Walgreens Boots Alliance Reports Fiscal 2015 Third Quarter Results; Board Names Stefano Pessina as CEO
Executive Vice Chairman and CEO Stefano Pessina said, “In just six months since the strategic combination that formed Walgreens Boots Alliance, we are beginning to make progress in our operations, as we were able to deliver another strong quarter. Our Retail Pharmacy USA division produced a solid increase in comparable prescriptions filled in the quarter, along with improved retail front-end margins and very good cost control. Our other divisions continued to perform as we expected. Of course, there is more work to be done as we move forward. The fourth quarter is typically the slowest quarter because of seasonality in the business, while prescription reimbursement pressure continues to impact our pharmacies, making retail margin expansion and cost control as important as ever.”
The company also announced today that its board of directors has named Stefano Pessina as CEO, effective immediately. Pessina had been serving as acting CEO since January. In his capacity as CEO, he will continue reporting to Executive Chairman James Skinner.
“In Walgreens Boots Alliance’s initial six months as a newly combined company, Stefano has done an extraordinary job leading the new enterprise, focusing our strategy while enhancing our financial performance,” said Skinner. “The integration of Walgreens and Alliance Boots is proceeding exceptionally well, with Stefano’s vision for the company driving the organization forward. Through his leadership, our organization is meeting the challenges of combining our two companies, and many of the opportunities we anticipated from our strategic combination are now becoming a reality. In order to continue this momentum and to recognize the progress that is already being made, the board concluded Stefano is the very best person to achieve our vision to be a truly global health care champion, the first choice for pharmacy, health care and wellbeing across the world.”
Overview of Third Quarter and Fiscal-Year-to-Date Results
Net earnings attributable to Walgreens Boots Alliance determined in accordance with GAAP for the fiscal 2015 third quarter increased 82.4 percent to $1.3 billion compared with the same quarter a year ago, while GAAP net earnings per diluted share increased 59.5 percent to $1.18 compared with the same quarter a year ago.
Adjusted fiscal 2015 third quarter net earnings attributable to Walgreens Boots Alliance increased 39.9 percent to $1.1 billion compared with the same quarter a year ago. Adjusted net earnings per diluted share for the quarter increased 22.9 percent to $1.02 compared with the same quarter a year ago. This year’s third quarter earnings adjustments were a net reduction of GAAP net earnings of $179 million or 16 cents per diluted share. (Please see the “Reconciliation of Non-GAAP Financial Measures” table and accompanying disclosures at the end of this press release for more detailed information regarding non-GAAP financial measures herein, including the items reflected in adjusted net earnings calculations.)
Net sales in the third quarter increased 48.4 percent to $28.8 billion compared with the same quarter a year ago, largely due to the inclusion of Alliance Boots for the entire current quarter.
In the first nine months of fiscal year 2015, GAAP net earnings attributable to Walgreens Boots Alliance increased 94.8 percent to $4.2 billion compared with the same period a year ago, while GAAP net earnings attributable to Walgreens Boots Alliance per diluted share increased 81.2 percent to $4.04 compared with the same period a year ago.
Adjusted net earnings attributable to Walgreens Boots Alliance for the first nine months of fiscal 2015 increased 28.5 percent to $3.1 billion compared with the same period a year ago. Adjusted net earnings per diluted share for the nine months increased 19.0 percent to $3.00 compared with the same period a year ago. Earnings adjustments in the first nine months of the fiscal year were a net reduction of GAAP net earnings of $1.1 billion or $1.04 per diluted share.
Net sales in the first nine months of fiscal 2015 increased 30.7 percent to $74.9 billion compared with the same period a year ago.
Combined net synergies for the first nine months of fiscal 2015 were $504 million and remain on track to reach at least $650 million in fiscal 2015. The company continues to expect to reach at least $1.0 billion in combined net synergies in fiscal 2016. This excludes the synergy benefits related to the company’s strategic, long-term relationship with AmerisourceBergen.
Walgreens Boots Alliance generated free cash flow of $1.6 billion in the quarter and $3.3 billion in the first nine months of the fiscal year. GAAP operating cash flow totaled $1.8 billion in the quarter and $4.2 billion in the first nine months.
Restructuring Program
The company previously announced a $1.5 billion cost savings program through the end of fiscal 2017. During the third quarter of fiscal 2015, the company made good progress with the program including reorganizing Retail Pharmacy USA field operations and continuing to optimize its corporate office; closing nine of a planned 200 USA stores with approximately 70-80 additional closings planned by the end of the fiscal year; reducing Retail Pharmacy USA’s IT cost structure to enable significant core system investments over the next several years; and announcing a reduction of approximately 700 non-store based roles in Retail Pharmacy International. Actions taken in the quarter resulted in pre-tax charges to the company’s GAAP financial results in the quarter of $160 million.
Dividend Increase and Debt Redemption
The company announced today a 6.7 percent increase to its quarterly dividend to 36 cents per share. The increased dividend was declared by the board of directors on 8 July 2015, is payable 11 September 2015 to stockholders of record 19 August 2015, and raises the annual rate from $1.35 per share to $1.44 per share. This marks the 40th consecutive year Walgreens Boots Alliance or its predecessor company, Walgreen Co., has raised the dividend. The company remains committed to a long-term dividend payout ratio target of 30-35 percent.
In addition, to allow the company to efficiently manage its balance sheet and potentially take advantage of lower financing costs in the future, Walgreens Boots Alliance announced today that its wholly-owned subsidiary, Walgreen Co., intends to redeem $1 billion of its 1.8 percent Notes due 2017 (issued 2012), and $750 million of its 5.25 percent Notes due 2019 (issued 2009), on 10 August 2015. The redemption will be made from the company's existing $4.4 billion in cash resources. The redemption price for each series of note is equal to the sum of the principal amount of the notes being redeemed, a make-whole premium that will be calculated three business days prior to the redemption date in accordance with the related indenture, and accrued and unpaid interest on the Notes through the date prior to the redemption date.
Company Outlook
The company increased and narrowed its guidance for full-year fiscal 2015 adjusted net earnings attributable to Walgreens Boots Alliance to $3.70 to $3.80 per share on a diluted basis. The company also reaffirmed its goal of adjusted net earnings per diluted share of $4.25 to $4.60 for fiscal year 2016.
Business Segment Highlights
Retail Pharmacy USA:
The Retail Pharmacy USA division, whose principal retail pharmacy brands are Walgreens and Duane Reade, had third quarter sales of $20.4 billion, an increase of 5.3 percent over the year-ago quarter. Total sales in comparable drugstores (those open at least a year) increased 6.3 percent compared with the same quarter a year ago. Comparable drugstore retail sales increased 1.6 percent in the third quarter with an increase in basket size partially offset by lower customer traffic compared with last year’s third quarter.
Pharmacy sales, which accounted for 66.1 percent of division sales in the quarter, increased 7.0 percent compared with the year-ago quarter, while pharmacy sales in comparable stores increased 9.1 percent. The division filled 226 million prescriptions (including immunizations) on a 30-day adjusted basis in the quarter, an increase of 3.8 percent over last year’s third quarter. Prescriptions filled in comparable stores increased 4.1 percent compared with the same quarter last year. For the quarter ending 31 May 2015, the division’s retail prescription market share in the USA on a 30-day adjusted basis increased 20 basis points over a year ago to 19.3 percent, as reported by IMS Health.
GAAP operating income increased 0.9 percent over the year-ago quarter to $1.0 billion. Adjusted operating income increased 8.8 percent over the year-ago quarter to $1.3 billion. The increases in both GAAP and adjusted operating income resulted from higher sales and lower selling, general and administrative expenses, partially offset by having no equity earnings in Alliance Boots in the current period versus three months in the comparable period and lower gross margins.
The fiscal 2015 third quarter for the Retail Pharmacy USA division includes results of operations, the allocation of synergy benefits including Walgreens Boots Alliance Development GmbH (WBAD) and an allocation of corporate-related overhead costs. The year-ago quarter included all corporate costs of Walgreen Co., the full consolidated results of WBAD and equity income from Walgreen Co.’s pre-merger 45 percent interest in Alliance Boots.
The division opened or acquired 104 drugstores in the first nine months of fiscal 2015, including 34 relocations, and closed 37 locations. At 31 May 2015, the division operated 8,240 drugstores across all 50 states, the District of Columbia, Puerto Rico and the US Virgin Islands.
Retail Pharmacy International:
The Retail Pharmacy International division, whose principal retail brands are Boots in the UK, Thailand, Norway, the Republic of Ireland and The Netherlands, Benavides in Mexico and Ahumada in Chile, had third quarter sales of $3.3 billion. On a pro forma constant currency basis, comparable store sales in the third quarter increased 3.2 percent compared with the same period a year ago. GAAP operating income was $205 million, while adjusted operating income was $249 million.
At 31 May 2015, the division operated 4,565 pharmacy-led health and beauty retail stores in eight countries, a net increase of six stores since the end of the second quarter of fiscal 2015.
Walgreens Boots Alliance also announced today that it has acquired Liz Earle Beauty Co. Ltd, owner of the Liz Earle skincare brand. Liz Earle is an award-winning premium skincare range that uses naturally active ingredients and is recognized as one of the leading botanical brands in the UK.
Pharmaceutical Wholesale:
The Pharmaceutical Wholesale division, which mainly operates under the Alliance Healthcare brand, had third quarter sales of $5.7 billion. On a pro forma constant currency basis, sales increased 0.2 percent compared with the same period a year ago. GAAP operating income was $162 million, while adjusted operating income was $171 million.
Comparability of Results
Walgreens Boots Alliance has organized its operations and reports results in three segments: Retail Pharmacy USA, Retail Pharmacy International and Pharmaceutical Wholesale. Segmental reporting includes the allocation of synergy benefits, including WBAD results, and the combined corporate costs for periods subsequent to 31 December 2014. The company has determined that it is impracticable to allocate historical results to the current segmental presentation.
Following the combination, the company eliminated the three-month reporting lag and recast prior period results with no lag. The combination on 31 December 2014 also means fiscal 2015 year-to-date reporting includes the results of Alliance Boots for five months (January through May) on a fully consolidated basis and four months (September through December) as equity income from Walgreen Co.’s pre-merger 45 percent interest.
The company's balance sheet reflects the full consolidation of Alliance Boots assets and liabilities as a result of the close of the combination on 31 December 2014. The company's purchase accounting remains preliminary as contemplated by U.S. generally accepted accounting principles (GAAP) and, as a result, there may be upon further review future changes to the value, as well as allocation, of the acquired assets and liabilities, associated amortization expense, goodwill and the gain on the previously held equity interest.
Year-over-year comparisons of results require consideration of the foregoing factors and are not directly comparable.
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