Walgreens Boots Alliance Inc (WBA) — Q1 2015 Earnings Call Transcript

Thank you, Ashley, and good morning everyone. Welcome to our first quarter conference call. Today, Greg Wasson, our President and CEO, and Tim McLevish, Executive Vice President and Chief Financial Officer, will discuss our first quarter results. Also joining us on the call and available for questions is Alex Gourlay, President of Customer Experience and Daily Living. In the interest of being efficient with everyone's time today, especially as we begin the holiday season, we are going to limit the call to 45 minutes. As a reminder, today's presentation includes certain non-GAAP financial measures, and I would direct you to our website at investor.walgreens.com for reconciliations to the most directly comparable GAAP measures and related information. You can find a link to our webcast on our Investor Relations website. After the call, this presentation and a podcast will be archived on our website for 12 months. Certain statements and projections of future results made in this presentation constitute forward-looking statements that are based on current market, competitive and regulatory expectations that involve risk and uncertainty. Except to the extent required by law, we undertake no obligation to update publicly any forward-looking statement after this presentation, whether as a result of new information, future events, changes in assumptions or otherwise. Please see our latest Form 10-K filing and subsequent Exchange Act filings for a discussion of risk factors as they relate to forward-looking statements. Now, I'll turn the call over to Greg.

Thank you, Rick, good morning everyone, and thank you for joining us on our call. I will keep my remarks relatively short today. I will review the results from the quarter, provide an update on our progress towards the completion of the second step of our strategic partnership with Alliance Boots, and offer some final thoughts before I turn the call over to Tim for a detailed financial review. We had a solid first quarter across both our pharmacy and retail products businesses with a strong holiday season and good cost control across the enterprise. In fact, our stores' year-over-year sales growth exceeded the overall retail market heading into the holiday season, which positions us well as we close out the calendar year. So I want to congratulate our teams for their success. For the full quarter, sales were a record $19.6 billion, up 6.7% from $18.3 billion a year ago. GAAP operating income for the quarter was $991 million, up 7.1% from $924 million last year. Adjusted operating income for the quarter was $1.14 billion, up 3.5% from $1.1 billion in the first quarter of 2014. GAAP earnings per diluted share were $0.85 in the first quarter compared to $0.72 last year, up 18.1%. First quarter adjusted earnings per diluted share were $0.81, up 12.5% from $0.72 in the same quarter last year. In terms of our front end, our retail products performance while our customer traffic in comparable stores edged down 2.7%, we were pleased that basket size was up 4.2%, resulting in total comparable sales for our retail products being up 1.5%, relative to the year ago quarter. As for pharmacy, we were also pleased that prescription sales grew 9%, or 8.1% in comparable stores as our retail market share increased 10 basis points from a year ago to 19%. As we finish out the holiday selling season in the next few days, we are also very focused on completing the work necessary to close our transaction with Alliance Boots. In November, we secured financing to close the transaction as well as refinance the majority of Alliance Boots' outstanding debt. We also issued our definitive proxy statement in preparation for our special shareholders meeting in New York on December 29th. We are currently on track to finalize the merger ahead of our original schedule. As we announced this morning, we now expect to close the transaction on December 31st, subject to shareholder approval. This is truly an extraordinary milestone in a strategic journey we began six years ago to position Walgreens for a new generation of growth and value creation. Wrapping up, let me touch on the journey we began six years ago. A journey that included transforming the front end of our drug stores, advancing the role community pharmacy plays in healthcare, and is culminated by taking Walgreens global, creating the first pharmacy-led health and well-being enterprise. As I have said before, bringing these two iconic brands together will be difficult, if not impossible, to replicate. It has been my privilege to lead us to this point, to have had the opportunity to bring Walgreens to the world and Alliance Boots to America. I wish Jim, Stefano, and the rest of this very talented leadership team all the best as they now bring our vision to life through Walgreens Boots Alliance. From everything I know and everything I have learned at this company over the past 35 years, I am completely confident that the combination of Walgreens and Alliance Boots will truly change the face of global pharmacy, retail, and wholesale. And I am even more confident that the best days for our company are still ahead. And that's a tribute to the hard work and commitment of over 350,000 women and men of both Walgreen and Alliance Boots who have made this great journey and future possible. On a personal note, I would like to thank everyone on this call and many others for your thoughtful insight into our business. I have appreciated your work, thoughts, and comments over the years. I also want to wish all of you a very happy and healthy holiday season. With that, thank you and I will now be stepping off and turning the remainder of the call, including the Q&A, over to Tim.

Thank you, Greg. Good morning everyone, and thank you for joining us on the call. I want to cover two topics today. First, to provide greater detail on our first quarter performance and second, to share some thoughts on our expectations post to closing of the deal with Alliance Boots. As Greg mentioned, we are pleased with our first quarter results as they came largely in line with our expectations and got us off to a good start for fiscal 2015. Our adjusted EPS of $0.81 reflects the execution of our strategy with strong revenue growth and solid expense management for the quarter. Let me begin with the discussion of total revenue, which increased 6.7% year-over-year. This was due in part to strong comparable store script growth of 4.1%, which is built on a solid base of 5.5% growth in the same quarter last year. To help drive that performance, we continued our focus on winning and gaining share with high-value seniors through preferred relationships with Medicare Part D plans. On balance, this business carries lower margins than the rest of our script business but remains quite attractive as it drives incremental revenue and gross profit dollars. This strategy contributed to our overall retail pharmacy share increasing this quarter as we grew scripts by 10 basis points more than the rest of the retail industry according to IMS data. We are also pleased with the progress we are making in driving our front end, our retail products comp. For the quarter, we reported a 1.5% comp growth building off a strong 2.4% comp in the same quarter last year. Our strategy is working. This is evidenced by margin and basket size being up while traffic is down slightly. Our main focus remains to drive profitable growth and thereby achieving the right balance between sales and margins. Let me now talk a little more about the retail products margin. This marked the third quarter in a row with year-over-year improvement in retail products gross margin, which indicates that our strategy is beginning to pay dividends. Let me remind you of the key elements of our strategy. First, to focus on enhancing our mix towards more upscale retail products to drive higher margins. Second, to drive supply chain efficiencies by removing excess costs and thereby improving overall store productivity. And third, to leverage our Balance rewards loyalty program to derive valuable insights that will allow us to better target our promotional investments. Now I will shift to our pharmacy segment which continued to face margin pressure due to third-party reimbursement pressure from contract step downs, ongoing generic drug inflation on a subset of generic drugs at a similar rate to what we saw in the fourth quarter of last year, and finally increased mix of specialty drugs. Partially offsetting these pharmacy margin decreases were the positive effects of a step up in the introduction of new generics this quarter and purchasing synergies generated by our joint purchasing group. For the quarter, the margin weakness in the pharmacy segment was only partially offset by improvement in the retail product segment. On balance, this resulted in overall adjusted gross margin being down 120 basis points year-over-year to 27.3%. As we look forward, we expect the negative factors impacting pharmacy margin to intensify in the second quarter as the impact from a meaningful step down in Medicare Part D rates begins January 1st. While we view margin percent as an important metric to help assess the overall health of our business on a long-term basis, we remain focused on leveraging our largely fixed cost structure by driving gross profit dollars in the near term. Our focus is for gross profit dollar growth rate to exceed SG&A dollar growth by greater than 100 basis points. During the quarter, on a GAAP basis, our gross profit grew $144 million outpacing SG&A change of $77 million and thereby contributing $67 million to operating income. On an adjusted basis, gross profit dollars increased by $133 million while SG&A dollars increased by $72 million year-over-year contributing $61 million to operating income. This resulted in the spread of positive 90 basis points, which is an improvement from the 50 basis point positive variance we saw last quarter. Adjusted gross profit dollar growth increased 2.6% this quarter despite the pharmacy pressures we are currently experiencing. We remain focused on mitigating the impact of these negative factors through a number of mechanisms including leveraging our buying group to secure better costs for drugs, incorporating inflation protection in payer contracts as they come up for renewal, and continuing to help align appropriate industry reimbursement levels. Additionally, we expect our retail products initiatives to continue to further drive gross profit dollar growth. Adjusted SG&A dollars increased by 1.7% for the quarter. We are quite pleased with our expense management during Q1. And with the pressures we are experiencing on our pharmacy margins, we have become even more focused on cost control such as lowering our cost to fill to help create a more sustainable profitability. As we communicated previously, we have identified and remain on track to achieve the $1 billion in cost savings reflected in our fiscal year 2016 goals. While there will naturally be some incremental variable cost as we continue to aggressively grow our business, we expect these will be mitigated by our cost savings program. We are looking to identify further cost savings opportunities and will update you after that review is complete. Combined net synergies for the quarter totaled $140 million and adjusted EPS accretion from our investment in Alliance Boots was $0.11 for the quarter. Both of these were in line with our expectations. Please remember, last year's adjusted accretion received a $0.07 tax benefit from the UK tax law change while this year's included a $0.02 benefit from a one-time gain on an acquisition. The progress we are making with synergies is slightly ahead of schedule. It is still early but we believe there is upside to our original $650 million goal for the fiscal year and we will provide more detail on our second quarter earnings call. Now let me walk you through our adjusted EPS. The GAAP earnings of $0.85 per share reconciles to an adjusted earnings of a positive $0.81 per share for the quarter as illustrated by this chart. The net adjustment of $0.04 includes the removal of the following: A LIFO provision of $0.03 per share, $0.13 per share of acquisition-related items which consisted of $0.06 of acquisition-related amortization cost, $0.02 of acquisition-related costs, $0.04 from Alliance Boots related tax, and $0.01 from interest associated with Walgreens Boots Alliance debt issuance. And finally a net impact of $0.20 for special items comprised of $0.02 per share negative impact from cost related to the corporate and store optimization costs, $0.10 per share negative impact from fair value adjustments on currency hedges, $0.09 positive impact related to the partial release of a tax valuation allowance, and $0.23 positive impact of the warrants issued by AmerisourceBergen to Walgreens and Alliance Boots. The Alliance Boots impact was reported on a three-month lag basis. Moving on to our balance sheet, I would like to share a couple of words on primary working capital, which I define as accounts receivable plus inventories minus accounts payable. Accounts receivable increased $850 million. Our third-party receivables are in very good shape, down approximately $40 million year-over-year. The increase was primarily due to higher vendor funding receivables from the joint venture and rebates for AmerisourceBergen. LIFO inventories decreased $1.2 billion. About two-thirds of this improvement came from pharmacy inventory reduction in conjunction with the terms of our agreement with AmerisourceBergen. The remainder was with retail products inventory reduction due to our initiatives to improve store level supply chain efficiencies. And accounts payable increased $400 million largely due to reclassifying due from vendors up to the receivables line as I just mentioned. Overall networking capital decreased by $700 million or 13.8% versus a year ago, which helped drive solid cash flow performance for the quarter. We generated approximately $1 billion in cash from operations versus $133 million in the year-ago period. Recall the cash flow in last year's quarter was adversely impacted by the timing of payments related to the AmerisourceBergen transaction. Free cash flow was $696 million versus a negative $231 million in the prior year period. We are pleased with the cash generation during the first quarter due partly to the working capital improvement I just mentioned as well as improved earnings. In addition to the $500 million in shares we bought back in the fourth quarter of fiscal 2014, we bought another $500 million worth this quarter. The number of diluted shares decreased by approximately 12 million from last quarter, I am sorry, 12 million from last quarter. Now let's talk about the rest of the fiscal 2015. We do understand that you will not have a reliable base on which to build your fiscal 2015 estimates, so we will provide additional information after we have had a chance to review our plans with Walgreens Boots Alliance Board. As you can appreciate, there are a lot of unusual factors that will impact results in the second quarter. Some of these are still being developed; therefore, we are not prepared to quantify our expectations at this time. In the meantime, let me give you some key factors for you to consider in your models. Subject to shareholder approval, we are expecting to close the deal with Alliance Boots on December 31st of this year. We will eliminate the three months reporting lag. Interest expense is expected to be in the range of $140 million to $150 million per quarter; this factors in the recent financing with a blended rate of approximately 3.2%. We will add 144.3 million incremental shares as partial consideration for the acquisition. Walgreens Boots Alliance fiscal year end will be August 31st, and remember that our future earnings will be impacted by exchange rate movements, most notably in the pound sterling and to a lesser extent the Euro. Moving on to fiscal year 2016, many of you have asked my thoughts on our outlined goals and now that I have been here for nearly five months, I have had enough time to make a thorough assessment. Based on everything I have reviewed and learned, I am comfortable that the fiscal year 2016 goals and their associated assumptions are reasonable and reflective of the markets. I am confident that we have initiatives and resources in place to address the controllable elements that drive the adjusted EPS range. For those variables that are beyond our control, we have also identified actions that can help mitigate any unforeseen pressures. I would now like to provide a few thoughts around our financial reporting and communications going forward. With regard to WBA, we are working diligently to develop the appropriate metrics and measures to help you better understand our business fundamentals. To that end, we will break out the performance of the new company into three reporting segments: retail pharmacy USA which will include Walgreens and Rite Aid, retail pharmacy international which has pharmacy-led health and beauty retail businesses in eight countries, and pharmaceutical wholesale which mainly operates under the Alliance Healthcare brand in 12 countries. We plan to share more details at an upcoming Analyst Day in New York that we will host in the months after closing the deal. We will provide you more specifics on this event as we finalize our plans.

Thank you, Tim. That concludes our prepared remarks. We are now ready to take your questions. When we get to your questions, please limit yourself to one question. Thank you.

Hi, good morning, guys.

Hi Ed, how are you?

Good, so Tim, a question for you on looking forward on gross profit dollar growth. You hinted at increased pressures coming up for the remainder of the year. My question for you is, we saw about 2.6% increase in gross profit dollars this quarter, how do you expect to cater that into what it should look like over the next few quarters? It does sound like that would deteriorate over the second quarter? And then from an SG&A standpoint, is there an opportunity there where you still believe that you will be able to drive better gross profit dollar growth versus SG&A growth over the next few quarters?

Sure Ed, so let me just talk about the pressure that we are experiencing from a gross margin standpoint. I mean there is ongoing pressure from generic inflation. Some of the impact that we had in the fourth quarter was mitigated a little bit through some improvement in average wholesale price and the related impact on the growth, etc. Certainly we have generated some additional synergies from our joint venture buying group in Switzerland. And then as we’ve pointed out, we expect a step down in reimbursement levels associated with the Medicare Part D that’s already contracted in. So on a going-forward basis, we do expect continued pressure and maybe a little bit additional pressure going into the second quarter and thereafter. We’ll continue to – I mean expect that we’ll see some improvement in the average wholesale price which helps reimbursements, will continue to generate the synergies we can to mitigate that on an ongoing basis, and I will remind you that there is lots of speculation about the wisdom of taking on the Medicare Part D contracts. I will tell you that incrementally it is very attractive business. Now clearly I mean there is a negative impact on overall margin percentage and even dollars relative to last year. But had we not undertaken that, it would have had a serious impact on both our revenues and our overall margins. So, I mean at the end of the day it was a good thing for us to take that and generate some continuous to keep an attractive customer base coming to work to our stores and doing business with us. We’ve talked about a billion dollar cost reduction program; we made some good progress on that in the first quarter of this year as evidenced by our results. We continue to execute against that and I would expect that largely to offset a big piece of the margin pressure that we continue to experience.

Great, thank you. Happy holidays guys.

Thank you very much Ed.

Thanks. I have two related questions, one for Tim. Do you think the reimbursement pressure in the third quarter could be greater than in the second quarter due to the additional time frame? And for Alex, how are you ensuring that the significant cost reductions do not negatively affect service levels in the stores? You're eliminating a lot, and it's important to maintain service quality.

In the second quarter, we have to reduce our involvement with Medicare Part D, which will create some pressure. I don't anticipate further pressure since there isn't a natural decline in the third quarter regarding Medicare Part D. We'll monitor how generic inflation develops, but over time we'll manage a bit of that as reimbursements improve. I do not foresee significant additional pressure in the third quarter compared to the second quarter. Before I pass it to Alex, I want to mention that our cost reduction strategy will eventually require us to reduce costs at the store level, but we are currently focusing on corporate costs and then addressing the supply chain. We're committed to minimizing any negative effects on our service to customers. In fact, some initiatives we are implementing are designed to alleviate workload from our store managers and employees, allowing them to concentrate more on customer service. Now, I'll hand it over to Alex for further comments.

Thanks Tim. Hi John, it is Alex here. Yes, Tim’s right; I think the best example we can give you is the inventory adoption across the business. Tim said it was $1.2 billion in the quarter, about $400 million in the front end. That just suggests a lot of workload in the stores, so that means that our people in the stores are able to spend more time focusing on customers and making sure they can actually get the right product on the store and on the shelf at the right time. I am feeling pretty good about the program, so we are just seeing costs naturally on reducing working capital and making us more efficient. So that’s a great example of one of the efforts in terms of cost reduction. We are really focused on workload in the corporate office and really important stores. We are really focused on giving our customers great care so we can make sure they come back time and again. We think these two things are completely compatible and that is what we are focused on.

Let me comment on one other piece. You noted the mix of impact on the front end on our retail products business. Traffic was down a little bit, margin was up and basket size was up. A big piece of that was the elimination of questionable promotions from last year. But again, as we endeavor to upgrade the quality of our product on the front end, improve the margin percentage, and eliminate some of those unprofitable promotions, it actually takes a fair amount of work out of the store. So rather than hang lots of hang tags of discounts and so forth, our store employees are much better positioned to support and provide service to our customers.

Okay, thank you.

Great, thank you and good morning. I believe in mid-November you released this filing with some internal targets, particularly an EPS target of $3.40 in fiscal 2015. I am wondering if you could frame the results today which were very good as well as commentary that you are ahead of the $650 million in synergies this year and the closing data with that target as it relates to the internal target?

Alvin, I want to remind you that what you read in our proxy statement was a piece of information provided to the bankers to enable them to generate a fairness opinion on the transaction. And we haven’t confirmed that information, but I will simply tell you this: that the results of the first quarter are largely aligned with our expectation for the year. I mean, it is kind of where we had anticipated the first quarter coming in, and it is aligned with our projections for the year.

Thank you very much.

Thanks very much. Tim, I think that when you talked about reimbursement pressure, one of the things you talked about was specialty. Obviously, a lot of new specialty drugs are coming to market. Can you talk about the difference in the margin for a specialty product versus some of the other brand and generic products? And secondly, as you think about your specialty pharmacy business for Walgreens, what do you see as some of the opportunities as we move into 2015?

We see specialty as a very important and strategic business. It has certain characteristics that may distort some metrics when you analyze them, but ultimately, it is an appealing business, and we plan to continue expanding it. The figures may not be perfectly accurate since they represent averages, but the specialty business primarily involves high-cost prescription drugs, with prices reaching up to 30 times our average prescription cost. These drugs generate gross profits that can be about 10 times our typical gross profit across other areas of our portfolio. As a result, our margin percentage will likely be significantly lower, applying downward pressure on it. However, achieving margins of 10 times our average, even with slight increases in selling, general, and administrative expenses to support it, makes this a very attractive business for us. While it may skew some ratios, it provides substantial dollar margins that bolster our business and operating profit. I also consider the next evaluation to involve the return on investment; on average, the inventory needed to support this business is actually less than average since we typically don’t keep these prescriptions in pharmacies or warehouses. They are mostly held by partners like AmerisourceBergen or upstream in the supply chain, meaning we aren’t managing the inventory ourselves. Hence, this business remains attractive on almost all fronts, despite some distortions in certain ratios.

And then Tim, as you think about specialty, anything about infusion. There have been some news reports that you are looking to divest your infusion business. CVS recently has bought an infusion business, can you maybe just discuss why you don’t see that as part of the offering around specialty?

We don’t comment on speculation or rumors in the marketplace that we have never confirmed any of those rumors.

Okay, great. I appreciate it, thanks.

Tim, one of the items that’s been talked about in the past is your occupancy cost is a little higher than you’d like it to be, could you give us some read on how many of the stores will be rolling off of their leases and you could start to work down on that occupancy cost or any other plans you have to kind of work the occupancy cost down?

Yes, I mean on balance, we’ve employed over the years a strategy to have the best corner or location in any geography with the intent that it would generate more traffic and more revenue and obviously more margins and more profits. In some cases, that worked; in some cases, it didn’t. But on balance, it left us with an occupancy cost both in terms of rent or lease cost and another occupancy as part of the strategy to avoid better service and try to drive higher traffic and revenues, etc. So in some cases, we find there are many cases on balance where the average when we look at it relative to our primary competitor, our occupancy cost and store costs are higher. We are doing lots of things to manage down all aspects of that overall cost structure including taking a hard look at those stores. Obviously, we have a vast array of different terms remaining on leases. They tend to be 10-plus year leases and some of them are well into their lifecycle. But I can't say that we would have an appreciable impact short term just waiting for those leases to naturally roll. We are taking the opportunity to go in where we can to renegotiate leases and then in some cases, it's attractive for a landlord to do that. And we’re looking at a variety of things but it is not a short-term quick fix solution. But it is all part of our cost savings initiatives that we have talked about.

Do you think you need a smaller store format moving forward or is it just getting away from these key locations where you were just paying too much rent?

I mean it covers the spectrum. I’ll let Alex talk about it, but in some locations we would benefit by a smaller format store versus in some cases that we are well served by the size and scale what we have. Alex?

Hi Mark, it is Alex here. We fill every single store more or less the same size. It was built around the pharmacy business and it was a fantastic strategy as Tim said. So clearly when I was looking at it from a retail point of view, one of the options we are looking at in terms of how do we make more use of the asset. So, it's a combination of, as Tim said, rent with options over time potentially so some space moves over time. Also, we have to make even better use of the asset by having the right offer in that locality for the customers who are actually based around that store. These are all strategies that we are now deploying.

I mean, as we have built the fleet, as Alex mentioned, we tend to use kind of a cookie-cutter approach. So if you look at most of our stores, they are quite similar in appearance and size and scale, etc. As we go forward, we will probably adapt that format a little bit more to the market conditions and so forth. And we are doing everything we can for the existing fleet where the size doesn’t fit optimally to the market to adjust as I talked about earlier.

Okay, thank you.

Hey, good morning guys and thanks for taking the questions. Tim, you started talking about cost reductions and starting at the corporate level as opposed to the store level. Is there any way for you to quantify for us kind of what is the corporate cost opportunity and how we should think about that?

Yes, I am sorry George, but I don’t want to go into specifics on where it is at. I mean we’ve identified, have the overall program. I’ve also commented not quantified but commented that we will look harder at our cost structure and in all likelihood considering market conditions and considering the opportunity we’ll go more aggressively at our cost reduction program. We haven’t finalized that; we haven’t communicated to our Board, but as soon as we do, we’ll get back to you on it. But we are going to go after all costs wherever there is opportunity and I prefer to start with those that are away from the customer, the furthest away from the customer.

Okay and then just maybe a real quick follow up, you highlighted the kind of Medicare Part D contracting terms, can you give us any more color on kind of the companies’ assumptions on kind of volumes and share gains in that space given how your setup in the preferred networks and a lot of your preferred network partners looks like they are in a position to take share this selling season, I guess any further color you can give us on the change in reimbursement expectation versus the change in volume would be very helpful, thanks?

Yes, I mean on balance we’re somewhat underwater on the incremental share and the incremental scripts that we’ve picked up relative to the step down in those that we already had. So if we had assumed that we could keep all of the existing scripts at the old prices we are deriving, it wasn’t very attractive for us to enter into this contract. But the likelihood that somebody else would pick it up and would take that business away from us was quite high and it was better for us to continue to participate with a little bit somewhat lower margins on the existing business that we are doing. And we have picked up some incremental customers and prescriptions. But I can't quantify exactly what that is. On balance, though, I would say it resulted in a step down in margins from the prior year.

And so volumes for 2015 expectations?

We don’t have much visibility on volume readiness, but we feel optimistic about the current market. The market is performing well, and we’ve noticed increased activity due to various government initiatives. We are well positioned for the peak in January when many people will begin presenting scripts to the new pharmacy for the first time. We are focusing heavily on this, and overall, we feel prepared and confident in the stability of the market, as reflected in previous periods.

Thank you.

Good morning, Eric.

Good morning. I am curious as you look forward thinking about the pharmacy gross margin, what your strategy is in terms of reimbursement rates. I think historically there was a focus on getting strong reimbursement for filling scripts at Walgreen store. I understand what’s going out to Medicare Part D, but thinking about the impacted influence of preferred and more narrow networks relative to the scale of your store network, what is your strategy in terms of trying to defend or define reimbursement in your pharmacy relative to the trend in the market?

It is Alex here, hi. We have always engaged in the market and aimed to offer payers good value. Currently, we are continuing this approach. The market has evolved, and we are collaborating closely with payers to ensure we provide them with good volume. This is our intention moving forward. One advantage we have now is our capability for global buying, which we didn't have before. As time progresses, we feel optimistic about the direction of the organization and the additional scale we are achieving. We are a large chain with global buying power, and we intend to compete effectively. We have discussed the generic inflation we faced over the past year, and some of that is now being addressed as average wholesale prices are adjusted to more appropriate levels. Additionally, as our reimbursement contracts expire and we renew them, we are making sure to include inflation protection, and we are achieving good success in this effort.

And just a follow up if I could on, Alex, I understand your comment on working closely with suppliers and doing a better job even on buying, Tim your comments earlier of upside to the $650 million this year and looking forward, the understanding I want to get into a ton of specifics but the source of optimism and upside is this more on the purchasing side or on the non-customer face and expense side, where is the bigger incremental opportunity you are seeing for 2015 and beyond?

Really it’s on both sides Eric. It’s in the generics a little modestly on the branded, but a big piece of it also is in the goods not for resale as we point out. But just by sheer magnitude of the opportunities, it more comes from the purchasing of generics. Under this head, we are making good progress and we are on pace, if not a little bit ahead on the target for the year. And as we flush that out going into the second quarter, I would expect us to update you on that and perhaps we’ll see it pretty clear to providing an even better number.

Hi, good morning everyone.

Hi Mark.

Hi, could you give us some perspective on the performance of Alliance Boots sales trends organically and so I’d be looking for just any color you can give us on the retail comps and also the wholesale business as you bring in that business consolidating it into 2015?

Yes, we do hold a 45% share in Alliance Boots, but until we finalize the transaction, as a private company, we cannot share specific details about their performance or growth. They do provide some general information quarterly on their website, but it is not detailed, and we are unable to disclose more information.

I have a question regarding accounting. We're looking at the numbers for Alliance Boots up until August. What can we expect for the results from September to December, and will there be any unusual expenses during that period?

I mentioned earlier that when we close on 12/31 the transaction, it will obviously be 100% owned and it will be consolidated into the WBA totals. We are removing the lag as we report on a going forward basis but we’ll restate to remove that lag and it will be all adjusted from a historical perspective.

Okay, but that period September to December, those numbers actually will they pull through the P&L vent or I mean are there any expenses that are in that period that are unusual?

Yes, I mean I can’t talk specifically about expenses that they’re incurring. Anything that you would have seen in ours will be reflected but you will see when we do restate for the first quarter of 2015 after we do consolidate, close the deal and consolidate any expenses, any unusual expenses that they might incur in that quarter will be reflected in our consolidated number. So you will have the visibility to them.

Okay, alright, thanks a lot.

Ladies and gentlemen, that was our final question. Thank you for joining us today. Lastly, on a personal note, I believe all of you probably know I am planning on retiring as of the end of the month. It’s been my honor and pleasure to work with Walgreens over the past 27 years and with all of you over last 15 years as the Head of Investor Relations. While many great accomplishments have been achieved at this company over this time period, I believe the best is yet to come. Thanks for the wonderful memories on behalf of Walgreens, let me one last time wish you all happy holidays.