WAG

Walgreen Co. (WAG)

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Walgreen (WAG)

Q4 2012 Earnings Call

September 28, 2012 8:30 am ET

Executives

Rick J. Hans - Divisional Vice President of Investor Relations & Finance and Assistant Treasurer

Gregory D. Wasson - Chief Executive Officer, President and Director

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

Kermit R. Crawford - President of Pharmacy, Health, Wellness Services & Solutions

Analysts

Andrew P. Wolf - BB&T Capital Markets, Research Division

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

Edward J. Kelly - Crédit Suisse AG, Research Division

Mark Wiltamuth - Morgan Stanley, Research Division

Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division

John Heinbockel - Guggenheim Securities, LLC, Research Division

Presentation

Operator

Good morning, and welcome to the Walgreen Co. Fourth Quarter 2012 Earnings Conference Call. At this time, I would like to turn the conference over to your host, Walgreen's Vice President of Investor Relations, Rick Hans. You may begin.

Rick J. Hans

Thank you, Ally. Good morning, everyone, and thank you for joining us. Today, Greg Wasson, President and CEO; and Wade Miquelon, Executive Vice President and CFO and President, International will update you on the fourth quarter and the fiscal year. Also joining us on the call and available for questions is Kermit Crawford, President of Pharmacy; and Mark Wagner, President of Store Operations.

As a reminder, today's presentation will include 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, the presentation and the podcast will be archived on our website for 12 months.

Certain statements and projections of future results made in this presentation constitute forward-looking information that is 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.

Gregory D. Wasson

Thank you, Rick. And good morning, everyone, and thank you for joining us on our call. Today, I'll begin with some perspective on the year and a review of our results for the quarter and the fiscal year. Second, I'll discuss the overall strength and performance of our business, and finally, I'll take a strategic look ahead to fiscal 2013. And then I'll turn the call over to Wade for a more detailed review of our quarter and full year performance and key considerations for fiscal 2013.

I want to begin today by putting fiscal 2012 into perspective. This was certainly a challenging year capped off by a tough fourth quarter but a very important and strategic year for Walgreens.

As you know, we started the year with the critical decision to exit the Express Scripts network. This decision, despite the short-term ramifications to our business, was absolutely the right one for our shareholders long term. That said, as you are aware, we were ultimately able to reach an agreement with Express Scripts last July that met our core principles. With this now behind us, we are focused on the many opportunities ahead, starting with our truly game-changing relationship with Alliance Boots to create the first global pharmacy-led health and well-being enterprise.

As we've said before, this relationship will accelerate our 5 core strategies. It creates an unmatched supply chain. Together, we will have the largest retail pharmacy distribution network in the world and be the world's single largest purchaser of prescription drugs and many other health and well-being products. And finally, it provides us with a platform for global expansion beyond the U.S. and Europe into new markets around the world. We believe replicating this combination will be difficult, if not impossible, given this tremendous first mover advantage. We also recently launched our innovative new loyalty program, Balance Rewards, which is our next step in making Walgreens the first choice for health and daily living. This required replacing our decades-old point-of-sale system with new state-of-the-art technology across the entire chain.

And we continue to expand our Well Experience stores, reaching 350 across the chain. As you know, we're combining cutting-edge design with an improved product assortment, including an enhanced mix of health care, beauty, fresh food and private brand solutions to meet more closely the needs of our communities and create an experience unmatched in the industry.

Finally, we continue to participate in the consolidation of both the traditional pharmacy and Specialty Pharmacy markets with our recent acquisitions of USA Drug, Crescent, Infusion and the assets of BioScrip. These were key strategic opportunities with top-notch talent, and we welcome their team members into the Walgreen Company.

As I said at the open, it's been a very important and strategic year for Walgreens. We now have the structure, strategies and talent in place to drive both short-term and long-term performance.

With that, let's get into the numbers for the quarter. I'll begin today with our quarterly results. We'll be presenting numbers on both a GAAP and non-GAAP basis, and Wade will walk you through the details and the specific adjustments later in the call.

As you saw in our release this morning, we reported fourth quarter sales of $17.1 billion, down 5% from $18 billion a year ago. GAAP operating income or EBIT for the quarter was $586 million, down 53.7% compared to $1.3 billion at the same time last year. Recall that GAAP figures from last year's quarter include the gain from the sale of Walgreens Health Initiatives, our pharmacy benefit manager.

Adjusted operating income or EBIT for the quarter was $838 million, down 12.6% from $950 million in the fourth quarter of 2011. GAAP earnings per diluted share were $0.39 in the fourth quarter compared to $0.87 last year, down 55.4%. Fourth quarter adjusted earnings per diluted share were $0.63, down 4.5% from $0.66 in the same quarter of last year.

Turning to our performance for the fiscal year. Sales were essentially flat for the year even with our strategic decision with regard to Express Scripts, which represented about 11% of our prescription business in the prior year. This performance illustrates the strength and diversity of our business. For the full year, we posted $71.6 billion in sales compared to $72.2 billion last year, down just 0.8%. It's important to note that overall sales would have increased by 1.2% without the impact of drug -- generic drug conversions throughout the fiscal year, which affected sales by $1.4 billion.

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