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Walgreen Co. (WAG)

38th Annual dbAccess Healthcare Conference

May 30, 2013 10:00 am ET


Rick Hans – Vice President, Investor Relations and Finance


Kristen Stewart – Deutsche Bank


Question and Answer Session

Kristen Stewart – Deutsche Bank

Thank you all for joining us. I am Kristen Stewart, the medical device analyst at Deutsche Bank but I’m moonlighting as a consumer drug retail analyst for the purposes of this fireside chat. I do want to give a special extra thanks to Rick Hans for joining, Vice President of Investor Relations and Finance at Walgreen. Certainly I think it’s been an interesting evolution of the company just to kind of watch from the sidelines, so I was wondering if you could just maybe take a step back and just kind of talk a little bit more about the bigger picture strategy that you guys have had over the last couple years. I know that you guys have entered into the arrangement or agreement with Alliance Boots, and then more recently have announced with ABC that equity investment and the pie agreement.

So maybe just talk about how you think really big picture, very strategically about Walgreen and the evolution of the company, because it struck me, just kind of looking at all the different transactions that you guys have and equity investments and whatnot. So maybe just start off real big picture.

Rick Hans

Sure. Okay, will do. Good morning everyone, thanks. It’s interesting – this all probably started back in 2008. That’s when we first announced our slowing of our store growth domestically, so there were a few obviously tougher years just getting through the downturn in the economy and then kind of cycling through that slowdown in store growth. So we managed our way through that, and of course with a slowdown in growth domestically we are a company that does look for growth, so we did look for growth around the globe. And without getting into too much of the minutiae, we struck a deal with Alliance Boots, who happens to be the biggest drugstore/wholesaler in Europe, and announced that deal last July. Now I think most of you recall that wasn’t particularly well received, and I think in part due to the fact that we were still at odds with Express Scripts at that time.

So we did patch things up with Express Scripts, as you know, and I think we hosted an analyst day in London in February of this year and I think people got a lot more familiar with the AB folks and what they’re trying to accomplish in Europe. In spite of their very tough economic environment there, I think, as you know, they are actually performing very well.

Then as you also know, in March we announced a strategic deal with AmerisourceBergen, and oddly enough the announcement of that deal actually made it a lot easier for people to look back and say, hey, I like the Alliance Boots deal a lot better. So as you know, we’ve now enjoyed the fruits of people getting more familiar with that and happier with the deal in general.

And that brings us to today. Now it’s about execution. We’ve put out some fairly, I think achievable but something worth shooting for goals for 2016. I think if people can wrap their heads around our ability to get to those numbers, and I’ll tick them off for you. We have a goal of a combined adjusted EBIT of 9 to 9.5 billion. We believe we can generate a billion in synergies just from the Walgreen’s-Alliance Boots agreement, and we have a cash from operations goal of around $8 billion, so if you plug in some 2 to 2.5 billion in CAPEX, you’re looking at fairly good free cash flow and then 11 billion in net debt. So if we can hit those goals, I think people can probably wrap their heads around the fact that this could continue to be a good company to invest in.

Kristen Stewart – Deutsche Bank

How does the ABC deal kind of help further—or allow you to better achieve the longer term plans, because it seems like that, you’ll have some savings associated with that, and maybe just to step a back, why did you choose ABC rather than staying with Cardinal, who I think you previously had an arrangement with.

Rick Hans

Sure, and I’ll back up just a bit before I answer that. The Alliance Boots-Walgreen deal is in part predicated on the idea that we can generate substantial cost of goods synergies from the buying of generic drugs, and today combined a Walgreen’s and Alliance Boots probably buys around 7 billion in generics. By 2016, that number should be around 10 billion, and so we think we can get roughly 500 million in generic buying synergies.

The ABC deal brings another probably $3.5 billion in generic buying to the table, so we’ve actually created a JV in Berne, Switzerland for the buying of these generic drugs, and so ABC will bring their generic buying to that pool of buying and it will be significantly bigger than even our combined buying, so by far, the largest buyer of generic drugs in the world. But the ABC deal, it’s more complicated than that. It’s really a three-part. It’s a distribution agreement, it’s a strategic collaboration both domestically and in Europe, and both on pharmacy and specialty and lots of other areas where they have expertise; and then Alliance Boots obviously is wrapped into that too. So it’s a large agreement, it’s a 10-year deal. We think it’s very beneficial to both parties, and really to all parties involved.

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