We are listening to Q&A.

JPMC: Reimbursement pressure
CEO Wentworth: Lessening of pressure in FY25, 80% of the discussions are completed, and 20% of the discussions are ongoing (and Walgreens is ready to take hard decisions). Constructive conversations and willingness to walk away from lines of business or sets of drugs. Discussion of value creation.

JPMC: Closures
CEO: 500 stores incremental in 2025 (back half) and some already occurred in 2024, helping financials.

Q: FCF timing, 2025 is a re-basing year. Is it really 2025, or later?
Vendor contracts renegotiations updates - suppliers progress.

CEO: Timing: multi-year turn-around, and 2025 is a rebaselining year.

Cencora 2029 agreement: meaningful dialog to together improve procurement through distribution and operations. No details provided.

Goal is to grow cash flow and AOI in the next three years. 2025 is a better base, with fewer one-timers. FY 2026 the equity benefits from Cencora will be lapped, providing headwinds to comps.

Pharmacy margins and US retail sales are the focus for growth, with scale over the next three years. Focus on cost optimization, especially store closing which should be accretive over the year. 

Deutsche Bank (DB): Store closures impacts, and earnings cadence in US Pharmacy Segment.
Store closure benefits of $100M in AOI in 2025. Cash accretive in working capital and owned locations will exceed store closure costs. Cadence will be the same, so no difference between H1 and H2.

Q: 80% PBM contract volume renegotiation: is it stable moving forward? FCF in 2025. His model is negative FCF in 2025.

CEO: ongoing and dynamic process on these multi-year agreements. Ongoing dynamic to keep 'sitting down' and focusing on improving the business. PBMs operate on a calendar year basis, and the 20% of the remaining contracts need more work by both parties.

Adjusted Operating Income to decline: $400M in sale leads-back and Cencora equity.
Legal payments of $1.050B in 2025, and lower in 2026.
Partially offset headwinds by $500M in working capital. CAPX decline by $150M in 2025.
Pragmatic approach to cash management, including monetizing non-strategic assets.

Q; US Healthcare: Reduction in investment in Village MD?
US Retail strategy is a healthcare strategy.
Specialty pharmacy is a growth area and starting point for growth.

Shields continues to grow within their partnership.
Improvement in Village MD (cost reduction program), and improvement from their risk-based book. Benefit of cost and clinic closures to continue, including contribution margin.
Continuation of trends in 2025.

​UBS: Flow of consumers and overall volumes?

Yes...continue to serve consumers.

Dividend?
Level of the dividend is on the table, and a board decision.

Cash flow? Stranded costs?
Yes, very committed to cost reduction. Very focused on non-store related cost reduction. This is a corporate culture of cost reduction, so they can invest in the stores.
The opportunity for cost reduction is smaller, but still significant.
The focus is at the corporate level.
The stores are tightly staffed, and there is not a significant opportunity. The people in the stores are the areas of investment, vs. Amazon or mail order pharmacy.

Q: US Healthcare side: Monetization and business improvement is complicated.

Improvement to the business (margin expansion) apart from cost optimization and store closure. What about the FNG: Jason? Mary has been building a successful team here. Disciplined growth strategy focused on the short-term. They exited non-strategic programs. They are focused on adjacency assets. Reaching and serving patients. 

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CFO Comments:

There were significant non-cash charges in 2024, including in Q4/2024. This will allow for offsetting of tax liabilities.

Adjusted EPS of $2.88 was down 28%
GAAP net loss was $10.01, largely due to non-cash charges.

Net sales were up 5% YoY and 6.5% vs. the prior year's Q4.
Cost savings of $1B/year in the U.S. retail pharmacy segment helped to offset weakness in retail performance.
Pharmacy Q4 adjusted gross margin was down.
Consumer weakness in non-essential categories such as beauty, seasonal and general merchandise. Positive impact from health and wellness. Also, higher shrink levels impacted profitability.

Cost discipline and focus on creating growth.

Cash flow impacted by legal matters cost them $934M and $386M in pension plan annuity premium contributions. Their free cash flow was positive for FY 2024, ta $23M. This is effectively zero, but a big improvement over FY23.
Net debt reduction of $1.9B, and lease obligations reduced by $1.2B.
Strong liquidity of $3.2B in C&E, and $5.8B in revolver capacity. They should be able to weather a small storm.

Guidance for EPS FY 2025: $1.40 to $1.80.
They renegotiated 80% of their 2025 pharmacy volume / PBM.
Consumer pressure assumed for FY2025, which requires them to cut costs further, accelerate store closure (accretive to cash flow). They will close 500 stores in FY2025, and 1,200 over the next three years. This is based on leases and owned stores, and the cash flow of individual stores. They are focused on the details of dark rent. This should fund the investments into remaining stores (to improve and modernize customer experience in the stores).

There are another 800 stores where there is a focus on operational improvement and cash flow generation, not closure, but they can be targeted to close if improvements do not occur.

Headwinds in 2025:
Higher tax rates.
Higher interest expense

Good news from international profitability, led by Boots retail and Germany.​

FY 2025: Working capital to generate $500M and $150M in capx reductions. Legal payments of $1.1B is a headwind. Monetization of assets will be redeployed to reducing net debt. Lease obligations will further decline through store closure. The turn-around over the next few years will help cash flow.

In conclusion, I am not sure there will be any free cash flow growth over 2024 as cash will go towards paying down debt. I sure hope they can continue their dividend of $1.00 per year.

We own a significant position in Walgreens Boots Alliance, Inc. to enjoy an 11% dividend yield, and a chance to earn capital gains resulting from their expected turn-around. We are on the earnings call as we write this blogpost.

By Jeffrey Cohen, Principal Investment Advisor
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CEO Tim Wentworth, Walgreens, Strategic Comments

In the short term, Walgreens built financial momentum around cash flow.

Strategic focus on retail pharmacy legacy business, and trust with consumers.

Accessible and convenient, but downsized from 8,000 stores to closer to 6,000 profitable stores.
They will accelerate by closing 1,200 stores over the next three years, which is a healthier store base. This should improve responsiveness in their retail business. They will re-deploy staff / employees to other stores, minimal layoffs.

Walgreens to promote their own "owned" brands to promote their positioning with consumers, especially in women's health. Rightsize their focus on national brands, with greater strategic partnerships.

From a financial perspective, they will monetize their non-strategic assets and use those proceeds to reduce net debt. This includes equity investments and Village MD.

They also need to improve their profit margins on retail sales. That is a focus.

PBMs and reimbursement approach: Fairness in reimbursement rates to maintain presence in American communities. Some PBMs are considering to adjust reimbursement to 'grow together.' Rational reimbursement to align with value provided by pharmacists.

Broaden and deepen the services they perform and bill for to improve pharmacy economics.

2025 will be an important year for setting a new baseline to grow the size and value of the business. Storms affected 1,500 stores, and all but 16 are back online from the two hurricanes.

CFO Comments

The price of gasoline, natural gas, ethanol, and crude oil are all lower recently in a significant way. Those are down significantly...and recently fallen. Heating oil is down a bit...not significantly.

This implies either a drop in economic activity (e.g., driven by a US recession), or due to an expectation for an increase of energy production in the near future.
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We noticed this on Finviz dot com, and suggest you visit this page for details. We are not responsible for inaccuracies or errors/omissions on that third-party website. We like the layout and clear visualization.

This is big news. Zapata AI decided to cease operations. Their stock has dropped to $0.07. It was ~$10.00 when it went IPO as a SPAC.

What I read is that they owed $2.3 million dollars that they did not have the assets to repay. They will terminate all employees, including the CFO.