Walgreens Boots Alliance Inc (WBA) — Q1 2017 Earnings Call Transcript

Thank you. And can I first say that in keeping with our corporate stance on cold and flu, a number of us have gone out and caught colds and flu, so please bear with us if we sound slightly bunged up this morning. Welcome to our first quarter earnings call. Stefano Pessina, our Executive Vice Chairman and Chief Executive Officer; and George Fairweather, Executive Vice President and Global Chief Financial Officer will take you through our results as usual. Alex Gourlay, Co-Chief Operating Officer of Walgreens Boots Alliance is also here and will join us for questions. You will find a link to the webcast on our Investor Relations website at investor.walgreensbootalliance.com. After the call, this presentation and webcast will be archived on the website for 12 months. Certain statements and projections of future results made in this presentation constitute forward-looking statements that are based on our current market, competitive and regulatory expectations, and are subject to risks and uncertainties that could cause actual results to vary materially. Except to the extent required by the law, we undertake no obligation to update publicly any forward-looking statements after this presentation, whether as a result of new information, future events, changes in assumptions or otherwise. Please see our latest Form 10-K for a discussion of risk factors as they relate to forward-looking statements. As a reminder, today’s presentation includes certain non-GAAP financial measures. And we refer you to the Appendix in the presentation materials available on our Investor Relations website for reconciliations to the most directly comparable GAAP financial measures and related information. I will now hand it over to George to take you through the numbers.

Thank you, Gerald. Overall, we are pleased with the progress of this quarter with results in line with our expectations. We continue to make good progress towards completing our Rite Aid transaction. And today, we have raised the lower end of our adjusted earnings per share guidance for fiscal year 2017. So, turning now to the financial highlights for the quarter, as we expected currency had a negative impact on the year-over-year financial performance, the U.S. dollar being around 18% higher versus sterling. Sales for the quarter totaled $28.5 billion, down 1.8% versus the comparable quarter last year. On a constant currency basis, however, sales were up 1.1%. GAAP operating income was $1.4 billion, a decrease of 1.4%. GAAP net earnings attributable to Walgreens Boots Alliance were $1.1 billion and diluted EPS was $0.97. Adjusted operating income was $1.7 billion, up 0.4% and in constant currency was up 2.8%. Adjusted net earnings attributable to Walgreens Boots Alliance were $1.2 billion, up 6.1% and in constant currency up 8.2%. Adjusted diluted net earnings per share was $1.10, up 6.8% and in constant currency up 9.7%. The adjusted effective tax rate, which we calculate excluding the equity income from AmerisourceBergen, was 25.5%. This was lower than the same quarter last year, primarily due to changes in our forecast geographic mix of pre-tax earnings and the U.S. taxation of our non-U.S. entities. So now, let me now turn to the performance of our divisions in the quarter, beginning with Retail Pharmacy USA. Retail Pharmacy USA sales were $20.7 billion, up 1.4% over the year-ago quarter, comparable store sales increasing by 1.1%. Adjusted gross profit was $5.5 billion, up 0.1% over the year-ago quarter reflecting an increase in retail, which was partially offset by a decline in pharmacy. Adjusted SG&A was 20.4% of sales, an improvement of 0.5 percentage points compared to the year-ago quarter. This reflects benefits from our cost transformation program. Adjusted operating margin was 6.2%, up 0.1 percentage points resulting in adjusted operating income of $1.3 billion, up 3.7%. So next, let’s look in more detail at pharmacy. U.S. pharmacy total sales were up 2.5% driven by increased script volumes and higher specialty sales. We filled 237.6 million prescriptions on a 30-day adjusted basis, including immunizations, an increase of 3.0%. On a comparable basis for stores, which exclude central specialty, our pharmacy sales increased by 2.0% with scripts filled up 3.4%, primarily due to a drop in Medicare Part D volumes. Within sales, volume growth and brand inflation were partly offset by reimbursement pressure, which was in line with what we anticipated and by the impact of generics. While branded drug price inflation continued, it was at a more moderate level than in prior quarters. Keep in mind that these factors impacted sales and gross profit. Our reported market share of retail prescriptions in the quarter, on the usual 30-day adjusted basis, was 19.5%, up approximately 40 basis points over the year-ago quarter. Total retail sales were down 0.9% on the same quarter last year. This includes the impact of the previously announced closure in September of certain e-commerce operations. Comparable retail sales were down 0.5% in the quarter due to declines in the consumables and general merchandise category and in the personal care category, partially offset by increases in health and wellness category and beauty category. Gross margin was higher than the same quarter last year, primarily driven by owned brand performance and procurement benefits. Since the quarter end, while our December comparable sales were still negative, we saw stronger performances in our key health and wellness and beauty categories. We have now completed the first phase of the rollout of our new differentiated beauty offering, which is available in more than 1800 stores. In addition, in October, we launched Beauty Enthusiast, a new loyalty offering which engages our most valuable beauty and personal care customers. Since the launch, signups and incremental spend among Beauty Enthusiasts has been above plan. As we anticipated, we have increased beauty sales in these remodeled stores, particularly No7 and Soap & Glory. During 2017, within these stores, we plan to introduce further new product lines, as well as expand the number of stores with beauty offerings. A significant element of the rollout is the recruitment and training of beauty consultants. In order to maintain high standards, we are doing this in a methodical manner, which is taking slightly longer than expected. So now, let’s look at the results of the retail pharmacy international division. Sales for the division were $3.0 billion, up 0.5% in constant currency. On the same basis, comparable store sales decreased 0.1%. Comparable pharmacy sales were down 0.5% on a constant currency basis, due to a decline in the UK, which was partially offset by growth in other international markets. Boots UK comparable pharmacy sales were down 0.8%, due to the expected reduction in pharmacy funding, partially offset by strong performance in pharmacy services. Comparable retail sales for the division increased 0.2%, due to growth in all countries other than Chile and Mexico. Within the UK, Boots performance was flat versus the year-ago quarter, and we saw growth in our opticians business. Adjusted gross profit for the division was down 2.7% in constant currency to $1.2 billion, mainly due to lower margins in the UK in what is really a new environment for retailers. Adjusted SG&A as a percentage of sales on a constant currency basis increased by 0.7 percentage points to 32.5%, mainly reflecting higher depreciation costs than the year-ago quarter. As you may recall, in January last year, I explained that fiscal 2016 first-quarter results benefited from purchase price accounting refinements. In addition, the higher depreciation this quarter reflected our ongoing IT and store investment program. Adjusted operating margin was 7.2%, down 2.0 percentage points in constant currency. This resulted in adjusted operating income of $213 million, a decrease of 21.6% again in constant currency. Since the quarter end, I’m pleased to report that December retail sales growth was notably stronger than in the first quarter. Boots December retail performance was solid, reflecting actions taken in the fall to counter what are challenging market conditions. However, from December 1, as expected Boots was impacted by the government action to lower pharmacy practice payments. So now, let’s look at our Pharmaceutical Wholesale division. Sales for the division were $5.4 billion, up 0.6% versus the same quarter last year on a constant currency basis. Comparable sales on a constant currency basis increased by 4.7%, this was slightly ahead of our estimated market growth weighted on the basis of our country wholesale sales, with growth in the UK and emerging markets offsetting competitive market conditions in continental Europe. Adjusted operating margin, which excludes ABC was 3.1%, up 0.3 percentage points on a constant currency basis. Adjusted operating income was $224 million, up 45.2% in constant currency. While the increase was mainly due to equity earnings from ABC, excluding this, adjusted operating income grew by 10.2% in constant currency, with cost benefits outweighing margin pressures. Operating cash flow in the quarter was $525 million. During the quarter, our working capital outflow was $1.2 billion. This reflected our typical seasonal build in inventories and inventory build to support certain new initiatives, partially offset by improved payable days. Cash capital expenditures for the quarter were $378 million. We continued to invest in our core customer proposition, including our stores and U.S. beauty program, as well as the upgrades to our IT systems, which we have previously discussed. Overall, this resulted in free cash flow for the quarter of $147 million. So turning now to our pending acquisition of Rite Aid, as you all have seen from today's earnings press release we are actively engaged in discussions with the FTC, and are still working towards the close of the acquisition in the early part of this calendar year, having announced the Fred's agreement on December 20, 2016. So turning now to guidance for fiscal 2017, we have raised the lower end of guidance by $0.05 and now expect adjusted diluted net earnings per share to be in the range of $4.90 to $5.20. This assumes as before, Rite Aid accretion of $0.05 to $0.12 and current exchange rates remaining constant for the rest of the fiscal year. Now keep in mind, we still expect second half-year growth to be stronger than in the first, as we benefit from the strategic partnerships announced last year. During the quarter, we purchased 5.6 million shares at a cost of $457 million. This substantially completes our anti-dilutive share buyback program for fiscal 2017. At the quarter end, this resulted in just over 1.79 billion common shares outstanding. So, I will now hand it over to Stefano for his concluding comments.

Thank you, George. As you have heard, the results for the quarter are good and very much in line with our expectations. As usual, they tell the story of a dynamic business with many moving parts. And we are aware of the complications these create for people looking from outside the company when they try to measure our progress, especially on a quarter-by-quarter basis, when we are fulfilling strategies that are aimed at delivering value over the long-term. Last quarter, we told you that we expect that our result for fiscal 2017 would be weighted towards the second half of the year as our new agreement with key strategic partners begins to deliver volume increases that offset the commercial sizing that we have given. As this implies, we will continue to see this impact in the second quarter of the year, which is as we expected and previously indicated. We continue to deliver major progress with cost reduction outsourcing both areas in which we have a lot more progress to make, which is allowing us to deliver these good financial results, while we implement initiatives to drive growth in our store. We are further differentiating our retail offering and promoting our own and exclusive brands across our businesses. We are still at an early stage of the deployment of new retail initiatives in Walgreens and are refreshing the offering and the processes to enhance the_customer experience. Looking forward to recognizing the natural work we're doing in the U.S., we are trying to bring in new ways of thinking to our company, which if we're successful will hopefully influence the sector as a whole. We are focused on working in partnership to provide a better, more efficient, and effective approach within the U.S. customer base. To make better use of the infrastructure in place at the moment and rethink how we do a myriad of things we do today. There is no doubt that the healthcare system needs to change by improving the provision of healthcare, while at the same time acting to control the rapid growth of costs. We are working to play our part in the changes that need to happen to achieve this and as we deliver value in the system that we create, we capture an element of that volume within our own business. Of course, we are a single part of the system, so can only do so much on our own, which is why we are committed to partnerships, and talk about it so much. Working together with others to rethink interaction and interfaces within the overall system allows us more impact within the system, a more leverage of a side, and more ways and opportunities to create value, both in our business and in the system as a whole. Of course, the U.S. is only a part of our business albeit a very significant part. Overall, across our company our business has changed and constantly reinvents itself to remain relevant in the ever-changing market. So, we continue to work to grow and develop the company as a whole. During the quarter, I have visited many of our operations outside the U.S. and I remain convinced that there are opportunities for us internationally. I said in the past that Asia and Latin America are areas of particular interest, perhaps outside the U.S., and the more I see of the market, the more convinced I am of these. In terms of corporate development, you have seen the progress we announced at the end of December regarding the proposed transaction with Rite Aid, in having reached a conditional agreement with Fred’s. We still have to complete our work with the FTC and as we have seen these things can take some time, as the FTC is scrupulous in ensuring that they consider everything properly and fully. As said, I remain as convinced as ever of the strategic benefit of the proposed Rite Aid transaction. I look forward to being able to provide you with another update as soon as we can. We are clearly making progress and while I would always like to move faster and do more, we must be measured and ensure that we work at a pace with which we are confident we can deliver for our customers and our shareholders with all the plans and strategies we have discussed with you. How confident? It is only strengthened by our recent performance. Holiday shopping started later than usual, with the bulk of the sales occurring in the last days before Christmas. That said, we have once again seen what appears to be a solid holiday period in our main retail market. As George has told you, we are raising the lower end of our adjusted earnings per share guidance for the year. We see the business as being in line with our expectations. We continue to identify different ways to deliver the value and growth that we see possible in the business, and as ever, we will evaluate each of these with prior guide depending on the market and the competitive changes that we observe, but overall these continue to provide us with the tools we need to maintain the financial performance we have committed to deliver as a company. Overall, we remain confident in the outlook for the company, optimistic that the strategies that we are pursuing will deliver future growth, and convinced of the long-term opportunity to create genuine value for this business, for many years to come. Thank you. Now I will hand you back to Gerald.

Thank you, Stefano. We’re now ready to take your questions. Operator, can you open the lines.

Good morning, gentlemen. So Stefano, you talked about the changing healthcare landscape; you’re obviously doing a lot to revolutionize in some ways how the supply chain functions. As you think about the competitive responses and the partnerships that have happened, where do you feel like you’ve made the most progress and where do you see the next leg of big opportunity? It’s going to depend somewhat on the Rite Aid transaction in terms of what you do next, but just on the core business, where do you feel like you have done the most and where do you feel like in the U.S. business you have probably the most to do?

Well apart from the Rite Aid transaction as you said, I believe that the big achievement of the last year has been for us to be able to create really a bridge with the main PBM and other big players in this industry, and now we have certain joint ventures, we have certain let's say contracts that may be new patients as a consequence of this or what we have done. But we have something much more important. We have established the trust. The trust between us and a certain number of companies, not all of them. Not everybody has been able to create these elements of trust, but for certain companies, the trust is there. And on the trust, we can build a lot of additional opportunities in the future. And so, our relationship with Prime, our relationship with Express Scripts, even with Optum, though there have been many discussions about Optum, has created a new basis of discussion and collaboration that of course can go beyond a simple contract and may take in consideration a wider scenario.

That's helpful. And maybe just quickly on the international business, you highlighted key emerging markets as a place for expansion, you know you entered a number of different countries with different mild acquisition, joint venture, etc. over time, is this the kind of environment currently favorable towards accomplishing more of those goals in terms of expanding your geographic reach? And to help us understand what are the key challenges? Obviously, we have seen folks enter Brazil, and at times that’s been tough for Russia, etc. What makes for a good emerging market in your view in terms of the ability to make money there?

It's always a challenging question because situations evolve quickly. Personally, I wouldn't be too eager to invest in Brazil unless we encounter a very advantageous scenario, but Brazil remains a large country, and eventually, it will be appealing again. On the other hand, countries like China are still very attractive. I remember that in China we have a solid sales presence, but not as a retailer due to historical restrictions that allowed foreigners to own only 30 pharmacies until three years ago. We had those 30 pharmacies, while we were only 29 in Brazil, which limited our ability to operate pharmacies there. The only option was to partner in a minority capacity with a state-owned company. Fortunately, this restriction has been mostly lifted, although some limitations still exist. Over the past two years, we have been actively seeking the right partner to launch a significant pharmacy chain. We will eventually be able to do this. As for when, I'm not certain, but it is achievable.

Great, thank you so much.

Great. Thanks for taking my question. How would you characterize the competitive promotional environment in the U.S.? There have been some concerns that recent partnerships and your wins could result in things like a price war, so I'm just curious, your take on it?

Hi. Good morning, Alvin. It is Alex here. Yes, I think as we have said quite a few times in the last 12 months, our partnership strategy is to really get deeply involved in conversations with our partners to understand what they want from us, and it is not just about prices; it is also about service and how we work together to really help them achieve their goals of creating better health outcomes. So we feel good about where we are now. We are in the very early stages of delivering these services to our pharmacies to TRICARE, and the first month is going well. And of course, January 1st is a very important date for the extension of Med D and our new Prime networks, which kicks in on January 1. So there is no other place from our point of view. We've established a very clear governance structure, ensuring that we stick to the pricing structure and that it is not below the market, which is very important to us. And we are working very hard to deliver excellent customer care to the pharmacies to make sure we take care of the patients we are responsible for.

Thank you. I know this is a tough question, but in light of the new political climate in the U.S., what kind of changes for the operating environment do you anticipate? Things like the potential repeal of the Affordable Care Act – what are you planning for in your outlook, is there anything proposed out there that would change your way of thinking about the business?

We really believe that we could start to work on hypotheses with information that we have. We have a lot of affirmation that the Affordable Care Act will be appealed, but they say yes, but maybe we have to create something similar; we have to create a transition. It’s very difficult to understand what the new administration will decide to do because for sure they will try to do something sensible and rational. It will take some time to start; probably the outcome will be quite rational. At that time, we will be able to organize ourselves and prepare our business to respond to the new environment. We don't have to panic or be taken by surprise just because rules are potentially changing. We have to wait for the changes and, after that, rationally decide how to react.

Alright, thank you very much.

Yeah. Hi, good morning, and thanks for taking my question. I guess Alex, I wanted to talk a little bit about the U.S. business and the price versus volume trends you are seeing there a little bit, where you guys continue to see volume up pretty comfortably on the prescriptions side with dollar sales coming in below that. However, from a lot of the data that we look at, it looks like the net price mix is still trending positively. Can you talk about what are the factors that are driving the discrepancy where dollar sales are coming below script volume growth?

Yes sure, George. I think that if you take it from our quarter-to-quarter, the differential for us is just under 3% as you made really clear. We see really a couple of main factors driving this. The first one is less inflation in branded drugs; that’s pretty clear and that’s a major chunk of it. The second is volume. Volume in the market is down. So as you see, we are doing pretty well in the market, with 40 basis points of open market share from what we measure, but overall the volume in the market is down in this quarter relative to the last quarter. And I think that’s on top of that. And as you said, we have been pricing models competitively in some of our networks in preparation to drive volume, as Stefano and George mentioned, in the second half of this year. That really sums up the three elements we see: reimbursement pressure continuing, branded inflation decelerating, and a decrease in overall market volume during this period.

Okay that's helpful. And then maybe a quick follow-up. There’s been a little bit of chatter in the market recently about the launch of some of the biosimilars, particularly on the pharmacy benefit side with wholesalers trying to take different paths around whether they will supply or carry these drugs. How are you guys thinking about primary and secondary wholesaler relationships in general and kind of secondary source contracts if your primary vendor doesn't want to carry certain products or wholesalers become more selective about products?

To be honest, we have a great relationship with AmerisourceBergen and we, as you know, are very strong partners particularly having both the secondary and primary wholesaler contracts. So from my point of view, we have direct conversations about how we continue to make the supply chain more efficient. That is a small part of the conversation. There are many other opportunities we are speaking about today for the future. To be honest, it is not an issue we see as a big opportunity right at this point.

Okay. I appreciate the color. Thank you.

Yeah, hi good morning. So a couple of questions. So first of all, obviously retail and pharmacy comps are soft across the industry, yet you raised the bottom end of the guidance. What has changed since you guided that gives you more confidence in the outlook for the remainder of the year?

We're obviously very pleased to be able to raise the lower end of guidance by $0.05. This really reflects that we are now four months into the year that gives us a clearer view of our performance. You have seen that we have delivered to expectations in the first quarter, and we remain very confident about our ability to deliver the numbers going forward. But I think when you look at the shape of the results you can see, obviously, you know, Alex has talked about the market, volume issues, and there have been questions about margins, but we delivered very strong cost controls, which is a key focus for us across all our divisions. Again, you would have observed the mix of profits and the taxes have also helped us a little bit on the comparables.

Hi Ricky, it's Alex here. So there are two things. First one, I’ve spoken about already, and we have seen in the first month of Tricare, and it's on plan, and that gives us confidence for the rest of the year. We will see the first month of Prime, which is starting this month. Secondly, and I think equally important strategically is that we have seen solid trends through our investments, particularly in beauty, wellness, and health, capturing these on the front end. We saw the retail pharmacy operating margin step up as a result of our investments, and our focus on customer service and differentiated products is key example.

Okay and then when we talked in the past, you talked about the vision of Walgreens as being kind of like the new retailer with a lot of different wraparound services that will attract patients and consumers into the stores. I think you recently opened or are piloting a vision offering in one of your flagship stores. Can you talk a little bit about what type of assets you are looking to add to your current offering and how it fits in with the recent partnerships that you signed in 2016?

Sure. I think we have solid businesses in Europe, particularly in the UK, if you want to consider both optical and hearing care. We have great partnerships in these businesses and with manufacturers that help us. We have tested, as you said, a pilot in our flagship store in Chicago, and that is really to understand the market and how customers will react to that. We will take decisions based on how that performance comes through going forward. So, these are two vision and hearing care, which we could clearly transport from our experience in Europe. I think also we've been very successful in the last 12 months in being able to outsource our retail clinics, and again as a partnership model that we will speak about a lot, and we have continued to sign deals and successfully outsource these with many partners across Medicare. That’s another way we are introducing wraparound services and attracting more patients into all regions by working closely with local service providers and providing the services that they want inside of a pharmacy across the USA. That’s an example of how we're thinking and acting.

Okay, thank you.

Great. Thank you, good morning. George, I just want to start with a question for you. You talk about being back half driven, and I think we heard you say that when you gave the initial guidance, but I’m just curious as to how to think about the cadence. How do we think about going from Q1 to Q2? Should it be a little more back half weighted than what you are currently seeing on the street? Is that the message that we should be taking today?

I think the message today is no different from the one we were certainly trying to convey in the full year results. The partnerships we have been discussing take time for us to build volume. So when you are reviewing relative numbers, our expectation has always been that the earlier part of the year would be the tougher segment. Then it takes time for us to build the volume to see the gross profit reflected in dollars. So, you should think of that in a shape suggesting a build across the four quarters while considering the first quarter results as an indication of that and then envisioning the build going forward.

And then my second question – I may have misunderstood this, but I never thought of drug price inflation as being very important to the drug retail model. Am I misunderstanding that? Is there more than just that interim opportunity of capturing some level of spread as the price went up before the reimbursement changed? Or are there other inventory opportunities or something else because I did hear you mention today that moderating drug price inflation is being a bit of a headwind?

Hi, this is Alex. Sorry if I missed that. The headwind to sales is related to the volume differential. It’s a slight headwind to the retail business, but it is supportive to the wholesale business. So it makes a difference but does not heavily impact sales, which was the question I was answering I think from Alvin earlier on.

Okay. And I guess if I could just slip in just one last one, and that’s around utilization. You talked about increasing your level of market share, but yet you are seeing less utilization. Do you have any thoughts around why that is and normally, I know this is a quarter end in November, but we start to see pick up as people move towards the end of the deductible. Are you seeing anything or have you seen anything in the December quarter that’s shifted from what you have seen historically?

No, the December quarter – I mean it is one so far. Again, this is a season that is usually for cough, cold, and flu and illness, and as Gerald mentioned, it is a bit around the table here this morning as well. So I think we are seeing more standard flu trends, which kicked in a bit later in the season than we had expected, but that’s the only thing that has changed in December, which will be, obviously, a slight tailwind for us in the second quarter. But that’s still early on and we will see what happens with the rest of the season.

Okay, great. Thank you.

Alright, what’s a good assumption for what sale leasebacks can contribute in cash over the remainder of the year? The first quarter was a bit higher than what we had thought, and then secondarily, any metrics on what the new store format is contributing for you?

Okay, if I take the sale and leaseback component: we are continuing to look at sale and leaseback opportunities on a go-forward basis. The timing of those is a little tricky to predict because we're very disciplined on the returns we are looking for on the various transactions, but you should take it that it’s something we would continue to do moving forward. As I said, those tend to be individual transactions, so it's hard to have a quarter-by-quarter prediction on exactly when they are going to occur.

I will take the second one. Regarding the new store formats, I mean the investment right now is to upgrade the whole estate. So we have been upgrading the whole estate with a particular focus on beauty in our top volume stores, of which we are focusing on the top 1,800 so far, with more to come next year, as George has said. We have got some pilots and tests both in urban and what we are calling the opportunity stores, which are in the very early stages of testing. Once we have followed through, we will update you. The investment here is to upgrade the whole estate to ensure we are providing a more consistent brand and offering across those stores.

But I would like to assure you that the cash flow this year, operating cash flow will be very good. You can expect a very good operating cash flow. Of course, we have had the first quarter with relatively low operating cash flow, but this is against every quarter because of course we buy more stock for Christmas because we pay bond fees and because we pay dividends, which are mainly cash expenses in this period. Thus, operating cash flow and free cash flow in the first quarter have been relatively modest. However, it will catch up during the year, and we don't foresee any structural differences this year. So, it is – as always it is very difficult to analyze things quarter by quarter and make conclusions from the last number.

That's great, thank you.

Hi. Can you please talk a bit about the billion dollars in synergies that you expect to capture from the Rite Aid transaction by year three or four? I’m assuming that’s $1 billion a year. What makes up those synergies? How do you think about Rite Aid's earnings themselves versus cost synergies? Is that billion dollars inclusive of both? How do I tie this billion dollars back to $0.05 to $0.12 of accretion in year one? The $0.05 to $0.12 sounds very modest to me, so that’s a lot. Thanks very much. Appreciate it.

Okay. So it is quite a few questions, and I hope I won't miss any. To start by saying that in terms of the accretion for this year, it is important to remember where we are. We’re already four months into the year, which gives us a clearer view of our performance. When we complete transactions, the first priority is always very much focusing on the customers, getting the key elements of everyone working together. In terms of delivering synergies, our approach to synergies as you saw in the Walgreens Alliance Boots transaction, is to have a very clear plan going in and then to build the synergies year by year. We're disciplined in that way, making sure we can secure the synergies year after year; so we don't just go for quick wins and pay the price later. We've got a good track record of doing that. Clearly, there are certain synergies that take time to access. For example, in procurement, it takes time to establish new arrangements. We have stock sitting on the balance sheet that needs to be sold through. So, that reflects the guidance we have provided for the balance of this year. In terms of the synergies themselves, the key areas for the billion will come from starting with procurement, where we’ve got our sourcing operation on generics that sources products today for both ourselves and for AmerisourceBergen. That’s going to be, in addition to the overhead cost savings we will deliver over time. What the billion doesn’t include, which is important to understand, is that it doesn't capture the opportunity we would have to actually rationalize the portfolio where there are overlaps in existing large markets. That is something we would do separately and it’s equivalent to what we consider over and above the synergies. Also important in the number of the billion is that we are very disciplined in measuring and tracking synergies. And the billion reflects synergies that we are confident are very clearly identifiable and quantifiable that we can measure and track and report on. That delivery is very important. One always finds generally in transactions, beyond what's presented, there are a lot of less tangible measurable synergies. But these are the ones that provide real long-term sustained shareholder value. The billion we project has a run rate, just to clarify. It’s what we expect to deliver over time.

Okay. That's very helpful. Thank you. And then how is, when we think about Prime and Tricare and Express Scripts for this most recent quarter, where the new prices and also co-pay and deductible plan designs in place at the start of the quarter?

It’s Alex here. No, remember the first one I mentioned was DOD in Tricare, which started on December 1 and Prime starts on January 1, 2017.

Okay, that's great. So then all of the new prices and the co-pay and plan design start on those dates, right?

Yes, correct.

To start, Alex did you just mention rationalization of Rite Aid post-acquisition, and is that an important part of the strategy or a potential opportunity following completion and approval of the transaction?

These guys add context to the field, so I didn’t mention it, George answered the question, and I think we have made no decision on this at all. Let’s be very clear about this. This is not included in the $1 billion synergies that we have projected.

More generally, when we talk about mergers, we try to figure out the potential level of synergies and we wait for the elements that we compare, thinking that there are store operations to us that could potentially reduce certain duplications and thus reduce costs. We have thoroughly analyzed all avenues to reduce costs, but it’s an exercise that cannot be precised until we understand the other company better. When we are in control of the company, we will analyze all these documents. Only at that point will we be able to access a more precise level of synergies, but we have conservatively calculated the synergies. It is very unlikely that the final synergies will be lower than what we have presented.

So I will come back to the rationalization point when we can openly discuss it. Maybe my original question was actually going to be about volume. We’ve talked a lot about this year’s volume. As we consider commercial versus Part D where a lot of the growth has been, do we expect that commercial may actually be a greater contributor to growth in the second half? Does that then extend over the next year or two where commercial pricing could be stable and give you a bit of an offset to the reimbursement pressure with the annual Part D?

Hi, this is Alex here. The fact of the matter is that reimbursement pressure is consistent and while Med D for sure is an annual contract that you see more regularly coming through, similar pressure exists in the commercial pick-up business. So the market is a market; we govern within the business and structure our pricing accordingly. This is ensured at the Walgreens level through my management and our group level through Stefano and George. The reimbursement pressure is real, and we manage it through a combination of factors: more volume, better partnerships which are currently delivering results, and also improving our retail gross margin and operating margin where we continue to see healthy growth through good cost control.

That’s a straight answer. Thank you.

Alright thanks, good morning everybody. It’s interesting now with some hindsight that Walgreens never ended up pulling the trigger around the international tax inversion phenomenon from a couple of years ago. Even now you may be in a position to benefit from recent U.S. corporate tax reform. Just a couple of questions on taxes: first over these past couple of quarters you seem to have enabled to get your tax rate down to levels that people are only dreaming of following this inversion craze. Kudos on that! But how should we think about your tax rate for the rest of fiscal 2017? Then second, do you have any preliminary comments on the pros and cons of this potential U.S. corporate reform and what it might mean for Walgreens?

I can answer on the second part of the question about tax reform; I can repeat the same thing I said before. Now there is not a project of tax reform; there are certain principles being discussed, but not everybody in the administration agrees on these principles, and even if they do, they do not agree on the level or quantity of them. It’s a waste of time today to start to create a scenario, which will likely be substantially different. So let’s see when we have the framework of the tax structure, and then we will start immediately to think how we can react within this new environment. In any case, we will not have a new tax system tomorrow morning. It will take months. We will have time to evaluate how it shapes over time. Even though we have examined the discussed principles, yes, there are certain ones that could damage us, but there are others that could benefit us. A principle that may damage us will likely also damage all our peers, so it adjusts the market to find a new equilibrium.

Regarding our effective tax rate, like at year-end we indicated last year, I think it was around 26.3%, excluding any discrete tax items. This quarter, we’ve come in around the 25.5%. This improvement is really a function of two things: the geographic mix, which of course varies quarter-by-quarter, and certain discrete items in an individual quarter, including historic tax issues or other discrete items that can impact quarter-to-quarter results. This mix reflects the recognition of profits across Walgreens, and we try to organize our inter-group funding structure so that it is as efficient as possible. We also obviously have sources of profit outside of the U.S. that benefit our rate. Beyond that, not much else to mention and Stefano has covered what may or may not happen in the future, but we are very focused on EPS, whether it is tax or up-funding cost, so that receives a lot of focus in our organization along with adjusted operating income and cash flow, which Stefano also discussed to drive shareholder value.

Okay, that’s helpful, thanks.

Hey guys, thanks for taking me in. I just wanted to talk about strategy, and I know Stefano you talked about acquisitions overseas. When we think about Rite Aid, what’s the kind of Plan B if it doesn’t get approved as we get down to the end here in the U.S. business? Does that speed up some of your thoughts overseas?

We're working hard to have the deal approved, and for the time being, we don't want to think about the fact that it may not be approved after so many months when we have given a lot of information and established a very good relationship with the people of the FTC. They have continued to ask for information, and we have continued to provide it. We believe that if they have spent so much time requesting documents and analyzing these materials, it is because they want to understand the transaction, which is a positive sign. So we are not thinking of a Plan B today. We don’t want to distract our people. I can assure you that if, let's say we were met with a surprise, we would sit down and decide what to do because there are myriad possible reactions to this, as you can imagine. We would also have to consider what our counter-party Rite Aid wants to do and see whether there are viable solutions or not. In reality, we would have funds available and would use the money in the best interest of shareholders. We will continue to act rationally; we will not spend money irrationally, just as a matter of principle. We will assess all opportunities rapidly. Once we determine what action to take, we will communicate it to our shareholders, but I assure you we will not make hasty decisions simply to convey that we are acting. We will efficiently analyze our financial resources and opportunities.

This does seem like you potentially could litigate depending on what happens; is that a correct interpretation of what you said?

Potentially. But for the time being, everything looks fine. So we don't go further.

Perfect. I wanted to move on to one last question and I appreciate the time. So Boots in the UK – the retail side of the business – it sounds like it was slightly positive, but I think there were comments that maybe December got a little bit better. We were over in the UK; it seems like discounting was pretty significant in the front end of the Boots operations, so I was wondering if we could get a little more color on the retail side of Boots and what is going on there.

Hi Scott, it is Alex here. I think, as George said really clearly in the script, two things: first of all the environment in the UK has changed, and second there has been a significant alteration to the retail environment in particular. We are working within that; so we've repositioned our business by focusing on rebasing our costs and honing customer care. The good news is these plans are working, as George has stated, and we’ve had notable improvement in sales performance through December. We are very much overhauling our core business. The real challenges persist, and we are ensuring we maintain effectiveness online and across channel models, while operating at a cost level that doesn’t critically affect the margin. We are also quite aware, as George mentioned in his script, that from December 1, the government has taken additional action concerning pharmacy practice payments, which has decreased revenue in that sector; we are planning around these changes. So overall, we feel confident about our position with a strong business, even in what are challenging conditions.

Alright, thanks guys. Appreciate it, good luck.

Thank you very much indeed everyone. That concludes our call today. Obviously as ever, if you have further questions please feel free to reach out to any member of the IR team, myself, Ashish, Deborah, Jonathan, or Patrick and we will look forward to seeing some of you during the quarter and if not talking to you all in the next quarter. Thank you very much indeed.