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

Brian Wang Brian Wang - Barclays Capital, Research Division John Heinbockel - Guggenheim Securities, LLC, Research Division Eric Bosshard - Cleveland Research Company Matthew J. Fassler - Goldman Sachs Group Inc., Research Division Mark R. Miller - William Blair & Company L.L.C., Research Division Edward J. Kelly - Crédit Suisse AG, Research Division

Good day, everyone, and welcome to today's Walgreen Co. First Quarter 2012 Earnings Call. Today's call is being recorded. I'll turn things over to your host, Mr. Rick Hans. Please go ahead, sir. Rick J. Hans: Thank you, Jason. Good morning, everyone. Welcome to our first quarter conference call. Today, Greg Wasson, our President and CEO; and Wade Miquelon, our EVP and Chief Financial Officer, will discuss the quarter and update you on Express Scripts. Also joining us on the call and available for questions is Kermit Crawford, our President of Pharmacy, Health & Wellness Services; and Mark Wagner, President of Community Management. 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. You can find a link to our webcast under the IR 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 for a discussion of risk factors as they relate to forward-looking statements. I'll now 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 our quarterly results. Second, I'll discuss the progress we're making on our strategies. And finally, I'll provide a brief update on Express Scripts, and then Wade will give you more details on our performance and the considerations for the year ahead. Beginning with our results today. As you saw in our release this morning, we reported record first quarter sales of $18.2 billion, up 4.7% from $17.3 billion a year ago. First quarter net earnings were $554 million, and first quarter earnings per diluted share were $0.63. Compared to the prior year, the delay in cough/cold and flu season impacted net earnings per diluted share by $0.01, while the strategic decision to no longer be part of Express Scripts pharmacy network as of January 1, 2012, cost $0.01 per diluted share in comparable pharmacy sales and $0.01 per diluted share in related expenses. Cash flow from operations for the quarter was $809 million, and free cash flow was $309 million. We returned $803 million to shareholders in the quarter, including the largest dividend payment in the company's history, and $601 million in stock repurchases, up nearly 18% over the first quarter last year. Now I'd like to put this quarter's results into context. On our September call, we anticipated we would see challenging comparisons for gross profit dollar growth in the first quarter and we did. We were up against 2 strong prior year quarters. As we discussed, our first quarter is always impacted by volatility and the timing and the severity of the cough/cold and flu season, which this year is off to a slow start. We were also impacted by slower rate of generic introductions this quarter compared to the prior year quarter, and that impact will reverse and then accelerate through the fiscal year with the release of new generics, including generic Lipitor. Couple that with a step-down in pharmacy reimbursement, including July rate reductions from Express Scripts that were built into our current contract, and our year-over-year increase in gross profit dollars slowed to $159 million or 3.2%. Turning to SG&A dollar growth. We continued to invest in our strategies, focusing on our CCR store conversions, our health and daily living pilot stores and driving innovation in E-Commerce. While overall SG&A dollar growth came in at 5% excluding drugstore.com, our costs increased by 4.2%. The spread between gross profit dollar growth and SG&A dollar growth for the quarter was negative $41 million. Recall, we really think about this spread over a longer period of time, not quarter-by-quarter. As we look further into the results, we continue to see strength in our business fundamentals. We filled a first quarter record 208 million prescriptions, as our 90-day program continued to fuel growth. In fact, 90-day retail prescriptions grew by 37% year-over-year. Based on the most recent data from IMS, on a 30-day basis, our retail pharmacy market share was 19.9%, which is up 40 basis points from a year ago. We administered 5 million flu shots this flu season through November 30 compared to 5.6 million a year ago. We continue to deliver more flu shots than any other single entity outside of the U.S. government and to build a strong immunization program for adults and adolescents, which is an extension of our flu program. In addition to our work in pharmacy, we maintained momentum in our front end despite weak cough/cold and flu. We completed the successful rollout of CCR, contributing to our front-end sales growth. We're striking the right balance between sales and margins as our front-end margins held steady compared to the first quarter last year. We're outperforming our nearest competitors on comps. And reinforcing the success of CCR, we continue to grow our market share in our targeted signature and power categories compared to food, drug and mass merchandise competitors, measured by the Nielsen company. For the 12-week period ended November 26, Walgreens gained share in key health and wellness, beauty and personal care product categories. Today, I'm going to focus my attention on 2 of our 5 key strategies: our efforts to transform our drugstores and to advance community pharmacy. In our new health and daily living pilot stores, we've stepped out of the traditional drugstore format and created something completely new. This new format brings together cutting-edge design with an improved product assortment, such as expanded fresh food and enhanced beauty experience and our growing private brand offering. Our goal is to create an experience unmatched in the industry. We're piloting these stores in Chicago and Indianapolis and with our flagship Duane Reade store at 40 Wall Street in New York and the soon-to-open Walgreens in Chicago's Loop. Customer response has exceeded our expectations. In addition, we're excited about our initiative to convert stores located in food desert communities to food oasis locations with a much expanded fresh food offering. In fact, First Lady Michelle Obama recently spent some time with us in one of our Chicago stores on the south side and applauded our commitment to meet the nutritional needs of these communities. We plan to open or convert at least 1,000 food oasis doors in the next 5 years. With our new health and daily living stores, we're also advancing community pharmacy. We've made significant design changes in this area as well to enhance the patient experience. We've made our pharmacists even more accessible by bringing them out from behind the counter to fill the gap in access to healthcare services that exists in this country. We've more tightly integrated our retail clinics and pharmacies to create a real community health corner, and we now provide health guides to help patients better utilize the resources within our stores and navigate the broader healthcare community. We recently hosted Secretary of Health and Human Services Kathleen Sebelius in one of our new health and daily living stores. In addition to receiving her flu shot from our pharmacists, the Secretary was very enthused with the role community pharmacy can play in the future of healthcare in this country. Because of the work we're doing to transform our drugstores and advance community pharmacy, we are creating value for patients, health plans, employers and partners, and that's exactly what we've been hearing from our partners since we announced that we do not plan to be part of the Express Scripts network as of the 1st of the year. For today's update on Express Scripts, I'll focus on 3 topics: prescription retention, our cost-saving efforts and the path forward. Let's start with retention. As you recall, based on current estimates and the current assumption that we will not be in Express Scripts pharmacy networks beginning in January, including for clients such as TRICARE and WellPoint, we expect to achieve 97% to 99% of our fiscal 2011 prescription volume in fiscal 2012. We are reaffirming that today. To date, well over 100 health plans and employers and other Express Script clients have informed Walgreens that they have either changed Pharmacy Benefit Managers or taken steps consistent with their contracts to maintain access to Walgreen pharmacies in 2012. In addition, we're in active negotiations with many health plans and employers to provide access to Walgreens in their networks as soon as their contracts allow. As part of those conversations, we're hearing from partners that this December has been the busiest in recent years for negotiations, as companies are putting their pharmacy benefit plans out for bid in unusual numbers. Next, regarding our cost-saving efforts, we reiterate our commitment to reduce our total SG&A and cost of goods. This month, we've already implemented a number of actions at our corporate office, and we'll make any store-specific adjustments as needed after January, as we manage the transition from Express Scripts. We're heading into the upcoming pharmacy benefit selling season with confidence in the value that Walgreens provides to patients and payers. We have a strong strategic foundation that gives us momentum, and our base costs are competitive. Building on our base, our industry-leading generic utilization and efficiency on new generics drive costs down with an estimated savings of $2 per script. In addition, we help partners control costs through our leading 90-Day at Retail program, which generates approximately 7% savings compared to 3 30-day scripts. And with the growth we're seeing in that program, 37% this past year, it is clear that having Walgreens in the network can drive significant cost savings. We know through our discussions with employers, health plans and payers that there's great appreciation for the value we provide and a strong desire to protect their access to Walgreens. This was reaffirmed in a recent employer survey commissioned by Walgreens and administered by a third party that interviewed more than 800 respondents. The survey showed most employers would demand significant discounts from their PBM in return for excluding Walgreens from their pharmacy network. More than 80% of employers said they would not exclude Walgreens from their network for less than 5% savings on their total pharmacy spend. 60% of employers said they would not exclude Walgreens for less than 10% savings, and 21% would not exclude Walgreens from their network regardless of the savings. To put these numbers in perspective, unlike other sectors of the healthcare industry where complex medical procedures can vary significantly in costs, the overall level of retail pharmacy reimbursements, on average, tends to vary modestly. The vast majority of pharmacy reimbursement falls within a narrow band, typically less than 5% of one another. Walgreens' unit prices fall within that narrow band and are especially competitive when compared with pharmacies that provide comparable levels of convenience and service, including drive-through pharmacies and 24-hour locations. Also, as pointed out in a recent white paper by Catalyst, a case study client paid $6 less per prescription at Walgreens than the average of all the pharmacies combined. Our research is supported by a number of other studies in the marketplace that indicate customers value Walgreens in their network and would require savings to even consider switching. So for more information on the research, you can read this white paper we released yesterday. It's available on the IR section of our website. To wrap up, it remains just as true today as it was in June when we announced our decision regarding Express Scripts. Patients and partners want Walgreens in their network, maintaining their personal relationship with the pharmacies they have come to trust and their access to our community pharmacies. We'll continue to drive home the value we bring to the marketplace, the choice, cost effectiveness, convenience and service we provide. We fully intend to work closely with our partners and customers to differentiate them with their clients because they have Walgreens in their networks. Based on everything we're hearing from our partners, our customers and these survey results, we are more confident today than ever that we have made the right decisions. We believe very strongly in our ability to execute and in the unique value we offer to our patients, customers and partners. As a result, we are accelerating our strategies and focused on taking our company where the marketplace wants us to go. Our direction is clear, continue the transformation of work we have underway to improve access to quality care while lowering pharmacy cost and overall healthcare cost for our patients, partners and payers. Thank you. And with that, I'll turn the call over to Wade. Wade D. Miquelon: Thank you, Greg, and good morning, everyone. This morning, I'll review the first quarter of fiscal 2012 in detail. I'll highlight the key considerations for upcoming quarters, and finally, update you on the financial impacts of our situation Express Scripts for the fiscal and calendar year. So let me begin by saying that this quarter's comparable store sales were impacted by several important factors, including the slow start of this year's flu season and the unusual timing and severity of the 2010 flu season. To better understand the underlying trends, we are showing the 2010 comparable sales numbers for reference. As you can see in the first quarter of fiscal 2012, prescription sales increased by 2.6%, front-end sales increased by 2.4%, total sales increased by 2.5% and prescription scripts increased by 1.8%, all versus a year ago. As our trends over the past 13 quarters highlight, the first quarter of fiscal 2010 was unusually strong, driven by the H1N1 flu pandemic and the launch of our flu shot program, and this quarter's prescription comp is still impacted by that echo effect. Remember that last year's 2% script comp was on top of a prior year comp of 9.2%. In addition to cycling strong 2-year trends, this quarter's 1.8% comparable script growth, shown in the green bars, was impacted by: the transfers of Walgreens' patients who had Express Scripts pharmacy benefit coverage, which had a negative 0.6% impact; the slow start to this year's flu season, which had a negative 0.6% impact; and flu shots, which had a negative 0.3% impact. Overall, the prescription industry continues to experience lower utilization. And our 1.8% comparable prescription growth outperformed the industry, excluding Walgreens, by 2.3 percentage points, despite the headwinds we faced. Looking at our longer-term trends, the 2-year stack represented by the blue line also illustrates the impact of the unusual 2010 flu season, and we believe that smoothing out the 2010 flu season impact with a 3-year stack, shown by the red line, better represents the underlying health of our prescription business. Front-end comparable store sales shown in the green bars increased by 2.4% in the first quarter, with our basket up by 2.6% and traffic declining by 0.2%. And we're very pleased with the solid comps in our signature, power and our staple product classes, led by categories including personal care, beauty, allergy and vitamins, all strategic health and wellness categories that we have refined through our CCR initiative. And we believe that front-end strategies that we have in place position us for continued profitable growth. Finally, our customer remains value conscious, and we have responded with smart promotions and maintaining our share while increasing profitability in the front end. As this graph illustrates, when we restate our front-end comps to each of our 3 major retail pharmacy competitors on their calendars, we outperformed all of them, as we have done in each of the last 4 quarters. And we believe that our CCR resets and our other front-end initiatives that drive relevancy and have improved the customer experience are the primary driver of our performance. Gross profit margin for the quarter was 28.1% versus 28.5% a year ago. The pharmacy gross margins were negatively impacted by reimbursement rates, including a step-down in Express Scripts rates versus a year ago and our growing 90-Day at Retail program, and this more than offset the positive impact of new generics. Front-end margins were neutral as we struck a good balance between sales and margins across our categories, especially given the tough comparison with prior year. Looking at gross profit margin trends by segment, you can see the progression of our quarterly margin over the past 5 quarters. As this slide illustrates, this quarter, we were cycling an 80-basis-point improvement in gross margin versus a year ago and gross margin benefited from improvements in both the front end and the pharmacy. As the year progresses and especially in the second half, we expect our pharmacy gross profit margin to benefit as a result of the increased rate of introduction of new generics. The first quarter of 2012 SG&A dollar growth of 5% reflects investments in key strategic initiatives. And the drivers were: new store openings, non-comparable drugstore.com expenses, investments to strategic initiatives and capabilities and costs associated with our plan to no longer be a part of the Express Scripts pharmacy network. On a 2-year stacked basis, our SG&A trends continue to be favorable, even as we invest in our core business. On a GAAP basis, first quarter 2012 2-year stacked growth was 12%, down from 14.4% a year ago and from 16.5% in 2010. Adjusting for the onetime impact of our costs associated with our drugstore.com acquisition, our 2-year stack was 7.1%, down from 10.3% last year and down from 16% in 2010. This quarter's SG&A had 80 basis points of non-comparable impact from our drugstore.com acquisition, which closed in June. And so on an adjusted basis, our SG&A was 4.2%. Taking a look at gross profit dollar growth over the past 2 years, you can see that we are cycling 2 strong prior year quarters. First quarter 2010 gross profit dollar growth of 9.3%, shown in the blue line, was driven by H1N1 and the 2010 flu season. And our 2011 gross profit dollar growth of 9%, shown in a green line, was driven by our Duane Reade acquisition. Both of the 2 prior year first quarters had a higher level of new store openings. In addition to cycling strong prior year quarters, this quarter's gross profit dollar growth reflects some step-downs in reimbursement, a slow start to this year's flu season and a dearth of new generics. Beginning with the November 30 launch of atorvastatin, the new generic version of the brand Lipitor, we expect to benefit from acceleration in the rate of introduction of new generics, which should positively impact our gross profit dollar growth in the second half of the fiscal year. Looking at our SG&A dollar growth in the same framework, we're cycling a 7% SG&A dollar growth in 2011, shown in the green line, following a 7.4% SG&A dollar growth in 2010, shown in the blue line. As you can see from our trends in both gross profit dollar growth and SG&A dollar growth, as we have highlighted in the past, we experienced quarter volatility primarily as a result of the timing of new generics, the timing of the flu season, the timing of our own initiatives. And this year will be no different. Turning to additional income statement details. This quarter included a LIFO provision of $45 million versus $42 million a year ago. Our effective LIFO rate of 2% was the same as it was a year ago. Our net interest expense was $17 million versus $20 million a year ago. Our effective tax rate was 37.2% versus 37% a year ago, and our average diluted shares outstanding were 885 million, down from 934 million a year ago due primarily to our share repurchase program. And moving to our balance sheet. Cash and cash equivalents were $1.1 billion at November 30 versus $2.1 billion a year ago. Accounts receivable were $2.6 billion versus $2.5 billion a year ago. LIFO inventories were $8.2 billion versus $7.9 billion a year ago, and inventories were up due to new stores and the acquisition of drugstore.com. Also contributing to the increase were higher inventories in our pain, sleep and cough and cold categories compared to a year ago, given the slow start of the flu season. Accounts payable were $4.8 billion versus $5 billion a year ago, impacted by the sale of WHI, our PBM, and just the timing of payables. Total working capital in the quarter was $6 billion versus $5.4 billion in last year's first quarter. And as a percent of sales, working capital was 33.3% this year versus 31.3% a year ago. I'd just like to say that, overall, we feel good about our working capital position, and we remain committed to making systemic improvement, such as reducing inventory, over time while maintaining and improving our in-stock and customer satisfaction levels. Total FIFO inventory was up 5.7% in the quarter versus 6.6% a year ago and versus 10% in the fourth quarter of 2011. On a per-store basis, inventory was up 3.6% versus negative 0.4% a year ago and versus 7.2% in the most recent quarter. The increase in inventory per store is attributable to drugstore.com acquisition and the increases in certain front-end categories I mentioned, such as pain and sleep, cough/cold, et cetera, given the softer start to the flu season. And that will ultimately make its way through the system. In the quarter, we invested $419 million in capital expenditures versus $273 million in the first quarter of 2011. As we've previously stated, for the year, we plan to invest $1.6 billion in capital expenditures versus $1.2 billion in fiscal 2011. The biggest driver of this year's projected capital expenditure increase versus 2011 level is related to information technology, with an investment in an upgraded point-of-sale system, including mobile point-of-sale and other wireless capabilities, to enhance the customer experience and employee efficiency. First quarter 2012 cash flow from operations was $809 million versus $1.165 billion a year ago, and the difference is primarily driven by the change in working capital. Free cash flow was $390 million versus $892 million a year ago, reflecting, again, the year-over-year uptick in capital spending. So we remain confident in our ability to continue to drive strong free cash flow through the balance of this fiscal year. We continue to emphasize our commitment to creating value for shareholders, returning record levels of cash to shareholders in fiscal 2010 and 2011. In the first quarter, we returned $803 million to shareholders, through a combination of $601 million in share repurchases and $202 million in dividends. Recall, that we announced a 28.6% increase in our dividend per share at our July board meeting, the highest in the history of our company. Over the past 6 quarters, we have repurchased $3.4 billion of our stock, and we currently have $975 million remaining against our $2 billion share repurchase authorization that was approved in July 2011. Now turning to an update of the financial implications of our decision regarding Express Scripts. I'm going to start with some comments on the value of including Walgreens in a pharmacy network, beginning with our cost effectiveness. Now Walgreens has a deep understanding of the pharmacy reimbursement landscape, given our experience of bringing other pharmacies into our store base through acquisitions, working with other PBMs and, until recently, owning our own PBM. From our data and experience, we believe that the vast majority of pharmacy reimbursement, unlike other healthcare reimbursement, falls within a very narrow band, typically within 5%, as illustrated in the bell curve where reimbursement falls within the 5% range of a $60 average. While all of our data points suggest and Walgreens firmly believes that our baseline pharmacy reimbursement rates are absolutely competitive with the average of other retail pharmacies, even if we were to ponder Express Scripts allegations that we're at the high end of their range, there would be little or no net savings as a result of excluding Walgreens from a pharmacy network. As shown in this example, even if you make the assumption that Walgreens was at the right end of a typical pharmacy range and couple that with our 20% market share, excluding Walgreens from a pharmacy network could save payers, on average, $0.30 on a $60 prescription or 0.5% of their total pharmacy spend. There has never been any evidence that we have seen to suggest that this level of savings is compelling to payers, and that is one of the reasons why narrow networks in pharmacy have never had meaningful traction. Beyond competitive unit pricing and the value of our convenience, with the most drive-throughs and 24-hour stores in the industry, we believe that Walgreens provides additional measurable savings to payers through our industry-leading generic penetration and conversion rates, which we believes pay -- save payers approximately $2 on our scripts or $0.40 per script when using the 20% market share estimate. And our 90-Day at Retail solution, which we believe saves payers an additional 7% versus 3 30-day fills up to the level that they decide to convert to. Our survey, which is supported by other data in the marketplace, revealed that over 80% of payers would require at least 5% of savings, which is 10x the level of savings in my example, even before factoring in generics and 90-day, and 60% of payers would require at least 10% of savings to accept the network that excludes Walgreens. Clearly, these level of savings, we believe, are unlikely to be achieved based on market information. As we continue to execute against our health and wellness strategies, we believe the broader value of Walgreens is our opportunity to help lower total healthcare costs through expanding our clinical services, enhancing the role a pharmacist plays in the healthcare system, especially with respect to adherence and chronic disease management. To scale the opportunity, consider that if through optimal use of the pharmacy and pharmacy benefit payers could lower their overall spend on healthcare by 2%, the resulting savings would be the equivalent of saving 15% to 20% of total pharmacy cost. Moving to the retention of Express Scripts prescriptions. I want to discuss a framework for how we develop the 25%, 50% and 75% hypothetical retention scenarios for calendar year 2012. Reiterating Greg's comment, the 100-plus payers that have already informed us that Walgreens remain in their pharmacy networks in 2012 represents approximately 10 million prescriptions or 11.4% of the total, as shown in the slide in the dark blue. These 10 million prescriptions are a combination of PBM switches and direct contracts, and it continues to grow. With respect to the other building blocks, the feedback we have received from the market, including our ongoing discussions with employers, managed-care companies and PBMs, and supported by our survey, gives us confidence that we are well positioned to retain a significant level of available Medicare Part D, small plan and other payer scripts. Recall that CMS publish Medicare Part D enrollment data and that will be -- information be available in mid-July -- mid-January. Looking at this slide, the hypothetical scenario in which we retained 50% of available Part D scripts and approximately 25% of all other available plan prescriptions gets us to 22 million scripts or 25% of the 88 million prescriptions that we fill on behalf of Express Scripts clients in 2011. While uncertain, we still believe that it's possible to retain or recapture the nearly 25 million prescriptions represented by WellPoint members, which if we were successful there, would get us to 50% of a going retention run rate. And finally, we continue to offer our ironclad price guarantee to the DOD. We remain committed to serving our military personnel, and we are still working to retain this prescription volume as well, which, if combined with the others described above, would enable us to achieve a 70% retention run rate with respect to Express Scripts prescriptions we filled last year. Apart from our ironclad guarantee, recall that well over 250,000 military personnel had signed a petition urging Express Scripts to allow them to access Walgreens. Clearly, this is a very significant number for a petition by any standard. The percentages in these retention scenarios for the calendar year would be affected in the event that the business is recaptured for only part of the year, with the full percentage effect realized as we cycle the relevant retention date. Finally, we're converting these numbers to a fiscal year impact. We estimate that prior to January 1, we have already filled approximately 29.5 million of the 88 million Express Scripts prescriptions. If we apply what we already believe we have retained and factor in an underlying growth of the business, we believe we can achieve 97% to 99% of our fiscal 2011 prescription volume in fiscal 2012. Recall that our 97% to 99% retention estimate excludes any prescription retention from WellPoint and the DOD and makes no assumption regarding the proposed Medco merger. In our September 27 earnings call, we provided 3 hypothetical scenarios for the potential fiscal 2012 earnings impact of moving forward without participating in Express Scripts pharmacy network beginning January 1. Recall our 3 scenarios, we're retaining 25%, 50% and 75% of the annualized prescriptions and associated revenue retention. At each of these scenarios, we believe that we can offset the gross profit dollar impact of lost Express Scripts prescription volume by 50% through a combination of planned cost of goods and SG&A interventions already in place, and which Greg has mentioned before, we have already begun implementing at corporate. Because we will continue to serve our patients through the transition, substantial portion of our cost savings will be realized in the second half of the fiscal. Using this framework, as we have previously stated, under the 25% retention scenario for January 1 to August 31, 2012 period, we estimate the impact of fiscal 2012 earnings will be approximately negative $0.21 per diluted share, and we continue to stand by these estimates. Well, I want to close today by emphasizing that we understand the near-term challenges we face as a result of not being in the Express Scripts pharmacy network, and the angst that this has created for the investment community, given that no one likes uncertainty. However, I want to assure you that our beacon has been and always will be doing what is in the best long-term interest of our shareholders. And what we are hearing from payers and the marketplace at large, supported by our recent survey, reinforces our belief that payers, large and small, are not interested in a network that does not include Walgreens. We understand the near-term impact on our gross profit dollars, but again believe it's absolutely the right long-term decision for our company, our employees and our shareholders. We are not standing still. We have committed to and have begun implementing cost-savings plans to offset 50% of the gross profit impact for the scenarios I've outlined. And as previously framed, we have progressive plans to help other partners win back this business as time progresses. Respect to our underlying business, I have never been more confident in our strategies and our opportunities. On top of that, we have a unique and powerful set of assets, a dual tailwinds of an aging population and the generic wave, the tremendous opportunity to leverage our assets to play a much broader and major role in our nation's healthcare system by offering quality, affordable and convenient access to health and daily living needs. As the puck is shifting, we are skating to it. We'll continue to make business investment and capital decisions to drive our strategy, and we are focused on creating long-term shareholder value, including delivering on our commitment to return cash to shareholders. I want to thank you for your support, and now turn the call back over to Rick for Q&A. Rick J. Hans: Thank you, Wade. That concludes our prepared remarks. We're now ready to take your questions.

[Operator Instructions] We'll go first to Mark Miller with William Blair. Mark R. Miller - William Blair & Company L.L.C., Research Division: In the white paper, you highlight that half of the employers have options to contract separately with Walgreens, and I think you talked about a number of those employers think there would be a resolution. But is that the main reason why you think that you've not gotten more of them to contract directly with you thus far? And for those that haven't yet, how many do you think may be able to do so in 2012? Gregory D. Wasson: Yes, Mark. I think that many, as we've said, were waiting toward the end to see if, indeed, we'd settle. And I think what's encouraging is the fact that they do have a clause to exit their PBM contract. And I think what we're hearing is that many are actually thinking about it and talking about doing that next year and going out to RFP. Wade D. Miquelon: Yes. Also remember that 2 clients for Express Scripts represent 50% of their business, right. But as we said, we've seen a very good traction. It's literally evolving by the day. So I think it's playing out in a very positive way. Mark R. Miller - William Blair & Company L.L.C., Research Division: The impact that you see if you can offset half of the gross profit loss, would that be proportional across the quarters or would that impact the -- more front weighted? How should we think about that flowing through the year? Wade D. Miquelon: You expect to have a little more impact in Q2, because as we said, we're making sure that we provide stellar level of service through January to help all of these patients, make sure they're taken care of and navigated properly. Gregory D. Wasson: I'd agree with that. We've spent a little extra money on purpose in this quarter, to make sure that we were allowing our pharmacist to have quality time with their patients, especially during the Med D enrollment period. And I think to Wade's point, we want to make sure we're taking care of patients in January. So it's most likely be back half weighted. Mark R. Miller - William Blair & Company L.L.C., Research Division: Then on my last question, can you give us some sense of what tolerance you have on debt to capital, given this more intense impact upfront and given your long-term beliefs? How aggressive can you be on share repurchases that are potentially you could do more during this period? Wade D. Miquelon: I guess, Mark, I'm only at liberty to talk about the fact that we're executing the plan we've got aligned. So as you know, we're halfway through the $2 billion plan. We continue to be aggressive and ahead of schedule on that, but that's really all I can say at this time.

Next up, we have Matthew Fassler with Goldman Sachs. Matthew J. Fassler - Goldman Sachs Group Inc., Research Division: I want to ask you a question about sort of looking down the road. And Medco has obviously been a part of the discussion here, that is the Medco merger with Express, from about a month after you made the decision to dissociate from Express. And it would seem as if the impact to sales would be similar and the impact to earnings would be greater from -- than initially walking away from Express. What would that do to your ability to return capital to shareholders? And how are you thinking about your capital plan, given the need to think about that contingency? Gregory D. Wasson: Matt, Greg. I'll take the first half, maybe let Wade comment on the capital plan. I think -- obviously, we think that if we -- that we deserve a fair and acceptable reimbursement compensation for the services we provide, and that's what this issue is about with Express Scripts so we wouldn't accept anything different from any PBM, including Medco. Can't comment on the proposed merger, but in addition, keep in mind that Medco's book of businesses is much less than it was a year ago. And we think with the uncertainty in the marketplace next year, that they're going to be -- they're going to have a challenged selling season as well. We're working with all of our partners out there right now to help them find a solution that would have Walgreens in it, so. Wade D. Miquelon: Yes. I mean, I would just say this, too, we hear the same thing from the Medco clients as we do from Express clients, which is they want Walgreens in the network, and they're going to want to have it. And the advantage they're going to have is they're going to have more window here of visibility to explore their options and probably more change of control provisions and other ways to direct their contracts. So we're very convinced that these clients are going to want Walgreens, and they'll have the luxury of time, hopefully, to find alternatives to do so. Matthew J. Fassler - Goldman Sachs Group Inc., Research Division: And then one other question, actually, on the near term. The payables ratio came down a chunk year-over-year. How should we think about the driver of that? And what direction do you expect it to move in? Wade D. Miquelon: Yes. Little bit of an anomaly of just the WHI sale, but a lot of it is just payables can just really flow month-to-month on the month end. And so this will work its way out. So it’s just really just an anomaly.

Next up with Crédit Suisse, we have Ed Kelly. Edward J. Kelly - Crédit Suisse AG, Research Division: Could you guys give us maybe your best update on how negotiations have progressed over the last 6 months with Express? And I guess what I mean by that is, has there been any movement whatsoever? And I've heard you kind of talking about a difference of maybe $4 to $5 per script, is that the delta that we're still looking at? Gregory D. Wasson: Yes. Ed, I'll start off with this. As I like to say all the time, we're in the business to fill scripts. And certainly, we need fair reimbursement, but we're always open. I will say that we made another serious attempt last week to get an agreement before January 1 to minimize patient disruption. Unfortunately, the response we got back was not very meaningful, and more importantly, the response was suggested to kick the can down the road past January 1, which, frankly, doesn't do anything to minimize the disruption for our patients, WellPoint's patients and Express Scripts' patients. So we're moving on, but we're always open. As I said, we're in the business to fill scripts at fair reimbursement, but -- that's the latest update I can give you. Edward J. Kelly - Crédit Suisse AG, Research Division: Greg, what do you mean by kick the can down the road as a response? Gregory D. Wasson: Past January 1. Our focus is to minimize the patient disruption, and there's going to be a lot of disruption in the marketplace beginning January 1. And we look to make one last attempt to try to prevent that, and the timeliness of that does not make sense for us. Edward J. Kelly - Crédit Suisse AG, Research Division: So we should consider that kind of like your last and best offer? Gregory D. Wasson: As I said, I'm always open. We're in the business to fill scripts, but that was our best attempt to try to prevent the disruptions. It's going to -- it's really going to happen in the marketplace January 1, and I hope the folks don't underestimate the disruption that this is going to cause. Edward J. Kelly - Crédit Suisse AG, Research Division: All right. So getting back to Medco, I mean, how should we begin to think about the Medco contract assuming obviously that Express does close on this deal? How has that weighed on your decision to not accept Express's offer? Gregory D. Wasson: I would say it hasn't changed our opinion one bit. Getting a bad deal with one party doesn't make you feel any better about getting a bad deal with 2. The reality is the people at Medco's network they value Walgreens network. They feel they're getting fair services for what we provide. And as long as we can keep compensated fairly for what we do, that's probably fine. But all the data suggests, those clients are going to want Walgreens in the network, and like I said, they'll have to look at all their options. And if it does happen with the luxury of time, we're very confident that we'll have that business one way or another as well. Ed, I think it's important to point out that, frankly, we're feeling more and more confident about this decision every day. We have plans, health plans, PBMs coming to us daily looking for the opportunity to differentiate themselves next year by having us in their network versus those that don't. And when you think about the fact that we absolutely are convinced that there is no significant cost savings, and in fact, by removing us, there may be increase in cost and the fact that you've got Walgreens in the network versus no without, we're encouraged by partnering with the folks that are out there looking to differentiate themselves and win in the marketplace next year. Edward J. Kelly - Crédit Suisse AG, Research Division: Then I guess what I don't understand is that you clearly make the case that it's not that much cost savings and a lot of disruption. And it doesn't really seem on the surface, if I just listen to this call, to make any sense that you're in this situation today, and yet you look at Express Scripts, right, and Express Scripts has shareholders to answer to as well. So I just -- I don't understand basically why we're seeing this today if all that is fair. Gregory D. Wasson: Well, clearly, their spread model obviously doesn't work if we don't pay them the rates that they want from us. But obviously, we just expected 2 principles of being compensated fairly for what we do and also not advantaging any one payer substantially versus others, unless there's a reason to warrant it. And as long as we stand by that principle, we're going to be just fine with or without them. And we would agree. We don't understand the fact. But frankly, Express Scripts’ desire to force narrow networks based on cost is only accelerating our ability to create deeper preferred partnerships with our partners based on both value and cost, and that's where we're headed. Edward J. Kelly - Crédit Suisse AG, Research Division: So just back to this Medco contract for a second. If you were to accept Express Scripts offer on that Medco contract, how big of a hit would that end up being? Because I -- I mean, I've heard from your peers that the Medco's reimbursements are actually better than Express Scripts' reimbursements. Is that right? Gregory D. Wasson: Well, we're not going to talk about any client obviously, but the fact that we have an issue right now with Express Scripts and not Medco tells you something. But we feel we get fair with all payers, including Medco, but we're not getting fair compensation with Express. And that's why we've done what we've done. Edward J. Kelly - Crédit Suisse AG, Research Division: All right. One last question for you. Just let’s take a step back for a minute and think about sort of longer-term strategy, right. Because it's kind of clear that drug retail seems to becoming a more challenging business. I mean, we hear your peers talking about reimbursement pressure. You've obviously got this dispute with what's potentially soon to be the biggest PBM out there. How has it changed the way you're thinking about corporate strategy? And what I mean by that is, do you view your business as maybe you need more scale and maybe M&A is a way to take care of that? Or do you look at the PBM retail model differently than maybe you have in the past? Gregory D. Wasson: Yes. Ed, good question. Frankly, I think what it does is get us more excited about our strategy and the need to even accelerate it and the opportunity to accelerate it. Frankly, as I said, this skirmish is moving the marketplace more toward us. The other hundreds of payers out there are looking to work more closely with us, and that's actually helping us. So we're excited about the strategic direction we're headed in. We're excited about the value the community pharmacy can and will play in the future, and frankly, we're accelerating. Wade D. Miquelon: Yes, I think Greg's completely right. I mean, in the bigger picture, we've got many, many tailwinds. We've got the generic wave coming on. We've got the aging population. But I think even more importantly, people are saying how can a valued community pharmacy and this 12% of spend help me and enable me to save on the other 88% of spend. And that's a huge opportunities for us to play, not only in pharmacy, but beyond that, into the health and daily living space that we're evolving to. So I'm optimistic on the space. I think we've got a great future ahead. We just have to play our game.

We'll move next to John Heinbockel, excuse me, with Guggenheim Securities. John Heinbockel - Guggenheim Securities, LLC, Research Division: Guys, couple of things. Have you heard anything at all from WellPoint or there's been radio silence there as it relates to you? Gregory D. Wasson: We've been in discussions with WellPoint as we are with all our payers over the last several months, but we can't comment specifically on what's going on with WellPoint. John Heinbockel - Guggenheim Securities, LLC, Research Division: All right. Secondly, you would think if Medco-Express goes through, there would be -- to some degree, there would be a value in you having a closer, an even closer relationship with Caremark. And obviously, if CVS didn't own it, that might be easier. Does that -- does the fact that CVS is a competitor on the retail side complicate that ability to have a closer relationship with them strategically, on the PBM front? Gregory D. Wasson: John, I would say no. As I said earlier, we're in the business to fill scripts. We're looking to partner with anybody who wants to leverage having us in their network. And frankly, I think the opportunity to have a wider, broader network, including Walgreens in Caremark's network, is an opportunity and advantage for Caremark. So we're absolutely interested and willing to work with Caremark. Wade D. Miquelon: Yes. I think common ground we both have, is we both have and both value community pharmacy. It's part of who we are, and I think that's a common ground we can work from. John Heinbockel - Guggenheim Securities, LLC, Research Division: If January 1 comes and goes -- I mean, people often ask, could you January 5 or 10 or whatever come to an agreement, obviously, you can come to an agreement at any point, but just practically, it almost doesn't make sense if we go past the 1st to do it until something is proven out right in theory. The white paper you guys have laid out, that has to get proven out. So it almost seems like if January 1 comes and goes, it's going to take a while for the 2 sides to get back together and work together again. It's not an overnight thing. Is that fair? Wade D. Miquelon: I think that's right. Gregory D. Wasson: Yes. John, as I said, we made our last attempt last week. So that we'd minimize the disruption January 1. I think once it crosses January 1, there's going to be a lot of disruption in the marketplace. And frankly, that's why we're locked and loaded, and we're moving on. Wade D. Miquelon: Plus, as we partner with others who are very eager to win new business, we need to picture that tactic if we cross that January 1 line and make sure that we work with them and help them continue these partnerships. John Heinbockel - Guggenheim Securities, LLC, Research Division: Do you -- have you done any work to see if you lose a script to somebody and it's gone for -- let's say, the PBM contract changes hands next year, but it's gone for 6 months or it's gone for a year, what's the -- maybe this has -- it has never happened before, but what's the percentage likelihood of getting that script back? Is it 50-50 after 3 months? Is it 25-75 after 6? Have you done any work on that? Gregory D. Wasson: Yes. John, let's put it this way, when we have -- had been forced out of plans in the past, what we have seen is that patients return much more sooner than they do if they choose on their own to go elsewhere. So there -- if the patient is forced to go somewhere and then we are back in that plan, they return to us much sooner than they do if they just chose that -- they made that decision on their own. John Heinbockel - Guggenheim Securities, LLC, Research Division: Yes. But what did you find in terms of timing though? How quickly -- what was the time lapse there for them -- for you to be back in that plan? Gregory D. Wasson: It varies by plan, by market and by market share. John Heinbockel - Guggenheim Securities, LLC, Research Division: All right. Then one final, just housekeeping thing. If you look at -- your pharmacy gross looks like down about as much as it's been in 2 years. How much of that was the Express reset? Was that half of it, or was that not that big? Gregory D. Wasson: I’ll just say it was material, but I won’t say more than that. John Heinbockel - Guggenheim Securities, LLC, Research Division: So there's reimbursement broadly? Wade D. Miquelon: It was a meaningful step-down in the number.

Next up with Cleveland Research, we have Eric Bosshard. Eric Bosshard - Cleveland Research Company: I'm just curious if you can provide a little bit of color on the retention number, the retention expectation in these next couple of months, specifically -- I know you've outlined where retention might be. But in January, February, March, what would you expect the retention number to be? Gregory D. Wasson: Eric, let me start, and then Wade can fill in a little more. What's encouraging is, as I said, I think, in my prepared remarks, the activity that we've seen in December with our partners is excessive compared to what a normal season is. That's encouraging. People that are now beginning to realize this could be major disruption for their employees are moving. We think that, that will continue on through January, February and March, as people begin to really realize what this will do. So we -- it's hard to put a number on it, but we think the -- typically, when there is almost no activity in January, February and March, there will be activity this January, February and March. Wade D. Miquelon: Yes. I would just say, you can see that we've got the 11.4% basically. They're kind of in the bank. Again, we feel pretty good about winning back a meaningful part of Med D. What is it exactly? We won't know. But it will be meaningful, we believe. This all other -- there's just a lot of plans. We don't even know what they are. And every day, we're getting notification of one more that we didn't know, so we don't know in that bucket what we don't know until we get there. And then of course, these other big blocks, what remains to be seen with DOD or WellPoint is -- I know but -- I think we feel pretty good about the progress we're making, and we'll keep making it. Eric Bosshard - Cleveland Research Company: Within sort of -- and I appreciate that the Part D you don't know until you get, I guess, into January and some of these other plans you don't know. But is it reasonable or logical, just trying to get a sense, that the January number is going to be at the lower end of whatever it's going to be? I mean, how -- I guess I'm just trying to figure out how it might step up from month-to-month, and if January could be this 11% number and then it would work its way higher from then. That's what I'm trying to better understand, but... Wade D. Miquelon: Well, I think it will continue. I mean, I've always said that whatever happens on January 1, in that period, we've always viewed that as that's going to be our toughest period, because we know, we’ll disproportionally get business back with other parties that value having us in their network. So whatever that is, it will continue to grow. The rate at which it grows, I think, remains to be seen, but all the market indications, everything we're seeing and hearing, everything our survey validates basically says that it's really a matter of time before people find an option to get what they want. Eric Bosshard - Cleveland Research Company: And then secondly, with these plans that you're negotiating directly with to get back into the plan, are you making any concessions to them? Is there any pricing change or reimbursement change that you're offering as an inducement for them, or is that part of the deal? Gregory D. Wasson: No, Eric. In most cases, once they realize what the rates are that we're offering, they realize those are pretty darn good rates. Wade D. Miquelon: Yes. I think exactly that's right, and I think it also affect those principle, too, of being fair with all the people that we deal with. Gregory D. Wasson: And, Eric, I'd just like to add the fact that in addition to our belief and the research we've done, that our baseline costs are extremely competitive. The opportunity for a client to take advantage of not only our generic utilization, but also our 90-Day at Retail offering, there are significant savings opportunity out there for clients. That if they were indeed given the opportunity to add a 90-Day Retail benefit on top of an existing mail benefit, there is -- there are ample savings for clients, and that's what we're pushing. Wade D. Miquelon: Eric, I'll say one more thing, too. I think what this thing has done is -- recall in the past, we haven't been able to talk or work with a lot of these clients directly. So they've never -- many of them have never known what our actual rates are. Now as many are coming and able to look at our direct rate, I would say the general feeling is a bit of surprise that our rates were much more competitive than they thought. And I think the thing is that now they're starting to understand the spread in the middle versus the actual rates, and I think that that's a good development. And I think we want people to know that we're very competitive with other pharmacies. Gregory D. Wasson: Unfortunately, a 1,000-employer shop -- Joe's garage shop has no idea what rate that Walgreens is giving to their PBM.

Next up, we'll take a question from Meredith Adler with Barclays Capital. Brian Wang - Barclays Capital, Research Division: This is actually Brian Wang on for Meredith. Just to change things up a little bit. Our question is actually around the front end. How long do you expect the benefits of the CCR initiative to last? And are you seeing above-average comps in year 2 of the CCR stores that were first converted? Gregory D. Wasson: Yes. Brian, we feel confident with CCR. You keep in mind, CCR wasn't just a static initiative. We're continuing to improve and add content, enhance product assortment, so forth. So we call it -- internally, we call it CCR 1.0, 2.0 and whatever, but -- so CCR was just a much-needed refresh, few reduction and some improvement of systems to help us manage our business better. That's been accomplished in 6,400 stores, and now we're moving on to the next big opportunities, which is content addition and marketing opportunities. Wade D. Miquelon: So exactly, I think Greg's completely right. I mean, we continue to raise our game in food, raise our game in beauty, raise our game in private label, et cetera and so forth. And so this is really just an evolutionary path, but we're very focused, and I think there's a lot of opportunity beyond 1.0.

Okay. So you expect it to -- as you make additional improvements, you expect it to continue to benefit results going forward, I would assume. Gregory D. Wasson: We expect to win in our front end.

That is all the time we have for questions. I'll turn the conference back over to our speakers for any final comments they may have. Rick J. Hans: Ladies and gentlemen, that's our final question. Thank you for joining us today. As a reminder, the company will report December sales on January 5. Our next investor event will be the Annual Shareholder Meeting in Chicago on January 11, and we report second quarter earnings on Tuesday, March 27. Until then, thank you for listening. Happy holidays to everyone, and we look forward to talking to you soon.

This will conclude this Walgreen Co. First Quarter 2012 Earnings Call. Thank you for joining us. Please enjoy the rest of your day.