James Kehoe
Executive Vice President & Global Chief Financial Officer at Walgreens Boots Alliance
Thank you, Roz, and good morning.
In summary, we had a solid start to the fiscal year. Despite the expected headwinds, the first quarter results were broadly in line with our expectations, and we are maintaining our full year EPS outlook. Adjusted EPS of $1.16 declined by 29.9% on a constant currency basis as we were lapping a very strong prior-year quarter when we delivered EPS growth of over 53%. The year-over-year decline was mainly due to a 19% headwind from COVID-19, US Healthcare growth investments of 5% and labor investments of 5%. These were partly offset by good retail performance in both the US and International segments and a favorable tax rate.
Excluding the AllianceRx and US Healthcare M&A, sales grew 3.2% on a constant currency basis. The core business remained resilient in a challenging operating environment. Comparable sales were up 3.8% in the US, despite lapping a very strong prior-year comp of 7.9%. International sales grew 4.6%, led by the UK and Germany. And our US Healthcare business continues to rapidly scale with almost $1 billion of sales in the quarter and growing 38% on a pro forma basis.
With the first quarter, broadly in line, we are maintaining our full year adjusted EPS guidance of $4.45 to $4.65 with 8% to 10% constant currency core growth offset by a COVID-19 headwind of around 17 percentage points. Our guidance now includes the EPS accretion from Summit Health and dilution from our reduced ownership stake in AmerisourceBergen. We have raised our full year sales guidance by over $3 billion to reflect the closing of the Summit Health transaction, refreshed currency rates and a good start to the year.
Let's now look at the results in more detail. Sales of $33 billion rose 1.1% on a constant currency basis, despite an adverse impact of 485 basis points from the anticipated decline at AllianceRx. This headwind will stop after December. Adjusted operating income declined 42% on a constant currency basis due to three factors. Firstly, a much lower contribution from COVID-19 vaccinations and testing led to a negative impact of approximately 20%. Secondly, the US Healthcare adjusted operating loss was $139 million higher in the quarter with an impact of 8 percentage points. The current quarter includes higher Walgreens Health organic investments and a full quarter of results for VillageMD compared to only 6 days of losses in the prior-year quarter. Thirdly, our previously disclosed labor investments in pharmacy staffing and minimum wage are a $100 million headwind, equivalent to 6 percentage points of AOI growth.
Adjusted EPS was $1.16, a constant currency decline of 29.9% due entirely to operating income. This was despite a favorable tax rate, which benefited from the release of valuation allowances related to capital losses. GAAP earnings were a loss of $3.7 billion compared to net earnings of $3.6 billion in the year-ago quarter. The current quarter included a $5.2 billion after-tax charge for opioid-related losses, partly offset by a $900 million after-tax gain on the sale of AmerisourceBergen shares. Additionally, we are comparing to a prior-year quarter that included a $2.5 billion after-tax gain on the company's investments in VillageMD and Shields.
Now let's move to the US Retail Pharmacy segment. While the US performance was impacted by the anticipated COVID-19 headwinds, we do expect year-on-year performance to improve in the second half as the COVID headwind lessens and initiatives to drive script volume gain traction. Sales decreased 3% in the quarter. But if you exclude the negative impact of AllianceRX, sales increased by 3%. Comp sales increased 3.8% despite lapping a very strong prior-year comp of 7.9%. Adjusted operating income of $1.1 billion declined 35%, broadly in line with our expectations. Headwinds from fewer COVID-19 vaccinations and PCR tests and increased labor investments were partly offset by retail sales growth and gross margin expansion and savings from the transformational cost management program.
Let me now turn to US pharmacy. Pharmacy sales declined 4%, held back by a 7.8 percentage point headwind from AllianceRx and by significantly lower contributions from COVID-19 vaccinations and testing. Comparable pharmacy sales were up 4.8% despite lapping a solid 6.8% comp last year. The sales growth was favorably impacted by branded drug inflation. Comp scripts were flat. And excluding immunizations, comp scripts were up 2.1%, a sequential improvement of over 200 basis points. We administered 8.4 million COVID-19 vaccinations in the first quarter, down 46% versus the prior-year quarter.
Flu vaccinations were up versus prior year due to higher flu incidences. Season-to-date, we have administered over 9 million flu shots. As expected, pharmacy adjusted gross profit and gross margin declined in the quarter due to fewer COVID-19 vaccinations, a mix shift to lower margin at home COVID-19 tests and ongoing reimbursement pressure, net of procurement savings. Reimbursement was broadly in line with our expectations and represented a lower level of pressure compared to the prior year.
Turning next to our US retail business. We saw a good retail performance in the quarter with continued growth in both sales and margin. Retail comp sales increased 1.4%, despite lapping a very strong 10.6% comp in the prior-year quarter. Excluding tobacco, comps were up 2.1%. And on a 2-year stack basis, comp sales growth was 13.8%. We benefited from a 220-basis-point tailwind from cough, cold flu. However, this was largely offset by a 170-basis-point headwind from lower sales of at home COVID-19 tests. Comp sales were led by 4.9% growth in beauty and a 2.9% increase in consumables and general merchandise. Both categories benefited from own brand offerings and decisions to invest early in inventory availability. We delivered another quarter of strong retail gross margin performance, reflecting effective margin management, including strategic pricing and promotional optimization and favorable shrink trends.
Turning next to the International segment, and I'll talk to constant currency numbers. Sales increased 4.6% with growth across all international markets. Boots UK was up 4.3% and Germany wholesale grew 4.2%. Adjusted operating income was $116 million, down 20% versus prior year. Strong UK retail sales and good operational execution in the Germany wholesale business were offset by lower demand for COVID-19 pharmacy services in the UK, the adverse gross margin impact of NHS pharmacy funding and the expiration of temporary rental reductions received in the prior year. On a combined basis, these three items had an impact of around 27 percentage points.
Looking forward, we do expect the international segment to return to strong profit growth in the second quarter. Early indications show that Boots had a strong Christmas season, with comp sales growth of around 15%. Key categories, including gifting, beauty and fragrance, performed extremely well, along with an uptick in OTC, cold and immunity categories.
Let's now look in more detail at Boots UK. Boots UK sales growth of 4% was led by continued strong retail performance. Comparable retail sales advanced 8.7%. And this is coming on top of a 16% comp growth in the year-ago quarter. Footfall grew 8% with flagship and travel locations again showing robust improvement. Boots continued to gain market share with personal care and health and wellness performing particularly well. Comparable pharmacy sales declined 0.9%, reflecting lower demand for COVID-19 services.
Boots.com continues its strong performance with sales more than doubling versus the pre-COVID period. Approximately 18% of our UK retail sales came from boots.com in the quarter, which compares to roughly 9% in the equivalent pre-COVID quarter. November was a very strong month with Black Friday being our biggest ever online event.
Turning next to US Healthcare. We are very excited about developments in our US Healthcare segment as the business continues to rapidly scale. Sales were almost $1 billion in the quarter compared to only $50 million in the year-ago quarter. Pro forma combined sales growth of 38% compared to 34% in the fourth quarter of fiscal '22. VillageMD had sales of $550 million, advancing 49% on a pro forma basis, with growth driven by existing clinic growth and expansion of the clinic footprint. Shields again showed very strong growth with sales of over $100 million and pro forma growth of 44%, driven by recent contract wins, further expansion of existing partnerships and strong executional focus. In its first full quarter, CareCentrix delivered sales of over $330 million, pro forma sales growth was 22%.
Segment adjusted operating income was a loss of $152 million. This was flat sequentially and compares to a loss of only $13 million in the year-ago quarter. Adjusted EBITDA was a loss of $124 million in the quarter compared to a loss of $11 million in the prior year. The year-over-year increase in losses largely reflects a full quarter of VillageMD in the current year versus 6 days in the prior-year quarter and higher Walgreens Health organic investments. These headwinds more than offset positive profit contributions from Shields and CareCentrix.
Let's now look at some of the key metrics for US Healthcare. As Roz mentioned earlier, VillageMD ended the calendar year with 393 clinics, including 200 clinics colocated with Walgreens. This was in line with our target. VillageMD, had 440,000 value-based patients at quarter end, up 46% from 300,000 at the end of the prior-year quarter. At quarter end, the Walgreens Health organic business of 2.9 million contracted lives, up from 2.3 million at the end of the fourth quarter, as existing payers added new lines of business. We exceeded our original goal of 2 million lives.
As we scale our access to lives and add new partners, we will continue to build out our Walgreens Health Corners. We ended the quarter with 112 health corners, ahead of our goal of 100. Health corners play an important role in engaging patients, addressing care gaps and improving health outcomes. Since the program was launched, Walgreens Health Corners have facilitated more than 300,000 patient interactions. In summary, we performed strongly against our key objectives, and we are well positioned for future success in the coming year. The addition of Summit Health will further enhance our portfolio of leading assets across the care continuum, drive meaningful synergy opportunities and accelerate the path to profitability.
Turning next to cash flow. We generated almost $0.5 billion of operating cash flow in the first quarter, while free cash flow was negative $117 million. Operating cash flow was negatively impacted by increased inventories, including successful advanced buys to secure product availability in the US and UK holiday seasons. The year-over-year decline in free cash flow was due to lower earnings, some phasing of working capital and increased capital expenditures related to growth initiatives, including the VillageMD footprint expansion, the rollout of micro fulfillment centers and digital and omnichannel investments.
Turning now to guidance. Overall, we are confirming our full year EPS guidance. The guidance now incorporates EPS accretion from the recently closed Summit Health transaction, and this offsets the dilution from our reduced ownership stake in AmerisourceBergen. Our projection for the total number of COVID-19 vaccinations is unchanged. But we do now expect a slightly greater headwinds from COVID-19 testing due to a demand shift from drive-through testing to lower margin at home tests. This has had a negative impact of roughly 1 percentage point of EPS.
Currency rates are somewhat favorable. And this has reduced the year-on-year currency headwind from 2% to 1%. Excluding these items, we continue to project core business growth of 8% to 10%. In terms of phasing, at the midpoint of our guidance, we see a balanced 50/50 cadence between the first half and second half. Versus our original expectations, this assumes a shift of COVID-19 vaccinations from the second quarter into the third quarter with an impact of approximately $0.09.
Second quarter earnings growth will continue to be adversely impacted by the ongoing headwinds from COVID-19, continued investments in US Healthcare and labor and the higher tax rate. In the second half of the year, EPS will grow around 30% with good visibility into the key drivers. Firstly, we expect significant second half momentum in US retail pharmacy, including ongoing script recovery as we normalize store operations and implement marketing win back initiatives, favorable trends in reimbursement, net of procurement, lower levels of shrink and continued strong retail performance. Additionally, while COVID-19 will remain a headwind in the second half of the year, it will be a lot lower, and we expect an impact that is less than 50% of what we saw in the first half of the year.
Secondly, International has delivered a strong Christmas trading period. And we expect to see strong ongoing performance through the balance of the year. Our international business, particularly in the UK, has emerged in a competitively strengthened position and is well positioned for growth. Finally, the first half of the year is the peak investment period for US Healthcare. And consistent with prior guidance, we expect this segment to achieve positive adjusted EBITDA exiting the year. The overall segment will flip from being a headwind in the first half to a significant mid-teens EPS tailwind.
Let me now provide some additional detail around our segment sales and profit assumptions. We are raising our WBA's sales guidance by $3 billion to $3.5 billion. The increase is driven by VillageMD's acquisition of Summit Health, refreshed currencies and better-than-expected sales in the first quarter. Adjusted operating income is unchanged at $4.7 billion to $4.9 billion. The acquisition of Summit is offset by a lower contribution from AmerisourceBergen, as we reduced our ownership stake.
For US Retail Pharmacy, we have raised our sales guidance by $500 million due to a better-than-expected first quarter, which benefited from brand inflation and broad-based retail strength. The AOI range is lowered by $150 million to reflect the sale of the AmerisourceBergen shares in November and December. These actions have reduced our stake from around 26% to 17%. We have raised our guidance for the International segment to reflect the lower headwind from currencies. We now expect sales of $21.2 billion to $21.7 billion, up $800 million versus the prior range. We are also raising our AOI forecast to $870 million to $900 million.
For the US Healthcare segment, we expect sales of $6.5 billion to $7.3 billion and an adjusted EBITDA range from a loss of $50 million to positive $25 million. Both of these are consistent with the goals we provided when the Summit Health transaction was announced in November. We continue to expect to exit fiscal '23 with positive adjusted EBITDA for the US Healthcare segment.
Moving onto our corporate assumptions. The full year tax rate is unchanged at around 16%. Interest expense is expected to be $560 million to $580 million, an increase of $70 million to $80 million compared to prior guidance and this is mostly due to the Summit transaction. We are raising our forecast for equity method investments on non-controlling interests, with the combined range increasing by nearly $100 million versus our prior guidance. This reflects the Summit Health transaction and the acceleration of the full acquisition of Shields and CareCentrix. In summary, we are raising our fiscal year '23 sales guidance for WBA, and we are confirming our full year EPS guidance.
With that, let me now pass it back to Roz for her closing remarks.
