Walgreens Boots Alliance, Inc. (NASDAQ:WBA) Q3 2023 Earnings Call Transcript

Michael Cherny: Good morning, and thank you for taking my question. So maybe, James, to stay on that thread. I understand the increase in cost savings targets. It’s something I know the company’s been really focused on. When you look at that, you look at still what you have from a sale leaseback contribution, an ABC contribution. What does that mean for what the core underlying earnings of this business should be? And how does that factor into where underlying growth should continue versus your previously assume multi-year targets? I know we’re not getting into more specific guidance on ‘24, but you do have the long-term targets already out there. So how does — what you’re doing now and especially how the core is growing factor into achieving those previously reported targets?

James Kehoe: Yes. And maybe I’ll take it from another direction. And if we look forward to the fourth quarter, we’ve got a bunch of headwinds in the fourth quarter, and you could actually call out COVID, which is probably 20 points of a headwind and sale and leaseback another 20. So the guide we’re basically giving is a slight decline in EPS, but the core growth is more like 30%, 40% growth in the fourth quarter. So we’re seeing that the flywheel is working. You know, we’ve had some pressure on margins in the short-term in retail, but the flywheel is starting to perform. Then the second data point is we give — as we discuss low-to-mid-single-digit operating income growth over the entire course of next year, absorbing sale and leaseback, and absorbing COVID, and any other headwinds that are on the horizon.

So if you subtract out those two, the low-to-mid-single-digit is more like a low-teens growth in adjusted operating income. So where we see the flywheel coming back and coming back quickly. If you project that forward, you’re right, the sale and leaseback gains run out in ‘24. So it is the last year. But by then, the improved profit prospects on the healthcare business, plus the flywheel working in the U.S. business more consistently should get us to those previous targets of low-single-digit. Now we’re not guiding to that. We’re not confirming guidance, but we see that the core earnings power is successively improving every quarter. And I think people will be very positively surprised by the quality of earnings particularly in the fourth quarter of this year and then going into next year.

Operator: And your next question comes from the line of Lucas Romanski from TD Cowen. Your line is open.

Lucas Romanski: Hi. This is Lucas on for Charles. I wanted to ask about the U.S. Healthcare Business and your appetite for taking on risk there. Last October, you talked about adding health plan partnerships and how the platform would enable you to take on risk eventually? Now you have four health plan partnerships and you’ve been able to show the ability to lower MLR from high-80s to low mid-70s in some regions. What are you guys seeing in terms of appetites from health plans in the market now that you have the bulk of your healthcare delivery assets in place? And then two, how are you thinking about increasing your exposure to risk over time and if you see that as a path to driving earnings growth for the U.S. Healthcare segment moving forward?