Walgreen’s (WAG) CEO Greg Wasson on Q4 2014 Results – Earnings Call Transcript

Walgreen’s (WAG) CEO Greg Wasson discusses Q4 2014 results on a conference call held on September 30, 2014…

Walgreen Co. (NYSE:WAG)

Q4 2014 Earnings Conference Call

September 30, 2014 8:30 am ET

Executives

Rick Hans – DVP, IR, Finance

Greg Wasson – President, CEO

Tim McLevish – CFO, EVP

Alex Gourlay – President, Customer Experience & Daily Living

Jeff Berkowitz – Co-President, Walgreens Boots Alliance Development GmbH

Analysts

Robert Jones – Goldman Sachs

Mark Miller – William Blair

Ricky Goldwasser – Morgan Stanley

Eric Percher – Barclays Capital

George Hill – Deutsche Bank

Scott Mushkin – Wolfe Research

Lisa Gill – JPMorgan

Operator

Good day, ladies and gentlemen and welcome to the Walgreen Co., Fourth Quarter 2014 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this call is being recorded.

I’d now like to introduce your host for today’s conference Mr. Rick Hans. Sir, you may begin.

Rick Hans – DVP, IR, Finance

Thank you, Amanda, and good morning, everyone. Welcome to our fourth quarter conference call. Today, Greg Wasson, our President and CEO; and Tim McLevish, Executive Vice President and Chief Financial Officer will discuss the quarter and the fiscal year. Also joining us on the call, and available for questions are Alec Gourlay, President of Customer Experience and Daily Living; and Jeff Berkowitz, Co-President of Walgreen Boots Alliance Development.

As a reminder, today’s presentation includes certain non-GAAP financial measures, and I would direct you to our Web site at investor.walgreens.com for reconciliations to the most directly comparable GAAP measures and related information. You find a link to our webcast on our Investor Relations Web site. After the call, this presentation will be archived on our Web site for 12 months.

Certain statements and projections of future results made in this presentation constitute forward-looking statements that are based on current market, competitive and regulatory expectations that involve risk and uncertainty. Except to the extent required by law, we undertake no obligation to update publicly any forward-looking statement after this presentation, whether as a result of new information, future events, changes in assumptions or otherwise. Please see our latest Form 10-K filing and subsequent Exchange Act filings for a discussion of risk factors as they relate to forward-looking statements.

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Now, I’ll turn the call over to Greg.

Greg Wasson – President, CEO

Thank you, Rick. Good morning everyone and thank you for joining us on our call. Today I will begin with a review of the highlights of the quarter and the fiscal year. Next, I will provide an update on our progress toward the launch of Walgreens Boost Alliance Inc. And finally, I will look ahead to fiscal 2015. And then I will turn the call over to Tim McLevish for a more detailed financial review.

In the quarter, we continue to see improvements in our top line with growth in our Daily Living business and prescription volume that resulted in our largest quarterly and fiscal year sales increases in three years. In addition, we continued to see margin improvement across the front end of our business.

As we move into fiscal 2015, we are very focused on our performance. We put into place a strong blended management team for the future of Walgreen Boots Alliance organization, which is bringing greater focus and clarity to the critical work at hand.

For the quarter, net sales were $19.1 billion up 6.2% from $17.9 billion in the fourth quarter last year. GAAP operating income for the quarter was $969 million down 5.8% from $1 billion last year. Adjusted operating income for the quarter was $1.14 billion up 3.5% from $1.1 billion in the fourth quarter 2013.

The GAAP loss per share in the fourth quarter equaled $0.25 compared to earnings per share of $0.69 last year. Fourth quarter adjusted earnings per diluted share were $0.74 up 1.4% from $0.73 in the same quarter last year. This quarter’s GAAP results were negatively impacted by $866 million or $0.90 per diluted share non-cash loss related to the amendment and exercise during the quarter of the company’s Alliance Boots call option.

I will turn into our fiscal year performance, sales were $76.4 billion compared to $72.2 billion last year up 5.8%. GAAP operating income was $4.2 billion up 6.4% from $3.9 billion in fiscal 2013. Adjusted operating income for the year was $4.9 billion compared to $4.7 billion in 2013 up 4.6%.

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Our full year GAAP earnings per diluted share were $2 down 21.9% from $2.56 last year and on an adjusted basis, earnings per diluted share were $3.28 up 5.1% compared to $3.12 last year.

We closed fiscal 2014 entering the next important phase in our strategic partnership with Alliance Boots amending an exercise and the option to complete the second step. Through the transaction, the new Walgreens Boots Alliance will have unmatched global reach strength and leadership and a broad mix of retail health, well-being and beauty businesses and an international pharmacy wholesale network all dedicated to ensuring people across the world lead healthier and happier lives.

This fiscal year, we also completed the transition of our drug distribution into AmerisourceBergen. Their company now supplies virtually all of our brand and generic medications; the strategic relationship together with Alliance Boots is establishing the leading global pharmaceutical wholesale and distribution network.

Importantly, we achieved $491 million in synergies through our WBAD joint venture. Our retail pharmacy market share grew 30 basis points to 19% in fiscal 2014 and we filled a record 856 million prescriptions.

In our Daily Living business, it was a big year for beauty. We launched boots number 7 products in our Phoenix and New York markets and our flagship locations to a very positive customer reaction and improved performance. And finally, we increased our dividend for the 39th consecutive year.

Turning to trends in gross profit dollars and SG&A dollars, in the fourth quarter on a GAAP basis, our gross profit dollars increased 2.6% or $136 million from a year ago SG&A dollars increased 4.8% or $207 million compared to the same time last year.

Adjusted gross profit dollars increased 2.6% or $133 million compared to the same quarter last year. Gross profit dollars grew primarily as a result of the improvements in script comps and front-end comp sales.

Gross profit dollar growth also benefited from brand to generic conversions year-over-year, but were negatively impacted by lower third party reimbursement and generic drug price inflation.

Our adjusted SG&A dollars increased 2.1% or $86 million compared to the same quarter last year. These results reflect the impact of savings from enterprise optimization, our efforts underway to improve efficiency across the organization.

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Looking ahead, we will continue our strong focus on cost reduction driving to achieve our $1 billion target over three years, which we announced in August. We have put headquarters and non-labor spending reductions into immediate effect and are continuing to work toward greater efficiencies in our processes through Walgreens lien Six Sigma.

Now, turning to our key performance drivers. In pharmacy, health and wellness, our script comp was up 3.9% in the quarter. We filled 211 million prescriptions in the quarter up 4.2% from the same period last year. To drive that performance, we continued our focus on winning with high value seniors through preferred relationships with Medicare Part D plans. Since 2013, our prescription share with Med Part D seniors has grown more than twice as fast as the overall retail prescription share. On average Med D seniors fill 3x as many prescriptions as our non-Part D – non-Med D customers.

We also are capturing share in the fast growing specialty market by improving and integrating care for patients with complex chronic disease states across our enterprise. By the end of the fiscal year, we now have access to more than 100 limited distribution drugs by manufacturers reflecting their growing desire to work with our unique specialty network of health system pharmacies, complex therapy pharmacies and fusion pharmacies and our specialty at retail offering.

In the fourth quarter, we continued to face headwinds to our pharmacy margin from ongoing pressure from reimbursement and generic drug inflation. To address the pressure on our pharmacy margin, we are focused on our contracting strategy to a lot of our payer contracts to the realities of an inflationary versus a deflationary market. We are also aggressively working to reduce total pharmacy costs by increasing efficiencies and providing high quality and cost effective pharmacy services.

Finally, Tim will discuss in greater detail the factors affecting generic inflation. We believe through our WBAD joint venture, we are well positioned to leverage our unique global retail wholesale relationships to create a long-term competitive advantage in the marketplace.

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