James Kehoe
Executive Vice President and Global Chief Financial Officer at Walgreens Boots Alliance
Thank you, Ros and good morning. Overall, we had a good finish to the year. With fourth quarter results slightly ahead of our expectations, we continue to drive strong execution across all of our operating segments and rapidly expand our US healthcare business. As a reminder, we are lapping a very strong prior year when adjusted EPS grew 28%, boosted by COVID-19 vaccinations. Year-over-year comparisons are also impacted by higher investments in the US health care segment, including the acquisition of a majority stake in VillageMD. Sales declined 3.2% on a constant currency basis, excluding the negative impact from AllianceRx and the positive contributions from healthcare M&A. Constant currency sales growth was around 2%, adjusted EPS was $0.80 in the quarter, a constant currency decrease of 30%, entirely driven by the decline in adjusted operating income and partly offset by a lower tax rate.
Solid gross profit performance in US retail and the continued rebound in international were offset by the lapping of peak COVID-19 vaccinations in the year ago quarter and planned growth investments in US healthcare. GAAP earnings per share was a loss of $0.48, which compares to earnings per share of $0.41 last year, mostly due to a $780 million non-cash impairment charge in Boots UK and higher charges related to the Transformational Cost Management Program, reflecting incremental store closures. Please note that the Boots impairment charges were related to trademarks and licenses and were mostly due to the impact of higher discount rates.
Now let's move to the full year financial highlights. Full year sales increased 1.2% on a constant currency basis. However, if you exclude the 5.5 percentage point negative impact from AllianceRx and positive contributions from US Healthcare M&A activity, core sales growth was a healthy 6%. Adjusted EPS was $5.04, a constant currency increase of 3.4% and above our initial guidance of flat EPS. Furthermore, the result included a 5.5 percentage point headwind from the build-out of the US Healthcare segment. In summary, full year core sales grew by 6% and adjusted EPS increased 3.4%.
Now let's look at the US Retail Pharmacy segment. Sales decreased 7.2% in the quarter as we lapped a very strong prior-year comp of 8% and we faced a 7.8 percentage point headwind from AllianceRx. Adjusted operating income declined 36%, lapping strong prior year results on AOI grew 16% including significant COVID-19 vaccinations. Strength in US retail and continued cost savings were offset by higher labor investments and lower results in US Pharmacy. For the full year, AOI was up slightly, reflecting solid core sales growth.
Now let's look in more detail at US Pharmacy. Pharmacy sales declined 8.8% entirely due to a 10.4 percentage point impact from AllianceRx. Comparable pharmacy sales were up 3% despite lapping a very strong 8.9% growth last year. Comp scripts declined 3.5% and excluding immunizations, comp scripts were flat which compares to a 4.2% growth in the prior year. We completed 2.9 million COVID 19 vaccinations in the fourth quarter, well below the 13.5 million vaccinations in the prior year quarter and this trend was generally in line with our expectations. Pharmacy performance in the quarter benefited from improved trends from seasonal scripts and maintenance medications. However, scripts remain challenged by temporary reductions in store operating hours due to staffing shortages. Operating hour limitations impacted scripts by about 270 basis points in the quarter with a full year impact of around 180 basis points. As Ros mentioned, actions have been taken to address the staffing challenges and we are encouraged by the positive hiring trends over the past 11 weeks. This gives us confidence that we can recover script volume as we move into next year. Overall, looking on a three-year stack basis which normalizes for COVID related volatility, comp scripts excluding immunizations increased 7.7%, We administered 3.4 million COVID-19 tests in the quarter compared to 5.2 million last year. Additionally, with payors now reimbursing OTC test, we sold 7.8 million OTC tests through the pharmacy. As a reminder our comp script numbers exclude testing. Finally, pharmacy adjusted gross profit declined, driven by a much lower level of COVID-19 vaccinations and ongoing margin pressure.
Turning next to our US retail business. Overall, we saw a good retail performance as we continue to benefit from our omnichannel and mass personalization initiatives. Comp retail sales decreased 1.9% and this was largely due to lapping a very strong prior-year quarter and sales advanced 6.2%. Overall, our retail business has good underlying momentum with 13% growth on a three-year stack basis. On a full year basis, comp retail sales were up a strong 6%, the highest in nearly two decades with positive contributions from personal care, beauty and cough, cold flu as well as COVID-19 OTC tests which contributed about 3 percentage points of growth. Retail gross margin expanded throughout the year, reflecting the effective margin management, including strategic pricing and promotion optimization and stabilizing shrink levels.
Turning next to the International segment. And as always, I will talk to constant currency numbers. International delivered a strong set of results. Sales increased 6.7%, reflecting growth across all international markets with Boots UK up 6% and Germany wholesale advancing 6.8%. Adjusted operating income was $163 million in the quarter, up 31% versus prior year. The strong finish to the year led to full year sales and adjusted operating income growth of 13% and 65% respectively.
Let's now look in more detail at Boots UK. Strong retail sales performance more than offset a decline in comp pharmacy sales of 7% as we lap strong demand for COVID-19 services. Comp retail sales advanced 15%, reflecting 20% rebound in footfall with flagship and travel locations showing robust improvement. Market share increased with personal care and health and wellness driving notable gains. Compared to pre-COVID levels, store footfall remains around 15% lower, however, this was more than offset by a 14% increase in store basket size and Boots.com sales that more than doubled. Over 11% of our total UK retail sales came from digital in the quarter, up from around 6% pre-COVID.
Turning next to US Health Care. Segment sales were over $600 million in the quarter with pro forma combined sales growth of 34%. VillageMD grew in line with plan and revenue growth is on track as we launched new clinics, scale existing clinics and increase value based arrangements. Shields delivered another excellent quarter with pro forma sales growth of 48%, driven by annualizing recent contract wins and by expanding the value proposition with existing health system partners. Segment adjusted operating income was a loss of $151 million in the quarter. Organic investments accounted for $45 million. Investments at VillageMD more than offset the profit contribution from Shields and led to a $106 million AOI loss across our majority investments. As the clinic roll-out at VillageMD continues on pace, VillageMD had 334 clinics at the end of the year, an increase of 82 clinics compared to prior year. VillageMD had 433,000 value based patients as of the end of fiscal 2022, up from 326,000 at the end of fiscal 2021. Fiscal 2002 was a peak investment here and the fourth quarter loss is not a good indicator for fiscal 2023 and beyond. VillageMD, Shields and CareCentrix will drive increasingly high contributions as the businesses mature. Additionally investments in the Walgreens Health organic business will be partially offset by positive contributions from clinical trials expansion and integration synergies.
Turning next to cash flow. Operating cash flow was $3.9 billion and free cash flow was $2.2 billion dollars as we cycled through some exceptional headwinds. First, the sales decline of AllianceRx led to the unwinding of a favorable working capital position with the year-over-year impact of $400 million. Secondly, we benefited from COVID-19 government-related support in fiscal 2021 whereas this partially reversed as the deferred FICA payments became due in fiscal 2022. In total, year-over-year impact was around $400 million. Additionally, we executed an inventory pre-buy ahead of an expected strong cough-cold flu and holiday season. And finally, there were some one-time items including legal settlements in the US of $200 million. Free cash flow was also impacted by a $355 million increase in capital expenditures to support our growth initiatives, including the VillageMD clinic expansion, rollout of micro fulfillment centers and continued omnichannel and digital investments. Before moving on I want to reiterate that our full year EPS grew 3% ahead of our original guidance of flat and we made substantial progress against our goals as we build-out our US Healthcare business.
I'll now turn to our fiscal 2023 guidance and long-term growth outlook. We are guiding fiscal 2023 adjusted EPS of between $4.45 and $4.65 compared to the $5.04 achieved in fiscal 2022. While we expect solid core business growth, looking forward into 2023, we are facing two key challenges. First, we project a much lower level of COVID-19 vaccinations and testing activity and this leads to an earnings headwind of 15% to 17%; second, the dollar has strengthened significantly and is at 2% headwind to EPS in reported currencies. Excluding these two headwinds, we expect core EPS growth of 8% to 10% on a constant currency basis with positive contributions from all segments. This healthy core growth reinforces our confidence in achieving our long-term growth algorithm and today we are providing more clarity and raising our US Healthcare targets. Based on the execution to-date and improved visibility, we are increasing our 2025 sales target for US Healthcare by over 20% and we are now projecting sales of $11 billion to $12 billion by 2025. Furthermore, we expect the US Healthcare segment to generate positive adjusted EBITDA by fiscal 2024. Later, I will provide greater detail on the key drivers.
Let me now walk you through our 2023 guidance in greater detail, starting with WBA. Overall, we expect low single digit sales growth on a constant currency basis. Excluding the COVID-19 headwind, we do expect a sales growth of 2% to 4%. This sales growth is also impacted by 2 percentage point headwind from AllianceRx, which largely cycles-out in the second quarter. So if you strip-out the AllianceRx and COVID-19 impacts, we expect constant currency sales to be up mid-single digit. Adjusted EPS is projected at $4.45 to $4.65, a constant currency decline of 6% to 10%. Excluding the COVID-19 and forex headwinds, adjusted EPS growth is around 8% to 10%.
Let me now walk you through the assumptions and guidance for each of our reporting segments, starting with US Retail Pharmacy. Sales are projected to decline low single digit. A lower sales contribution from vaccinations and testing will reduce the growth by 2 percentage points whereas the low margin AllianceRx business also has an adverse impact of 2 percentage points. In summary, if you strip out these factors, we expect low single digit sales growth. We are projecting 16 million vaccinations in 2023 compared to 35 million in both of the previous years. The 16 million estimate assumes only one booster this year and that around 40% of the population chooses to get one. AOI is projected at $4.5 billion to $4.6 billion including an 18 percentage point headwind from the lower COVID-19 contribution. Excluding this impact, core AOI growth is 10% to 11%.
Let's walk through some of the key growth drivers. First, we anticipate script volume recovery as we move through the year. Focused labor investments are already leading to positive net staffing trends and over the coming months, will allow more stores to return to normal operating hours. We expect the ongoing rollout of micro fulfillment centers to continue to drive efficiencies in the pharmacy, easing staffing challenges. Additionally, pharmacy will be boosted by increased contributions from pharmacy services and patient acquisition initiatives. We also have good visibility to reimbursement, net of procurement savings. Second, we expect continued momentum from the retail business, driven by our digital and omnichannel offerings, the enhancements we have made to our myWalgreens loyalty program and through innovation and growth in own brands. We are also seeing increasing contribution from alternative profit streams, including financial services and media.
Finally, actions to mitigate shrink are well underway and we are already seeing improved shrink rates. Overall, we expect gross profit to be broadly flat but up around 5% to 6% excluding the COVID headwind. SG&A is expected to increase by around 1% to 2%, reflecting increased investments in team members and technology, offset by continued strong results from the Transformational Cost Management Program.
Turning next to the International segment. International had a very strong year in fiscal 2022 and we expect continued robust growth in 2023. However the strong dollar will negatively impact reported results and represent a headwind to sales and adjusted operating income of around 11% to 12%. Sales are projected to grow 5% to 7% on a constant currency basis with all markets growing. Specifically, we expect the UK to grow 6% and Germany will grow 4%. We expect adjusted operating income of $830 million and $870 million with strong constant currency growth of 26% to 32%. This follows on from 65% growth in 2022. Sales growth, strong cost management discipline and integration related benefits in Germany are the key drivers.
Now let's turn to US Healthcare. We are very encouraged by our progress as we build-out our next growth engine. We expect sales of around $5 billion including a full year of contribution from prior acquisitions and pro forma sales growth of 45% to 55%. We are introducing an adjusted EBITDA metric for the US Healthcare segment and for fiscal 2023, we expect an adjusted EBITDA loss of $220 million to $240 million. This is an improvement of $70 million to $90 million versus fiscal 2022. We have moved past the fiscal 2022 peak investment period and the team is operating with agility and efficiency and we have clear line of sight to positive adjusted EBITDA in fiscal 2024.
Let's now take a deeper look at the US Healthcare projections. The US Healthcare segment is scaling to $5 billion in sales and pro forma sales growth of 45% to 50% reflect strong growth across all of our Healthcare businesses. VillageMD sales are projected at $2.8 billion to $3 billion, growing 50% to 60% with the performance driven by growth and value-based patients at existing clinics and continued expansion of their clinic footprint. We anticipate pro forma growth of 20% to 30% at CareCentrix, reaching sales of over $1.4 billion in fiscal 2023. This performance reflects growth across existing and new payer and provider customers and upsell of innovative new home services. Shields is expected to drive pro forma sales growth of 30% to 40% through new health system partners and an expanding value proposition at existing customers. Given the relatively early stage of development, we expect the Walgreens Health organic business to deliver a modest sales contribution of $120 million to $150 million.
Let me now walk you through some of the key corporate assumptions. Our tax rate is expected to be around 16% in fiscal 2023, roughly 50 basis points higher than prior year. However, we do anticipate an increase to around 20% in fiscal 2024, largely consistent with our previous expectations. This step-up will be driven by higher tax rates in the UK and Switzerland and a greater percentage of income from US-based businesses. Interest expense is expected to increase by $100 million due largely to higher interest rates. Our fiscal 2023 guidance assumes only anti-dilutive share repurchase activity as our near-term capital allocation priorities will be primarily focused on growth investments and debt pay-down. However, beyond 2023, we do expect to have flexibility for a sizable new program. Please note that our fiscal 2023 guidance does not assume any acquisitions or divestitures. And finally, corporate costs will decline slightly as we tightly manage central costs.
While we are not providing quarterly EPS guidance, we see a more balanced cadence between the first and second half compared to current consensus which appears more first-half weighted. In the first half, we will be lapping strong COVID-19 the execution and record retail comps, the second half of the year will reflect the pace and timing of script volume recovery and reduced US healthcare losses as the segment scales up.
Let me now turn to our long-term outlook. Looking beyond 2023, we are reconfirming our long-term growth algorithm with mid to high single-digit adjusted EPS growth in 2024, building to low-teens growth in 2025. Additionally, I would highlight that 2024 includes a more modest headwind from COVID-19 and the impact of a higher tax rate. Our transformation to a healthcare company will drive accelerated earnings growth as the faster growth and higher margin US Healthcare business reaches scale. We expect the US Healthcare to contribute over half of the annual adjusted EPS growth over the long term. While we continue to assume moderate growth from the core business and increase returns from capital deployment as we exit 2023 with improved credit metrics.
Looking now at our capital allocation priorities. First, we will continue to prioritize organic investment in our resilient core business and this will drive consistent returns and fast payback. Second, we will prioritize M&A that advances our health care ambitions, evaluating all opportunities through a rigorous strategic and financial lines. We intend to further simplify our portfolio to unlock value and this provides significant flexibility as we execute on our transformation. Third, balance sheet strength is a key focus area for us. We remain committed to maintaining our investment grade rating. Finally, we will return excess capital to shareholders, including a growing dividend. Beyond fiscal 2023, we have potential capacity to resume sizable share repurchases.
Given the rising importance of US Healthcare, I would like to provide increased clarity on the segment goals over the next three years. With our solid execution to-date and greater visibility ahead, we are increasing our fiscal 2025 sales goal from $9 billion to $10 billion previously to $11 to $12 billion and representing a compound annual growth rate of approximately 50% on a pro forma basis. VillageMD is the largest contributor with growth achieved as existing clinics mature and realize more attractive economics and through ongoing expansion of VillageMD's clinic footprint. We expect continued strong sales growth at Shields, benefiting from rapid growth in the broader specialty pharmacy market and their unique focus on health system enablement. CareCentrix sales will be driven by increased demand to better manage the needs of patients with complex or chronic conditions as they transition-out of the hospital and into other post-acute settings including the home. Finally, we expect the Walgreens Health organic business to scale rapidly as we add new payer and provider partners and increasingly move to value based and delegated risk arrangements. We expect the Walgreens Health organic business to contribute over $1 billion in sales by 2025.
Moving now to our EBITDA projections for US Healthcare. We have a clear path to profitability by fiscal year 2024, building to a target of mid-teens adjusted EBITDA margin. We are projecting adjusted EBITDA of $125 million to $225 million in 2024, rising to $500 to $700 million in 2025. We are confident in this trajectory with several factors expected to drive significant profit growth. Achieving scale across the portfolio is critical, as it enhances our ability to cover central overheads and platform investments, including technology. As you have seen the earlier, sales will scale from $5 billion in fiscal 2023 to $7 billion to $8 billion dollars in 2024 and $11 billion to $12 billion by 2025. [Indecipherable] VillageMD clinic profile is a significant tailwind as a greater percentage of clinics reach positive contribution margin. As a reminder, this typically occurs in year three on a seven-year glide path to very attractive at-scale economics.
Within the Walgreens Health organic business, we continue to have productive discussions with existing and prospective payer partners around the shift to risk arrangements and our margin accretive Shields business is projected to continue to grow strongly. On top of all this, the US Healthcare team has identified sizable synergy opportunities across our various health care assets and they are operating with speed and agility and driving operating efficiencies on a clear path to profitability.
Let me now wrap-up the guidance section. I would like to leave you with three key takeaways as to why we are excited about the near-term and long-term outlook for WBA. First, we expect to drive positive core business momentum in fiscal 2023 as we lap strong COVID-19 execution in 2022. The US Healthcare segment is rapidly approaching positive adjusted EBITDA. The business continues to scale and we have raised our 2025 sales outlook to $11 billion to $12 billion, representing a compound annual growth rate of roughly 50%. Finally we remain confident in our long term growth algorithm and we are reconfirming our goal of low teens EPS growth.
We are committed to our vision and strategy and we have and will take action to simplify the business and unlock shareholder value.
With that let me now pass it back to Ros.
