Walgreens Boots Alliance (WBA) Earnings Report: Q1 2016 ... · Walgreens Boots Alliance (WBA) Earnings Report: Q1 2016 Conference Call Transcript The following Walgreens Boots Alliance

CompanyName:WalgreensBootsAllianceIncCompanyTicker:WBASector:ServicesIndustry:Retail

EventDescription:Q12016EarningsCallMarketCapasofEventDate:87.80BPriceasofEventDate:81.88

©2014TheStreet,Inc.Al l R ightsReserved Page1of22

WalgreensBootsAlliance(WBA)EarningsReport:Q12016ConferenceCallTranscriptThefollowingWalgreensBootsAllianceconferencecalltookplaceonJanuary7,2016,08:30AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

GeraldGradwell;WalgreensBootsAllianceInc.;SVPIR&SpecialProjectsStefanoPessina;WalgreensBootsAllianceInc.;ExecutiveViceChairmanCEOGeorgeFairweather;WalgreensBootsAllianceInc.;EVPGlobalCFOAlexGourlay;WalgreensBootsAllianceInc.;EVPPresidentofWalgreens

OtherPart icipants

MarkWiltamuth;JefferiesLLC;AnalystLisaGill;JPMorgan;AnalystRossMuken;EvercoreISI;AnalystRobertJones;GoldmanSachs;AnalystGeorgeHill;DeutscheBank;AnalystRickyGoldwasser;MorganStanley;AnalystDavidLarsen;LeerinkPartners;AnalystJohnHeinbockel;GuggenheimSecuritiesLLC;AnalystScottMushkin;WolfeResearch;AnalystEricBosshard;ClevelandResearchCompany;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

WelcometotheWalgreensBootsAlliance,Inc.,first-quarter2016earningsconferencecall.

(OperatorInstructions)

Asaremindertoouraudience,thisconferenceisbeingrecorded.

NowIwouldliketoturnthefloorovertoGeraldGradwell,SeniorVicePresidentofInvestorRelationsandSpecialProjects.Sir,youhavethefloor.

GeraldGradwell(SVPIR&SpecialProjects):

Thankyou.Goodmorning,everybody.Welcometoourfiscal2016first-quarterearningscall.

Today,StefanoPessina,ourExecutiveViceChairmanandChiefExecutiveOfficer,andGeorgeFairweather,ExecutiveVicePresidentandGlobalChiefFinancialOfficer,willtakeyouthroughourresultsingreaterdetail.AlsojoiningusonthecallandavailableforquestionsisAlexGourlay,ExecutiveVicePresidentofWalgreensBootsAllianceandPresidentofWalgreens.

YoucanfindalinktoourwebcastonourInvestorRelationswebsiteatinvestor.walgreensbootsalliance.com.Afterthecall,thispresentationandawebcastwillbearchivedonourwebsitefor12months.




Certainstatementsandprojectionsoffutureresultsmadeinthispresentationconstituteforward-lookingstatementsthatarebasedonourcurrentmarket,competitive,andregulatoryexpectationsandaresubjecttorisksanduncertaintiesthatcouldcauseactualresultstovarymaterially.Excepttotheextentrequiredbylaw,weundertakenoobligationtoupdatepubliclyanyforward-lookingstatementsafterthispresentation,whetherasaresultofnewinformation,futureevents,changesinassumptions,orotherwise.PleaseseeourlatestForm10-Kandotherfilingsforadiscussionofriskfactorsastheyrelatetoforward-lookingstatements.

Asareminder,today'spresentationincludescertainnon-GAAPfinancialmeasures,andwereferyoutotheappendixofthepresentationmaterialsavailableonourInvestorRelationswebsiteforreconciliationtothemostdirectlycomparableGAAPfinancialmeasuresandrelatedinformation.

Pleasenotethatwe'vestreamlinedaspectsofthepresentationusedinreportingourresultsthisquarter.Muchoftheunderlyingdetailremainsavailableintheappendix,andyoushouldrefertotheappendixforthatadditionalinformation.WiththatIwillhandthecallovertoStefanoforsomeopeningcomments.

StefanoPessina(ExecutiveViceChairmanCEO):

Thankyou,Gerald.Goodmorning,everyone,andwelcometoourfirst-quarter2016earningscall.IampleasedtoreportthattodayIstartwithacomparativelystrongfirstquarter,asweexpected.OurongoingworktocontrolcostsacrosstheCompanyandimproveadjustedoperatingincomemarginisgrowingearningsoverall,withadjusteddilutednetearningspershareattributabletoWalgreensBootsAllianceup32.1%comparedwiththeyear-agoperiodto$1.03.Althoughitisearlydays,weareontracktodeliveragainstourexpectations.

Inadditiontotheencouragingorganicresultsfromallthreeofourdivisions,wecontinuetoworkhardtodeveloptheCompany.WehavetakenasignificantstepforwardwithourproposedagreementtoacquireRiteAid,andweremainfocusedonbuildingnewpartnerships.InDecember,afterthequarterend,weannouncedthefulfillmentagreementwithValentwhich,webelieve,willenableconsumerstoconvenientlyaccesstheValeant'sproductatlowercost.Iwillcomebacktothislater,butnowwillhandovertoGeorgetotakeusthroughthefinancialperformanceforthequarter.

GeorgeFairweather (EVPGlobalCFO):

Thankyou,Stefano.Goodmorning,everyone,andgoodafternoontothoselisteninginEurope.

Startingwiththefirst-quarterhighlights,netsaleswere$29billion,up48.5%onthesamequarterayearago,largelyduetotheinclusionofAllianceBoots.OnaGAAPbasis,operatingincomewas$1.5billion.NetearningsattributabletoWalgreensBootsAlliancewere$1.1billionanddilutedEPSwas$1.01.

Onanadjustedbasis,operatingincomewas$1.7billionup53.8%.NetearningsachievabletoWalgreensBootsAlliancewere$1.1billion,up51.1%,andadjusteddilutedEPSwas$1.03,up32.1%.

Theseresultsare,ofcourse,notdirectlycomparablewithfirst-quarteroffiscal2015duetotheAllianceBootstransactioninDecember2014andtheresultingchangesinsegmentalreporting.KeyfactorsdrivingourperformanceversusthesamequarterlastyearweretheAllianceBootstransactionandgrowthintheRetailPharmacyUSAdivision.

TotalRetailPharmacyUSAsaleswere$20.4billion,anincreaseof4.2%overthesamequarterayearago.Salesonacomparable-storebasisincreasedby5.8%,drivenbystrongpharmacyvolumeandmix.Totalsalesgrowthwaslowerthancomparable-storesalesprimarilyduetothesaleofourinfusionbusinessandstoreclosuresduringthepastyear.

Adjustedgrossmarginat27%was30basispointslower,primarilyduetoongoingpharmacymargin




pressure.Thisresultedin$5.5billionofadjustedgrossprofit,up2.7%.

AdjustedSG&Awas$4.2billion,adecreaseof2.1%.Thisreflectsthemeaningfulprogressmadeinourcost-savingsprogramwhilemaintainingourcustomerexperience.

Thedivision'sadjustedoperatingincomewas$1.2billion,up11.2%,givinganadjustedoperatingmarginof6.1%,up40basispoints.ExcludingWalgreens'shareofequityearningsinAllianceBootsintheyear-agoquarter,adjustedoperatingincomeforthedivisiongrewby22.9%.

Turningnowtolookinmoredetailatpharmacy,pharmacysaleswereup6.7%forthequarter.231millionprescriptionswerefilledona30-daybasis,includingimmunizations,anincreaseof4.1%.

Onacomparable-storebasis,pharmacysalesincreased9.3%,withcomparablescriptsbuildup4.7%.Overall,wearepleasedwithourtop-linegrowth,especiallygiventheweakstartforthecough-cold-fluseasonthisyear.AccordingtoIMSHealth,thereportedincidenceoffluacrosstheUSAdeclinedby10.7%comparedwiththeyear-agoquarter.

Ourincreaseincomparable-storescriptswasdrivenbyourMedicarePartDgrowthstrategy,wherewegrewmarketshare,andagreaterfocusoncustomercare.Thisresultedinourrefillprescriptionmarketshareona30-dayadjustedbasisincreasingbyapproximately20basispointsovertheyear-agoquarterto19.2%,asreportedbyIMSHealth.

Consistentwithourexpectations,weexperiencedpressureonpharmacygrossmargins.Thesewerenegativelyimpactedbylowerthird-partyreimbursements,anincreaseinMedicarePartDmix,ourcontinuingstrategyofdriving90-dayprescriptionsatretail,andthemixofspecialtydrugs,whichcarryalowermarginpercentage.Thiswaspartiallyoffsetbyadditionalbrand-to-genericdrugconversions.

Althoughwecontinuetoanticipategrossmarginpressure,weremainconfidentinourabilitytogrowthepharmacypartofourbusinessovertime.Ourstrategytodeliverthisistodriveaccesstocriticalprograms,suchasMedPartD,throughbuildingdeeperpayerrelationshipsandthroughdevelopinginnovativepartnerships,suchasourrecentlyannouncedagreementwithValeant.

SincethequarterendinDecember,ourpharmacysaleswereimpactedbythecontinuingweaknessinthecough-cold-fluseason.

Retailsalesdecreasedby90basispointsoverthefirstquarteroffiscal2015,withsalesincomparablestoresdown60basispoints.Thiswasprimarilyduetoareductioninunprofitablepromotionsasweincreasinglyfocusonourkeyhealthandbeautycategories.

Additionally,aspartofourstrategy,wetransitionedseasonalitemsawayfromholidaydecorations,whichwerehistoricallysoldonBlackFridayandintheNovemberrun-uptoChristmas,withhigher-qualitygiftableitemsthatsellthroughouttheholidayseason.Thisledtoananticipatedfallinsalesinthequarter.

Whilegrossmarginwasessentiallyflat,overallretailprofitabilityincreasedduetothelowercosts.Sincethequarterend,Decembercomparableretailsaleswererelativelyflatwithpositiveresultsfromourstrategicshifttohealthandbeauty,wellness,andseasonalcategoriesoffsetbytheweakcough-coldfluseason.

Webelievethatourfundamentalshifttowardshealthandbeautyisresonatingwithourcustomersandisanimportantpointofdifferentiation.Havingconductedpilotsinover400stores,we'reexcitedforthepositiveresultswehaveseen,particularlyforNo7andSoap&Glory.Aspreviouslyindicated,weareexpandingourdifferentiatedbeautyofferingtoapproximately2,000storeswiththerolloutplannedtobegininsummer2016.




TurningnowtoourRetailPharmacyInternationaldivision,whichispharmacy-ledhealthandbeautyretailbusinessesineightcountries,thebiggestbusinessbeingBootsintheUK.TotalRetailPharmacyInternationalsalesforthequarterwere$3.5billion,proformaconstantcurrencycomparable-storesalesbeingupby2.2%.Adjustedgrossprofitwas$1.5billion,withanadjustedgrossprofitmarginof42.6%.

AdjustedSG&Awas$1.2billion,thedivision'sdepreciationchargemarginallybenefitingfrompurchasepriceaccountingrefinementsinthequarter.Adjustedoperatingincomewas$350million,theadjustedoperatingmarginof8.9%beinghigherthanintheseasonallyweakerfourthquarter,asweexpected.

Onaproformaconstant-currencybasis,comparablepharmacysalesforthedivisionwereup3.8%.Comparableretailsalesup1.3%.

BootsUK'scomparablepharmacysalesincreasedby3.5%mainlyasaresultofadditionalhigh-valuedrugsdispensedinitshospitalpharmacies,higheraveragevolume,higheraverageitemvalue,andgrowthinpharmacyservicessuchasfluvaccinations.ComparableretailsalesgrowthatBootsUKwas80basispoints,growthcomingmainlyfromBoots.com,albeitatalowerratethaninpreviousquartersasinAugustBootsanniversarieditsimprovedorderonline,collectinstoreoffer.

CosmeticswerethebestperformingretailcategoryintheUK,ledbyastrongperformanceinpremium,No7,andLizEarle,whichweacquiredinJuly.InNovember,weaddedanotherexcitingbrandtoourportfolio,SleekMakeUP,whichhasayoungandethnicallydiversecustomerbase.Sleekiscurrentlysoldinover100Bootsstores(technicaldifficulty)doingwithLizEarle.

OutsidetheUKwedeliveredparticularlygoodcomparablesalesgrowthinMexicoandintheRepublicofIreland.BenavidesinMexico,whilecurrentlyaloweroperatingmarginbusinessthanBoots,isakeypriorityforexpansion,andwe'reworkinghardtofindinnovativewaystoaccelerateourstoreopeningprogram.

Sincethequarterend,Decemberperformancehasbeenencouraging.BootsUK'sretailsalesgrowthwashigherthaninthefirstquarterduetoastrongonlineperformance.Salesofourexclusiverangeofseasonalgiftswereparticularlygood.

TurningnowtoourPharmaceuticalWholesaledivision,overall,thePharmaceuticalWholesaledivisionperformedinlinewithourexpectationsduringthequarter.Totalsaleswere$5.8billion.Onaproformaconstant--currencybasisexcludingacquisitionsanddisposals,comparablesalesincreasedby3.1%overthesamequarterin2015.Thiswasslightlyaheadofourestimatedmarketgrowth,weightedonthebasisofourcountrywholesalesales.Asinthepriorquarter,salesgrowthwasparticularlystronginNorway;andwecontinuedtoseegoodgrowthinGermanyandTurkey,twoofourlargestmarkets.

Adjustedoperatingincomewas$166millioninthequarter,andtheadjustedoperatingincomemarginwas2.9%.

CombinednetsynergiesinthequarterfromtheAllianceBootsprogramwere$288million,soweareverymuchontracktodeliverourgoalofreachingatleast$1billioninfiscal2016.AsIsaidontheyear-endcall,wecontinuetoidentifyandactionmanyothersynergieswhicharesimplynotpracticaltoquantify,astheyblendintoourcoreoperations.Atthesametime,we'recontinuingtomakegoodprogresstodeliverour$1.5billioncost-savingsprogramandremainontracktoachievethistargetbytheendoffiscal2017.

Operatingcashflowinthequarterwas$732million,reflectingourtypicalseasonalbuildininventories.AsIsaidonthelastcall,wecontinuetoseekwaystodeliverfurtherworkingcapitalefficiencies,particularlyintheUS.




Capitalexpenditureinthequartertotaled$340million,whichwasjustbelowtheamountspentinthefourthquarteroflastyear.Thisreflectsourdrive,whichIagaintalkedaboutonourlastcall,toinvestinkeyareasthatdevelopourcustomerproposition,includinginformationtechnology.Freecashflowforthequarter,therefore,nettedto$392million.

SinceourRiteAidannouncement,we'vemadegoodprogresswiththefunding.InDecember,wecompletedtheplacementof$5billiontermloanfacilitiesandthesyndicationofanew$7.8billionbridgefacility.Thesenewfacilitiesreplaceourpreviouslyreported$12.8billionbridgefacilitycommitment.Drawingsare,ofcourse,subjecttoclosingoftheacquisition.

Letmenowconcludewithsomecommentsonguidanceforfiscal2016.Asyouwillhaveseeninthismorning'spressrelease,we'veraisedthelowerendofourfiscal2016guidanceby$0.05persharetoarangeof$4.30to$4.55.ThiscontinuestoassumenomaterialaccretionfromtheagreementtoacquireRiteAid,thepreviouslyannouncedsuspensionofthebalanceofthe$3billionsharebuybackprogram,continuationofournormalanti-dilutivebuybackprogramrelatingtostockincentives,andnosignificantchangesincurrencyexchangerates.

Pleaserememberthatwehavecurrencytranslationalexposurebasedprimarilyonmovementsinthepoundsterlingversusthedollar.NotonlydoesthisimpactouradjustedoperatingincomeandEPS,butitcanalsocausequarterlyvolatilityinthesalesgrossmarginandSG&Aitemlines.TheguidanceIhavejustprovidedreflectscurrentcurrencyratesandsofactorsinaheadwindofaround$0.03sinceweprovidedourinitialfiscal-year2016guidancebackinOctober.

I'llnowhandyoubacktoStefano.


Thankyou,George.TheCompanyhasperformedwelloverallinthefirstquarter,andIwanttocomebacktothatinamoment.Iwouldlikefirsttoupdateyouonafewofthethingsthatwehavebeenworkingoninthequarterandsinceits[progress]thathasnothadadirectimpactonthequarterlyperformanceandthereview.

Asyouhaveheard,wearenotassumingourproposedacquisitionofRiteAidwillprovideanymaterialaccretion(inaudible)of2016.ButIwouldreiteratethatthistransactionisprogressingasweexpectedandplanned.

Wecontinuetoanticipatecompletingtheacquisitioninthesecondhalfofcalendar-year2016.ThetransactionremainssubjecttoapprovalbyRiteAid'sshareholders,regulatoryclearances,andothercustomaryclosingconditions.

RiteAidhaveissuedtheirproxyandtheirstockholdersmeetingtoapprovethetransactionisscheduledforFebruary4.Wearecontinuingtoworkcloselywiththeregulators.Youwillhaveseen,asweexpected,thatwehavereceivedasecondrequestfromtheFTCforadditionalinformation.ThisisastandardpartoftheregulatoryprocessinconnectionwiththeFTC'sreview.

Shortlyaftertheannouncementoftheproposedacquisition,weappointedahighlyexperiencedintegrationteamwhichhasbeenupandrunningsincetheendofNovember.Theyarenowwellunderwayonpreliminaryplanningwork.

InDecember,wealsoannouncedouragreementwithValeantPharmaceuticals.Thisagreement,thoughnewtotheUSmarket,hassomesimilaritiestothewayweworkwithanumberofpharmaceuticalcompaniesinEurope.Itisaverygoodexampleofhowwecantransferexistingexperienceandunderstandingfromonemarketand[directit]toanother.




ThetwomainpartsoftheagreementscombinetoprovideValeantwiththeopportunitytoserveafarwiderpatientbaseatasignificantlylowercost,andthepotentialtobothgrowtheirbusinessandimproveconvenienceandservicelevelsatanoverallsavingtothehealthcaresystem.Fromourpointofview,wehavethepotentialtoofferpatientsthemedicationstheywantandtheyhavebeenprescribedwithahighstandardforcounselingandtherapyinamethodthatmakesgooduseofourinfrastructureandprofessionalcapabilities.

Soaswelookatourbusinesstodayandwhatwehaveseenhappeninourdynamicandchangingmarkets,it[serves]anumberofglobalthemesthatIhavebelievedtobeinevitableforsometime.Inhealthcarewearecontinuingtoseeincreasingdemandontheexistingsystemforbothpreventativeandtherapeutictreatment.Thisisonlycompoundedbyinflationarypressureofnew,innovative,andcorrespondinglyhigh-cost(inaudible).

In[desires]tomitigatethispressureandprovidemoreandbettercareatlowercost,ourpharmacystandsoutasbeingoneofthemostconvenient,flexible,andlowestcostmeansofmeetingthechallengeswhichthesystemfaces.OuragreementwithValeantdemonstrateshowwecanuseourpharmacynetworktoimproveaccessandservicelevelwhilereducingcostsinthehealthcaresystem.

AswehaveseeninEuropeandelsewhere,webelievethatwhenweworkinclosealignmentandtruepartnershipwithValeantinthesectorwecanachieveimmensebenefit,bothinservicelevel,therapeuticcare,costsavings,andofcourseinfinancialrewardforbothourpartnerandourself.ThisiswhyIwantthepartnershiptobecomeacharacteristicbywhichourCompanywillbeknown,asgoodpartnershipsdeliverrealvalue.

Asyouknow,ourPharmacyservicesoperateinclosealignmentwithourRetaildivision.InRetail,weareatthebeginningofajourney,tofocusonourcustomers'trueneedsandtodifferentiateourRetailoffering.

Wehaveseentherealchangestakingeffect.Andsupportedbygoodoperationaldisciplines,thesewilldelivergrowthforthefuture.

Likeallotherretailers,wehavealsoseenanaccelerationintheUSincustomersmovingtowardsomnichannelretail,withonlineshoppingworkinginparallelandintegratedwiththephysicalstore.Thisisatrendwehaveseeninmanyofourmarkets,mostparticularlyintheUK,wherewehaveadaptedourmodeltoembracethistrend.Wemustnowdecidehowtodeployour(inaudible)andexperiencetomaximizetheopportunitieswhichthistrendpresentsworldwide.

Today,wehavedeliveredwhatIbelievetobeastrongperformanceforthebusinessinaprocessoftransformation.Lookingforward,thereisnodoubtthatwestillhavealotofworktodowithinourcorebusinessestooptimizethemfortheirexistingmarkets,tointroducenewproducts,servicesandwaysofworking,andtofurtherenhanceourspendingwithourcustomers.

ThesearefundamentaldriversthatIbelievewillhelpustodeliverthelong-termearningsgrowththatweareconfidenttoachieve.Asacompany,wecontinuetolookatnewareasofbusinesstoaddtoourportfolio;wecontinuetofindopportunitiescomplementarytoourcoreoperationsprofessionally,commercially,andgeographically,thatwillhelpusgrowthebusinessandenhanceitsfinancialperformance.

Ultimately,oursuccessreliesonthequalityandcommitmentofourpeopleglobally.Theirexperience,expertise,anddrivewillimproveourbusinesseveryday.ThecommitmentIseefromourteamgivesmegreatconfidencethatwewilldeliverwhatwehaveseenforfiscal2015andbeyond.

Nowlet'sopenupforquestions.Gerald?





Thankyou.Operator,wearenowreadyforquestions.

QUESTIONS&ANSWERS

Operator :

(OperatorInstructions)

MarkWiltamuth,Jefferies.

MarkWiltamuth (Analyst-JefferiesLLC):

Hi.Goodmorning.IwantedtodigalittlebitontheBootssideofthebusiness.Youhaveashiftinstrategytherewhereyou'refocusingmoreontop-linegrowthratherthanmargin.

Iwantedtoseewhat'stheprogressthereonthemarginsatBoots?

AndthenIwantedtoaskalittlebitaboutwhatyouthinkabouttheopportunitytoturnaroundRiteAidlongerterm.


Well,firstofall,wehavenotshiftedourstrategy.Wearepursuingbothsalesandmargin.

Ofcourse,youdon'thavetojudgeonasinglequarter.Wehaveaprogramwhichhasbeendesignedovermanyyears,andwearemanagingtheCompanyinthelongterm.Whilstwetrytobeasgoodaspossibleeachsinglequarter,butthisisnotourultimateaim.OurultimateaimistotransformthisCompany.

Sofromtimetotime,wewillseetheprevalenceofthesalesortheprevalenceofthemargin.Andmaybeyou,Alex,canrespondtothis.

AlexGourlay(EVPPresidentofWalgreens):

Yes,thanks,Stefano.Yes,obviously,IknowBootsverywellfromthepast,andIthinkthatwhereweareinBootsisaprettygoodspace.IthinkasStefanohasindicated,BootsisreallywellestablishedintheUK,anenormouslyloyalcustomerbase,whichI[find]theteamtheyaresuccessfullygrowing.

Soforthefirsttimeinmanyyearsthey'restartingtogrow(inaudible)forwardandgrowcustomerbaseinBootsUKusinganomnichannelstrategy.Sothesamegreatproducts,thesamegreatpositionedstores,thesamegreatpeoplewho(technicaldifficulty)formanyyears.Butnowwe'reexpandingandusingthenewtechnologiescustomersareengagingwithbothhereintheUSandalsoglobally,butparticularlyintheUK,IthinkGeorgehassaidalready.

IntermsofRiteAid,we'refeelingprettygoodaboutRiteAid.Theyannouncedtheirresults(technicaldifficulty)tome.Weknowthere'sfiveyearsandthingsthey'vedonealsointheirfrontendingrowingsalesthatwecanlearnfromaswell.

Asalways,theideahereistoputtheCompaniestogetherinawaythatallowsustoreallygetthebestpracticefrombothCompanieshereintheUSA,whileimportingsomeofthebestideasfromothermarkets.


Doyouthinkyou'llhavetoputalotofcapitalintothestorestodrivetheturnaroundintheRiteAid




base?


Again,wearereallyintheearlystages.Weknowthisspaceverywell.OurteaminWalgreensobviouslyknowstheRiteAidspaceextremelywell,andwedon'tthinkthisisabigproblem.

Theyhavehadagoodinvestmentprograminabout2,000oftheirstoresalready,over2,000.Andwebelievethatwithappropriateinvestmentandimportantly,asGeorgesaid,appropriatereturnswecangettherightsalesandmarginmixinRiteAidovertime.


Butwhatisimportant--Stefanoagain--whatisimportanttounderstandisthatwecouldn'thaveabettertimeforthisdeal.BecauseinrealitywearealreadyinvestingalotofcapitaltotransformWalgreens,fromthestoresinWalgreens.Andsoattheend,thiswillbejustanextension--theintegrationofRiteAidwillbejustanextensionoftheworkthatwearedoingatWalgreens.

Ifwehaddonethisinthreeyears'time,probablywewouldhavehadtostartfromscratch.Now,wewilljustcontinueintheworkthatwehavetodoinanycase.


Stefano,nowthatyou'vedonethisbighorizontalacquisition,doyouthinkthere'sapossibilityofgoingverticalwithyouracquisitionsmovingforwardandmaybecontemplatingaPBMtransaction?


Yes,youknowwhatIthink.Icouldn'thavebeenclearersincetheverybeginning.IhaveseenthismarketandIamreallyconvincedthatverticalintegrationisanecessityforthismarket,[by]market.Itispartofwhatwehavetodotoreduce--tocontrolthecostsinthehealthcarearena.

Anykindofverticalintegrationisgood.Itdependsontheopportunitiesthatwewillhave.Itdependsontheavailabilityofpartners.

Andalsotherearemanywaystohaveamultiple--averticalintegration.Youcanhaveamerger,whichofcourseistheperfectway.Butyoucanalsohaveacommercialagreement,averystrongcommercialagreement,andverystrongpartnerships.Andaswehavesaidmanytimes,wearealwaysopenevenforapartnership.


Okay,thankyou.

Operator :

LisaGill,JPMorgan.

LisaGill(Analyst-JPMorgan):

Great,thanksverymuchandgoodmorning.Stefano,canIjustfollowuponwhatyoujustsaidaroundastrongcommercialagreementorapartnershipasitpertainstoaPBM?IsthatsomethingthatweshouldexpecttoseeWalgreensannouncewithoneormaybemorethanonePBM,aswethinkaboutputtingtogetherpartnerships--inyourword--overthenext12to18months?Howdowethinkaboutputtingthisintocontextandyouroverallthoughtonstrategy?





IwouldliketogiveyouananswerbecausethiswillmeanthatIwouldhaveaclearideaandacleartargetforthenextperiod.Unfortunately,youhavetorealizethatwehavejustdoneadeal;wehavetodigestthedealthatwehavedone.

Wehavetolookaround.Andattherighttime,whenwewillbeprepared,wewilltellyouwhichkindofdealandwhenwecanexecutethedeal.

Butwehavedonetwobigdealsinlessthanoneyear.Giveusthetimetoorganizeourselves.

(inaudible)atthe[time],let'sbeclear,it'saproblemthatweareveryrarely[seek]andweknowwhatwecandigest,whatwecanapprove.Soattherighttimewewillcomebacktoyou.


Okay.Thensecondly,whenyoutalkabouttheValentdeal,youtalkedaboutthefactthatyouviewthisasafirststeppingstoneandmaybesomeotheropportunitiesinthemarket.SoIguessIhavetoquestionsthere.

ThefirstwouldbeDoyouhavespecificmanufacturersyou'rediscussingopportunitieswithtoday?

AndthenthesecondpartisforGeorge.IsthereanycontributionintheupdatedguidancefromthenewValeantrelationship?


Well,thefirstpartofthequestionIcantellyouthatweare--again,wehavejustdonethisdeal.Wehavetoexecuteproperlythisdeal.Wehavetoshowthatweareabsolutelyabletomanagethiskindofrelationship,aswehavedemonstratedmany,manytimesinEurope;andafterwewillthinkaboutapotentialdealifwewillfindotherpartners.


Anyfinancialcontribution?


Yes,onguidance,obviouslyguidanceincludeseverythingforthisfiscalyear.Ijustwouldpointout,obviously,thatweareonlyshortlygoingtocommenceandstarttorollouttheValeantprogram.Andofcourseaseverwhenyoubringinnewprograms,there'svariousstartupcoststhathavetobeincurredwhenyougodownanewroute.

So,yes.Yes,yes,it'sincluded;butrecognizethatwe'reprettywellhalfwaythroughtheyear,andthiswillberampedupreallystartingrelativelyshortly,butwilltakesometimetorampup.


Thankyouforthecomments,andIlookforwardtoseeingyounextweek.


Lookforwardtoseeingyoutoo,Lisa.

Operator :




RossMuken,EvercoreISI.

RossMuken (Analyst-EvercoreISI):

Goodmorning,gentlemen.OnthecostsideintheUSbusiness,itlookedlikeversuswhatwesawonthefourthquarteryoumadesomegreatprogress.Ithinkthereyouhadmaybehadsomeupfrontcostsattheendoftheyear.

Canyoujusthelpusunderstandintermsoftheprogression?It'sprettyobviousonthesynergysidehowwellyou'redoing.Butonthelargerplan,the$1.5billionplan,whataresomeoftheexamplesofprojectswhereweseemoreoftheupfrontsavings?Andthenhowdowethinkaboutsomeofthelonger-datedprojectsthatwilldelivermaybesomevaluethereoverthenext,Idon'tknow,18or24months?


Yes,hi,it'sAlexhere.Hi,Ross.Yes,someoftheexampleswhicharemaybemoretheoperationalexamples,we'vespokenaboutthesebefore.Obviously,we'veconfirmedthe[turn]ofstoresandwe'rewelloverhalfwaythroughthatprogram,andthat'sgoingfairlywell.

Wehavereducedsomeopening[areas]asappropriatetomakesurethatwe'reabletogivebettercarewhenmorecustomersareactuallyinourstores.We'veswappedourphotolabsfordryphotolabsusingdigitaltechnology;andobviouslythat'sbeenagreatsuccessonthecostsidebutalsoimportantinthegrowthsideaswell.

Sothesearesomeofthestructuralchangesthatwe'vebeendoingsofar.ButthereissomeniceworkIthinkincentralizingalotofpharmacyoperationswhichallowsourpharmaciststogivemoreattentionandcaretocustomersatthecounter,whilereducingcostsubstantiallyinthecosttofill.

Andalloftheseareprogramsthatwecontinuetorunintothefuture.We'renotshortofideas.WehaveaverystrongoperationalandITteamhere,andwe'reworkingonallthethingswecandotoreduceworkloadthroughouttheCompanybutparticularlyourstores,sowecantakebettercareofourcustomers.Andwe'vegotalotmoretogoat,bothintheplanandotherideasthatwewilldevelopoverthenextperiod.

Sowebelievethesearesustainablechanges.Webelieve,importantly,thecustomercarenumbersthatwemeasureinternallyaregoingupaswell.Soremovingwork,takingbettercareofcustomers,takingbackcostsout,andstartingnowtoreinvestbackinthecoststhataremostimportanttothecustomershavemorepeopleinourshopstoservethem,asappropriate;andobviouslygettingthevaluepropositionrightaswellforcustomersbothinpharmacyandalsointhefrontend.

Sothat'swherewe'reonthecostprogrambangontrack,andmoretocome,anddevelopingopportunitiesforthefuture.


Maybegettingbacktothebroaderbasedquestiononverticalintegration,Ithinkas,Stefano,yousaid,mergerisalwayspreferred;andthatmakessense,becausethenyouhavecontrol.Ontheotherside,goingonLisa'squestionwithmaybeagreementorpartnershiporsomethingofthesort,whatdoyouneedtohaveaccomplishedinsomethinglikethat?

Andwhatarethechallengesinmakingsuretheeconomicbenefittothetwosidesareequivalent,andthatbothpartiesareworkingforthegoodofeachotherandthecustomer?Whataremaybeconceptuallythethingsthatyouneedtogetoutofit?




AndthenIstatedsomeoftheobviouschallenges,butwhataresomeoftheothersintermsofnothavingnecessarilycontroloverthewholerelationshipandonlyhopingthatyourpartner,whomeverthatmaybe,participatesinthesameway?ObviouslyyougotthereonValeantandyou'vedoneitbefore;soIwouldjustlovesomebroadercontext.


Firstofall,letmesaythatIhavenever,everspokenaboutcontrol.Whatwewantistodosomethingwhichcreatesvalue--long-term,sustainablevalue.Wehaveneverspokenaboutcontrol.

Wehavedonemany,manydealswhereattheendwehavelostthecontrol,andit'sbychancethatmanyofourmergershavecomeback.Andthiswasnotthedesign.Itwasjusttheforceofthings.

Whenyoumergeacompany,whenyoumergetwocompanies,youhaveonecompany;andofcourse,allthepeopleoftheprevioustwocompaniesaremembersofthenewcompany.Youhavejusttotrytoselectthebestpeopleforthebesthope.

Andthepeoplecancomefromeverywhere.Sowehavenever,ever--Icantellyou,Icanassureyou,never,everdoneadealwiththeideaofcontrollingtheresultingcompany,firstofall.

Secondly--soweareopentoanymerger;weareopentoamergerwherewecouldhavethecontrol,amergerwherewecouldcedethecontrol,amergerofequals.Wewouldbeopentoeverythingwhichwouldcreate,Irepeat,substantialandsustainablevalueimmediatelyandinthefuturefortheCompany.Thisisforthemerger.

Forthecommercialpartnership,ofcourse,youcanimaginemany,manydifferentkindsofcommercialpartnership.Valeantisareallygoodexample,butthereareotherkindofpartnershipsthatyoucandoonthecostside,onthemarginside,creatingsynergiesthatyoucanshare.

Andthereisnotamodel.Everytimeyouhavetodiscussandyouhavetoseewhatisthebestwaytocreatevalueandhowtosharethevalue.

Butifyouapproachthesediscussionswithanopenmind,maybesometimesit'spossibletofindasolution.Alex,youhaveseenmanyofthesejointventures,commercialjointventuresinthepast,soyoucansaysomethingmaybe.


(inaudible)Ithinkthatthethingthat'simportanthereistocreatethewin-win.Forexample,inValeantwhatweseeistheopportunitytoreallytakefrictionoutforcustomersandpatientsanddoctorsandpharmacistssotheycanspendmoretimewithpatients,andthereforepatientswin.SothewholeideabehindValeant--asIthinkStefanosaidattheintroduction--reallyisabouttakingfrictionandcostoutoftheinteractionsbetweenhealthcareprofessionalsandgivingmoretimetocustomers.

We'rebecomingmoreofaservicescompany.We'vebeenfacedwiththingswhichhavetowiththejobofpharmacists,whichisproviding--actuallydispensingandmakingsurepeopleunderstandtheirdrugsproperly.Andthatisgreatforpharmacistsandgreatforprofession.We'vecommitted,asthey,asweallhavecommittedtoovertimeensuringthatweindependentlymonitor,thatwedelivermorecostsinthesystemasaresultofworkingdifferentlytogether.

That'sanexamplewe'redevelopingintheUS,andwewilltakeourtimetogetthisrightandmakesurethatweimplementinawaythatisappropriateforthesystemsthatweworkin,inAmerica.There'slotsofexamplesinEuropeIwishwecouldgointoaswell,intermsofnotjustretaillocallyinawaythatcreateswin-winsandensuresthatwedeliverbettercareatlowercosts.Andthat'sreallywhatthepartnership




strategyisallabout.


That'ssuperhelpfulonmyend,andIaswelllookforwardtoseeingyouguysnextweek.Thankyou.

Operator :

RobertJones,GoldmanSachs.

RobertJones (Analyst-GoldmanSachs):

Thankssomuch.IactuallyhadaPBMquestionaswell.Iknowyouguysdon'tprovidespecifictimelinesforthelargePBMcontracts;butbasedonpreviouspublicannouncements,itwouldseemthatyou'reaboutthreetofouryearsintothecontractwiththethreelargestPBMs.

SoI'mjustcurious.Isthereanythingyoucanshareasfarashowweshouldbethinkingabouttimelinesforrenewals,andmaybedirectionallyhowyoufeelreimbursementmightmatchuprelativetohistoricalreimbursementrates?


Hi,it'sAlexhere.Hi,Robert.Again,wedon'tdiscussthesecontractsopenly,soIcan'tcommentonthetimelines.WhatIcancommentonisthatourstrategyistoimproveaccess

YoulookattheperformanceofPartMedDandyouseeagainit'sbeenasuccessfulstrategy.Wearewellsetupagainforthisseason.

Theseareannualcontractsinthemain.Theyarebecomingmoresophisticated,aswealsoknow,beingpaidofcourseonserviceswithinthesecontracts.Andagainwe'redeterminedtogivebettervalue,bettercarewithinthesecontracts.

Andwe'restartingtogentlybutprogressivelyimproverelationshipsandgrowshare.AsGeorgehassaidwegrewshareagaininthequarter,whichwe'repleasedwith;butweknowwehavealotmoretodo.

Sothat'swhereweare.WearefeelingmoreconfidentinrelationshipswiththePBMs.Wearefeelingmoreconfidentaswegivebettervaluetothemarketintermsofbothpriceandqualityofcare.Wegetabetterreturn.Andwe'llcontinuetodevelopourstrategyoverthemonthsahead.


That'sgreat.IguessjustmaybegooutsidetheUSformyfollow-up,reallysolidperformanceintheRetailInternationalsegmentbothfromasalesandEBITperspective.ButifIlookattheconstantcurrency,same-storesalesgrowththerewasabout2.2%,astepdownfromwhatyou'veseenthelastseveralquarters.

Thenontheflipside,theEBITmargincameinmuchhigherthanwe'veseen,significantlyhigherthanwhatwe'veseeninthelastthreequarters.CouldyoumaybejusthelpuswalkthroughsomeofthedynamicsatplayintheRetailInternationalbusiness?

What'sdriving,outsideofsame-storesalesgrowth,thestrongsalesperformance?Andthenonthemarginwhat'scontributingtothatupside,andhowsustainablecouldthatlevelbeaswelookacrossthenextthreequartersoffiscal2016?





Okay,I'lltryandhaveagoatthis.Thereisalwaysanelementofmix.ButIthinkthatoneofthefactorsthatItriedtodrawinisobviouslywe'recontinuingin--thebiggestbusinessisBootsintheUK;it'sthebiggestbusinessinthedivision.They'recontinuingtoperformwell.

AsIsaid,wehad--inlookingatthesaleswhereomnichannelisandBoots.cominparticularisaveryimportantpartofourgrowthstrategy.WedidinthesummeranniversaryjustatthebeginningofAugustourmuchfasteronlinecollect-in-storeoffer,sowe'veseentheimpactofthegrowthofthatcomingthrough;thentheanniversary;thenwebroughtinsomenewdevelopment.

SowesawthisimprovementcomingthenbackupagainintotheDecembernumbers,whichtogetherwiththestronggiftingmeantthatwe'vehadagoodChristmasinwhat'sbeenaparticularlycompetitiveenvironment.Sointhosebusinesses,it'sreallyabouthavingadifferentiatedfrontofstoreofferandthenincreasinglysupportedbyomnichannel.

Ofcourse,inBootsintheUKwe'reabletopiggybackontheAllianceHealthcaredistributionsystemtodothat.SoifyoulookatBoots'performance--andcertainlyit'sstillearlydays.We'rejuststartingtoseesomeofthefiguresfromourcompetitorsontheHighStreet;butIthinkwhat'scomingthroughprettyclearisthatBootsiscontinuingtobearealwinnerthere.

Intermsofthemargin,reallytwopoints.One,thereisalwaysaseasonalimpact,giventheimportanceoftheretailpartofourofferingsinRetailPharmacyInternational.Ofcourse,westartedtoseethebuildupinNovember,becauseittendstobethatpeoplestarttheirChristmasshoppingalittlebitearlierinEuropethanwouldbethecasehereintheUnitedStates.

Sothereisaseasonalelementandthen,asIsaidalsointhepresentation,wegotalittlebitofabenefitinthisquarterfromthefinalizingofthe--we'reworkingtowardsfinalizingourpurchasepriceadjustmenttothefairvaluesthatyouhavetodoontheacquisitionofAllianceBoots.Wegotalittlebitofbenefittherewhichhelpedthemargininthisquarterthatwewon'tseewhenyoucomeandlookatthesamefirstquarterin12months'time.

Thekeyfactoristheseasonality.Ofcourseaswelooktowardsthesecondquarterwherewe'vegottheveryimportantholidaytrading,theDecemberresultsandintoearlyJanuary,you'llalsoseethebenefitofthatcomingthroughwhenwe'reonthenextcall.


Gotit.Okay,thanks.

Operator :

GeorgeHill,DeutscheBank.

GeorgeHill(Analyst-DeutscheBank):

Hey,goodmorning,guys,andIappreciateyoutakingthequestion.IguessthisoneiseitherforAlexorGeorge.AswethinkabouttheValeantdeal,Iguesscanwetalkabouttheeconomicsofthatdeal,I'dsayversusyouguysandthenusingtheregularwholesalingchannel?

Isthisstructuremoreeconomicallyattractiveforyouandforthem,aswe'veheardalotofthemidsizemanufacturersscreamabitaboutthefeesthatarepaidtowholesalers?I'dappreciateanycolor.


Hi,George.It'sAlexhere.Yes,againasIthinkwe'vesaidit'sabouttakingfrictionandcostoutofthesystem.Forsure,wehaveaninfrastructurehereintheUSAofthepharmacists;andofcourseinthisdeal




importantlytherewillbeindependentpharmaciesinthisdealaswell,becausewewantedtomakesurethatwegivecustomersproperaccesstothegoodproductsthatValeanthas.Andwithinthatwehavetheability,therefore,todistributeaswellasfulfilltheprescription,andthat'swhatweintendtodointhisoccasion.

ButasStefanosaidbefore,everysinglepartnershipweworkwith,atleastonmeds,welookathowdowecreateawin-winforourpartnerandwhat'simportanttothem,andhowdoweuseourinfrastructure,ourassets,inwhatevercountryweoperateintomakethatso.Sowhatwedohereisweprovidegreatcareandaservicemodeltoourpharmacies,toourpharmacists,tothepatients;andthenwedistributethesedrugsatthisoccasionasafulfillment.

Eachonewillbedifferentdependingonthecircumstances.AndasStefanosaidalready,wewilltestthismodelproperlytomakesurethatitisappropriateanddoesworkintheUS.


Okay.Thenmaybethequickfollow-upwouldbejusttogetonRiteAid.Giventhatyouguyshavegottenyoursecondrequest,Iguessanythingintheconversationsthusfarthatwouldindicatewhetheryouguyshaveanychangesonstoredivestitureexpectations?

Synergyexpectationsseemtostillbeintact.ButIguessasitrelatestodivestitures,areyouguysstillthinkingthenumberislessthan500?


Wedon'thaveanyreasontochangeourview.AsIhavesaidbefore,we'reworkingwiththerelevant[targets]inordertospeeduptheprocessifpossibleofcourse.Forthetimebeing,wecannotaddanycommenttowhatwehavesaid.Wearestillconfidentthatthiswillgothroughinthetermsthatwehaveanticipated.


Okay.Iappreciatethecolor.Thanks,guys.

Operator :

RickyGoldwasser,MorganStanley.

RickyGoldwasser (Analyst-MorganStanley):

Yes,hi.Goodmorningandcongratsonaverygoodquarter.Acoupleofquestionshere.

Thefirstone,ifwethinkaboutthecontractwithValeant,wecanalsothinkaboutitasaformofverticalpartnership,right,thathelpsreducecostbyremovinglikethedistributorfromtheequation.Sowhenyouthinkabouttighteningrelationshipsbetweenyouandmanufacturersandlikebypassingthedistributor,doyouthinkthatthisissomethingthattheoreticallycanbeextendedtoothermanufacturers,orthesewillbelikeone-offs?


Hi,Ricky.Yes,IthinkasGeorgesaidbefore,manymanufacturersarelookingformoreefficientwaystogettothemarket,togettheirproductstothecustomerandtothepatient.Soagain,Valeantcamewiththatrequesttous,andothermanufacturersmayormaynotcomewiththatrequesttous,andwe'lllookateachcaseindividually.




Soforsureit'sreallythesameanswer,Iapologize,aswegavetoGeorge.Whichis,wehaveagreatinfrastructureintheUSA;wehaveaverystronglogisticsoperationintheUSA;wehavegoodexpertiseinwholesalingcomingfrom(inaudible)divisionacrosstherestoftheglobe,particularlyinEurope.

Andwewillalwaysdoourverybesttotakecostoutofthesystem,todoabetterjobforcustomers,anddoagreatjobforourpartners.Sowe'reopeningtotheseopportunities,butwe'vegottomakesurethatthisoneactuallyworksanddoesworkinAmerica.Andwe'lltakeitfromthere.


Okay.ThenI'dsaythatthetoneofthisconferencecallisalotmorepositivethanyourlastconferencecall.Sohaveyouseensomethinginthemarketplaceorinternallythatmakesyoufeelbetternowonthebusinesstrendsthanyouwereafewmonthsago?


No.Wewereconfident.Wehavebeenconfidentforallthetimewehavebeenhere.Ifwehadnotbeenconfidentwewouldn'thavedonethisdeal.

Wehavedonethisdealknowingthatweweregoingthroughaperiodof,let'ssay,substantialworkthatwe--toreallybeabletoexploitalltheopportunitieswhichwerethere,whicharehere,whichwillbehere,wehavetodoacertainwork.Andthisiswhatwearedoing.

Somaybeit'spossiblethatsometimeswearemoreorlessgoodinourpresentations,butthisdoesn'tdependonourmood.Itdependsmaybeonourphysicalcondition;Idon'tknow.(laughter)Butnotonourmood.

Ourmoodhasalwaysbeenpositive,isstillpositive.Andwestillbelievethereis[confidence]inwhatwe'redoing.Ifbyanychancewechangedourmind,wewouldfeelobligedtotellyou;butIcanassureyouweareaspositiveaswewereoneyearago.


Youcantakefromthat,Ricky,thatIfoundareasonablecoffeeshopwithgoodpastriesthismorningbeforethecall.


There'snothinglikeAmericancoffee,right?Okay.Thankyouverymuch.

Operator :

DavidLarsen,Leerink.

DavidLarsen (Analyst-LeerinkPartners):

Hey,guys.Congratulationsonagoodquarter.CanyoutalkabitabouttheadjustedgrossmargininRetailUSA?Itlooksprettygoodtome,27.0%;that'sactuallyupabitsequentially.Theyear-over-yearcompressionofabout39basispoints,thatshowssomeimprovementintherateofcompressionrelativetothepastcouplequarters.

Socanyoutalkaboutthereimbursementthatyou'reseeinginthePartDnetworks,alsothecommercialplans?Andthen,whatimpactisgenericinflationhavingonthosemargins?Thanks.





Thanks,David.Hi,it'sAlexhere.IthinkthatthefirstthingIwouldsay,itreallyisasanticipated.Sothisisreallyasweexpected.

Genericinflation,goingtothelastpartofthequestionfirst,isnotmaterial.Sotherefore,wearefeelingprettygoodaboutthis,andthisisfactoredintoongoingguidancegoingforward.

Thetrendsbeyondthatreallyarethesametrends.Wehaveongoingreimbursementpressureasweworkwiththemarkettolowercosts.Theyaremoreorlessasweexpected,andthetrendcontinuesinthesamefashion.

It'ssomethingwe'reusedtoinEurope,aswesaidbefore.I'veworkedinEuropeformany,manyyears,andit'satrendthatweexpecttosee,becauseashealthcareexpandsandgovernmentpaysmoreandpatientspaymorethenyou'vegottoworktobecomemoreefficientwithinthemarket.Andthat'swhatwecommittodoing.

Onthefront-endmargins,wearepleasedwiththeprofitabilityaswecontinuetoswapoutoldproducts.AsGeorgesaidinhisintroduction,wetookoutalloftheorderhomedecorationproducts,whichprimarilysellinNovember;andwearereplacingthesewithmoregiftables.

Thiswasreallythefirstyearofthattransition.Wehadgreatsupportfromsomeofourpartners.WehavemoreplanstoshiftthatmixnextChristmas.

Andalsoimportantlywehave[view]2,000whereagainwe'reshiftingthemixtowardsmorebeautyproducts,ownedbrandbeautyproducts,fromKen'sorganizationwiththelaunchoftheseproductsinoverone-half--1,000extrastorestogetto2,000storesbysomewherearoundChristmasnextyear.

Sothetrendsareverysimilar,tobehonest.Weareprettypredictable.

Maybetheonethatwasabitlesspredictablewaspromotionalmarketswhere,again,wegavegreatpromotionalsthroughtheautumn;sowe'vehadtoadjustthatalittlebitafterthatperiod.Ofcourse,that'simportanttostayinamarketandstayprepared,whichwearedoing.

Soreallythetrendsarethesame.Weadjustaswego,butthefundamentalsarethesame.


Wouldyouexpectthis27.0%grossmargintocontinueorimprovefortherestoftheyearinRetailUSA?


Asyou'llappreciate,wedon'tgiveforecastsatthatlevel.I'llreallyreiteratewhatAlexissaying

Whatwe'vegottocontinuetodoisdrivetheefficiencyandtheproductivity.It'sabsolutelythewayoflife.

Whatwe'rereallyfocusedonifwecomebackislookingattheoperatingmarginendtoend.That'swhereIknowAlexandIarevery,veryfocused.

ComingbacktotheRetailexample,Alexjusttalkedaboutalotofthepromotionalworkthatwetalkedaboutcreatedalotofinefficiencyinthestoresandalotofcost.Sowhatyou'veactuallygottodoisdrivetheefficiencyoutaswellasfocusingjustonthegrossmargin,becausewhat'simportantistobeabletogrowouroperatingmarginfromthebusinessovertimeaswellasourtopline.


Okay.Thenjustonemorequickone.AssumingtheRiteAiddealdoesclose,IthinkwhatIheardmaybe




lastquarterwasthatyouwouldexpectthedealtobeaccretiveinyearone.Canyougiveanymorecoloraroundthat?

Like,whatexactlydoesthattermaccretivemean?WouldthatbeaboutandbeyondwhattheRiteAidearningswouldnormallylayerin?Justanymorecoloraroundthatwouldbereallyhelpful.


Wehavegivenyouthelevelofsynergies.Wehavesaid$1billionofsynergies.Westillsaidweareintothatnumber.

Ofcourse,thesynergieswillbedown,dayafterdaysincethetimewhenwewillbeabletoexecutethemerger.Youcanreallyvalueforthese[guesses]fromthesehowmuchofthesesynergieswillbepossibleinthefirstyear.

Wesaidthatwewouldneedtwoorthreeyearstodeliverthis$1billion,soyoucansee.Wehavegivenanindication.

Tobehonest,wedon'twanttobemoreprecisebecausewedon'tknowexactlytheterms.Wedon'tknowexactlyhowmanypharmacieswewillhavetodivest;wewillknowexactlyhowmanypharmacieswecouldconsolidate.Sowedon'twanttobemorepreciseforthetimebeing;butoverall,youhaveanindication.


Okay,that'ssuper.Veryhelpful.Thanksalotandcongratsonagoodquarter.

Operator :

JohnHeinbockel,GuggenheimSecurities.

JohnHeinbockel(Analyst-GuggenheimSecuritiesLLC):

Iguessforanybody,butparticularlyAlex,therewouldseemtobe--oneofthewaystheRiteAiddealisgoingtoworkreallywellarethelearningsthatyoucanpickupfromthem;andobviouslythere'salotofpotentialthere.Obviouslytheydotheloyaltycarddifferentlythanyou;theydotheWellnessAmbassadors,theCareCoaches.

Whataretheoneortwothingsthatyoulookatfromafarandareintriguedby,wheretheremightbesomeearningsthatareparticularlyapplicabletoyourstorebase?


Ithinkthefirstthingisthiscompanyhasmanagedwithverylimitedresourcesforsometimeandhasdoneitverywell,andIthinkthat'sagreatdiscipline.It'sadiscipline,tobehonest,theWalgreensteamhaspickedupreallyquicklyinthelast12,18months.

Ithinkit's(inaudible)alsotheWalgreensorganizationtousemoneywisely.ButagainwehaveanopportunityIthinktolearnevenmoreaboutthat,giventhelevelofcashthatRiteAiddidn'thaveinthelastperiod.Sothat'sthefirstone.

Ithinkrelatedtothat,secondly,toyourpoint,they'veinvestedwiselyintheirbeststores.Andtheyaregetting--fromthenumbersthattheteamspeakabout,andyouwillconfirm,they'regettingniceliftsintheir(inaudible)stores.

Tobehonest,aswereviewsomeofthestuffwedidintheWellExperiencewehadn'tbeensuccessfulin




thepast,maybetwoorthreeyearsago,withsomeoftheselifts.We'renowgettingbetterlifts.

IguessIthinkifwecanputtheselessonstogetherwecanmakebetteruseofourcapitalandgetbetterliftsinthefrontend.Andofcoursewith(inaudible)reallysomereallygreatproductscomingoutoftheglobalsourcingorganizationfromAllianceBootsthat(inaudible)mentioned,[same]withbeauty,developingintohealthcare,intoseasonalgifts.Weputthesethreethingstogether.

Soweareveryopen.Partnershipisaboutopenness,curiositytolearn,andthatteamhasdoneagoodjobinthesetwodimensionsinparticular.


Doyouhaveaviewto,againfromafar,theGoldcustomerorSilvercustomer,thenatureofthatloyaltyprogram,whichisveryuniquerelativetoalotofloyaltyprogramsintheUS?Isthatsomethingthat'sparticularlyintriguingassomethingtogiveyoureffortabitofaboost?


Yes,wehadastartat(inaudible)Walgreens.Imean,theloyaltycardhereisonlythreeyearsold.Wehave85millionactivecustomersonthecard;wehavenowgotalmost28million,Ithinkitis,saveupEverydayPoints,whichwasonlylaunchedinMay.

Sowe'reverycuriousabouthowthatcardworksinthemarketplace,andwe'llcertainlytakeourtimetounderstanditandseewhatbenefitsitcouldbringtoourpartnership.


Sure.Allright.ThenmaybejustforGeorge,onthe$1.5billioncost-reductionprogram,haveyouseen--wasthereanybenefitinthefirstquarter?Haveyouseenanythingtodate?

Andthenifyouthinkabouthowthatbreaksout2016and2017,isthatmoreback-endloadedorfront-endloader?


We'rejustreallyworkingthroughtheprogram,soeveryquarterwe'regettingmorebenefitcomingthrough.Ithinkwesaidwewerebroadlyatthehalfwaystageattheyearend,andwe'rejustworkingmethodicallythroughitwithAlex'steam.

We'repleasedwiththeprogressandverymuchontracktodeliverthisprogram.Ofcourse,oncewe'rethroughthisprogram,wewillalwaysseeknewwaystodrivefurtherefficiencies.It'sjustgottobeawayoflifeforourbusinessgoingforward,justaswe'vedoneintheUK,justaswe'vedonesuccessfullyinBootsoveranumberofphases.


Okay,thankyou.

Operator :

ScottMushkin,WolfeResearch.

Scott Mushkin (Analyst-WolfeResearch):

Hey,guys.Thanksfortakingmyquestions.Ihadtwo,anditgoestotheValeantdealthatwassigned.




SomeofyourPBMpartnershavebeenontherecordsayingthattheythoughtthedealwaskindoftheoppositeofwhatyouguysportrayed;itincreasedcoststothesystem.SoIwanttoaskyouwhyyouthinktheirpointofviewissodifferent.

Thenthesecondquestionis,asyoulookatthesepartnerships,isValeantthe--obviouslyyouthoughtitwastherightpartner.I'mtryingto--IguessIwouldaskwhy.

AndthenIhadafollow-upquestiononsomethingelse.


Yes,hi.ThisisAlexhere,Scott.Wearedeterminedtoimplementthiswell,andwe'redeterminedtobeverytransparentaboutwhattherealcostsareasaresultofthispartnership.AsIthinkwesaidinourstatementthatwehaveemployed(inaudible)teamtoindependentlyreviewthis.

SoweareworkingverycloselynotjustwithValeantbutwithourPBMpartnerstounderstandtheirconcerns,andwewilltakecareoftheseconcerns.We'renotlookingtodisruptthesystemandtermsofwhattheyaretryingtodotolowercosts.We'retryingtotakecostsoutofthesystemwhichwillhelpthemtolowercostsfortheirpayers.That'sourintention.

Ofcoursewhenyouintroducesomethingnewtothemarketandsomenewthoughts,there'salwayspeoplewhomaybethinkdifferentlyaboutit.Butwearedeterminedtoimplementthiswellandmakeitwork.

IntermsofwhyValeant,well,becauseofthefactthattheycametousandtheyaskeduswouldwebeabletokeeptheir[adama]businessinparticularwiththesituationthatwe'rein?Wedidappropriateduediligenceandwedecidedthatthisisagoodopportunitytotakesomeofthelessonsthattheteam,particularlyOrnella'steaminEurope,hadlearnedabouttheattractivepharmacymodelinwholesale.

SowesawtheopportunitytoliftandshiftourbestpracticeinEuropeintoValeant.Andtheylikedtheidea,andtheywalkedthroughitprettyquicklyandgottoagoodplaceinthatprettyshortperiodoftime.

Theyareagreatteamtoworkwith,andwewishMikeaveryspeedyrecovery.Theteamthemselvesareveryengagedandworkingwithusverywell,andwewilldoallwecantomakesurethatanyconcernsaretakencareofandareindependentlyreviewed.


And,Stefanohere,don'tforgetthattheyhaveacceptedtoreducetheirprice,whichisreally,Iwouldsay,quiteexceptionalparticularlyhereintheUS.Andtheyhaveaccepteditbecausetheyhaveunderstoodthatanewmodelwhichshouldcostlessshoulddeliverbenefitstothecustomers,tothefinalpatients.

Andthisisveryimportant.Thisshowsthatthisneedofnewwaysofworking,theinnovativewayofworking,isreallyunderstood.It'simportantthatit'sunderstood.

Someonehastostart,andweareveryhappythatwe'llbeable,Ihope,todemonstratehowthismodelwillworkintheUSandhowthismodelcouldreducecostforthefinalcustomer.

Scott Mushkin (Analyst-WolfeResearch):

Right,makessense.





(multiplespeakers)Iknowit'sabigsubject,butrememberwearebothglobalcompanies.Valeantareaglobalcompany.Theyareoperateinmanymarketsthatweoperatein.Wehavegreatinfrastructureacrossmanymarkets,asStefanoandGeorgeandothershaveexplained.SowebelieveonceweimplementthiswellintheUSthereareotheropportunitiesforustoworkinapartnershipwithValeant.

A20-yeardealwasunusual,butitwastherebecausewewantedtomakesurethatovertimewegeneratedagreatplatformnotjusthereintheUSA.Butalsotheyareverygoodqualityproducts,tomakethemmoreavailabletotheirbrandsandmaybeevensomeoftheirownbrandspossiblyintheEuropeanandothermarkets.SothisisamuchbroaderdealthanjustEurope.

SotocomebacktowhyValeant,thereisasecondreasonbecausetheyareaverygoodcompanywithgoodexpertiseonamodelwhichisavery,veryefficientR&Dmodel.


Andalso,asyouknow,weatBootsareveryfocusedonskincareandwehavemanyproductsinthisarea.We'reamarketleaderinthisarea,andValeanthasalsomanyproductsandmanypatentsandintellectualpropertiesinthisarea.Andthecollaborationcouldreallyimprovethequalityofourrelevantproducts.


Okay,Brian,Ithinkwehavetimeforonemorequestion.

Operator :

EricBosshard,ClevelandResearch.

EricBosshard (Analyst-ClevelandResearchCompany):

Thankyou.Twothings,ifIcould.Firstofall,SG&Aperformance--SG&AdollarsintheUSIthinkgrewin4Qalittlemorethanexpectedandimprovedin1Q.Curiousofthedifferencebetweenthat,andhowweshouldthinkofthatgoingforward.

Thensecondly,IthinkyousaidtheretailmarginwasflatinthequarterintheUS.Itseemedlikeyouhaddonesomethingstoimproveprofitability.Curiousonthecolorthere,andhowwethinkaboutthatlineaswemoveforward.


BeforeIanswerthetwoquestionsIwouldliketoattractyourattentiontowhatIhavesaidattheverybeginningofthis[call].Inreality,youdon'thavetomeasureupforthequartertakingallthedifferentelementsofourCompanyquarterbyquarter.

Wehavealong-termproject.Wearefollowingthisprojectindependentlyonthequarter,andsoyouwillseesometimesbetterrewardsorKPIs,andthesewillnotbealwaysthesame.Youhavetojudgeonthewhole,andyouseethatonthewholewewillcontinuetoprogress,aswehaveclearlydemonstratedinthelastfourquarter.

Everyquarterweprogress,andit'samixofeverythingwedo.Thegrossmarginisimportant,butattheendoftheday,whatisreallyimportantistheoperatingmargin;itistheearning,theprofitthatwecanextractfromanoperation.

Sometimesyouhavetosacrificethegrossprofitbecausethe[lower]increaseinthegrossprofitorinthegrossmargincanbeveryexpensivebuttoachievealevelcostoranothercost.Sowehavealwaysa




holisticviewandthis,ourholisticview,isextendedoveralongperiodoftimeandnotoveraquarter.

Maybeyoucananswerindetail.Butthisisthelogic,thephilosophy.


MaybeifIgiveaspecificexampleinphotographic,[tipping]thepointthatStefanoismaking.Inphotographicwereducedsubstantiallyouroperatingcostsbyremovingmoreexpensive-to-maintain,moredifficult-to-use,andrequiringmorepeopletousethem,wetlabs,theoldlabs.Weremovedallofthatveryquickly,inaperiodofabout18monthsacrossallourstatesandreplacethemwithanewdigitaltechnologywhich,inessence,reducesthegrossmarginactuallybutactually,becauseoftheoperatingcostadvantagesofthatsystem,drivestwothings.

Itdrivesvolume.Wehadaverystrongvolumerightthroughtheperiod,andaspartoftheabout-flatsalesthatGeorgementioned,inholding[theNovember]period,thatwasadriverupthewayofsales.

Andalsowehavebeenabletoofferbettervaluetocustomers,andwe'reverypleasedwiththeperformanceinthatcategory.Wehavereallydrivenabigdifferential.

Andthat'sbeenalsotransportedtoBootsaswell.BootsareusingthesameplatformwiththesameeffectnowintheUK.Sothat'sagreatexampleofwhatwemeanbyoperatingmargin.

Intermsofcostsgoingforward,weremainconfidentinourcostplan.We'reontrack(technicaldifficulty)people'sattitudetowardsthishasbeenfantastic.Theteamshavedoneagreatjob,andcustomercarescoresareupbecausewe'retakingworkloadout.

Sogoingforward,youshouldexpecttoseethesameactivities.Nowhowtheyfallquartertoquarter,asStefanosaid,sometimesvariesdependingonanumberoffactors.Butthestrategywe'reimplementingisaveryclearstrategy,andwe'reverypleasedwiththeprogress.


I'lljustemphasizeontopofthatreallythatwe'reverydisciplinedinthewaythatwelookatreturns,beitfromcapital,beitfromrevenue,revenueexpenditure.It'sreallybacktowhatwesaidearlier

Butequally,we'reperfectlywillingtoinvest,investineithercapitalorinvestinrevenueexpenditure,wherewe'reconfidentwecangetagoodreturn;andwewillalwaysdothat.Itwillmeanthereforefromtimetotimewewillgetthevariationsbetweenthevariouscategories.

Theimportantthingistocontinuetodriveupouroverallreturnsanddeliverlong-term,sustainedshareholdervalue.Andofcoursetherewillalwaysbeseasonalvariations.It'sthenatureofourbusiness.


(technicaldifficulty)justonseasonalityofsales,thatpointisanimportantone,whichis(technicaldifficulty)substantiallyvaryingover10%inthequarterjustpast.Andifyoulookatthepubliclyavailableinformation,it'scontinuedtoasimilarifnothighertrendinthelastfewweeksaswell.Soagain,seasonalityisabigflexinourbusiness,alwayshasbeen,alwayswillbe.

Butoneyearwehaveabenefitmaybefromseasonality;oneyearwehavelessbenefitfromseasonality.Sowefeelveryconfidentourstrategyisworkingandwewillfeelveryconfidentthroughthequarter,asStefanosaid,wewillseethatcoming(technicaldifficulty).





Thankyou.Ladiesandgentlemen,thatwasthelastquestionwehavetimeforonthecall.Thankyouforjoiningustoday.FeelfreetoreachouttoAshish,myself,oranyoftheIRteamifyouhaveanyfurtherquestions.

AndIhopeyouallhaveagoodday.Thankyouverymuch,indeed.


Thankyouverymuch.

Operator :

Ladiesandgentlemen,thisdoesconcludetoday'sprogram.

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