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Walgreen Co. (WAG)

November 16, 2011 8:40 am ET


Wade D. Miquelon - Chief Financial Officer and Executive Vice President


Unknown Analyst

Mark Wiltamuth - Morgan Stanley, Research Division


Mark Wiltamuth - Morgan Stanley, Research Division

Okay. Welcome, my name is Mark Wiltamuth. I'm the drug retail analyst for Morgan Stanley. I'm here to introduce Walgreens. Walgreens is one of the leading U.S. drug retailers with 7,800 stores and roughly a 20% market share. The company was in the third year of a big 3-year turnaround campaign, driving for slower growth but higher return on invested capital. They've cut about $1 billion of expenses. They've slowed their store growth from 8% down to 2% to 3%, taken out working capital, and now they're returning a lot more cash to shareholders. In June, Walgreens announced that they had plans to exit the Express Scripts retail network that put about $5.3 billion of sales at risk. Walgreens has put out an 8-K addressing some of the Express Scripts concerns. So I'm sure we're going to hear a lot about that this money. Let me introduce Wade Miquelon, Chief Financial Officer.

Wade D. Miquelon

I've been asked to go fairly quickly here because you may have a lot of questions. So I will hit the highlight points, and away we go. So good morning, just take a moment to read the Safe Harbor. Great. What I want to do is I want to basically talk about a couple of things. First, I want to just talk about the assets and strengths of our company, which I think are formidable and growing all the time. I want to talk about our financial results, capital priorities, where we've been from the last 2 years, where we're going, strategies overall, and I'll home in on a few of those. And then finally, we'll have ample time for Q&A.

As Mark said we have -- actually have 7,700 drugstores here, but he said 7,800. I think they might have built 100 since last night, since we put the slide together. But nevertheless, we have the most drugstores of any chain in the United States, a strong financial foundation, balance sheet, history of, I think, a very prudent financial management on both not only the P&L side but the balance sheet as well. 40 million people a week come to Walgreens. When you think about that physical touch point and what we can do with that over time, it really is, I would say, probably our most remarkable asset on top of our footprint. 75,000 healthcare professionals, unmatched, unrivaled by anyone else in this country or almost anyone in the world. That's pharmacists, pharmacy techs, nurse practitioners, doctors and the like. We've crossed over the 20% retail share, so we're #1 in retail and just slightly over 20%. And it's the most trusted brand in pharmacy. And we have a lot of other assets too. I'll touch on it later, but things like 24-hour stores. We have 1,600 24-hour stores, more than anyone. And 560 of those are in MSAs where the closest 24-hour store apart from us is more than 5 miles away from a person's home. So these are these embedded assets that really make a difference when you think about who you are to your customers.

We're closest to people. So close means proximity, but it also means other things I'll touch on. But with respect to proximity, you can see that about 2/3 of Americans live within 3 miles, and when you get within 5 miles, this number is up around the 80s. And that's more than any other retailer in America. And importantly, I think, is that this is an average, but when you look at communities that we serve, some of the underserved in food, the food deserts and medically underserved, which tend to heavier in Hispanic and African-American, these numbers are much higher. So we're close. And we're even closer to customers, where close is even more important.

About 3 years ago, we started what was called the "plan to win," and with all the things changing in the world, we really set out on a journey to basically get back to industry-leading sales growth. I know Mark said that we were slowing our sales growth. We didn't. We actually slowed our store openings, but our plan is to keep our sales growth accelerated. So it was to get back industry-leading sales growth, to that strong double-digit earnings, EPS that we've seen over time, and to drive cash flow efficiencies, both for things like return on invested capital -- to keep rising that metric, but also to reward shareholders. And the reality is that 3 years later, we've done everything we said we'd do. We've been leading the industry in sales growth. You can see that last year, we're up 7% overall. And when you strip out the divestiture of WHI PBM, earnings last year were about 14% adjusted for that. They were higher if you include the gain. And on an EPS basis, they're about 24% or 25%. Cash flow is at record level. So I'll touch on that a bit as well. And as I said before, our return on invested capital is now starting to grow again nicely.

A few other highlights. We filled 820 million prescriptions last year, up 5% from the prior year. Flu shots, we administered 6 million, which is more than anyone in the country by far except for the U.S. government. Various new health and wellness partnerships with folks like Johns Hopkins, Northwestern, Ochsner and several others. Opened 200 drugstores basically, which is more than anyone else and almost, I think, as much everyone else combined. We dramatically enhanced the front-end experience, but we're just getting started. We'll touch on that. We did the acquisition to extend our multichannel capability. And again, have strong financial results. And I think Mark touched on the fact that 3 years ago, we also said that we would strip $1 billion of cost out of our company and take that to both fuel the business and to the bottom line, and we have completed that program ahead of schedule and ahead of the $1 billion dollars.

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