Walgreens Boots Alliance, Inc. (NASDAQ:WBA) Q3 2023 Earnings Call Transcript June 27, 2023
Walgreens Boots Alliance, Inc. misses on earnings expectations. Reported EPS is $1 EPS, expectations were $1.07.
Operator: Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Walgreens Boots Alliance Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Tiffany Kanaga, Vice President of Global Investor Relations, you may begin your conference.
Tiffany Kanaga: Good morning. Thank you for joining us for the Walgreens Boots Alliance earnings call for the third quarter of fiscal year 2023. I’m Tiffany Kanaga, Vice President of Global Investor Relations. Joining me on today’s call are Roz Brewer, our Chief Executive Officer; James Kehoe, our Chief Financial Officer; and John Driscoll, President of U.S. Healthcare; Rick Gates, Senior Vice President and Chief Pharmacy Officer at Walgreens will participate in Q&A. All references to the COVID-19 headwind on today’s call include U.S. vaccines, drive-through tests, and OTC tests. As always, during the conference call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on slide two and those outlined in our latest forms 10-K and 10-Q filed with the Securities and Exchange Commission.
We undertake no obligation to publicly update any forward-looking statement after this presentation, whether as a result of new information, future events, changes in assumptions or otherwise. You can find our press release and the slides referenced on this call in the Investors section of the Walgreens Boots Alliance website. The slides in the press release also contain further information about the non-GAAP financial measures that we will discuss during this call. I’ll now turn the call over to Roz.
Roz Brewer: Thanks, Tiffany, and good morning, everyone. I’d like to start today’s call with an acknowledgment that our performance in the third quarter did not meet our overall expectations, and we are disappointed to have to change our fiscal 2023 guidance. While we achieved good sales growth and return to adjusted earnings growth in the quarter, several dynamics created margin pressures that we are factoring into our full-year outlook, We have seen changing market trends that have consumers prioritizing value in response to a more uncertain and challenging economic environment. There has been a steeper drop off in COVID vaccines and testing with the end of the public health emergency. We are also experiencing a slower profit ramp for U.S. Healthcare.
Importantly, we remain committed to our strategy through immediate actions to accelerate our path to profitability and unlock long-term value. I remain confident in the long-term trajectory of our transformation, which is underpinned by significant progress against each of our four strategic priorities. We are continuing to transform and align our core business with advancements in our tech enabled pharmacy operating model. Today, we are announcing a scalable partnership with TelePharm to expand telepharmacy services; improve access to care; and provide flexibility for how and when patients engage with our pharmacists. Our model is also supported by our micro fulfillment centers, covering over 40% of our Walgreens store footprint. In U.S. retail, our flat year-to-date comp sales have successfully lapped last year’s record 8.8% growth and retail gross margin is up over 100 basis points yet again.
We have also made significant progress on building our next growth engine in healthcare, rapidly establishing our portfolio of assets across the care continuum. VillageMD acquired Summit to create a leading independent care delivery platform, and we accelerated the full acquisition of Shield and CareCentrix. This segment has gone from zero sales contribution just two years ago to a run rate of $8 billion in the third quarter of 2023. To fund our transformation and focus the portfolio, we have realized $4.1 billion in proceeds from the sale of ABC shares this fiscal year and also exited our Option Care Health position for $800 million in proceeds. Finally, we have continued to invest in strategic talent and capabilities, most recently, strengthening VillageMD’s bench to welcome CFO, Rich Rubino.
Turning to the third quarter, WBA returned to adjusted EPS growth, up nearly 4%. Third quarter sales were solid, growing almost 9% in constant currency. U.S. comp sales were up 7%. Let me call out U.S. retail digital sales, up 19% on top of a 25% gain last year with 3.7 million same day pickup orders. International was also notable, up 6.9% in the quarter. It is clear that consumers continue to appreciate the value, convenience and range of services delivered by Walgreens and Boots. Our increased expense discipline in the quarter only partly offset outsized margin pressure, and earnings growth was held back by three external factors. First, we saw lower-than-expected COVID-related demand, we had called out COVID as a wildcard heading into the quarter and have unfortunately seen less patient willingness to vaccinate.
Walgreens administered 800,000 COVID-19 vaccines in the quarter, down 83% year-on-year and testing volumes are also down sharply. We are in turn taking the prudent [Indiscernible] of further reducing our expectations for COVID contributions going forward. We are currently projecting to administer 9 million to 10 million COVID vaccines next year in line with the typical flu season and compared to 12.5 million COVID vaccines expected in fiscal 2023. Second and similar to other retailers, we’ve been impacted by the rapid softening of the macro environment and a more cautious and value-driven consumer. Our customer is feeling the strain of higher inflation and interest rates, lower SNAP benefits and tax refunds, and an uncertain economic outlook.
They are pulling back on discretionary and seasonal spend and responding strongly to promotional activity. For example, promotional unit is running up 10% in the retail channel, including a sharp increase over just a five-week period, while non-promotional units fell 8%. Let me add that we see the retail pricing environment as remaining rational. We have also seen some pressure on industry script volume excluding COVID, which may be related to these broader consumer headwinds. [Day fall] (ph) adjusted market growth excluding immunizations has slowed almost 2 percentage points from February to May. Our core retail pharmacy business is resilient and relatively well positioned in times of volatile consumer confidence. However, we’re not immune to these external pressures and have trimmed our expectations accordingly, while at the same time ramping up our efforts around cost savings.
Third, we’ve experienced a drag from a recent weaker respiratory season. We are feeling the effects through our script volume through our front of store sales, especially in the higher margin cough cold flu category and in CityMD’s traffic trends. These trends are likely to persist into the fourth quarter against last year’s category strength. Importantly, we achieved strong quality of earnings considering a 4.7% adverse net impact to adjusted EPS from COVID the sale of ABC shares, sell in leaseback, incentive accruals, and tax. This trend gives us line of sight to accelerating adjusted operating income growth in the fourth quarter. Let me turn to our updated guidance. We now expect fiscal 2023 adjusted EPS at $4.00 to $4.05, reflecting consumer and category trends, lower COVID-19 contribution, and a more cautious macroeconomic forward view.
This guidance represents core earnings to be flat to up 1%, excluding COVID and currency. We are also providing preliminary fiscal 2024 commentary. Let me be clear, there are some factors impacting us today that are likely to extend into next year, namely the macroeconomic-driven consumer pressure and COVID headwinds. We are closely watching emerging challenges to consumer spending and sentiment, such as the end of fiscal stimulus and the resumption of student loan payments. There are other factors that are more specific to our business today and should not be annualized into fiscal 2024, such as the weaker respiratory season. Most importantly, we have undertaken several aggressive initiatives to enhance profitability and cash flow into next year, especially in our Healthcare business.
We expect low-to-mid-single-digit adjusted operating growth in fiscal 2024 with the U.S. Retail Pharmacy and U.S. Healthcare Businesses more than offsetting headwinds from COVID, sale and leaseback and ABC. AOI growth should outpace adjusted EPS, due to offsets from higher tax and non-controlling interest. We will provide a more detailed discussion of 2024 guidance when we report fourth quarter and full-year 2023 results. The positive operating growth trends with improving quality of earnings support our continued confidence in building to sustainable long-term low-teens adjusted EPS growth over time. To drive shareholder value, we are taking the following immediate actions to enhance profitability and accelerate our journey. First, we are raising our transformational cost management program savings goal to $4.1 billion, this includes $800 million of savings in fiscal 2024.
Second, we have implemented capital and project spend reductions, and we’ve launched a working capital optimization program. Third, we are pursuing portfolio simplification at an even faster pace. Fourth, we are announcing several specific actions to accelerate U.S. Healthcare’s path to profitability focused on VillageMD and Summit Health. We are also accelerating the synergies between our U.S. Healthcare segment and our core Walgreens business. We have a unique opportunity to improve local healthcare and wellbeing in this country. The flywheel of healthcare and retail pharmacy working together will deliver more affordable, accessible, quality healthcare to our communities and will also deliver sustainable shareholder value. It starts with our trusted brand and pharmacist, national footprint, and digital offerings.
58% of Americans are likely to visit their local pharmacy as a first step when faced with a non-emergency medical issue. Add to that, our leading assets across the care continuum. VillageMD, Summit, Shield, and CareCentrix and our early work with health corners and clinical trials. We’ve created a platform at scale that is absolutely proving to help health plans and patients improve outcomes and lower cost. Our teams are expanding partnerships and driving greater market access, which is the next step to getting our will to turn. As healthcare and retail pharmacy jointly serve consumers, we will deepen engagement and reinforce our trusted brand. Let’s look at a few tangible examples of how we’re driving that value through our integrated portfolio.
In partnering with VillageMD, our team based healthcare delivery enhances adherence. We are building digital connections and standalone clinics. More than 30 in Arizona and Texas are now supported by Walgreens pharmacies virtually with more coming online in Georgia this summer. To make the virtual experience seamless, we’re piloting a healthcare concierge program to provide extra care coordination. We are also exploring an integrated pharmacist ambulatory care model. The pilot has driven over 40% reduction in hospital readmissions over 30-days and a material A1C reduction in diabetic patients. Remember also that roughly 50% of patients have co-located VillageMD clinics opt to get their prescription filled at Walgreens. VillageMD co-located sites that have been open for over [Technical Difficulty] per day.
CareCentrix and a leading national healthcare services provider are partnering to offer a turnkey durable medical equipment benefit management solution and point-of-care platform for health plans. This should drive medical and administrative savings, while improving the overall member experience. Shields and Walgreens are working together to establish Walgreens as the single contract pharmacy for health systems. Walgreens is also converting existing specialty pharmacy locations to Shield partners to increase access to specialty drugs and services. Finally, at Walgreens Health, we are exploring new healthcare service lines such as additional diagnostic services and data analytics and insights. We’ve already seen strong results with our at-home testing programs such as the one we conducted last fall with Blue Shield of California to boost patient access to colorectal cancer screening.
Members due for screening had the opportunity to visit Walgreens Pharmacy locations across the state to pick up an at-home kit. The test completion rate was 50 percentage points higher when members chose pharmacy pickup, compared to those that received a kit in the mail. Based on these successful results, we are launching similar at-home testing programs with other payer partners. In summary, our healthcare and retail pharmacy businesses are working together to improved outcomes and lower cost as only Walgreens can do. I’m not satisfied by today’s headline guidance revisions. However, I see the enterprise approach coming together to deliver sustainable value to consumers, to our partners and to shareholders. We have the right strategy. We are driving good progress across each of our strategic priorities and we are taking appropriate measures to account for the recent macroeconomic challenges and uncertainty.
Through the necessary actions discussed today, we are pushing harder toward profitability with a strong sense of urgency, while continuing to reimagine local healthcare and wellness for all. With that, I’ll hand it over to James to provide more color on our results and our outlook.
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James Kehoe: Thank you, Roz, and good morning. In summary, while we returned to adjusted EPS growth in the third quarter, earnings were below our expectations. As we encountered lower COVID contributions, shifting consumer behaviors, and a recent slowdown in respiratory incidences. Overall, we delivered 8.9% sales growth on a constant currency basis ahead of our plan, led by our U.S. pharmacy business, up 10%. Our Boots U.K. retail business, which delivered a solid 13% comp and our scaling healthcare business, which added $1.4 billion in sales versus the prior year. Adjusted EPS increased 3.6% on a constant currency basis despite a 19 percentage point headwind due to a lower COVID-19 contribution and 8 percentage points from reduced ownership of AmerisourceBergen.
These were partly offset by favorability’s from sale and leaseback, incentive accruals, and tax. All of these items net out to be a 4.7 percentage point headwind to EPS growth and this demonstrates overall good quality of earnings in the quarter. As Roz discussed, we are lowering our fiscal ‘23 adjusted EPS guidance to $4.00 to $4.05. This updated outlook reflects consumer and category trends, a lower contribution from COVID and an overall more cautious forward view given the continued macroeconomic uncertainty. Later, I will provide more color around the key assumptions underpinning our revised guidance. But first, let’s look at the third quarter results in more detail. Adjusted operating income increased 0.6% on a constant currency basis.
This included a 22 percentage point headwind from COVID-19 and a 7% drag from reduced AmerisourceBergen ownership, partly offset by sale and leaseback gains and incentive accruals. All of these items net out to an approximately 6% headwind to AOI growth. GAAP net earnings of $118 million declined a $171 million, compared to prior year. The current quarter included a $323 million after tax impairment charge related to pharmacy licenses in the U.K. Adjusted net earnings increased 3.4% on a constant currency basis to $860 million. Now let’s move to the year-to-date highlights. Year-to-date sales increased 4.8% on a constant currency basis. Adjusted EPS was down 20.7%, reflecting a lower COVID-19 contribution of 20 percentage points and reduced AmerisourceBergen ownership of 3 percentage points.
GAAP earnings were a loss of $2.9 billion, compared to net earnings of $4.8 billion in 2022. With the current year including a $5.5 billion after tax charge for opioid related claims and lawsuits. Now let’s move to the U.S. Retail Pharmacy segment. Sales increased 4.4% in the quarter with comp sales up 7%. Adjusted gross profit declined 3.2% year-on-year, reflecting a 5 percentage point negative impact from COVID-19, a 5% reduction in SG&A expense more than offset the gross profit decline and led to AOI growth of 8.4% before the inclusion of AmerisourceBergen equity income. The sell down of our ABC stake led to a slight AOI decline of 0.4%. Let me now turn to U.S. Pharmacy. Pharmacy sales increased 6.3% and advanced 9.8% on a comparable basis, driven by both script growth and brand inflation.
Excluding immunizations, comp scripts grew 2.8%, a slight deceleration from the prior quarter and reflecting broader prescription market trends. As expected, adjusted gross profit declined year-on-year, although excluding COVID, gross profit increased as script growth and lower cost of goods sold more than offset reimbursement pressure. Turning next to our U.S. retail business. Following several quarters of very good performance, the retail business encountered some headwinds in the third quarter as the consumer navigated through a difficult macroeconomic backdrop. Excluding tobacco, comp sales grew 0.2%, held back by 90 basis points due to holiday seasonal weakness as consumers pulled back on discretionary spending and 80 basis points due to lower sales of COVID-19 OTC test kits.
We saw solid growth in grocery and household, up 4.7% and beauty, up 3.7%. Cough cold flu sales were flat, but slowed significantly in May, due to a decline in respiratory incidences. IQVIA fan data shows flu, cold and respiratory activity, down 8% in the third quarter, versus a 15% increase in the second quarter with May down in the mid-20% range. Following several consecutive quarters of year-on-year margin expansion, retail gross margin came under modest pressure in the third quarter. We’ve seen similar trends as the broader market with our promotional units, up around 7% in the most recent 13-week period. However, on a year-to-date basis, gross margin has increased by more than 100 basis points, driven by effective margin management. Turning next to the International segment and as always, I’ll talk to constant currency numbers.
The international segment continues to perform very well. Sales increased 7% with good growth across all international markets. Boots U.K. was up 10%, and Germany wholesale grew 4%. Adjusted operating income of $208 million increased 21%, despite a $40 million year-on-year headwind from sale and leaseback transactions. Let’s now look in more detail at Boots U.K. Boots U.K. sales advanced 10%, pharmacy comp sales increased 6%, and comp retail sales grew 13%. And this comes on top of a 24% comp in the same quarter last year. Boots grew market share for the ninth consecutive quarter with gains across all categories. We successfully launched Future Renew, a range of innovative new skincare with very positive consumer response. This product line was recently launched in Walgreens.
Boots.com sales grew 25% year-on-year, and have more than doubled versus the equivalent pre-COVID quarter. Over 14% of our U.K. retail sales now comes from Boots.com. Turning next to U.S. Healthcare. The U.S. Healthcare business continues to rapidly scale with sales reaching $2 billion more than doubling from the prior year, pro forma sales growth was 22%. VillageMD sales were $1.5 billion, up 22% on a pro forma basis. Legacy VillageMD growth was driven by expansion of the clinic footprint, with an additional 93 clinics opened in the past year and the ongoing maturation of existing clinics. Summit Health was, however, impacted by a weaker respiratory season that led to fewer CityMD visits and fewer referrals across the Summit Health Network.
Shields delivered another strong quarter, up 35% and driven by contract wins, including the addition of six new health system partners and further expansion of existing partnerships. CareCentrix sales were approximately $360 million with pro forma sales growth of 15%. Adjusted EBITDA reflects weaker-than-expected results at VillageMD and Summit Health, partly offset by continued growth at Shields. CityMD has been impacted by lower visit volume, whereas the VillageMD EBITDA loss reflects new clinic expansions. We anticipate improvement in the fourth quarter as we build patient [tunnels] (ph) and traffic and align the cost profile with sales. Let’s now look at some of the key metrics for the U.S. Healthcare Business. VillageMD managed 850,000 value based lives at quarter end, reflecting year-over-year growth of approximately 27% in the legacy VillageMD business and the addition of 309,000 value based lives from Summit.
Total value based lives include 179,000 full risk lives. Our clinical trials business continues to expand with eight contracts signed and a robust pipeline. Turning next to cash flow. We generated $1.2 billion of operating cash flow, with free cash flow of $116 million. The year-over-year decline reflected lower earnings due to COVID-19, a lower contribution from working capital and increased capital expenditures related to growth initiatives. Looking ahead, we are reprioritizing capital projects to reduce plan spend and are rolling out of comprehensive set of working capital optimization initiatives to enhance our cash generation. Turning now to guidance. We are updating our full-year ‘23 adjusted EPS guidance $4.00 to $4.05, a constant currency decline of around 20%.
Excluding the impact of COVID-19 and ForEx core adjusted EPS is flat to up 1%. The EPS contribution from COVID-19 is $0.23 lower than our original assumptions at the start of the year. At the beginning of the fiscal year, we expected 16 million vaccinations. And despite the spring booster recommendation, we have reduced our full-year expectations to 12.5 million vaccinations. COVID testing has decelerated at an even faster pace. Additionally, we have incorporated the impacts of a more cautious consumer outlook, leading to a $0.20 to $0.25 impact as we realign our fourth quarter sales and margin goals to reflect recent trends. Finally, while reducing our ownership stake in AmerisourceBergen has improved our debt position. It has, however, led to a $0.05 headwind.
Let me now walk you through our assumptions for each of our business segments. Starting with U.S. Retail Pharmacy, we now project sales of around $110 billion, up low-single-digits year-on-year. AOI is projected at $3.8 billion to $3.9 billion, a decline of 22% to 24%, reflecting a 23 percentage point headwind from COVID-19 and 3 percentage points from our reduced ownership stake in AmerisourceBergen. Excluding these two impacts, AOI growth is up 2% to 4%. Turning next to the International segment, which is performing well this year. Sales are projected to grow 6% to 8% on a constant currency basis, reflecting strong execution, especially in the U.K. Adjusted operating income of around $900 million, represents constant currency growth of approximately 30%.
This performance is towards the top end of our original expectations. Our revised outlook for U.S. Healthcare reflects lower visits at CityMD, the continued ramp up of new VillageMD sites and the slower integration of prior acquisitions into Summit’s multi-specialty business. We expect sales of $6.3 billion to $6.8 billion, an increase of $4.8 billion versus prior year and growing approximately 25% on a pro form a basis. We are projecting an adjusted EBITDA loss of $340 million to $380 million, including the factors I mentioned earlier. While the profit performance so far this year has been below plan, rapid correction actions are underway, and we expect to drive sequential adjusted EBITDA improvement in the fourth quarter and beyond. Turning now to our corporate assumptions, our full-year tax rate is now expected to be around 12% and this basically reflects the favorability we have seen so far in fiscal ‘23, with some of the benefits reversing in the fourth quarter.
More specifically, we expect the fourth quarter tax rate of around 23%. Full-year guidance of $4.00 to $4.05 implies fourth quarter EPS of approximately $0.70 to $0.75. The result is weighed down by a much higher average tax rate and the fourth quarter typically is the lowest to extrapolate the quarter. As such it would be incorrect to extrapolate the quarter as a proxy for 2024. First, normalizing for the tax rate would result in an additional $0.08 in the quarter. Second, seasonality impacts all of our businesses. Looking back over the past five years, and excluding the impact from COVID-19 and ABC, approximately 20% of our adjusted operating income comes in the fourth quarter. To conclude, adjusting the fourth quarter for tax rate, an accounting for seasonality would result in annual adjusted EPS of around $4 per share.
Next, I would like to cover the key factors that will influence 2024 performance. Overall, we expect the long-term tailwinds to outweigh the near-term pressures. Some of the challenges we faced in fiscal ‘23 are expected to continue into ‘24. We do expect to see some continued weakness in consumer spending, together with moderate increases in labor costs. While reimbursement pressure has eased somewhat over the past 18 months, it is not going away and we will continue to identify way to offset the pressure. In addition we expect lower sale and leaseback activity in fiscal ‘24, and the tax rate will be higher as we lap a very favorable fiscal ‘23 performance and higher statutory tax rates are introduced in both the U.K. and Switzerland.
However, we have multiple profit drivers and initiatives that will drive sustainable profit growth Our U.S. Healthcare business will be a significant profit driver, including the first full-year of Summit Health, a maturing VillageMD clinic profile and strong actions to accelerate their path to profitability. We expect continued script volume growth and strong contribution from front of store initiatives. These include own brand penetration gains and the further expansion of our successful category performance improvement program. Lastly, the transformational cost management program will deliver at least $800 million of savings next year. Next, let’s take a deeper look into 2024. We expect fiscal 2024 adjusted operating income to grow low-to-mid-single-digits, led by the U.S. Healthcare segment and solid execution in U.S. Retail Pharmacy.
We are expecting U.S. Healthcare to be the largest driver of total company AOI growth, as the business is rapidly gaining scale, and we will now accelerate the path to profitability. John Driscoll will provide much more color on the immediate actions we are taking to accelerate EBITDA delivery. We expect U.S. Retail Pharmacy AOI to be flat to down slightly, due to lower COVID contributions of approximately $290 million and a $260 million step down in sale and leaseback gains. Absent these items, we anticipate solid core growth led by transformational cost management program savings and expanding gross profit. Finally, we expect international AOI to decline year-on-year as we lap sizable real estate gains and lose the relatively small AOI contribution from the sale of our business in Chile.
Core profit growth will be flat as the business manages through high levels of cost and labor inflation. That being said, our International business is well positioned for long-term success with market share gains and an advantaged and growing e-commerce presence. We do expect AOI growth to outpace EPS, due to a higher tax rate and non-controlling interest. Next, we’ll look at U.S. Pharmacy in more detail. Excluding COVID, we expect to grow pharmacy gross profit. Underpinning the growth is our differentiated tech enabled operating model, which frees up capacity for pharmacists to spend more time on clinical programs and supporting our expanding pharmacy service offerings. We are projecting solid script growth benefiting from improved operating hours, increased access to lives and growth in specialty.
We are integrating AllianceRx community-based specialty pharmacies and Shields under a new go-to-market strategy with a payer agnostic provider-centric approach. In addition, we have launched multiple programs across our pharmacy and U.S. healthcare business and continue to see engagement from payers and partners for clinical quality initiatives that leverage our integrated assets. Moving now to our U.S. Retail business. Gross profit growth will be driven by low-single-digit comp growth and continued margin improvement. We are creating significant value through category performance management, where assortment decisions should deliver at least $200 million of savings in fiscal 2024. We are accelerating our own brand penetration through innovation and increased points of distribution and display, our own brands have margins that are significantly higher than national brands.
We are creating more value for consumers as we scale our e-commerce platform and evolve our store formats, including a new digital forward store concept and a health and wellness focused store with favorable early feedback on both concepts. Let me now hand it over to John to discuss our U.S. Healthcare strategy and profit growth drivers.
John Driscoll: Good morning. As Roz and James outlined, while we’re confident in the range and scale of our healthcare business, we are disappointed with the pace of our path to profitability. U.S. Healthcare missed targets due to VillageMD and CityMD underperformance. Directly related to reduce COVID, cold and flu season and softer market demand. We’re taking immediate actions to drive improved profitability. We anticipate this year will remain a transition year as we take action to deliver value and drive profitability. We’re rightsizing our cost structure, through optimizing overhead and revenue synergies to better match market demand. We’re raising and accelerating synergy capture goals. We believe that we can enhance Village growth and value by focusing on gaining density in existing markets to accelerate VillageMD’s path to profitability and supporting the integration of our digital assets with our VillageMD platform, and we continue to enhance our Village management team.
We’ve recruited Rich Rubino, a seasoned healthcare CFO, to be the Chief Financial Officer of the combined VillageMD Summit Business. Longer term, we’re implementing a high impact three-year plan to improve performance through an intense focus on operational excellence and cost optimization. Achieving our healthcare vision depends on each of our companies, delivering on their respective plans, and relentless execution of harvesting growth synergies across the Walgreens portfolio. We’re building a differentiated value-based care delivery model that successfully integrates pharmacy and medical care for a value-based care market that will more than double by 2027. Walgreens has a unique right to win, with our reach, consumer engagement, and enterprise investments in primary care, specialty, and care to the home.
We continue to see the enhanced value of our individual healthcare assets connected to our core Walgreens pharmacy to create value for patients, providers, and plans. A great example of that is our quickly scaling clinical trials recruiting business. Next, let me turn to Summit Health, where we see opportunity to drive meaningful AOI in U.S. Healthcare. While we are obviously disappointed with the pace of unlocking the full value of Summit and CityMD, we expect Summit to contribute materially to profit growth in fiscal year ‘24. Leveraging WBA, we will invest in targeted marketing campaigns to increase the patient base at CityMD sites. Our continued focus on operational excellence and cost optimization should continue to improve growth and synergies from prior acquisitions.
Finally, we are raising and accelerating the synergy capture goal from $150 million in 2027 to $200 million in calendar year 2026. Turning to VillageMD. Over the last few months, we’ve slowed the pace of clinic openings in new markets. As we’ve studied their performance, we have refocused our growth plans to leverage regional density to support more profitable growth. To achieve our strategic objectives of better engagement and lower cost of care in a more cost effective manner, we are launching new virtual and asset light models. We’ve expanded our marketing efforts to support patient panel growth in our clinics and are working with new leadership to accelerate cost control. We continue to be impressed by the performance of our more mature VillageMD markets risk performance and are focused on continuing to accelerate the conversion of our fee for service lives to our proven risk based model.
VillageMD is a high quality care delivery model. As James mentioned, most of our newer VillageMD clinics are at an early stage of development. But if we focus on the performance of our more mature Medicare Advantage markets, where we have achieved an appropriate level of market density, including Arizona, Georgia, and Houston, VillageMD has demonstrated the ability to bend the cost curve. We will focus on replicating this performance in other markets, as we convert fee for service volume to our risk based model. And we will also leverage our integrated care models with pharmacy and our other healthcare assets across the U.S. healthcare business. As part of our refocused U.S. healthcare approach, we aligned our go-to-market products for health systems and health plans under one team of seasoned healthcare executives with some encouraging short-term sales results noted on the slide.
In summary, Walgreens remains the independent partner of choice for health plans and health systems through the combination of our legacy pharmacy platform with our portfolio of health assets. Our portfolio consistently delivers better outcomes at lower costs for plans, systems, and patients, which we believe is well suited to meet the demands of a healthcare market that is quickly moving from fee for service to fee for value. While there is clearly work to be done, we now have the leadership, plans, an organizational structure in place to rapidly advance our priorities. Now let me turn it back over to James.
James Kehoe: Thanks, John. Capital allocation priorities remain focused on core business investments, debt pay down, and our dividend. We will continue to pursue disciplined returns-based organic investment in our core business. And we are simplifying our portfolio to unlock value and provide financial flexibility. We are very committed to maintaining our investment grade rating and our dividend. Now, let’s take a quick look at the transformational cost management program. We are raising the cumulative 2024 savings target $4.1 billion and this is the sixth target increase since the program began. With $3.3 billion saved by the end of this year, we are projecting at least $800 million of savings in ‘24. Let me talk to a couple of the cost saving initiatives.
We just completed an organization restructuring, which included transforming our headquarters to better align our resources with our strategic priorities. This led to the elimination of more than 500 roles, representing around 10% of our corporate and U.S. support office workforce. Our pharmacy of the future operating model will drive significant savings we’re optimizing the model through our micro fulfillment centers, tech enabled centralization of in-store activities and telepharmacy solutions. These initiatives will also elevate the role of the pharmacists and improve patient engagement. Finally, we will continue to optimize our locations and opening hours and expect to close an additional 300 locations in the U.K. and 150 locations in the U.S. As you have seen, we are accelerating our portfolio optimization to further simplify the business, we have fully exited from our Option Care Health position with overall proceeds of $1.2 billion since August 2022.
Let me also highlight our recent monetization of AmerisourceBergen shares using a variable prepaid forward structure. Under the VPF approach, there is no EPS dilution until the contracts mature. We continue to receive dividends and we retain some share price upside. Please note that the remaining stake in AmerisourceBergen is worth approximately $5 billion. With that, let me now pass it back to Roz for her closing comments.
Roz Brewer: Thank you, James. Before we kick off Q&A, let me sum up what you’ve heard. WBA has the right to win through our differentiated model and we have the right strategy in place. We are now entering the next phase of our healthcare transformation with aggressive actions in motion to improve profitability. We are addressing current challenges head on and moving at a pace to deliver long-term shareholder value. We have the scale. We have the skills. We have the sense of urgency. And we have the right plans to drive sustainable profit growth ahead. Now I’d like to open the line for questions. Operator?
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