WAG

Walgreen Co. (WAG)

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Walgreen Company (WAG)

F1Q 2014 Earnings Call

December 20, 2013, 8:30 AM ET

Executives

Rick Hans - Divisional Vice President, Investor Relations and Finance

Greg Wasson - President, Chief Executive Officer, Director

Wade Miquelon - Chief Financial Officer, Executive Vice President, President - International

Kermit Crawford - President - Pharmacy, Health and Wellness Services and Solutions

Analysts

Steven Valiquette - UBS

Mark Miller - William Blair

John Heinbockel - Guggenheim Securities

Ricky Goldwasser - Morgan Stanley

George Hill - Deutsche Bank

Mike Minchak - JPMorgan

Robert Jones - Goldman Sach

Edward Kelly - Credit Suisse

Charles Rhyee - Cowen and Company

Meredith Adler - Barclays

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Walgreen Co. First Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference. Rick Hans, you may begin.

Rick Hans

Thank you, Nicole. Good morning, everyone. Welcome to our first quarter 2014 conference call. Today, Greg Wasson, our President and CEO, and Wade Miquelon, Executive Vice President, CFO and President International, will discuss the quarter. Also joining us on the call are Kermit Crawford, President of Pharmacy and Mark Wagner, President of Store Operations.

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 Forms 10-K and 10-Q and subsequent filings for a discussion of risk factors as they relate to forward-looking statements.

Now, I will turn the call over to Greg.

Greg Wasson

Thank you, Rick. Good morning, everyone and thank you for joining us on our call. Today, I will begin with highlights of our performance in the first quarter year. Next, I will update our strategic progress in light of the continued soft economy and finally I will look ahead into the fiscal year. Then I will turn the call over to Wade for a more detailed financial review of the quarter in the coming year.

Before we get into the highlights, I want to start by saying we are generally satisfied with the topline results, our cost management and our synergy performance this quarter. Our margins, however, were most significantly affected by the year-over-year negative impact related to generics. This quarter saw a significant shift in the generic wave from a peak in introductions in the first quarter last year to a trough this year.

We also saw an impact from our strategic decision to make meaningful promotional investments in our daily living business. Wade will walk you through the gross margin story in more detail later. Regarding sales for the quarter, we generated a record $18.3 billion. GAAP and adjusted first quarter earnings per diluted share were $0.72, which include the positive impact of $0.07 per diluted share attributable to a deferred tax adjustment from a reduction to the UK corporate tax rate for Alliance Boots.

We sold a record 213 million prescriptions in the quarter and we increased our pharmacy market share 50 basis points to 19.4% year-over-year. We opened an innovative new store with John Hopkins Medicine which will allow us to codevelop clinical initiatives, designed to improve community health care that we intend to pull throughout the chain. Walgreens and Theranos also took the next step in our planned national roll-out of groundbreaking new lab services with the opening of Theranos Wellness Centers in two stores in Phoenix. We continue to participate in industry consolidation as we completed the acquisition of certain assets of Kerr Drugs retail drugstores and specialty pharmacy business. And finally, we opened our NetZero Energy Store in Evanston, Illinois. We are investing in this store to bring what we learned through our other locations and help us reduce our chain wide energy consumption 20% by 2020.

As I have mentioned, we reported first-quarter sales of $18.3 billion, up 5.9% from $17.3 billion a year ago. GAAP operating income for the quarter was $924 million, up 31.1% from $705 million last year. Adjusted operating income for the quarter was $1.1 billion, up 19.4% from $924 million in first quarter 2013. GAAP earnings per diluted share were $0.72 in the first quarter compared to $0.43 last year, up 66.1% and first-quarter adjusted earnings per diluted share were $0.72, up 24.1% from $0.58 in the same quarter last year. Finally, we generated operating cash flow of $133 million in the first quarter compared with $601 million in the year ago quarter. The decrease was primarily the result of the tiny working capital changes associated with our transition to AmerisourceBergen.

Looking at our gross profit dollar growth and SG&A dollar growth on a GAAP basis. This quarter the spread was $72 million. On an adjusted basis, the spread was $44 million. Adjusted gross profit dollar growth increased by $61 million or 1.2% compared to the same quarter last year. Adjusted SG&A dollar growth increased $17 million or 0.4% compared to the same quarter last year, as we continued our strong focus on cost management. In fact our SG&A dollar growth performance this quarter was among the best we have had in the past several years.

As we made progress on our topline results, we also advanced our three strategic growth drivers, creating a well experience, transforming the role of community pharmacy, and establishing an efficient global platform. Today I will provide an update on that progress beginning with well experience. We are continuing to see a value conscious consumer and the impact of a soft economy.

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