Walgreen’s FY 4Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Walgreen FY 4Q14 Earnings Call Notes

Boots and Bergen

“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.”

Front end comps up on basket size, traffic down
“Turning to our front-end comp sales, which increased 1.3% in the fourth quarter, average basket size grew 3.5%, while traffic was down 2.2% as we cycled a more aggressive promotional environment from a year ago.

margins fell 100bps based on pressure in pharmacy.

‘Now on to margins, adjusted gross margin was 27.9% in the current quarter compared to 28.9% last year, 100 basis point decline. Margins were solid on the front end, but were weak in the pharmacy… The primary drivers for the pharmacy margin decrease were increased third party reimbursement pressure partly due to contract step downs increased Medicare Part D business mix including our strategy to continue driving 90-day prescriptions at retail, pronounced generic drug inflation on a subset of generic drugs and the mix of specialty drugs partially offsetting these pharmacy margin decreases were the positive effect of the increased rate of introductions of new generic this quarter versus the year ago quarter and purchasing synergies in the pharmacy.

Drug manufacturers can and will raise price in a tight market

“Let me say a few additional words about generic drug inflation. The dynamics under which generic drug and manufacturers can avail themselves of pricing actions has not changed. They are able to raise prices when demand outpaces supply. These drug supplies can be impacted by a number of mechanisms including regulatory actions by the FDA resulting the shutdowns of both API and finished dosage for manufacturing plants, generic drug manufacturer consolidation and portfolio harmonization, API manufacturer consolidation and FDA backlog on approvals as well as a shrinking pipeline of first to market generic blockbuster launches.
Our current environment is experiencing all of these mechanisms and as a result, the average inflation in our basket of generic drugs is mid-single digit as measured on a comparable drug priced basis.

Drug inflation is being caused by large increases in a small number of molecules

“This change is caused by very large price increases and a small percent of molecules because these supply constraints and other factors are continuing, we expect a generic drug inflation will be with us for a while.

headwinds through 2015

“The tailwinds we expect through fiscal 2015 will be largely offset in the short-term. Of note, our reimbursement rate pressure, including specifically lower Medicare Part B reimbursements coming in January of 2015 and the continued impact of generic drug inflation. Also affecting the EPS growth rate in 2015 is the timing of the close of step two with Alliance Boots.

Continued pressure on margins in 2015

“In 2015, we don’t expect to see that significant of a step-down. We think there will continue to be pressures plans we’re looking to control costs. And then certainly with generic inflation being a big driver of those contracts versus the deflation that we’ve seen over the past, we’re going to have to really understand and understand where generic inflation is going.

We may need legislative action to control this cost inflation

“I think it will probably end being both [better contracting and legislation]. I think certainly we do think that it’s going to persist based on our intelligence and all the industry intelligence that we’re seeing out there. It’s hard to predict. I think Jeff and his team have really ramped up their predictive modeling so we can understand what may happen going forward. But, I think that we may indeed see the benchmark, the tables begin to reflect what’s really going on with cost inflation, we’ll begin to see some of that as we speak and then a lot of the different things that Jeff and team are doing with regard to putting inflation protection into contracts. So I think we will begin to be able to get after.

Lots of dynamics leading to inflation

“Well, again, I think it’s a host of things that have driven that inflation. Certainly, there is consolidation in the buying space with us and three or four other large buyers buying about 80% to 90% of the generics. But at the same dynamic, there is some consolidation in suppliers. But that said, I wouldn’t say that all of it. There are a lot of other dynamics

Inflation is coming from a molecule-supply perspective, not a vendor perspective

“I would look at it as more a molecule-led than vendor-led. I mean, we continue to forge very deep relationships at the highest levels and on a global scale with the major generic manufacturers. But the inflation that we’re seeing is really not associated with any one particular vendor. It’s really based on the molecule opportunity where there is harmonization in the portfolios, or manufacturers have supply issues or pulling out of molecules where that price opportunity comes, somebody then takes an increase and the others feel some confidence to follow up, sometimes later than others.

Walgreen 1Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings.

Pharmacy market share 19%, filled 218m prescriptions

“Our retail pharmacy market share increased to 19% from the quarter, up 20 basis points year-over-year and we filled 218 million prescriptions, up 4.5% from the same period last year.”

Seen reimbursement pressure and generic drug price inflation

“we’ve seen an increase in reimbursement pressure as well as a shift from historical patterns of deflation in generic drug cost to inflation. Over the past year, we’ve seen cost increases on a subset of generic drugs and in some cases these increases have been significant. Both reimbursement pressure and generic inflation are having an adverse effect on margin.”

Working on contracting strategy to decrease costs

“To address the pressure on our gross margin, we’re focused on our contracting strategy to account for increasing drug cost.”

Our organization is the largest purchaser of drugs worldwide

“Along with Alliance Boots and AmerisourceBergen, our three companies are the largest purchaser of pharmaceuticals worldwide. ”

Front end traffic down slightly but basket size up

“The components of the 2.2% front-end comp traffic which decreased by 0.7% and basket size which increased by 2.9%. We are pleased with the trends in the one and two year stack comps over the past few quarters.”

Still room to improve margin in front end

“we think we actually have tremendous opportunity to grow EBIT and operating margin on the front end of the business. We are beginning to getting more confidence in just that, and I think that is obviously going to help us with the overall business.”

Evaluating everything to look for opportunities to operate more efficiently

“we’re going after the business from a structural point of view, everything from supply chain, everything from how we supervise and manage stores, everything from looking at our store footprint as we never have in the past and as we indicated on the last call. So we’re really taking a step back and looking at the entire enterprise from a structural perspective.”

We’re not going to be tolerant of partners who try to be opportunistic in pushing price

“we’re not going to be very tolerant of long-term partnership with people that are opportunistic.”

I wouldn’t say it’s all around drug inflation

“I wouldn’t say it’s all around the drug inflation. I mean we’ve certainly had some increase in our third party reimbursement pressures. We have had fewer brand-to-generic drug conversions compared to a year ago. And so as we think about our contracting strategy it certainly will account for these increases in the drug cost.”

Looking to manage cost of fill through automation, centralization

“we’re aggressively looking at our cost of fill around improving efficiencies in our cost of fill sometimes like technology where our customers are refilling their prescriptions through digital and mobile technology, through automation that is making us more efficient in selling prescriptions, through centralization that is reducing labor in the stores but as the same time increasing our customer service level.’

Inversion isn’t so simple, we’re doing all the work we need to do to make the right decision

“I’ll say as we had said that we’re looking at all and everything. We’re looking at everything from what the timing, best timing would be, what the capital structure should be, what our tax structure or what the structure could do to as far as our effective tax rate. So, and that’s complex stuff I guess is what I would say Ricky as we work through this. We are working around the clock to try to understand all the above so that we’re able to make the right decision for the company. And again that’s why we need a little more time to be able to bring all this together. But I would say that we’re looking at everything. It is complex and it’s all interdependent”

Didn’t really anticipate this generic price inflation

“I think in the order of magnitude I think probably generic inflation is specifically more — probably more important because it was — we didn’t quite anticipate it…This was really kind of snuck up I think on the industry and us”

Still pretty early days for ACA

“David, it’s still very early to tail around ACA. I mean obviously publicly they have announced 8 million people have joined the ACA. We certainly feel like we’re getting our share of that 8 million people, but certainly some of those folks were former cash paying customers that are now in the exchange.”

it’s a subset of molecules that are inflationary, the contracts aren’t structured to handle that

“I think it’s a subset of molecules that have kind of popped up in this inflationary environment that we’re — that caught I think the entire industry a little off guar. I’d say ourselves as well. We’re now all over with the combined Walgreen team with Bern team focused on those molecules. I do think that and there is a lot of moving parts there as Wade alluded to earlier, that the cost increase, the — the corresponding AWP is not keeping up with the cost increases.”

Strong pound favorable for alliance boots ownership

“we have a strong pound situation, which is also very favorable too, so I think on that we feel very good about their business”

Walgreen 1Q14 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Sales up slightly earnings down

“For the quarter, sales were $19.6 billion, up 5.1% from $18.6 billion a year ago, driven in part by 4.3% increase in comp store sales. GAAP operating income for the quarter was $1.3 billion, up 4.9% from $1.2 billion last year. Adjusted operating income for the quarter was $1.3 billion, down 4.3% from $1.4 billion in second-quarter 2013. GAAP earnings per diluted share were $0.78 in the second quarter compared to $0.79 last year, down 1.3%.”

Largest purchasers of pharmaceuticals worldwide

“We continue to make good progress on our global initiatives. We are pleased with the performance of our global procurement organization. With the introduction of AmerisourceBergen, we believe we will be the largest purchaser of pharmaceuticals worldwide.”

Manufacturers like that

“Manufacturers have told us they appreciate our approach. We think this sets us apart from others in the market, benefits our organizations over the long haul and positions us and our pharmaceutical manufacturer partners extremely well for both short term and long term sustainable value creation.”

Closing some stores, but increasing net number

“between now and August, we intent to close 76 stores spread across the country importantly, overall this year including store closings, we expect to expand our store base by approximately 55 to 75 locations in fiscal 2014.”

Closures just 1% of base

“We looked at several factors in deciding which stores to close. We address the impact of increased density from our own stores, the impact of real estate positioning within the market and material changes to a store’s trade area. In total, this represents a very small portion less than 1% of our 8,200 plus store base.”

No plans to redomicile the company

“maybe I’d start with just retreating what I said, I think not on last earnings call, the one before that we have no plans to do so to do so, to do an inversion or redomicile the company.”

Walgreens FY 3Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“We also continue to face a soft economy, especially in our lower income communities, where our stores, on a comp basis, are performing on average below our stores in middle or higher income neighborhoods.”

“physician visits are down 2.7% year over year in May, according to JPMorgan’s monthly tracker”

” we expect margins to be negatively impacted by a trough in the generic wave, expected to continue until the latter half of fiscal year 2014, when we expect to experience another peak in the wave, albeit smaller than the fiscal year ’13 peak.”

“every day we’re kind of moving forward and getting more and more express scripts customers back. I think that trend is going to continue.”

“with AmerisourceBergen, because we are a small investor, and we plan to just be a partner versus anything grander.”

“our pharmacy business outpaced our front end. Our front end has a higher gross margin on average. You get mix effects in that regard.”

“The business model is to try to maximize gross profit dollars.”