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

John Driscoll: Lucas, thanks for the question, it’s John. We are seeing a remarkably robust appetite for risk of two different sorts, one, is the per member per month, capitated risk, and your — on the MA population, but whether it is performance risk on closing gaps in care or performance opportunities to earn and enhance the delivery of our specialty pharmacy business with the Shields. There is a consistent interest in products and services that in total, lower the cost of care and improve outcomes. And we are very encouraged by the demand across every constituency for every product we’ve got, whether it’s health corners, VillageMD, City, or Shields or CareCentrix, that the opportunity that the track record of performance around delivering on lower cost of care, while keeping up a high NPS on the part of the patients and providers.

And delivering those results will allow us to honestly deliver a portfolio of risk based and performance based products that I think are going to be — are going to build on, you know, our notion of being the independent partner of choice for health plans and health systems. So I think we will — you’ll see more and more news about that, and that’s part of unlocking the embedded profitability of the assets we own.

Operator: And your next question comes from the line of A.J. Rice from Credit Suisse. Your line is open.

A.J. Rice: Hi, everybody. Thanks, let me quickly — I know it’s been missed a couple times the goal for working capital optimization. Can you — maybe expand a little bit more on what you think over time the incremental cash flow opportunity might be there? And then as you talk about prioritizing debt pay down, what is — can you give us any updated thoughts on how far you need to — you feel like you need to go on debt pay down, maybe a leverage target, any comments on either of those?

James Kehoe: Yes. I think on working capital, if you look back over, let’s say, a five-year period, we’ve probably reduced working capital by $2.5 billion. It’s not as if we haven’t done it, but we’re setting on fairly high levels of inventory. We’ve run a front of store above 90-days, which is on the high side. And the second part on pharmacy, we’re above 30-days, and both of those for me personally are quite high. We’ve put in place big initiatives to address those. One is the micro fulfillment centers, which effectively will take a fair amount of inventory out of the 8,800 stores as we centralize into less than 20 centers. When we put together the program, that was identified at almost $1 billion of working capital opportunity, we’ve probably captured 40% of that.

And, you know, I just want to emphasize, this is a multi-year program we’re running, but it’s hundreds and hundreds of millions every year on working capital optimization driven by micro fulfillment centers, we have new forecasting systems going in. We’re putting in a new inventory management system and perpetual inventory for pharmacy for the first time, and that’s rolling out even as we speak. So we have huge initiatives rolling out that will really drive benefits next year. On that, we’re targeting investment grade rating. We’re not within our metrics right now. The target with Moody’s is I think it’s 475. And we have worked to do to both improve our operating cash flow, which we just talked about. And then secondly, targeted pay down of debt to get within the metrics, and we expect to do so — confidently expect to do so during the course of fiscal ‘24.

Operator: Your next question comes from the line of Elizabeth Anderson from Evercore ISI. Your line is open.