Gregory D. Wasson - Chief Executive Officer, President and Director Wade D. Miquelon - Chief Financial Officer and Executive Vice President Rick J. Hans - Divisional Vice President of Investor Relations & Finance and Assistant Treasurer

John Heinbockel - Guggenheim Securities, LLC, Research Division Eric Bosshard - Cleveland Research Company Mark Wiltamuth - Morgan Stanley, Research Division Thomas Gallucci - Lazard Capital Markets LLC, Research Division John W. Ransom - Raymond James & Associates, Inc., Research Division Matthew J. Fassler - Goldman Sachs Group Inc., Research Division Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division Mark R. Miller - William Blair & Company L.L.C., Research Division Andrew P. Wolf - BB&T Capital Markets, Research Division

Good day, everyone, and welcome to the Walgreen Company Fourth Quarter 2011 Earnings Conference Call. As a reminder, today's call is being recorded. And now at this time, I'd like to turn the conference over to Mr. Rick Hans, Division VP of IR. Please go ahead, sir. Rick J. Hans: Thank you, Kathy. Good morning, everyone. Welcome to our fourth quarter conference call. Today, Greg Wasson, our President and CEO; and Wade Miquelon, Executive Vice President and Chief Financial Officer, will discuss the quarter and fiscal year. Also joining us on the call and available for questions is Kermit Crawford, our President of Pharmacy, Health & Wellness Services and Solutions; and Mark Wagner, President of Community Management. [Operator Instructions] 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 reconciliation. Also, I'm available throughout the day by phone to answer any additional questions you may have. You can find a link to our webcast under 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 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 and 10-Q 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. Good morning, everyone, and thank you for joining us on our call. Today, I'll begin with a review of our quarter and fiscal year. Second, I'll provide an update on our status with Express Scripts. And finally, I'll discuss our strategies to become America's first choice for health and daily living. Then I'll turn it over to Wade, who will give you more details on our quarterly and full year performance, offer context around Express Scripts and frame the key considerations for fiscal year 2012. Starting with our results today, we had a solid quarter and a strong year as we made substantial progress on our transformation strategy. You saw in our release this morning, we reported record fourth quarter sales of $18 billion, up 6.5% from $16.9 billion a year ago. Excluding the after-tax gain from the sale of WHI, our pharmacy benefit manager, which closed in June, fourth quarter EBIT increased to $832 million. Fourth quarter net earnings were $519 million, and fourth quarter earnings per diluted share increased to $0.57. Our earnings this quarter marked the fifth consecutive quarter of double-digit growth in earnings per share. On a GAAP basis, which included a $434 million of pretax, $273 million after-tax gain or $0.30 per diluted share from the sale of WHI, fourth quarter EBIT was $1.3 billion. Fourth quarter net earnings were $792 million, and fourth quarter earnings per diluted share were $0.87. In addition to the gain from the sale of WHI, both our reported and our adjusted earnings per diluted share included $0.02 of dilution from our acquisition of drugstore.com and $0.01 of restructuring and restructuring-related costs associated with our Rewiring for Growth initiative. Last year's fourth quarter results included the negative impact of $0.04 per diluted share related to the acquisition of Duane Reade and $0.01 per diluted share in Rewiring for Growth costs. As we've previously stated, in fiscal 2012, we expect $0.03 to $0.04 of dilution related to drugstore.com. Now turning to our performance for the fiscal year, we posted record sales of $72.2 billion, up 7.1% from $67.4 billion last year. Excluding the after-tax gain from the sale of WHI, our adjusted fiscal 2011 EBIT was $3.9 billion, up 13.7%, and our adjusted fiscal 2011 earnings per diluted share were $2.64, a 24.5% increase. On a GAAP basis, including the after-tax gain from the sale of WHI, fiscal 2011 EBIT was $4.4 billion, up 26.2%. Net earnings for the year were $2.7 billion, up 29.8%. In fiscal year 2011, earnings per diluted share were $2.94, up 38.7%. And finally, operating cash flow for fiscal 2011 was $3.6 billion versus $3.7 billion in fiscal 2010. In the fourth quarter, we grew gross profit dollars at 5.8% or $277 million versus SG&A dollars at 4.8% or $191 million, yielding an $86-million difference. For the full year, the spread between gross profit dollar growth and SG&A dollar growth was $473 million. The spread reflects the success of our strategies to drive top line growth in our front end and our pharmacy and health and wellness services while carefully managing our costs. Overall, our strong performance and solid results this year demonstrated that we are on the right track in our transformation as we continue to leverage the best store network in America and expand our Pharmacy, Health and Wellness Solutions. And most of all, our results this year demonstrated the value that Walgreens provides every day in communities across our nation. Let me touch on some of the key milestones we achieved in fiscal 2011. On the pharmacy and healthcare side, Walgreens now fills 1 out of every 5 retail prescriptions in America with a record 819 million prescriptions filled, an increase of 5.3% in fiscal 2011. We also administered 6.4 million flu shots during the last flu season as we continued to be the largest provider of flu shots in the country outside of the government. To expand the role we play in healthcare, we established important partnerships with top health systems, including Johns Hopkins Medicine, Ochsner Health System and Louisiana State University to name a few in order to enhance coordinated care to patients. Turning to the daily living side. We refreshed and revitalized our front end, completing our plan launched in 2009 to convert or open 5,500 stores to our customer-centric retailing format, which offers more targeted assortment, better sidelines and new décor packages. Our CCR stores are reporting higher customer satisfaction and improved sales. We've also expanded our product offerings across all of our stores, completing our roll out of beer and wine, adding fresh foods, launching a new format with expanded grocery in our Food Oasis stores and building our Private Brand business, including the August launch of Nice! In addition, we opened or acquired 199 net new drugstores this past year, including a 22,000-square-foot flagship Duane Reade store at 40 Wall Street with a pharmacy powered by Walgreens. We expanded our multi-channel capabilities with the acquisition of drugstore.com, which enables us to reach an additional 3 million online customers, forge relationships with new vendors and partners and add approximately 60,000 health, personal care and beauty products through online offering. In terms of our financial highlights, in addition to record sales and earnings per diluted share, we completed our 3-year Rewiring for Growth cost savings initiatives and exceeded our $1 billion goal. Finally, we announced the largest dividend increase in the history of the company in July and including share repurchases, this year we returned a record $2.4 billion to shareholders. Looking ahead, let me touch on our status with Express Scripts and the opportunities we see. As you know, our contract renewal negotiations have been unsuccessful, and we're planning not to be part of the Express Scripts network as of the first of the year. At the time we made our announcement on the last earnings call, we emphasized that the terms Express Scripts offered us, including rates that were below the industry average cost to provide a prescription, were not in the best interests of our company, our customers, our employees, or our shareholders and we still firmly believe that. We also said we intend to work closely with our partners who are focused on lowering overall healthcare costs and recognize the critical value that community pharmacy can provide. Since then, many of these partners have indeed made clear that they value the choice, cost effectiveness, convenience and service of Walgreens and want to move forward with us. Also patients and employees have made it clear, they want to continue having the choice of Walgreens, maintaining their personal relationship with the pharmacists they've come to trust. This interest of our partners to maintain access to Walgreens community pharmacies has created additional opportunities for us. Finally, during the upcoming open enrollment period, Medicare beneficiaries will be able to choose a plan that best meets their healthcare needs. Many Medicare plans include Walgreens in their pharmacy provider networks, and we expect that beneficiaries will take that into account as they make these important plan decisions. The interest in continuing a relationship with Walgreens demonstrates what our data has shown: that employers and plans are not interested in restricted networks for little or no savings and that without Walgreens in the network, their cost could actually go up while at the same time creating unnecessary patient disruption. We know that Walgreens can play a vital role in advancing cost-effective Pharmacy, Health and Wellness Solutions. To make that clear, we recently released a white paper demonstrating the real value of Walgreens to pharmacy benefit networks. In addition to our competitive base pricing, we reduce overall costs for payers in many ways, including our generic convergence and utilization and our 90-Day at Retail program. With 74% generic penetration in Express Scripts' own network, which is 140 basis points better than the average of their network that does not include Walgreens, we produce a savings of around $2 per script. That comes about $180 million in total savings each year to Express Scripts and its clients. Through our leading 90-Day at Retail program, Walgreens promotes 90-day prescriptions for patients on chronic medications, offering 6% to 8% savings compared with 30 day scripts. Allowing patients to receive extended supplies of chronic medications through a 90-Day at Retail benefit in addition to a 90-day mail benefit has been demonstrated to substantially lower cost, increase compliance and improve the overall health of patients. In addition, we helped to reduce overall costs with our broad array of health services including immunizations, adherence programs and health screening and testing services. When you combine all these efforts to save overall costs, price, generic efficiency and 90-day scripts, it's clear why excluding Walgreens is not in the best interest of patients and payers, and why many of our partners want to stay with us. If you haven't already, I invite you to take a look at our The Value of Walgreens white paper on our website. Now let me turn to the 5 key strategies that we are focused on to create even greater value for our customers and patients in this fiscal year and beyond. As we enter fiscal 2012, we continue to refine and strengthen our strategies to become the first choice for health and daily living for customers and patients across the country. First, as we complete the refresh of our stores, we're also moving forward to completely redefine the drug store experience, set us apart in our industry and establish Walgreens as a destination for consumers to meet a broad range of health and daily living needs. We're bringing together all the transformation strategies we've developed over the past 3 years to pilot an exciting new concept store for Walgreens. These new pilot formats give us the opportunity to create the physical expression of all the work we've talked about with you over the last several years: a redesigned pharmacy, a new front end with fresh food, expanded beauty and all of our learnings from CCR in one place. Through this year, we've converted or opened 20 of these new concept stores in the Chicago area, and we've been expanding the pilot to Indianapolis. And in New York, at our 40 Wall Street store, we brought together the best of Duane Reade and Walgreens to create a truly unique shopping environment. We've also added Food Oasis stores to provide fresh food in underserved food desert communities and plan to open or convert at least 1,000 more over the next 5 years. With a large existing presence in underserved markets, more than any other retailer today, we are uniquely positioned to address this opportunity. We continue to focus on advancing community pharmacy to play a greater role in healthcare through integration and expanded services. As you know, we've been very successful with our flu shot program, a great example of customers coming to the community pharmacist for broader healthcare services. As a result, we've added more healthcare solutions such as additional immunizations and vaccinations, health tests and screenings and clinical services. We're also playing a more significant role in improving health outcomes for patients by helping to improve adherence, medication management and the use of advanced specialty and infused medications through counseling support and education. With our partnerships with health systems, we're taking the next steps in our communities to coordinate and integrate with national, regional and local health systems and advance the care our patients receive with some of the best physicians and clinicians in healthcare. For more about this, we just issued a second white paper that outlines our expanding scope of traditional pharmacy services, our leadership in home infusion and specialty pharmacy, our partnerships with major hospital systems managing their outpatient pharmacies and the expanding health and wellness services we provide through our Take Care Clinics. Next, as we transform the traditional drugstore and advanced community pharmacy, our third key strategy is to deliver an outstanding customer experience through enhanced employee engagement. Studies have shown that there is a direct link between how engaged employees feel at work, the quality of service they provide to their customers and the value delivered to shareholders. To continue to make that equation work, we are strengthening employee engagement by setting new standards, providing additional training and developing strong leadership. We're also focused on expanding across new channels and markets to ensure our customers have access to what they want, when they want and where they want it. Fiscal 2011 was a pivotal year in our expansion of our multi-channel business as we welcomed drugstore.com into the Walgreens family of companies. Our teams are fully engaged and are on track with our integration efforts, and we're looking forward to the innovation and growth that will result from their efforts into fiscal 2012. We've also rolled out new services such as Web Pickup, services now available to all of our Chicago stores as well as our San Jose pilot market. And finally, we're reinventing our cost structure through continuous improvement and innovation rather than driving onetime programs designed to generate savings. We're building that cost discipline into our daily business operations and corporate DNA, making it a way of life at Walgreens as we look at SG&A and COGS differently. As we close the books on 2011, we're more excited than ever about the plans and initiatives we have underway as we continue the transformation of Walgreens into 2012 and provide even greater value for our customers and our patients. We've built a solid financial foundation that gives us a platform to continue to innovate and transform our business. We've accomplished a great deal this year, and it's thanks to all of our people, their focused effort and tremendous hard work. We're looking forward to 2012 and to continuing to accomplish great things for Walgreens. And finally, we want to thank Dana Green, our recently retired General Counsel for her 37 years of service, and welcome Tom Sabatino, who joined us this month in that role. Thank you. And with that, I'll turn the call over to Wade. Wade D. Miquelon: Thank you, Greg and good morning to everyone. This morning, I'll first review our quarter, then I'll update you on our plan to move forward without being in Express Scripts pharmacy network, including how we frame the potential fiscal 2012 earnings impact of that decision. Let me begin by saying that we are pleased with our strong performance on our key financial metrics in what continues to be a challenging economic environment. Following Greg's summary of our financial results, I'll begin with detail regarding comp trends. Our fourth quarter comparable sales and prescription trends have each improved from a year ago with prescription comp sales increasing 4.4%, front-end comps sales increasing 4.6%, total comp sales increasing 4.4% and comparable prescriptions filled increasing 3.4% for the quarter. For the year, our comparable sales trends have improved as well, with prescription sales comp up 3.3%, front-end sales comp up 3.3% and total sales comp up 3.3%. Finally, our RX script comp for the year was up 3.7% versus up 4.5% in fiscal '10, reflecting the slowdown of prescription utilization in the industry year-over-year. For fiscal 2011, we achieved 20% retail pharmacy share, up 50 basis points from fiscal 2010. Looking at our quarterly trends over the past 3 years, our prescription comp, shown in the green bars, increased by 3.4% in the fourth quarter, up from last year's 3.3% despite the slowdown in the industry from 3.5% growth in the fourth quarter of 2010 to 1% in the fourth quarter of 2011. On a 2-year stack basis, represented by the blue line, comparable prescription increases remained in the 6% to 8% range. And finally, recall the spikes in the 2-year stack's in both the first quarter of 2010 and 2011 was caused by the unusual timing and severity of the 2010 flu season. Our quarterly front-end comp sales were up a robust 4.6% versus an increase of about 1.2% a year ago. The biggest driver continues to be CCR, with over 5,500 stores either converted or opened in the new format to date, which was designed to positively impact the shopper experience and increase traffic and basket. Into more specific categories, beer and wine contributed over 50 basis points to comp this quarter after adding 76 basis points a year ago. We continue to achieve a good mix between traffic and basket with traffic up 1.6% and basket up 3%. Within that basket, we are seeing some inflation and believe our convenience model affords us the ability to pass majority of it through. The 2-year stack shown by the blue line continue to trend up, reaching 5.8% in the quarter after bottoming out in the second quarter of fiscal 2010. Compared to the industry, our sales continued to perform well. When comparing our front-end comps to the next 3 largest retail pharmacy competitors, adjusting our comps to their calendars, we outperformed all 3 by a wide margin as shown on this chart. On a 2-year stack basis, we outperformed all 3 by over 300 basis points as well. Like everyone, we continue to see a cautious consumer and a competitive retail environment. This outperformance, we believe, is a reflection of our differentiated strategies coupled with strong execution. Turning to margin. Our gross margin as a percent of sales was up 28.2% in the current quarter compared to 28.4% last year. The front-end margin was lower primarily as we were up against a strong prior-year quarter. We believe our strategies are working to drive profitable front-end growth, good balance of mix, pricing and promotion. Overall margin change in the quarter was not impacted by pharmacy, which was flat year-over-year. Taking a look at our longer-term gross margin trends, this quarter, overall margins were cycling a 70-basis point improvement. So for the 2-year period, we achieved a 50-basis point gain. Looking forward, keep in mind that we are cycling an 80-basis point improvement in last year's first quarter, so as we've discussed in recent quarters, additional progress becomes increasingly difficult to achieve. As we frequently remind you, we believe that gross profit dollar growth and increases in traffic and basket rather than gross margin percent are the more relevant measures of our progress and will become increasingly important to consider as we move through the upcoming generic wave. 2-year stack SG&A trends improved versus a year ago with 15.8% growth in the fourth quarter of 2011, down from 20.6% last year. Recall that the fourth quarter in 2010, SG&A growth included 550 basis points impact from the acquisition of Duane Reade, which was a major driver of this year's lower SG&A dollar growth. After adjusting for restructuring-related costs associated with the Duane Reade acquisition in 2010 and costs associated with the drugstore.com acquisition in 2011, our 2-year stack SG&A growth showed improvement at 9.8% for the most recent period. Finally, I'm pleased to repeat Greg's comments that we have completed our 3-year Rewiring for Growth initiative, successfully over delivering our $1 billion and one ongoing cost savings versus our 2008 base as reflected in the decline in SG&A dollar growth over the past 3 years. To get to our core SG&A dollar growth, you could see that our reported 4.8% SG&A growth included 70 basis points of operation costs and 30 basis points of transaction costs related to the drugstore.com acquisition. The remaining base SG&A dollar growth was a combination of store openings, inflation and business mix. With respect to our CCR, our SG&A included $84 million of CCR conversion costs in fiscal 2011, up from $45 million in fiscal 2010. This next slide shows our quarterly gross profit dollar growth trends for the past 8 quarters with the blue line representing fiscal 2010 and the green line representing fiscal 2011 and the red line showing the 2-year stack trend. The primary driver of our higher gross profit dollar growth in the fourth quarter of 2010 and the first 3 quarters of 2011 was the acquisition of Duane Reade. When we cycled the acquisition in the fourth quarter of 2011, you can see the slower gross profit dollar growth. As you look at the upcoming first quarter, you should consider the following points: First, the timing and severity of this year's cough, cold and flu season. Currently, the incidence of flu is running about 15% below a year ago. Second, we are cycling 2 years of strong gross profit dollar growth. And third, on a quarterly basis, we will continue to experience volatility resulting from the timing of generic introductions, which we believe will impact us more significantly as the year progresses. And finally, regarding AMP, we are currently analyzing the draft FULs that CMS released last week, which are subject to a comment period and changes are anticipated. We are still awaiting the proposed AMP rule, which will provide direction to manufacturers for calculation on AMP. To date, manufacturers have been providing AMP data based on their interpretation of the Affordable Care Act without regulations. We will be working with states to increase their dispensing fees to more appropriately reflect pharmacy costs to dispense a prescription. And as we previously said, it's still premature to speculate on the ultimate timing and financial impact of AMP. We have a similar concept for SG&A dollar growth for the last 8 quarters, with the blue line representing 2010 and the green line representing the fiscal 2011 and the red line showing the 2-year stack trend. As you can see, SG&A dollar growth in the quarter was 4.8% versus 11% a year ago. Last year's SG&A dollar growth rate includes 550 basis points from the impact of the Duane Reade acquisition. Now as you can see from this slide, our first quarter will be our most difficult gross profit dollar comp of the year when we cycle a 9% gross profit dollar growth. Recall that our first quarter in fiscal 2011 was strong performance versus the prior year as well. Taking you through our income statement, this quarter included a LIFO provision of $60 million versus $61 million a year ago. Our effective LIFO rate for the year was 2.4%, up from 1.7% a year ago. Restructuring costs were $20 million versus $19 million last year. Net interest expense was $15 million down from $18 million a year ago. Our effective tax rate was 36.7% versus 35.6% last year. Before the year, our effective income tax rate came in at 36.8% versus 38% in fiscal 2010. Average diluted shares outstanding were 911 million versus 965 million a year ago due primarily to our share repurchase program. Cash and cash equivalents were $1.6 billion as of August 31 versus $1.9 billion a year ago. Overall working capital increased by 9.3% versus a year ago, driven primarily by increased inventories and the impact of the WHI divestiture. Finally, as a percent of sales, working capital was up 2.6%. Total FIFO inventory increased by 10% in the quarter versus 6.5% in total sales. The FIFO inventories increased by 7.2% on a per store basis. The increase in per store inventory was primarily in the front-end and related to strategic decisions including inventory we assumed with the acquisition of drugstore.com and the increase in certain categories, which is pain, sleep, cough and cold, where we have been running low due to supply constraints last year. For the year, we invested $1.2 billion in capital expenditures, including approximately $300 million in our new stores and $500 million in existing stores including remodels and store IT. In addition, we invested $100 million in our distribution centers and $300 million in corporate technology and other investments. For the year ended August 31, 2011, we generated $3.6 billion in cash from operations compared to $3.7 billion a year ago, continuing our strong cash flow generation driven by our strong earnings. Cash flow from operations was down slightly from a year ago, due primarily to the impact from working capital. Free cash flow was down as a result of higher capital spending versus 2010 as well as the impact of higher working capital. As one of our core capital allocation priorities, we continued to return surplus cash to shareholders, and in the fourth quarter, we returned $759 million including $159 million in dividends and $600 million through share repurchases. As of August 31, 2011, we repurchased $425 million against our new $2 billion authorization. And as you can see, in fiscal 2011, we returned a total of over $2.4 billion to our shareholders. Now let me share our plan to move forward without being in Express Scripts' pharmacy networks. As Greg noted, we're working on a number of Express Scripts customers consistent with the contractual obligations to help them evaluate all of their options to ensure that their members and our patients have continued access to Walgreens in their pharmacy networks. While we cannot comment on any plans or contracts specifically, we're very pleased with the response that we are receiving, and we expect these plans will make announcements when they are ready. While it's still too early to quantify how much of this business we will ultimately retain, I can share with you how we think about the various levers, including retention of total sales and cost savings opportunities and the potential resulting impact on our fiscal 2012 earnings. Because we're not going to speculate on the ultimate retention, we're going to illustrate 3 different retention scenarios among the many possible scenarios to illustrate how we frame the potential financial impacts. Regarding cost savings, we believe that within a range of 25% to 75% retention, with the cost savings plans we have in place, we can offset the anticipated gross profit impact by approximately 50%, including both COGS and SG&A interventions. Applying this framework under scenario A, which depicts 25% retention, the total revenue retained would be approximately $1.3 billion. To frame our cost savings under 25% retention scenario, consider that our COGS pool is nearly $52 billion. So improvement in the supply chain of 1/3 of 1% can generate over $170 million in savings and our SG&A pool is over $16.5 billion. So additional measures here could yield up to $250 million equal to 1.5% of our total SG&A. So again, using this framework under 25% retention scenario, we estimate the impact of financial earnings will be approximately negative $0.21 per diluted share. Using the same framework, we estimate that the impact of 50% retention could be approximately negative $0.14 per share and the impact of 75% retention will be approximately negative $0.07 per share. As I said before, we're not going to speculate at this time on the amount of business we'll ultimately retain, and it may be less than 25% or may be greater than 75%. But I hope this slide helps you dimensionalize the EPS impact that we may be looking at under different scenarios. And of course, on a longer-term basis, we believe additional business will move to networks that have Walgreens in the network. Finally, recall that in light of the planned cost interventions we will implement as a result of our current situation with ESI, we have temporarily suspended our goals for our key financial metrics. The upcoming generic wave will benefit many including payers, PBMs, providers and patients. Generic wave will also help to control drug trend increases projected to be in the low-single digits compared to overall healthcare spending projected to grow in the high-single digit. In Walgreens' proposal to Express Scripts, we offered to hold annual average reimbursement cost increases to within an estimated 2% annually over the next 3 years, which compares to a 3.2% annual drug trend increase that Express Scripts reflects in their 2010 drug trend report. In closing, notwithstanding the fragile external environment, our strategies are translating into solid financial results. We continue to leverage our leadership position in the community pharmacy to play a more significant role on the healthcare system as our stores become the first choice in retail health and daily living. We have strategies in place to create new revenue streams. We continue to reinvest in our stores, expand our offerings and invest in new channels and keep an absolute focus and continuous improvements and innovations in our cost structure. And finally, we are committed to creating shareholder value through disciplined financial decisions and a sound capital allocation policy, and we thank you for your support as our shareholders. Gregory D. Wasson: Thank you, Wade. That concludes our prepared remarks. We're now ready to take your questions.

[Operator Instructions] And our first question will come from Mark Miller of William Blair. Mark R. Miller - William Blair & Company L.L.C., Research Division: There was a lot discussed there. Wade, in your prepared remarks, you went through kind of quickly the company's objectives to offset the lower gross profits proceeding without Express Scripts. Could you go over that in a little more detail and elaborate basically where would you find the additional savings on the cost of goods and also on SG&A, I guess, given the company has been running leaner the last couple years with the prior objectives. Wade D. Miquelon: I guess the first thing I'd say is that we absolutely have plans in place to deliver against the framework that I gave you, both with respect to SG&A and COGS. And as you've seen from the data, we have subsequent pools, about $50 billion of COGS and over $16 billion of SG&A. With respect to any specific detail plans, the levers we'll pull are going to be dependent upon how much business we retain or don't. So I don't want to go into significant detail right now on what those are, but I guess I would just say that rest assured that the plans are in place. Mark R. Miller - William Blair & Company L.L.C., Research Division: Can I just ask one follow-up then? I know one of the things you're working on is doing more direct imports. Is that a significant part of it or, I mean, can you comment at all on what the bigger buckets would be? It's just not obvious what it would be. Wade D. Miquelon: Yes, I mean, there's no question that expanding our base for suppliers, including overseas, being more rigorous about our B [ph] processes are all part of that. Also just we're looking at how we run the fundamental supply chain and how we can use different types of partners to help us make more effective is another piece. But again, when you look at the grand scheme of overall costs, we're talking about a very small percent to get back to what we need to offset half of those retention rates.

Our next question will come from Andrew Wolf of BB&T Capital Markets. Andrew P. Wolf - BB&T Capital Markets, Research Division: I think the other side of the same question, which is kind of 2 parted. One is, is it closer to 25%, 75%, 0 or 100%? And also time frame. There's also a theory that even as you may be persuasive in the marketplace, the clock is sort of heading towards the end of the year and are you going to run up to -- are you potentially too close to the end of the year and disruptions, plan changes, how is that potentially impacting timing of potentially going direct with folks? So it's 2 parts. Any more granularity on helping us understand the scope of your conversations. Maybe you can -- for example, when you gave us the Express book of business, for you it's about 71% MCOs and employer groups. I would hope, I would expect, I guess, that, that would be where you would expect to see the most retention. Is it sort of a pro rata situation with the customers, like if you hit the 50% mark, would it be pro rata to the business or would it be more on one group of payers than the others? And again, the second part is one area. Gregory D. Wasson: Andy, Greg. As Wade said and as I said, we're not going to speculate on retention. We do feel that we are having positive response from all of our partners. First and foremost, our intent is to work with everyone, all the partners, our patients, their beneficiaries, to try to find solutions that allows them to continue to use Walgreens. And we are having positive response from many. I think regarding the time frame, I think as we get -- as plans and employers begin to get closer to that time, that cut off for the first of the year, I think you'll continue to see more interest and more activity. And certainly, from our point of view, it's really up to the plans and employers to make that public themselves. We certainly respect their desire to do just that, but we believe that the relationship that we have and we're seeing with patients and employees in the market and the value they place on continuing to use their community pharmacist that they've known and trusted for years is powerful, and we feel good that we're moving in the right direction. Wade D. Miquelon: Let me just build on this, too. This 25%, 50% and 75% hypothetical scenarios, this is for a 2012 look. So $0.07 to $0.21 was the impact dimensionalized on those 3 scenarios. But make no mistake about it. Whatever happens January 1 and that quarter, we see as being the toughest period because over time, we plan to win back more and more of those plans in the next selling season as they come up. So again, if you think about time frame, this is the initial time frame, but we see that will be the toughest period, and from that point, we're just going to move and build forward. Andrew P. Wolf - BB&T Capital Markets, Research Division: And I just wanted to ask a follow-on, Greg, to your answer about partners announcing things up until the first or whenever they feel like it. But in the -- at the back end, don't they have to make a decision sooner than that so that system conversions and other things can occur? Gregory D. Wasson: Yes, Andy. I think that varies by client and type of client, size of client, and so forth. But certainly, many of them are going to need to be making decisions soon. And again, we're just working with all to try find solutions that help them through this process and feel good about the response we're getting. One thing I would like to say, Andy, this is really not just about Express Scripts. There's a shifting payer landscape. Going forward, payers in general are looking now more holistically to try to figure out how they lower overall health costs and coordinate care. And I think the shift to the individual marketplace away from employer group business over time plays in our favor. I think the shift that there are more payers emerging, health plans, physician groups, health systems all looking for the value that we could help them with. So I think there are going to be emerging payers that we're partnering with. So we absolutely feel good about our strategies and where we're headed, the shifting landscape that we're working with and where we're headed.

And our next question will come from Tom Gallucci of Lazard Capital Markets. Thomas Gallucci - Lazard Capital Markets LLC, Research Division: I guess 2 things. One, you had mentioned sort of the deal that you had offered Express. Can you give any color as to the details of what they've offered you, or can you give some indication of how far apart you all really are or were? And then just on the cost savings side of things, to the extent you are out of network, curious about given the high fixed cost nature of the business, is Express volume fairly concentrated in some of your stores, or is it sort of a little bit everywhere? I guess I'm sort of struggling to see how easy it is to get that cost savings if it's sort of spread out. Wade D. Miquelon: Yes, Tom, Greg. I'll take the first half. Maybe Wade can follow-up with cost. We do think -- as I said, unfortunately the offer and the proposal we received was below the industry cost to fill a prescription and we don't think values what we truly can bring to payers and patients across the country. So we do believe that there are hundreds of other networks out there that we work well with, that are looking for a lot of the services and solutions that we're bringing to the marketplace. That's who we intend to focus on. But unfortunately, as I said, the proposal they had on the table was below the cost to provide a prescription in the industry. Gregory D. Wasson: Yes, on cost, all I would say is this. As you know, while in some cases their prescriptions will be basically more concentrated to one store versus another, we're not making this just a store problem or just a pharmacy problem or just a pharmacist problem. We're looking at this holistically across the entire company, making sure that we do everything possible to deliver the right cost savings so that we move forward successfully to a new future. So it's really more about that. It's more about taking a principled stand and looking holistically across the company to make sure that we continue to move on over the long term towards our goals. Thomas Gallucci - Lazard Capital Markets LLC, Research Division: All right. Generally speaking, are some of these cost saving initiatives that you could have in the works, are they things that you could do even if you don't lose the relationship with Express? Wade D. Miquelon: Sure. I mean, if there's things that are right to do, we will do it anyway. But we'll continue to look and be as diligent as we have to be. Gregory D. Wasson: And Tom, I would add that certainly, that's the reason we're kind of looking at this based on retention. And as we learn more about retention, we'll pull the right levers that make sense for our company long term. And our value in community pharmacy has been the great locations, our convenient hours, the fact that we have more 24-hour pharmacies than the rest of the industry combined. So we'll look at all those intelligently based on retention.

And next we have Scott Mushkin of Jefferies. Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division: So I know you don't want to tell us exactly who, but has anyone signed a separate deal with you guys yet? Gregory D. Wasson: Scott, as we said, we've got to keep the confidentiality of our partners and respect that. So as we said, we're working closely with many, and as they intend to or desire to release that, they will. Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division: I'm not asking for that. I don't want to know the name or anything, but I'm just asking the specific question if anyone actually signed with you yet. Gregory D. Wasson: As I said, we're not going to give information to that detail yet. As I said, we're encouraged by the response we're receiving. Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division: Okay. Second question is you guys seem pretty dug in here, so I guess the question comes to mind, is there anything Express can do to change your mind? It seems like you're walking away and maybe they really can't do anything. Or am I misinterpreting your... Wade D. Miquelon: The principle is very simple, right? I mean, one is we believe that we deserve fair value for what we do, but importantly, we don't see any reason to give any PBM a substantially better deal than all the others without having done something to warrant it. So it's pretty much as simple as that. If Express wants to give us fair compensation versus the market versus what we receive with others versus the value we provide, then we'll move forward. But if not, that's not really -- it's not really a productive place for us to be in our business. So... Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division: Okay. Oh, go ahead. Sorry. Wade D. Miquelon: No. So it's as simple as that. Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division: And then how do we, as analysts, investors, kind of frame Medco now? I mean, can you maybe talk to that? Wade D. Miquelon: Well, we can't -- I mean, we're not going to comment on the proposed merger. All that we'll say is that it doesn't change things, is that if it were to happen, we would expect the fair compensation we get today with them. And if we weren't to get that, then we wouldn't be in that network either. Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division: And when's your -- when's your contract up with Medco? Wade D. Miquelon: We don't talk about any specific contract, but the reality is that we've had a good relationship with them, and we believe we get fair compensation from all the others and that's why we're working with them. But if that were to change, then it wouldn't work for us either, and we'd have to make the same kind of decision. Gregory D. Wasson: I'd like to add on to Wade's point. Just to be clear, we wouldn't accept terms similar to what Express Scripts has offered us from any PBM regardless of what happens. Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division: And switching gears just quickly, how many remodels, major remodels, are you expecting to do in FY '12? Wade D. Miquelon: Well, we haven't said specifically of major remodels. Obviously, we plan on -- the next few months here, finishing out CCR. We've got lots of different various pilots underway of different stages. We're seeing great results on those. But with respect to our plans to expand that, we haven't commented on that at this time.

And next, we'll go to Mark Wiltamuth of Morgan Stanley. Mark Wiltamuth - Morgan Stanley, Research Division: Just to follow-up a little bit on the Medco question. I mean, clearly, Medco is a debate that investors have to have here. If the merger does go through, aren't they about the same size as Express in terms of impact? And can you continue to deliver COGS and SG&A savings to kind of offset some of that? Gregory D. Wasson: Well, yes. Greg. As I said, we're not going to comment on the merger, but I'll go back to exactly what I said. It takes -- rates that were proposed by Express Scripts, we won't accept those from anyone. Certainly, we'll begin to look at what we can do to reduce costs and COGS just as we are with Express and make the adjustments needed. The main point is, as I said earlier, we are focused on where healthcare is going, what our partners that are out there working with us are looking for us to provide. We're going to drive these key strategies to play a greater role in community pharmacy and greater healthcare going forward. We will see, we believe, a shift to the individual marketplace. Our strong consumer brand and trust with patients in that market, we believe, provides value and wins. We do believe that we'll see government entities and state entities that are looking for additional solutions to provide to their beneficiaries, especially those in underserved communities, where 45% of our stores are located. So we think there's a lot of value to work with health systems and hospital systems like Ochsner and Northwestern and the others I mentioned across the country to help coordinate care. That is where we are headed. So regardless of what happens and what the landscape looks like, we know where we're headed. People are looking for us to provide that type of value, and that's where we're going. Mark Wiltamuth - Morgan Stanley, Research Division: And in your estimates of $0.07 to $0.21 of potential impact, are you assuming any front-end impact or is that just the prescription loss and the offsetting actions you're going to take there? Wade D. Miquelon: Yes, the front-end is in those numbers, and the front-end loss is very, very small. So we've got lots of data on that. We've modeled that many, many times. So it's in those numbers, but it's basically around there. Mark Wiltamuth - Morgan Stanley, Research Division: And what percent of employers do you think could actually go direct with you under their current contracts? Wade D. Miquelon: Well, only they know their contracts, obviously, and so, they have to decide what their options are. But it's not just about within their current contracts. People every few years get a choice to consider whether or not they want to stay with that PBM or not. And so at the end of the day, if people can have Walgreens in their network versus not and have it at a competitive price and value proposition over time people choose that, too. So again, we're working with people to explore all their options, but every customer has different contractual obligations, and we honor those. But they have to let us know what it is they want to consider within their framework. Mark Wiltamuth - Morgan Stanley, Research Division: Okay, and Wade, just to get back to the generic wave on the industry themes. You indicated you thought the second half of the wave in 2012 could be better than the first half in terms of margin impact, is that fair to say? Wade D. Miquelon: No question. For our fiscal period. Remember our fiscal is starting effectively September 1, but our back half is much stronger for generics than our front half.

And John Heinbockel of Guggenheim Securities has the next question. John Heinbockel - Guggenheim Securities, LLC, Research Division: A couple of things. Wherever you are on an economic difference with Express, because obviously, you can put a number to that, whatever that is, is there room, short of wiping out the difference to 0 in your favor, is there room for compromise between those 2 numbers or not really? It's sort of all or nothing from your perspective? Gregory D. Wasson: Well, John, again, without going into the details, again, we're looking for fair reimbursement for the value we provide. And as I said, the proposal we offered was well below the industry average cost to fill, and we're not going to work in that type of environment. We've got too many payers and partners that want more from us, and that's where we're headed. Wade D. Miquelon: Yes, we're very, very far apart. And the truth is we also have to make sure we're fair to all of our other partners. So coming to some spot that's not optimal and not fair to everyone else doesn't really work either. John Heinbockel - Guggenheim Securities, LLC, Research Division: So as a follow-up to that, have you seen -- I guess you have. Have you seen any change in their negotiating posture as this whole Medco thing is played out and it's before the FTC, because I would have thought maybe that would be an impetus to create a little bit of compromise on their part. Gregory D. Wasson: We continue to work with our partners and that's where our focus is, in trying to find solutions for them. And again, to the earlier comment, we're not dug in. If there's a suitable arrangement, we're certainly open. But at this point in time, we're miles apart, like Wade said, and we're working and focusing on helping our partners find solutions. John Heinbockel - Guggenheim Securities, LLC, Research Division: All right. Getting back on the core business then, if you look at SG&A growth and comparable stores, what do you think that is longer term? Because you've done a very good job bringing that number down probably below what I would think it could be longer term. But what do you think it is longer term, 2% to 3%, or do think it's less than that? Wade D. Miquelon: No, what I'd say is prior to this Express Scripts event, we had given basically 3.5% to 4.5% as our ongoing kind of systemic model. And within that, we plan on opening around 200-ish stores, which drives 1.5% to 2%. So you could then basically make an inference somewhere between 1%, 1.5% and 2% is more of a normalized comp store range. John Heinbockel - Guggenheim Securities, LLC, Research Division: And is that impacted by -- because you talked about wanting to raise service levels, training, et cetera. Can you do 1% to 2% within the context of raising service levels? Gregory D. Wasson: Well, a lot of it's really just about thinking differently and reengineering. We're putting a lot of systems in our stores. Our POS system is one example we've talked about many times that we're rolling out now. Makes it much easier for a cashier to work, much more effective, it gives us much better data integration. But these kind of investments in infrastructure and in our people will then help free up time to do other things to help our customers. And so we have lots of efforts like that underway. But I think that's the bigger idea.

Next we'll move to Eric Bosshard of Cleveland Research Company. Eric Bosshard - Cleveland Research Company: Two questions. First of all, can you give us a sense -- and obviously, we don't need the specifics, but the $0.07 to $0.21 of dilution that you framed here, which is helpful, can you compare that to the dilution from accepting the terms that Express is offering? Wade D. Miquelon: I think I said before that from the offer they proposed us, there was no scenario we could think of, none, that wasn't financially better for us to move on without them. So you can assume that -- your question's answer from that. Eric Bosshard - Cleveland Research Company: Okay. Secondly, back to the core business, the front-end margin, you commented, was down in the quarter, and you explained some of that was the comparison. That looked like inventories grew a little bit in the quarter. Can you just talk about what you're seeing in terms of the front-end merchant environment in this quarter and on a go-forward basis? And what gives you confidence and where you think front-end margins are going? Gregory D. Wasson: Yes, Eric. As we've said and others have, I think we're still seeing a consumer that's a little wary. Consumer confidence as we know is down. The good thing is we feel we're well-positioned with our convenience and all that we've done over the past year to really provide solutions to that new consumer. We feel good that we are managing pricing promotion well. I think [indiscernible] and Bryan Pugh and our merchants are doing a good job there, indicated by the fact that our gross profit dollars are up, traffic's up, basket's up. We are able to pass on, due to our convenience, some of the inflation we're seeing. But I think we feel pretty good with our position to continue to do well in a challenging economy. Wade D. Miquelon: Yes, and I think Greg alluded to it, but I think the key point here is, really, the way we look at our business, both in the daily living as well as in the pharmacy area, is really total gross profit dollars, making sure we drive those and versus less looking at just the margin per se. Eric Bosshard - Cleveland Research Company: So from within that, just to dig in it a little bit is from a pricing and promotional standpoint, considering a more wary consumer, as you framed it, is there a need to be more aggressive with pricing promotion? Is there any need to give up a little bit of margin to drive the dollars? I'm just trying to figure out how that is evolving. Gregory D. Wasson: Eric, as I've always said, the key to retail is swinging doors and managing the pricing promotion to get that done. We feel good that we're managing that. The opportunity that we do have is to continue to drive share in private brand with the launch of Nice! And where we're headed there, we think that's going to be an opportunity for us. So we're going to swing doors and continue to make sure that we're driving traffic and basket but at the same time, drive the profitable items that can help us offset that. Wade D. Miquelon: And I think the big idea here, we're making lots of progress, we've got a long way to go, too, is really just being more relevant to consumers. What we've done across our assortment, what we've done across our décor packages, the new lines we keep in reducing, additional private label, all that is making us much, much more relevant every day. And I think this is the big idea of how we really keep driving bigger basket and more gross profit dollars over time versus just pricing promotion per se. Eric Bosshard - Cleveland Research Company: And then just within this, the above trend inventory growth, can you give us any color of what contributed to that and if that has any future profitably ramification? Wade D. Miquelon: You mean the increased trend in inventory? Eric Bosshard - Cleveland Research Company: Yes. Wade D. Miquelon: I would say for the most part, it's somewhat of an anomaly. Again, we talked about last year having some low inventory in some of the key categories. But we continue to have many strategies in place to keep driving inventory down. I think there's still room to go. We haven't put a goal around it, but quarter-to-quarter, there could be an impact. Working capital and total, too, was impacted by the WHI transition a fairly large number, and so we'll be out of that now as we move ahead as well.

Next we'll move to Matthew Fassler of Goldman Sachs. Matthew J. Fassler - Goldman Sachs Group Inc., Research Division: Just a couple questions on the Express issue. Just in terms of clarifying timing for your guidance, the EPS impact that you gave, is that the 2012 run rate once you get to the level of participation you might anticipate to reach those levels? Or would that be inclusive of a gradual ramp to that level of penetration? Wade D. Miquelon: No, that's the fiscal impact. So that would be the fiscal year. So obviously, the impact will be heavier on January 1 than it was in December. But as we go over the next selling season and then we start to cycle, we believe we'll also bring more and more accounts on through different PBMs. And so that starts to offset it and really strengthen our position over time financially. Matthew J. Fassler - Goldman Sachs Group Inc., Research Division: So you would anticipate that the annual run rate you'd be at by the end of the year if you had, say, 25% retention would be nicely better than the number that you put in your presentation? Wade D. Miquelon: Well, let's put it this way. Those numbers are 2/3 of an annualized impact. But as I said before, once we get to the next selling season and cycle into next December and January, we believe it'll pick up a lot of that business with other parties who value Walgreens and want us in their network. Matthew J. Fassler - Goldman Sachs Group Inc., Research Division: I would imagine -- a follow-up to that. One consideration that was not in the mix when you first announced this at the time of your last conference call 3 months ago was Medco. And obviously, there's a transaction that we might see go through in the relatively near term. How is that thinking into your strategic consideration given that presumably the 2 companies, once they merged, would be doing business on the same terms? Wade D. Miquelon: Well, look, whether that happens or not is not for us to say. We have no official opinion on it. But what I will say is that our principle and our stand doesn't change at all. We need to be provided and compensated fairly by the people we work with, right? To the extent that, that were to happen and we would keep getting compensated fairly as we do today, I suppose we would work with those people. But if there was some shift or change in line with what Express Scripts has proposed, then we wouldn't. It's really as simple as that. Matthew J. Fassler - Goldman Sachs Group Inc., Research Division: Got it. And then finally, just to clarify on your answer to Eric's question, you basically said that the numbers you lay out of doing business without Express would be better for you financially than had you agreed to their terms. I guess the question, is that better in 2012 or better in the long run or both? Wade D. Miquelon: Better forever. Matthew J. Fassler - Goldman Sachs Group Inc., Research Division: And would that be inclusive of 2012 on a standalone basis? Wade D. Miquelon: Yes. And more so over time because of our ability to win business back with other parties over time as those contracts renew.

And we'll take our final question from John Ransom of Raymond James. John W. Ransom - Raymond James & Associates, Inc., Research Division: Just a clarification. Does the retention include or exclude Medicare Part D-wise? Gregory D. Wasson: It would include. John W. Ransom - Raymond James & Associates, Inc., Research Division: Okay, and the second question is the PBM consultant feedback says that a lot of clients are saying that even contract provisions would prohibit them from contracting with you separately. There hasn't been any external evidence that you're getting any traction going direct. What makes -- what can you say to change that perception because we're just not finding any confirmation that your efforts are gaining traction to go around Express? Gregory D. Wasson: As I said earlier, we're working with several partners, and we are having several positive discussions. We feel pretty good with those that we're having. We're not going to release any information on that because of the confidentiality of our folks and the people we're working with. I will say at the same time, as Wade mentioned earlier, this is not just going to be a single-year event. In addition to those that we're working with that we believe we'll be able to work direct with and be able to continue to move forward with, there are folks who have the opportunity either this year or over the next couple years to change PBMs. And as we've said, January 1 would be potentially the toughest time for us, but as we -- but we do think that there are folks who want Walgreens in their network and we'll have many alternatives and choices and ways to do that. Wade D. Miquelon: Yes, we know of many, many PBM shifts. But again, for any one of those, it's going to be up to them when they want to announce it. So at the end of the day, this isn't going to be a battle that's won in the newspapers or a battle that's won on conference calls. It's going to be about what customers want and their options and their choice. And over time, we're pretty confident that we'll get back in much of this business with people who value us and see the value proposition we provide. John W. Ransom - Raymond James & Associates, Inc., Research Division: And is this contract lower than what you're getting paid on your average Medicaid fee per script? Wade D. Miquelon: Well, we don't talk about plan by plan by plan, but just again, the fact that we said that it's below the industry cost to fill, if everybody took this with every plan, there'd probably be no industry. So again, it's just not acceptable versus what others provide and the value provided. So it doesn't work for us. Gregory D. Wasson: Yes. Again, if I can just wrap up, this is unfortunate example of a PBM that has forced a network provider to a point where it no longer makes sense for us to participate in that network. And with that, we know where we're headed. We've got plenty of opportunities to work with providers that want all the services we provide, and that's where we're headed. Rick J. Hans: Ladies and gentlemen, that was our final question. Thank you for joining us today. As a reminder, the company will report September sales on October 5, and we will report first quarter 2012 earnings on December 21. Until then, thank you for listening, and we look forward to talking with you soon.

And again, that does conclude today's conference call. We'd like to thank you for your participation.