and Britain struggled to attract shoppers, despite their essential status. WBA is a complex company; in January 2021 it sold off its European distribution business partly to focus more on its pharmacy and retail operations. So far this new fiscal year, the company’s business trends have remained similar to 2020’s. New CEO Roz Brewer is taking a long look under the hood to figure out how to revitalize the company.

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F500-2021-16-Walgreens

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G500-2020-041-Walgreens

The drugstore giant endured a challenging 2019. While full-year sales rose 4% to $137 billion, the company’s shares declined 14%, the worst performance by a Dow 30 stock. Diminished profits from generic drug sales and increased competition from the likes of Amazon and Walmart challenged the drugstore giant—and that was before the coronavirus hit, prompting many to skip doctor visits and the prescriptions that come with them. The company is countering by closing hundreds of stores to cut costs and striking more than a dozen strategic partnerships with companies including Microsoft and Kroger, as well as with Alphabet’s drone delivery service, Wing. In July, Stefano Pessina announced that he will step down as CEO and become executive chairman; a search for his successor is under way.

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F500-2020-019-Walgreen

The drugstore giant endured a challenging 2019. CEO Stefano Pessina described the second quarter as the “most difficult” since the company's 2014 aquisition of European pharmacy group Alliance Boots. While full-year sales rose 4% to $137 billion, the company’s stock declined 14%—the worst performance of the Dow Jones Industrial Average stocks. Diminished profits from generic drug sales and increased competition from the likes of Amazon and Walmart have challenged the drugstore giant. The company is countering by closing hundreds of stores to cut costs and striking more than a dozen strategic partnerships with companies including Microsoft and Kroger, as well as with Alphabet’s drone delivery service, Wing.

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Change the World

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Global business is back. After limping through a worldwide financial crisis and economic slowdown, the 500 largest companies ranked by revenues shattered all sorts of performance records in 2013: They racked up combined revenues of $31.1 trillion, up 2.5% from 2012, and profits soared 27% to nearly $2 trillion. China’s 95 companies (up from 89 last year) posted $5.8 trillion in revenues. The U.S. has four fewer companies on the list than last year but remains (for now) the country leader, with 128 corporations on the list—including No. 1 Wal-Mart Stores—reporting $8.6 trillion in revenues. 

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Walgreens Boots Alliance is a global health care, pharmacy, and retail company. It operates tens of thousands of retail locations under the Walgreens and Duane Reade names in the U.S.; Boots in the U.K., Ireland, and Thailand; and Benavides in Mexico. The company’s health care segment owns VillageMD, a health care provider with primary care, specialty care, and urgent care divisions; CareCentrix, a home health care provider; and Shields, a hospital pharmacy system. Walgreens Boots Alliance stock became a component of the Dow Jones industrial average in 2018; in March 2025, it reached a deal to go private in a sale to Sycamore Partners.

Q1 2025

Walgreens Boots Alliance Company Profile, Stock Price, News, Rankings

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Walgreens Boots Alliance

walgreens boots alliance

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Eric Wasserstrom, Senior Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining us for the Walgreens Boots Alliance earnings call for the Q1 of fiscal year 2025. I'm Eric Wasserstrom, Senior Vice President of Investor Relations. Joining me on today's call are Tim Wentworth, our Chief Executive Officer and Manmohan Mahajan, Global Chief Financial Officer. In addition, Mary Langowski, Executive Vice President and President of Walgreens Health Rick Gates, Senior Vice President and Walgreens' Chief Pharmacy Officer and Tracy Brown, President of Walgreens Retail and Chief Customer Officer will participate in Q and A. As always, during the conference call, we anticipate making projections and forward looking statements based on our current expectations.

Our actual results could differ materially due to a number of factors, including those listed on Slide 2 and are outlined in our latest Form 10 ks 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 slides referenced in this call in the Investor Relations section of the Walgreens Boots Alliance website. During this call, we will discuss certain non GAAP financial measures. These measures are reconciled to the most directly comparable GAAP financial measures and the reconciliations are set forth in the press release.

You may also refer to the slides posted in the Investors section of our website for reconciliations of non GAAP measures to the most comparable GAAP measures discussed during this earnings call. We encourage you to review the comparable GAAP measures and reconciliation to non GAAP values in the other earnings materials we provided. I will now turn the call over to Tim.

Thanks, Eric, and good morning, everyone. We've started the fiscal year by making progress against our financial and strategic priorities despite the challenging backdrop for our consumer. Our operating earnings in the period were driven by cost management initiatives and relative strength in our U. S. Pharmacy services businesses offsetting weakness in our front end retail business as we work to respond to changing consumer behavior.

Among the outcomes we achieved this quarter, in U. S. Pharmacy, we maintained script market share. Our international business continued to show strong returns and our U. S.

Healthcare segment contributed somewhat above expectations on a combination of revenue growth and cost control. Importantly, we started to progress on the opportunities that we consider essential to our longer term turnaround. At the end of fiscal 2024, we identified 4 areas of long term focus and 1 quarter into the current financial year, we are executing against these targets. Let me spend a few minutes walking you through each. The cornerstone of our turnaround is stabilizing the U.

S. Retail pharmacy business and we showed progress across several key planks of this plan. We've begun our footprint optimization program and are pleased with the early results. We're currently exceeding historical script retention rates and have retained the majority of store and pharmacy team members. We expect to significantly ramp the pace of our store closures from the Q1 level.

As a reminder, we have a lot of experience with store closures having closed about 2,000 locations over the past decade. That said, to handle the stepped up pace for the next 3 years, we've assembled a dedicated team to focus exclusively improve upon our historical results. This team has already sequenced the next approximately 450 store closures and at this point we have a high degree of confidence in the execution of this process through the end of 2025. Naturally, we expect our future footprint to support stronger performance. Currently, we see comparable front end sales in our retained store fleet outperforming those stores slated to close this year by approximately 250 basis points and comparable pharmacy scripts by approximately 390 basis points.

To be clear, even within our future footprint, we have to execute on our longer term merchandising and consumer engagement initiatives in order to grow. However, this data supports our view that the smaller footprint will be a healthier one for our company. Also critical to our retail turnaround is our employee experience. Across the enterprise, we are refining the way we forecast, allocate and schedule labor in our stores. Beginning with about 200 stores this month, we're launching new scheduling optimization logic to better deliver on the in store experience for our customers, patients and team members.

The solution deploys labor based on store specific demand patterns, while also accounting for team member availability and preferences. We've received positive feedback from our initial pilot and are excited to roll this logic out to the chain later this year. Winning in pharmacy requires superb operating leverage, so we are also taking steps to improve our pharmacy operations. You may remember at the start of last year, we talked about a pause in the rollout of our micro fulfillment centers to optimize productivity and better engineer our patient and team member experience. This work has yielded successful results.

Our MFCs currently serve about 4,800 stores and shipped volumes from these centers are up 23% year on year, while cost to fill is down by 13%. These improvements allow our pharmacists to spend more time on patient care and clinical services, expanding the critical role they provide. For example, stores supported by MFCs were able to administer more vaccines and complete more medication therapy management for our patients, payers and B2B customers. Looking forward, there's still more work to do to expand this across our national footprint and further lower our operating costs on a per script basis. In addition to improving our pharmacy operating model, a key priority has been to reframe the reimbursement discussion with our partners to focus on fair value for our services.

As an update to last quarter, we have now completed all of the contract negotiations for calendar 2025 and the nature of these conversations has evolved. We've had success in adjusting contract dynamics in our negotiations with our commercial, Medicare and Medicaid plans such as rebalancing brands and generics and carving out new categories for high cost drugs, all in response to the evolving needs of customers and to better align reimbursement with our cost of goods. We are also expanding discussions about being compensated for additional services beyond dispensing and promoting alternative payment models. Notwithstanding our progress, there's still much more that needs to be done over the next several years. Our goal is to serve as many patients and communities as possible, but this is dependent on being reimbursed fairly so that we can maintain our presence as a healthcare provider across the country.

It is also our goal to become a market leader in drug procurement. We are working to ensure that we are procuring drugs at the most competitive price and continue to engage with our partners at Syncora. We are making incremental progress in these discussions as we work towards a more acceptable long term solution. Turning now to our 3rd priority, the turnaround of our consumer retail business. This has been made more challenging by the persistent deterioration in consumer discretionary spending.

Our consumer remains under pressure from accumulated inflation and higher interest rates, and we are seeing continued value seeking and channel shifting behavior. Additionally, the warmer season impacted our Q1 results with reduced respiratory incidences and the associated baskets with those trips contributing to about half of our retail decline versus last year. As we look to effectuate a broader repositioning of our retail business, we're responding to these conditions in real time. Some of our actions like recent changes in our targeted approach to managing store inventory have been successful and our in stock rate is the highest it's been in over 4 years. We are also modernizing the tools we use for assortment optimization to have the right item in the right store to create a customer centric assortment.

We began to introduce new products as a part of our health and well-being focused growth strategy, specifically in categories such as women's wellness, superfoods and sports nutrition. We also continued to pursue own brand penetration, which is up 75 basis points in the Q1 to 17.8%. Coming into this year, we targeted introducing about 300 new own brand products and have introduced approximately 60 in the Q1. As it relates to the evolution of our consumer experience, we are further leveraging our omnichannel capabilities such as home delivery and virtual care to meet evolving consumer preferences. Walgreens has offered same day prescription delivery nationwide for more than 3 years and delivery within 2 hours from approximately 800 stores.

We also offer virtual care in 30 states available to nearly 90% of the U. S. Population. While we expect home delivery to continue to grow across retail and healthcare, we view it as one component of many touch points with our customers including in store, drive thru and online. In summary, we are progressing a number of elements of our retail strategy.

While we are seeing early green shoots, we still have substantial work to do here. Turning to our non core assets, we are underway with the sale process for Village Medical, while continuing to evaluate the best options for Summit CityMD. We are encouraged by the leadership of new CEO, healthcare veteran, Jim Murray. To be clear, our ultimate intent to exit is unchanged and we remain committed to redeploying any proceeds to reduce our net debt and improve the health of our balance sheet. Importantly, we improved free cash flow this quarter with decreased capital expenditures and higher adjusted operating income excluding the non cash impact of sale leasebacks.

Longer term generation of positive cash flow remains a key priority for us in the context of litigation, opioid payments, debt and our current dividend. Continued progress on cash flow will require meaningful action and focus. In conclusion, we've shown progress on our priorities over the past quarter. And while we have a lot of work ahead of us, this progress underpins our belief in delivering a successful turnaround. I will now turn it over to Manmohan to review our financial results.

Thank you, Tim, and good morning, everyone. Overall, Q1 results were better than our expectations. Sales increased 6.9% on a constant currency basis with growth across all segments. Adjusted EPS of $0.51 declined 23% year over year and on a constant currency basis. This decline was entirely driven by prior year sale leaseback gains and lower Syncora equity income.

Absent these two factors, continued cost discipline in U. S. Retail pharmacy and growth across U. S. Healthcare and international businesses were partly offset by challenging U.

S. Retail market trends. GAAP net earnings for the Q1 included after tax charges of $252,000,000 related to footprint optimization program and $152,000,000 non cash charge related to fair value adjustments on variable prepaid forward derivatives related to monetization of Syncora shares. Now let me cover U. S.

Retail Pharmacy segment. Comparable sales grew 8.5% driven by pharmacy and partly offset by decline in retail sales. The footprint optimization program negatively impacted total sales during the quarter. AOI decreased 36% versus the prior year quarter, including $184,000,000 headwind related to prior year sale leaseback gains and lower Syncora equity income. Absent these impacts, AOI declined due to lower retail sales partly offset by continued cost discipline.

Despite a $160,000,000 headwind from prior year sale leaseback gains, adjusted SG and A was flat to last year. This cost improvement was largely driven by our initiatives to modernize our store level demand forecasting and labor deployment tools. Let me now cover U. S. Pharmacy.

Pharmacy comp sales increased 12.7% driven by brand inflation and script volume, partly offset by lower vaccine volume. Comp scripts excluding immunizations grew 3.5% in the quarter and we held script market share. Pharmacy services performed better than our expectations during the quarter as higher margin for COVID-nineteen vaccines was offset by the lower overall vaccine market volume due to the weaker cough, cold and flu season. Pharmacy adjusted gross margin declined versus the prior year quarter, negatively impacted by brand inflation and mix impacts and net reimbursement pressure. NADA changes in November did not have any material impact to the gross profit in

quarter. Turning next to our U. S. Retail business. Comparable retail sales declined 4.6% in the quarter which was lower than our expectations.

There are 2 key drivers. 3rd party data shows flu, cold and respiratory activity over 40% lower compared to the prior year, which paired with the warm weather through November led to a much softer cough, cold and flu season. This dynamic negatively impacted comparable retail sales by approximately 2 70 bps in the quarter, including the impact from the attached basket, which was about half of the comp sales decline. 2nd, the consumer backdrop also remains difficult with the promotional environment and continued channel shift impacting our discretionary categories. Retail adjusted gross margin declined year over year negatively impacted by pricing and promotions as well as lower sales related to cough, cold and flu.

Turning next to International segment and as always I will talk in constant currency numbers. Total sales grew 6.5% with Germany wholesale increasing 11.3% and Boots UK up 4.5%. Segment adjusted gross profit increased 3% with growth across all businesses. Adjusted operating income was up 16% led by a strong retail performance in Boots UK and growth in Germany, partly offset by cost inflation and technology investments. Let's now cover Boots UK in detail.

Boots UK continues to perform well. Comp retail sales increased 8.1% with gains across all categories. Boots.com sales increased 23% year on year aided by a strong Black Friday performance and represented 22% of our UK retail sales. Turning next to U. S.

Healthcare. Sales of $2,200,000,000 increased 12% compared to the prior year quarter. VillageMD sales of $1,600,000,000 grew 9% year on year despite the impact of clinic closures. The increase was driven by growth in full risk lives and fee for service revenue. Shield sales were up 30% driven by growth within existing partnerships.

Adjusted EBITDA for the Q1 was $70,000,000 up sequentially and an improvement of $109,000,000 compared to last year, reflecting the growth at VillageMD and Shields. Turning next to cash flow. Operating cash flow in the quarter was negatively impacted by the seasonal inventory build in the U. S, UK and Germany and legal payments of $137,000,000 Year over year free cash flow improvement benefited from decreased capital expenditures and higher adjusted operating income excluding sale leaseback which does not impact free cash flow. We remain on track to achieve $500,000,000 in working capital initiatives and are currently ahead of our target for $150,000,000 reduction in capital expenditures.

While we do see opportunity for further reduction in CapEx, we have plans for investment later this year in our stores and technology to support them. During the Q1, we reduced our lease obligations by $652,000,000 We remain committed to improving our cash flow generation and net debt position through a combination of operational actions and asset monetization activities. As Tim alluded to, we also continue to evaluate the appropriateness and size of our dividend as part of our capital allocation policy. Our priority for fiscal 2025 is to stabilize our core performance, while we make progress on the longer term strategic and operational turnaround. Our progress to date is reflected in our reaffirmed adjusted EPS guidance of $1.40 to $1.80 We continue to execute on cost savings, inclusive of our footprint optimization program.

We continue to expect $100,000,000 in AOI benefit from footprint optimization program with working capital benefits and sale proceeds from owned locations significantly higher than cash closure costs. We are also encouraged by pharmacy services results to date. We believe the impact of lower than originally expected vaccines volume to be offset by higher margin on COVID vaccines. The recently announced NADA changes are expected to be less than a $50,000,000 negative impact on pharmacy margin for the remainder of the year versus our original expectations. However, as we think about rest of the year, there remain certain risks to our outlook as well.

The weaker coughcoldflu season and continued challenging consumer discretionary spending are impacting our retail sales in the U. S. We now expect retail comp sales for fiscal 2025 to decline approximately 4% to 5% compared to our prior outlook of down 2% to 3%. While the Q1 results are encouraging, we are maintaining our guidance range considering the challenging U. S.

Retail environment. With that, let me pass it back to Tim.

Thanks, Minoan. Before I open the call up for Q and A, let me leave you with a few closing thoughts. Our first quarter results demonstrate that we are executing against our long term strategic priorities. Importantly, we believe our approach to 2025 payer contracting supports our expectation for future stabilization in our pharmacy business and we're still in the early stages of getting to a better outcome on our drug procurement costs. We're also executing on items that are in our control.

Our initial wave of store closures has performed better than expected on multiple facets, including script retention and employee engagement. This gives us increased confidence in our centralized deliberate approach to this process. Also fundamental to our turnaround is financial discipline. While we are pleased with our Q1 results, there is more work to be done as we aim to strengthen our balance sheet and to ensure longer term positive cash flow generation. We remain committed to achieving a retail pharmacy led turnaround underpinned by a sustainable economic model.

Our turnaround will take time, but as the quarter's results demonstrate, we are executing with urgency and believe the actions we're taking will be the basis for sustained value creation over the long term. With that, let's take questions. Operator?

Our first question comes from the line of Lisa Gill from JPMorgan.

Thanks for taking the question. Tim, I'm encouraged by the comments that you made around the levers to lessen reimbursement risk and the fact that contracts for 2025 are done. But can you maybe just give us a little bit more color on, 1, what does that new reimbursement look like? And 2, when I think about contracts are generally 3 years in length, so should I be thinking that for calendar 'twenty five, it's roughly a third of your book of business that has some type of new reimbursement metrics that are tied to reimbursement? That would be the first thing.

And then secondly, just really want to understand the script retention. You talked about script retention being better than expected. Can you maybe just give us a number around that?

Sure. Thanks, Lisa. So the new reimbursement actually, let me answer the other part of your question first, which is you're correct that the arrangements that we have with PBMs typically are multi year. It doesn't mean that we don't, by the way, come back to the table and open them up in response to opportunities or changes in the market, but generally so. We haven't said exactly what percentage it is, but it was a meaningful percentage.

So your number broadly speaking is probably about right. And in terms of what the actual arrangements themselves, how they've evolved and what they look like, I think what you've seen is a couple of things. One is we've been successful in aligning with PBMs to create a category for higher cost drugs, for example, where in the past those drugs would fall into the basic reimbursements and they were massively insufficient in certain cases. We've highlighted GLP-1s as an example. And so that's one of the things that we've done in many of the contracts.

In other contracts, what we've seen is rebalancing of brands and generics to more appropriately sort of reflect the environment today, both in terms of the absolute environment and how it's going to be evolving. Because if you really take a look back and I know I've spoken about this before, what you had was essentially us performing well on generics, but it being insufficient to offset the less than our acquisition cost, brand drug reimbursement or and our less than cost to deliver services. And so we've been able to in many of the contracts again rebalance. And so what I'd say is, each contract we've come to the table to be creative and we have found good receptivity. We still have a ton to do.

Let's be very clear because what you just said indirectly is we have 2 thirds of our contracts left. The good news is many of those are with some of the same payers that we've had success with this year aligning on going forward. In terms of the script retention, we haven't given a number on that, but we do track it internally. And again, it has been much better than our underlying assumption in those stores that we've been closing. And I would point out, we closed about 70 stores in the quarter.

We have a lot left to do this year, but we have a very different process. It has been definitely pushed through our receiving stores so that the patient experience when their store is closing is meaningfully different as they come into a new store. And all of this really drives to longer term pivoting to profitability in the back of our stores. Obviously, other services such as vaccines, adherence programs, other things we may do for pharma or for payers will be incremental to that. But in the current short term, the things that we've done have put us in a position that we wanted to be in at this point.

Thank you. One moment for our next question. Our next question comes from the line of Eric Percher from Nephron Research.

I'd like to stay on the same subject, Tim. And I guess what I would ask is, when you look at the type of pressure that you're facing in reimbursement in 2025, are you finding that the actions you've taken are leading to an absolute improvement reduction in the pressure in 2025 versus what you saw the last couple of years? Or has your focus been on changing terms and contracting in a way that leads to stability today and really positions you for better visibility and the improvement comes in future years?

The answer is both. So there's no question that restructuring our contracts to be, I'll call it future proofed or at least more resistant to the inordinate shifting of risk to us that was simply we had no levers to manage, to be frank, was really, really important.

And again, I think the good news is that our PBM and payer partners also saw that. And in many cases, their markets are sort of looking for these same sort of changed terms in terms of unraveling the cross subsidization that has just gotten so distorted. And so from that standpoint, the construct is important. Also though, in 2025 and of course, we're in the very early days of calendar 2025, setting aside our fiscal calendar, we are now fully in those contracts that were redone. And our projections are continue to be that we see a reduced pressure than we have seen in the past.

That is a continuation of several years. And the number that we achieved in these negotiations was pretty darn close to what we had set out as our goal to experience. And again, I would remind you that's in the context of what we have said is over the next 3 years, this being the first of 3, that we expect to reach a place where what we are taking out of the market in terms of increased value, whether that's new generics or other things, that we would not be giving more than that. And ideally, then we would be subjected to being able to collect on other services and other things that we do to improve profitability in the back of the store. So we have continued to set the stage for that.

2024 was a very important year for it, and we are very pleased with that start on the 3 year process.

Thank you. One moment for our next question. Our next question comes from the line of Charles Rhyee from TD Cowen.

Yes. Thanks for taking the questions. Tim, I hear everything you're saying and it sounds like you are definitely making progress here, particularly in the contracting side. But Timothy, a lot of these are for oneone starts for the calendar 25 year. Given sort of the strength in the fiscal Q1, any reason not to think that we would see then incremental sort of positive step changes as we move through the rest of this year along with the fact that we're still at the early part of the store closure cycle and yet you still maintain guidance.

Can you help us square that a little bit? I understand I'm trying to there's still some uncertainty here, but besides sort of the outperformance in the Q1, it suggests particularly in the pharmacy side that things are at least moving in the right direction relative to at least where the initial guidance was set? Thanks.

Sure. Thanks, Charles. So what I'd point out is that the Q1, which as you correctly say, did not was not impacted by any of the 2025 contracts that we were able to negotiate is it was strong for 2 fundamental reasons. 1 is we had good pharmacy volumes and 2 is we had good, in terms of pharmacy services, particularly vaccines, we had good reimbursement. And so those two things were strong in the quarter and we what you've seen is part of those volumes is closing stores.

We were successful in beating our own targets and moving patients into the receiving stores. So that was good. We closed stores and we didn't just give up share. And again, while the vaccine volumes haven't been quite as strong as we might have expected, The fundamental fact of the matter is that we were reimbursed pretty fairly for those vaccines and we were very successful in getting patients who came into our store to nearly I think 40% of the time or thereabouts actually co administer multiple vaccines to keep themselves safe across several disease platforms. So that all was what carried the quarter.

Therefore, as I look at our full year 2025, what we see based on the contracts results that we've had so far and again, there'll be some perturbations because of mix of or did you get as many patients as you thought with some new business that may have been won, but those are generally small impacts. We would expect to continue to see what we wanted to see in 2025 and nothing incremental to that in terms of things. So we see it being better than it was in 2024, but we ended 2024 strong because of some things that didn't have to do with PBM reimbursement.

Thank you. One moment for our next question. Our next question comes from the line of Michael Cherny from Leerink Partners.

Good morning and thanks for taking the question. Maybe if I can build a little bit on Charles' question there relative to the changing dynamics of the business. Tim, you spent a lot of time on the reimbursement side. Maybe if we can go back to the procurement side and the work you're doing with Syncora, what does that look like qualitatively in terms of making sure that you're maximizing your procurement, especially for a partner that you've had for more than a decade? And specifically within the guidance, are there any changes to procurement that are built into your current fiscal 2025 expectations?

Yes. So we haven't let me start with the second question, which is that we haven't broken down in our guidance what would be contributed by any improvements that we make in our process or our underlying contract with Syncora. That said, you asked about qualitative sorts of things. What I would say is qualitatively, there's a question of having a partner who sits down with us and we have made very clear what our long term aspiration is, which is to be world class at buying drugs and today we're not. And so from that stand and they are in a position to help us and to benefit from that when our volumes increase because we're able to be more competitive in our underlying business model.

And so from that standpoint, what I would tell you is we have relationships with their team. We have spent a lot of time together. We continue to spend time together to navigate a way forward that not only helps us in the short term incrementally, but more importantly transformationally in the long term modernizes the way that we buy drugs in a way that keeps us very competitive and growing, which is good for both parties. And I'm pleased that we've had the discussions we've had. We have a lot more work to do.

Thank you. One moment for our next question. Our next question comes from the line of Kevin Caliendo from UBS.

Guys, thanks for taking my question. First, just on the footprint optimization, is that number going to grow over time? Like how do we think about that as the store closings increase? Is it a forward look as to where we are? Is that like your projection?

Is this $331,000,000 a projection? Or is that like point in time and as the stores keep going that optimization add back grows? And then I guess my second question is your peer announced that they had put in their sort of cost plus model successfully across for 2025. As you see that happening, is there opportunity for you guys? Is that a pivot for the market that maybe can be advantageous to you?

I know you're renegotiating out your contracts, you did that already. I'm just wondering if this changes the market in any way, shape or form positively or negatively for you? Thanks.

Yes, thanks. Let me take the second half of your question first, which is, obviously, we're always pleased when we can see the market moving in a direction that is rational for us in the role that we play. And so CVS' announcement, while I'm not going to comment specifically on details with that, really if you think about what they announced, it's very similar, it's a different way of I guess thinking about what we've been doing our contracts, which is realigning branded generic. Because if you think about a cost plus model, cost plus model, therefore, doesn't have a cost subsidization in it. It has a service fee on top of an acquisition cost.

And from our perspective, that's very much what we have been coming to the table with, willing to both work with the various payers and how they want that constructed and how they want to go to market because not all cases will the payers necessarily go to market with that exact model. They may use it and then alter it to meet what the benefits consultants drive at the self insured employer level, let's say. And so I don't want to

real arcane details of how all that works. But suffice it to say that their announcement didn't surprise us. We haven't announced or put a brand name on our process for unwinding these things in the contracts, but we are doing exactly the same thing. And we again come to the table as a very willing partner to help the payers win in whatever configuration of value works for them, but also more importantly puts us back on track to have a sustainable pharmacy model. As it relates to the stores the store closures, which of course we mentioned 70 or thereabouts in the quarter, but for the full year on track and prepared for another almost 450, I'll let Mohan speak to the underlying financial impacts of that.

So Kevin, as you think about the impact of store closure in the year, we've talked about expecting $100,000,000 of AOI benefit in the year. We're still on track to close 500 locations during our fiscal year 2025. And from a cash flow benefit perspective, we believe the benefit from working capital as well as sales proceeds from some of the owned locations that we're closing and we will sell is going to outpace the closure cost in the year. Now as you think about this, these are in year benefits. And so, yes, as we continue down the path over 3 year plan, these benefits will scale over time.

Thank you. One moment for our next question. Our next question comes from the line of Elizabeth Anderson from Evercore ISI.

Hi, guys. Good morning. Thanks so much for the question. Two questions. You obviously had a very nice improvement in the free cash flow on a year over year basis.

And I know, Mehmed, you talked about the improvement in both working capital and CapEx. Can you talk about your sort of confidence for positive free cash flow on a full year basis? And as a follow-up, can we also talk about sort of the rollout of the micro fulfillment centers? I know you talked about sort of from a broad level that you expect to roll them out to an increased number of stores. But how do we think about the pacing of that as we think about the rest of 2025?

Sure. So I'll let Mohan take the free cash flow question first since it's such a central question to what we focus on every day.

Yes. So Elizabeth on the free cash flow, yes, the year over year cash flows were better in the quarter. A couple of elements driving it. First, the underlying performance, the adjusted EBITDA was higher year over year as you exclude the sale leaseback gains, which does not impact free cash flows. And second is, we did see higher than expected reduction in the capital expenditures.

Actually, we talked about at the beginning of the year targeting $150,000,000 We achieved more than that in the quarter. And in my prepared remarks, I talked about while we do see opportunities on CapEx reduction rest of the year, we also have plans to invest in stores and technology that supports them. So there is that phasing part to think about. In terms of overall free cash flows for the year, we're not sharing guidance on the free cash flows today. But I would say, we're broadly in line with the commentary I provided at the beginning of the year, which had really four factors in there, which is the sale leaseback gains and Syncora earnings reduction does not impact CapEx reduction, which we have achieved in the quarter.

And working capital, we feel good about. And so those elements were broadly in line with.

And as it relates to the multi site the multi fulfillment centers, we're super pleased with where we are in the progress we've made this year on a number of levels. First is in the absolute operating operations of them and the cost to operate them. And we brought in a very, very talented leader, a gentleman named Jon Joplin, who has just done a phenomenal job working with our team to take that to the next level in terms of operating efficiency, but also longer term in terms of the experience for our stores as receivers for this. As you may recall a year ago, we had slowed this way down in part because the experience at the last mile was not what we wanted it to be. It also was not as cost effective as we had hoped.

We have made massive improvements in both to the point where again today we have over 4,500 of our stores that are being serviced by the MFCs. And we believe over the next 12 months we will get that number closer to 6,000 as we continue to again ratchet down the cost so that it is not cost disadvantageous for us to use automation. And importantly, what we've seen in the stores that we have moved on to the platform has been a material increase in our ability to counsel patients, do adherence programs and use our clinicians in frankly more higher order activities that also bring reimbursements that help sustain our model. And so we are very focused on it. As I said, we're not going to give you guidance exactly as to how many or when.

We have several more that we are going to be bringing up. And I can tell you that now when I'm in the stores, it's very exciting. A year ago, they don't want to talk about it. The bags were too big. The bottles were too big.

Now we go into the stores and they're saying, when are we going to get on the platform? Because they've heard from their colleagues that we have meaningfully improved the experience. So it's Because they've heard from their colleagues that we have meaningfully improved the experience. So it's a great example of our broad theme of hopefully you're hearing today, which is execution for the customer and for the shareholder.

Thank you. One moment for our next question. Our next question comes from the line of Anne Hynes from Mizuho.

Good morning. Thanks. I just want to focus on long term just given the new speculation of a potential private equity. I really feel it's important from a stock perspective that investors have some visibility on the timing of when management thinks they can stabilize free cash flow and adjusted operating. Tim, now that you've been over the here for over a year, do you think you can provide more clarity in the long term?

And if not today, when do you think you'll be in a position to provide more clarity or more certainty to investors? That's my first question. And my second question is healthcare obviously did better this quarter both on the revenue and cost side. Can you talk about what sub segments did better than your expectations? That would be great.

So we aren't going to give multiyear cash flow guidance per se. I'm going to let Mohan speak briefly to cash flow though because again I appreciate the spirit of your question. And the fact is that as I think we've said, our focus on our balance sheet and on a sustained positive operating cash flow and doing the things we have to do in order to achieve that are front and center for us and it is a multi year process to position ourselves to be able to consistently and reliably deliver that. So I'll come back and let my mom add any color to that he wants. As it relates to what drove our healthcare, our U.

S. Healthcare assets, it was a great quarter in a number of ways. We saw VillageMD as we said in our prepared remarks grow. So even though we are running a sale process for VillageMD, we have new leadership there in Jim. We have a team that's really functioning very effectively and executing well on the smaller platform because we closed a lot of facilities and we're growing off of that smaller platform and economically we're also seeing the benefits of that focused business.

So that was a piece of the puzzle is VillageMD. The second piece of

a terrific quarter and continues to what you would see if you were sitting in our chair is strong revenue growth that comes with strong profit growth. Also interestingly, we don't talk a lot about it, very strong renewals. So their clients are renewing at rates that are not putting us in a position where we're essentially dropping backwards in terms of the growth platform. In fact, if anything, they are some of the most strong supporters I have ever worked with for a company. When I speak to the CEO of 1 of the largest health systems in the country or I speak to the Head of Strategy, they tell me how important Shield is to them.

So that business is terrific and that shows through in its growth profile. CareCentrix had a good quarter. They're selling through some new relationships that they have. It wasn't material to the over performance, but we're super pleased. Our and again, from our perspective longer term, we see that the opportunity to serve the B2B payers as well as pharma companies is super interesting longer term, but it's nice to see that result this quarter obviously.

And in terms of Momoa, anything you want to add additional to the longer term cash flow outlook and how we would want to communicate that?

a couple of thoughts as you think about the long term from a cash flow perspective. Again, we're not providing guidance on this call, but few elements to consider. 1st, obviously, operating performance as we think about the free cash flow generation as we improve operating performance over time, and that's going to have an impact. I think from a CapEx perspective, we've made a great progress over last year and a half. And so I think we're getting to a good place there.

Walgreens Boots Alliance Q1 2025 Earnings Call Transcript

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