WBA
#Thank you, <UNK>
Our performance this quarter was in line with our expectations despite challenging conditions in a number of our markets
We were particularly pleased with growth in U.S
pharmacy volume and market share as the early benefits of our new pharmacy contracts started to come through
We continue to work hard to secure regulatory clearance for the Rite Aid transaction and we are reiterating our guidance for fiscal 2017. So now let's look at the financial highlights for the quarter
As we expected, currency again had a negative impact, the U.S
dollar being around 16% higher versus sterling than in the comparable quarter last year
Sales for the quarter were $29.4 billion down 2.4% versus the comparable quarter
On a constant currency basis, sales were up 0.9%
Without the extra day in February last year, this would have been up 2.2%
GAAP operating income was $1.5 billion, a decrease of 20.5%
GAAP net earnings attributable to Walgreens Boots Alliance were $1.1 billion up 14% and diluted EPS was $0.98 up 15.3%
Adjusted operating income was $2 billion down 4.9% and constant currency was down 2.7%
We estimate this would have been broadly flat taking into account the leap year impact
Adjusted net earnings attributable to Walgreens Boots Alliance were $1.5 billion, up 3.7% and in constant currency up 6.2%
Adjusted diluted net earnings per share was $1.36 up 3.8% and in constant currency up 6.1%
The adjusted effective tax rate which we calculate excluding the equity income from AmerisourceBergen was 23.7%
This was lower than in the same quarter last year primarily due to reduced estimated annual tax rate associated with our current year pretax earnings, an incremental discrete tax benefits
Year-to-date the tax rate on the same basis was 24.5%
For completeness, here are the numbers for the first half of fiscal 2017. I will not go through this in great detail but you will note that GAAP diluted net earnings per share was $1.94 up 3.7% versus the same period a year ago
Adjusted diluted net earnings per share was $2.46 up 5.1% and up 7.7% on a constant currency basis
So let me now turn to the performance of our divisions in the quarter beginning with Retail Pharmacy USA
Retail Pharmacy USA sales were $21.8 billion, up 1.5% over the year ago quarter, comparable store sales increasing by 2.4%
As 2016 was the leap year, when we calculate comparable sales and prescription figures, we exclude the 29 February, 2016. Adjusted gross profit was $5.9 billion down 0.6% over the year ago quarter with the impact of the extra day in 2016 holding back growth and adjusted gross profit by over 1%
Lower retail gross profit was partially offset by an increase in pharmacy
Adjusted SG&A was 20% of sales, an improvement of 0.1 percentage points compared to the year ago quarter
Adjusted SG&A as a percentage of sales was improved versus comparable quarters for 15 consecutive quarters
As a result of the lower adjusted gross margin, adjusted operating margin was down 0.5 percentage points of 7.1% resulting in adjusted operating income of $1.6 billion down 4.9%
So now let's look in more detail at Pharmacy
U.S
Pharmacy total sales were up 3.7% mainly driven by increased retail script volume
We filled 246.7 million prescriptions on a 30-day adjusted basis including immunizations, an increase of 5.9%
On a comparable basis for stores which excludes central specialty, pharmacy sales increased by 4.2% with scripts filled up 7.9%
This was the highest quarterly growth rate in more than seven years and was primarily due to strong volume growth from Medicare Part D and strategic pharmacy partnerships which we announced last year
We are pleased both with the progress of Medicare Part D an early indications of the benefits derived from our new pharmacy contracts
Within sales volume growth and brand inflation was partially offset by reimbursement pressure which was in line with what we had anticipated and by the impact of generics
Our reported market share of retail prescriptions in the quarter on the usual 30-day adjusted basis was 20.4%, up approximately 100 basis points over the year ago quarter
Total retail sales were down 2.7% on the same quarter last year
This includes the impact of previously announced closure of certain e-commerce operations and the impact of the leap day in the prior year
<UNK>omparable retail sales were down 0.8% in the quarter and what was a challenging environment
The claims in the consumables and general merchandize and personal care categories partially offset by solid growth in the health and wellness and beauty categories
Adjusted gross profit was lower than in the same quarter last year primarily due to the decline in sales
Despite the difficult market conditions, we were pleased with growth in our key categories
This was reflected by our absolute performance, as well as recent market share gains
Based on the latest Nielsen data for the 13 weeks ended 25 February, we gain share in the health and wellness, beauty and personal care categories
However, we know there is more to do and after taking further actions to help drive future performance
These include simplifying our product offering, further emphasis on our omni-channel capabilities, and expansion of our beauty differentiation program
While still early in the journey, our own brands are performing well and currently represent over 15% beauty sales in our beauty differentiation stores
We have now recruited beauty advisors across more than 1800 stores which is helping to drive No7 sales and gross profit
Repurchase levels of No7 products are been very encouraging and Soap & Glory has also got off to a good start
Following the successful introduction of No7 and Soap & Glory, we are planning to introduce another of our own brands Botanics, into our existing beauty differentiation stores in the next six months
Looking ahead we are now developing plans to introduce our enhanced beauty offering to over 1,000 additional stores by the end of the calendar year
So next, let's look at the progress of our cost transformation program
In our previously announced cost transformation program, we set ourselves an ambitious target of delivering $1.5 billion in savings by the end of fiscal 2017. I'm delighted to announce that we achieved this target ahead of plan
We now expect that the cumulative pretax charges associated with this program will be approximately $1.8 billion
This is in line with our expectations with an expanded program was announced in April 2015. These costs are higher than we anticipated in October primarily as we now expect to close around 60 more stores
The program will be completed as expected by the end of fiscal 2017 and the full benefits will be realized in future periods
We continue to expect but approximately 60% of the program costs will be in cash over time, the principle items being future lease obligations
So now let's look at the results of the retail pharmacy international division
Sales for the division were $3.1 billion, down 1.9% in constant currency again impacted by the leap year
<UNK>omparable store sales decreased 0.9% in constant currency
<UNK>omparable pharmacy sales were down 3.7% on a constant currency basis due to decline in the U.K
which is partially offset by growth in other markets
comparable pharmacy sales were down 5.2% mainly due to the reduction in government pharmacy funding
<UNK>omparable retail sales for the division increased 0.6% reflecting Boots growth in the U.K
, Republic of Ireland, and Thailand
Within the U.K
Boots comparable retail sales increased 0.7% versus the year ago quarter supported by solid December trading
Adjusted gross profit for the division was down 4% in constant currency to $1.2 billion mainly due to lower pharmacy margins in the U.K
reflecting the reduction in funding and the impact of the leap year - leap day in the prior year
Adjusted SG&A in constant currency dollars was flat versus the year ago quarter
However adjusted SG&A as a percentage of sales on a constant currency basis was 0.6 percentage points higher of 31% as a result of the largely fixed cost elements of the cost base
Adjusted operating margin was 7.8% and 1.4 percentage points in constant currency
This resulted in adjusted operating income of $242 million, a decrease of 16.7% again in constant currency
So now let's look at our pharmaceutical wholesale division
Sales for the division were $5 billion up 0.6% versus the same quarter last year on a constant currency basis
Growth was held back by the sale of Alliance Healthcare Russia in March last year and also by the leap year
<UNK>omparable sales on a constant currency basis were up 5.2%
This was behind the <UNK>ompany's estimate of market growth weighted on the basis of country wholesale sales
With challenging market conditions in <UNK>ontinental Europe partially offset by growth in emerging markets and the U.K
Market growth is particularly strong in certain emerging markets due to the timing of price increases
Adjusted operating margin which excludes AB<UNK> was 2.9% up 0.2 percentage points on a constant currency basis
Adjusted operating income was $226 million up 59.4% in constant currency
Excluding the $79 million and adjusted earnings from AB<UNK>, adjusted operating income was up 8.4% in constant currency reflecting procurement and cost benefits
Operating cash flow in the quarter was $2.9 billion
During the quarter, our working capital inflow was $1.4 billion
This reflected our seasonal reduction in inventories, as well as an improved receivables position
<UNK>ash capital expenditure in the quarter was $261 million
This was lower than in the first quarter mainly due to phasing
As I said last quarter, we continue 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 talked about
This resulted in free cash flow for the quarter of $2.6 billion
Today, we announced a new share repurchase program of up to $1 billion in this calendar year with the flexibility to do this due to the changes to the pending Rite Aid transaction announced in January
So turning next to our guidance for fiscal 2017, we have maintained guidance and continue to expect adjusted diluted net earnings per share to be in the range of $4.90 to $5.08. Remember our guidance assumes current exchange rates remaining constant for the rest of the fiscal year and no material accretion from Rite Aid or from the new strategic alliance with Prime announced on Monday
So I’ll now hand over to <UNK> for his concluding comments
I mean on the particular program that we talked about today we obviously are very pleased to have achieved our target the program will conclude as we previously announced – around the end of this fiscal year
Some of the benefits of that will obviously – it will continue to see and see more of in the coming years
Given that nevertheless looking for opportunities to drive efficiency in our sort of businesses is just a way of life
So we will absolutely continue to look for opportunities year after year
They will come in different places they may be in different geographies, but there are always opportunities to drive efficiency
And so it's just a never ending we’ll continue this program will finish, but we’ll continue to look for more opportunities
I think really it always looks at the year-to-date effective tax rate and if you look at that from an adjusted basis as I said that was around 24.5%
So I think tax obviously you know mix can change quarter-by-quarter but looking at year-to-date I think it’s perhaps the best way of thinking about this discrete items of course the timing of those, there was a little bit uncertain and they can go up or down but think of the year-to-date
I mean obviously we haven’t given specific guidance by segment we had first provide by reiterating our overall guidance figures I mean in terms of thinking about sort of the modeling
There is going to be a number of factors that you've got to think about and firstly we will we are consolidating the new Prime deal from Monday when we completed it
You need to think about that in factoring the U.S
model recognizing obviously that is a specialty on mail business with different dynamics
In terms of the international businesses, I think as we've said in the prepared remarks there is still the challenge in the U.K
with the NHS having cut the reimbursement that will continue the basis has performed robustly as we said over key customer period
But retailing is still itself quite challenging particularly in the U.K
which is our largest market
And then on wholesale sales, wholesale always a its kind of business or division that operates in a number of markets you can always get certain mix affect quarter-by-quarter
So it's tough to model I know quarter-by-quarter but I did point out in the prepared remarks that in certain of the emerging markets we had some growth really in the period when you get price changes in the market where people tend to buy ahead of customers buy ahead of the price change and that was the notable impact in the second quarter
Well just on the accounting side I mean we will account for it on a fully consolidated basis
So when you're looking at our of sales, our adjusted operating income then you will obviously see a 100% of the entities results coming through, but then when you're actually looking at an earnings attributable to our shareholders to the WBA shareholders, we strip out and align the proportion that is attributable to Prime itself and I think as we said we own just over 50% of the business
So when you thinking of EPS then it will be our share if you thinking of operating it's a 100% also in the accounting books
Anything that goes through the venture that the new combined venture as to say we show a 100% in revenue 100% in adjusted operating income but then we strip as I say at the lower end of the P&L that the Prime share
So when we are looking at adjusted earnings attributable to Walgreens Boots Alliance staffs got their share netted out
