WBA
#Thank you, <UNK>
Overall, we are pleased with our progress this quarter with results in line with our expectations
As in the last quarter, we were particularly pleased with growth in U.S
pharmacy volume and market share
During the quarter, we also completed the $1 billion share buyback program which we discussed on our last earnings call
I'm also pleased that today, we have raised the lower end of our adjusted earnings per share guidance for fiscal year 2017 by $0.08. 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 12.5% stronger versus Sterling than in the comparable quarter last year
Sales for the quarter were $30.1 billion, up 2.1% versus the comparable quarter
On a constant currency basis, sales were up 5%
GAAP operating income was $1.5 billion, a decrease of 1%
GAAP net earnings attributable to Walgreens Boots Alliance were $1.2 billion, up 5.3% and diluted EPS was $1.07, up 5.9%
Adjusted operating income was $1.9 billion, up 5.5% and in constant currency was up 7.5%
Adjusted net earnings attributable to Walgreens Boots Alliance were $1.4 billion, up 11.9% and in constant currency up 13.6%
These percentage increases were higher than for adjusted operating income
This was due to a lower tax rate, partially offset by losses on certain legacy investments which adversely impacted both earnings from other equity method investments and other income
Since the quarter-end, we have disposed of the legacy investment, the gain on which will largely offset these losses
The adjusted effective tax rate, which we calculate, excluding the adjusted equity income from AmerisourceBergen, was 19.1%
This was lower than in the comparable quarter last year primarily due to relatively high incremental discrete net tax benefits and a lower estimated core annual tax rate of 25.3%
All of this resulted in adjusted diluted net earnings per share of $1.33, up 12.7% and in constant currency up 14.4%
For completeness, here are the numbers for the first nine months of fiscal 2017. I will not go through those in great detail, but you will note that GAAP diluted net earnings per share was $3.02, up 4.9% versus the same period a year-ago
Adjusted diluted net earnings per share was $3.79, up 7.7% and up 9.9% 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 $22.5 billion, up 6.3% over the year-ago quarter
This included two months of results from AllianceRx Walgreens Prime, a recently formed central specialty and mail services business
<UNK>omparable store sales for the division increased by 3.7%, adjusted gross profit was $5.7 billion, down 0.5% reflecting a decrease in pharmacy, partially offset by an increase in retail
We'll look at this in more detail in a moment
Adjusted SG&A for the division was 18.7% of sales, an improvement of 1.7 percentage points
This improvement was primarily due to sales mix and higher sales as well as an amendment to certain employee postretirement benefits and our cost transformation program
Adjusted operating margin was 6.5% in line with the comparable quarter last year, resulting in adjusted operating income of $1.5 billion, up 5.9%
So next, let's look in more detail at Pharmacy
Pharmacy total sales were up 10.3% versus the year-ago quarter, mainly due to higher prescription volumes, including mail and central specialty
During the quarter, we filled 255.2 million prescriptions on a 30-day adjusted basis, including immunizations, an increase of 8.5%
On a comparable basis for stores, which exclude central specialty and mail, pharmacy sales increased by 5.8% with scripts filled up 8.3%
In the second quarter, we reported our highest quarterly growth rate in over seven years
This quarter was even better
Growth was primarily due to strong volume growth from Medicare Part D and the positive impact of our strategic pharmacy partnerships
Within sales, volume growth and brand inflation were partially offset by reimbursement pressure and the impact of generics
This pressure contributed to lower pharmacy gross profit and gross margin
A higher proportion of specialty adversely impacted pharmacy gross margin by around 100 basis points
However, the higher specialty sales had a positive impact on gross profit
Our reported retail prescriptions market share on the usual 30-day adjusted basis was 20.5%, up by approximately 110 basis points over the year-ago quarter
This was the highest market share that we have ever reported
Total retail sales were down 1.8% on the same quarter last year
This included the impact of the previously announced closure of certain e-commerce operations
<UNK>omparable retail sales were down 0.4% with declines in the consumables and general merchandise category and in the personal care category, partially offset by solid growth in the health and wellness, and beauty categories
Adjusted gross profit was higher, primarily due to mix and underlying margin improvement
Beauty category performance and beauty differentiation stores continues to be markedly better than in other stores, supported by strong sales growth of No7 and Soap & Glory
We have also continued to introduce new brands into our existing beauty differentiation locations, including Botanics, which I mentioned last quarter
We remain on track to introduce our enhanced beauty offering to over 1,000 additional stores by the end of the calendar year
This quarter as part of our strategy and ongoing cost transformation, we have also begun to implement a program in certain stores to simplify our offering and improve our retail operational performance
This is designed to deliver a better experience for our customers, provide ongoing efficiencies, and reduce working capital
In the coming months, we expect this program to reach approximately 1,500 stores
So now let's look at the results for the Retail Pharmacy International division
Sales for the division were $2.8 billion, down 0.2% in constant currency versus the year-ago quarter
<UNK>omparable store sales increased 0.2% in constant currency
<UNK>omparable pharmacy sales were down 0.1% on a constant currency basis, mainly due to a decline in the UK
In Boots UK, comparable pharmacy sales were down 0.4%, mainly due to the reduction in government pharmacy funding
<UNK>omparable retail sales for the division increased 0.4%, Boots UK’s comparable retail sales increasing 0.1%
Within this, beauty was Boots UK’s strongest category, assisted by the launch of No7 Restore & Renew Face & Neck Multi-Action Serum
Adjusted gross profit for the division at $1.1 billion was down 1.2% in constant currency versus the year-ago quarter, mainly due to lower pharmacy gross margin
Adjusted SG&A as a percentage of sales on a constant currency basis was 0.7 percentage points higher at 34%, mainly due to inflationary pressures and higher variable payroll costs
Adjusted operating margin was 6.9%, down 1.1 percentage points in constant currency
This resulted in adjusted operating income of $193 million, a decrease of 14% again in constant currency
I am delighted to report that in April, the first Boots franchise store opened in South Korea
This is in line with our strategy of expanding Boots retail presence in Asia
South Korea is a highly sophisticated beauty market particularly for cosmetics, and it’s strategically important for sourcing innovative products
So now let's look at our Pharmaceutical Wholesale division
Sales for the division were $5.3 billion, up 2.7% versus the same quarter last year on a constant currency basis
<UNK>omparable sales on a constant currency basis were up 3.7%
This was ahead of the <UNK>ompany's estimated market growth weighted on the basis of country wholesale sales, with growth in emerging markets and the UK partially offset by challenging market conditions in <UNK>ontinental Europe
Adjusted operating margin, which excludes AB<UNK>, was 2.9% down 0.1 percentage points on a constant currency basis, but in line with the second quarter
Adjusted operating income was $253 million, up 53.1% in constant currency
Excluding adjusted equity earnings from AB<UNK>, adjusted operating income was up 0.6% in constant currency
So turning next to capital allocation
Operating cash flow in the quarter was $1.9 billion
During the quarter, our working capital inflow was $502 million
This primarily reflected improvements in inventories both in the quarter and year-on-year
<UNK>ash capital expenditure in the quarter was $273 million
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
Overall, this resulted in free cash flow in the quarter of $1.6 billion with a total of $4.3 billion in the year to date
Turning next to our guidance for fiscal 2017. We have raised the lower end of our guidance and now anticipate adjusted diluted net earnings per share to be in the range of $4.98 to $5.08. Remember this guidance assumes current exchange rates remaining constant for the rest of the fiscal year
I will now hand over to <UNK> for his concluding comments
Okay, I’ll try and take some of those in the right order
If I start, perhaps, with just the tax, as I said in the prepared comments, the core tax rate was 25.3% and then this quarter if you look back historically, we had a relatively high number of discrete positives clearly very significantly quarter-by-quarter as you can see going back historically
And as I say you can see this was a relatively high number, but I think in terms of the core tax rate and helping you with the model, the 25.3% that you see it today is clearly under U.S
GAAP or the rate that we would anticipate at this point for the core tax element for the full-year
Just in terms of buyback program, clearly, we've announced the program just today
And I think – and just in thinking about modeling, clearly, we’re pretty well the end of June now, so we’ve really only got a couple of months to go to the year-end
So there's not really long for any impact where we to choose to commence that program, any impact will be relatively modest
Obviously, our guidance as ever is all in, but again as I said in the prepared comments it is of course assuming currency exchange rates for the balance of the fiscal year
I think in terms of the accretion, what we said is modest accretion in the first full-year and I think that's important to take away and we’re very clear on the synergies that we can deliver the $400 million over three to four years
We've got a very clear path to delivering it
And I think one of our approaches to acquisition integration is one where we have very detailed plans
We take it in a very structured way, so that we do things smoothly
We are going to be obviously – actually acquiring those stores over a period of time as we've explained in the announcement and then we will be rebranding those over time to Walgreens, bringing in the Walgreens offer
And that is not something that we would ever dream of actually big banging
We need to do it properly so that we have the customer proposition is delivered in a consistent way as we do the rebranding
So we're very confident about the returns, but what's important is to go in a straight line and do in a way where we keep the focus on the customer as we integrate the business on the service that we provide our patients rather than sometimes which you see, dare I say, I see in other businesses do, where they rush things and they don't execute properly
And I think you’ll have seen that consistently as with the merger of Walgreens and Alliance Boots, I think you'll see we've got a very clear track record of doing that over time
We've not published our long-term leverage target
We've chosen as you know <UNK> to talk about our commitment to solid investment grade and that’s very much what our policy as we've obviously because of the time is taken since the original announcement of the original Rite Aid transaction we've obviously been building up a lot of cash, which is not something that we like doing we're very committed to having an efficient balance sheet
We have to do and that’s why today when we've announced the new transaction, we've been probably announced the $5 billion share buyback program
So we're very committed to being financially disciplined to when we're looking at M&A we’re always very focused on the numbers
If the numbers don't add up, don't give meet our investment hurdles then we're very disciplined, we don't do transactions and so we're very happy to grow organically and invest with to do M&A when we get the right returns, but equally a very clear policy of returning any surplus funds to shareholders within those parameters that I've explained, having an efficient balance sheet very important to us
Yes, I think as I have said, go back to the point that is very promotional far too promotional
We don't think is good for us
It’s not good for customers, I mean don't think is actually good for suppliers either
So we believe much more net consumption driven model and that's where we’re heading to
Also as customers change more and more new future will use personalization and digital marketing and more than the secular to understand what Walgreens can do for them
And we've got a mature digital organization for retail that as you know and we're making moves no to really shift to spend over time in marketing and towards digital and personalization
So all these things are true <UNK> and is an evolution of the model and we're really accelerating it based on fact, based on data and we are really making strong moves in the next 18 months as <UNK> said to do that
And then we have the systems coming in and Phase III to really sustain not move and accelerate to further
So we've been running for two or three years we're very confident that we know the approach have to do
I’m going to taking the steps to get on with it
