Gerald Gradwell - SVP, IR and Special Projects Stefano Pessina - Executive Vice Chairman and CEO George Fairweather - EVP, Global CFO and Principal Accounting Officer Alex Gourlay - EVP of Walgreens Boots Alliance, Inc. and President of Walgreens

Meredith Adler - Barclays Capital John Heinbockel - Guggenheim Lisa Gill - JPMorgan George Hill - Deutsche Bank Ricky Goldwasser - Morgan Stanley Robert Jones - Goldman Sachs & Co. Alvin Concepcion - Citi Mark Wiltamuth - Jefferies Ross Muken - Evercore ISI

Good day, ladies and gentlemen and welcome to the Walgreens Boots Alliance Third Quarter 2015 Earnings Conference Call. At this time all participants are in a listen-only-mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder this conference is being recorded. I will now turn the call over to your host, Gerald Gradwell. Please go ahead.

Thank you Stephanie and good morning everyone. Welcome to our fiscal 2015 third quarter earnings conference call. Today Stefano Pessina, our Executive Vice Chairman and Chief Executive Officer and George Fairweather, our Executive Vice President and Global Chief Financial Officer will take you through our third quarter results. Also joining us on the call and available for question is Alex Gourlay, Executive Vice President and President of Walgreens. You can find a link to our webcast on our Investor Relations website at investor.walgreensbootsalliance.com. After the call this presentation and a webcast will be archived on our website for 12 months. Certain statements and projections of future results made in this presentation constitute forward-looking statements that are based on our current markets competitive and regulatory expectations and are subject to risks and uncertainties that could cause actual results to vary materially. Except to the extent required by law we undertake no obligation to update publically 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, Form 10-Q and other filings for a discussion of risk factors as they relate to forward-looking statements. As a reminder today's presentation includes certain non-GAAP financial measures. And we refer you to the appendix, to the presentation materials available on our Investor Relations website for reconciliations to the most directly comparable GAAP financial measures and related information. With that, I'll turn the call over to Stefano for some opening comments.

Thank you Gerald. Good morning everyone and welcome to our fiscal third quarter earnings call. The past six months have been significant for us in delivering on the benefit of the merger and structuring the business for the future, but there is a lot more to do. As you have seen today, I have been appointed by the Board as Chief Executive Officer, replacing the Interim appointment that I was previously fulfilling. The Board has decided that bearing in mind the pace of change and the amount that we have still to do, there is a benefit to stability at the senior level in the organization and to focus on the operational and strategic task before us, rather than appointing, orientating, and educating someone new to the business during the period. The role presents me with certain personal and logistical challenges, but with the support of the Board and particularly of Jim Skinner as our Executive Chairman, I have agreed to accept the appointment in the best interest of the company, my colleagues, and of course my fellow shareholders. Today, I am pleased to be announcing another strong financial performance, in deed the first quarter to reflect a full three months of the combined company. Although it may not always appear so from outside the business, it has been a very busy period for us since I last talked to you. As I have mentioned, our focus has naturally been on putting in place the changes and the restructuring we need in order to deliver the full benefits of the enlarged company and position the company for growth in the immediate long term. Given that the deal was consummated only six months ago, we are still in the early stages of this process, but we have been working hard and fast to deliver on our plan, in fact better than our plan, and I am pleased to say that the benefits of this work are already beginning to be seen in our results with reasonable growth in revenues and margins and continuous strong cash generation. Really, the first avenues in which you can see the impact are tight cost control and disciplined financial management, but I want to assure you that we give our operations the investment they need to grow and prosper. We have accelerated our cost reduction process and have reaped certain benefits earlier than expected in this quarter. Of course, we cannot extract these benefits more than once. However, the process of identifying benefits is ongoing, not final, so when we have completed this first wave of restructuring, we will reveal it and review all areas of our business to identify further potential cost saving. I must commend my colleagues throughout the company for their willingness and openness to accept change even when it is most uncomfortable in the interest of improving and growing our company, and I would assure them that change is a sign of life and if embraced in this manner, it becomes more of an ally than an enemy. It’s a reminder that while we must prioritize our work if we have to achieve everything we want to and promise to, we cannot ignore any element of the business when it comes to our [indiscernible] for efficiency and best practice. I will handover to George now for him to take you through the results for the quarter and give you some color on what I have just said. George?

Thank you Stefano. Good morning everyone, and good afternoon to those listening in Europe. Today, I will begin my remarks by taking you through key highlights of our fiscal 2015 third quarter results. I will then give you some insights into the performance of each of our three divisions before updating you on progress we have made in implementing our cost savings and continuing to execute our synergy programs. I will conclude by taking you through our updated guidance for fiscal year ‘15 and comment on our fiscal year ‘16 goals. As Stefano said, the benefits of the work carried out since Walgreens Boots Alliance was formed at the end of December are already beginning to be seen in our financial results, enabling us to deliver another strong quarter. Looking at the highlights, net sales for the quarter were $28.8 billion, an increase of 48.4% versus the comparable quarter in the prior year. Operating income on a GAAP basis was $1.4 billion and on an adjusted basis was $1.7 billion. The increase in adjusted operating income was driven by the consolidation of Alliance Boots as well as growth in our retail pharmacy USA segment. GAAP net earnings attributable to Walgreens Boots Alliance were $1.3 billion or $1.18 per diluted share, while adjusted net earnings were $1.1 billion or $1.02 per diluted share. This represents an increase of 59.5% in GAAP net earnings per diluted share and an increase of 22.9% in adjusted earnings per diluted share over the comparable quarter in the prior year. Net interest expense in the quarter was $151 million and our adjusted tax rate was 30%. Finally, the average number of diluted shares outstanding for the quarter was $1.1 billion. This includes the cost of 144 million shares issued on the 31st December as part of the second step consideration for Alliance Boots. It should also be noted that the third quarter results last year included three-month equity earnings as a result of Walgreens’ 45% interest in Alliance Boots compared to fully consolidated results in this year's third quarter. Now I will take you through the walk from GAAP diluted EPS to adjusted diluted EPS. GAAP earnings of $1.18 per diluted share for the quarter reconciles to adjusted earnings of $1.02 per diluted share. The net adjustment of $0.16 per share reflect additions of $0.05 of LIFO provision cost in retail pharmacy USA, $0.06 of amortization of acquisition-related intangibles, and an additional $0.11 of restructuring related costs, from our cost optimization and store closure programs. These additions were more than offset by removal of $0.29 gain on our warrants to acquire Amerisource Bergen shares and a net 9% gain from special items, which include the release of a capital loss valuation allowance totaling $0.12 combined with a $0.01 loss on the sale of Walgreens infusion services, and $0.02 from an adjusted tax rate true-up. So, now I will take you through the performance of each of our divisions in the quarter. To remind you, our results are reported in three segments; Retail Pharmacy USA, Retail Pharmacy International, and Pharmaceutical Wholesale. The segmental reporting includes the allocation of synergy benefits, including WBAD, as well as an allocation of corporate related overhead costs. Responding to feedback received at our Analyst Day in April, you will see that we are providing additional detail on segmental performance within the press release and in this presentation. This quarter, we have provided gross profit, SG&A and operating profit on a GAAP and adjusted basis for each of our segments. We plan to continue this practice going forward. So now let's start with the Retail Pharmacy USA segment. Retail Pharmacy USA total sales for the quarter were $20.4 billion an increase of 5.3% over the third quarter in the prior year. Please remember of course that we sold the majority stake in Walgreens infusion services on the 7th of April. With our minority position our share of earnings in the company now flow through the post-tax earnings from equity method investments in the income statement. Sales in the division, on a comparable store basis, increased by 6.3%. SG&A on a GAAP basis was $4.5 billion and on an adjusted basis was $4.3 billion. We continued to see strong progress in controlling SG&A expenses this quarter, including benefits associated with our cost savings program. This is a significant driver, of the quarterly year-on-year performance. As a result GAAP operating income for Retail Pharmacy USA was $1 billion while adjusted operating income was $1.3 billion. So looking now at the pharmacy part of Retail Pharmacy USA in more detail; comparable store sales for pharmacy were up 9.1% for the quarter. We sold 226 million prescriptions, including immunizations on a 30-day adjusted basis. That was an increase of 3.8% over last year's quarter with prescriptions filled in comparable stores up 4.1%. We continue to see a positive impact and further growth in Medicare Part D scripts along with positive underlying share trends. Our retail prescription market share on a 30-day adjusted basis increased to 19.3% in the quarter, up 20 basis points. The benefit of positive sales growth was however substantially offset by Pharmacy gross margin pressure, consistent with our expectations. Retail product sales increased by 2% in total, comparable store sales increasing by 1.6%. The growth in retail sales was driven by performance in key destination categories, including health and wellness. We're pleased with our progress in driving profitable sales growth and margin expansion, while at the same time focusing on operating efficiencies and focusing on working capital efficiencies. Additionally we continue to enhance our successful Balance Rewards program by recently releasing Balanced Rewards with everyday points. We now provide our active customers with a more consistent platform to receive loyalty points on most pharmacy and retail product transactions. We also encourage healthy life style choices by awarding points for positive health and well-being decisions. So turning now to the results of our Retail Pharmacy International division; for Retail Pharmacy International division pharmacy led health in beauty retail businesses in eight countries. At the end of the quarter we operated 4,565 retail stores and adding -- net increase six doors during the quarter. As a reminder our biggest operations are Boots in the UK followed by Mexico. We've also retail pharmacies in Chile, Thailand, Norway, The Republic of Ireland, The Netherlands and Lithuania. Total sales in the division for the quarter were $3.3 billion. GAAP operating income was $205 million, while adjusted operating income was $249 million. Adjusted operating margin at 7.6% for the quarter was 1.5 percentage points higher than in the second quarter, which remember included only January and February performance. The margin is typically lower in these early months of the year reflecting the seasonality of sales. So now let's look more closely the performance for the division. On a pro forma constant currency basis comparable store sales growth for the quarter was 3.1%. This reflects Boots UK growth of 2.4% complemented by higher growth in emerging markets, most notably in Mexico and Chile, where we are making good progress in integrating these businesses, acquired by Alliance Boots in August 2014. In the UK Boots resale sales were driven by good performance in both the beauty and retail health care categories. Orders on our UK website at boots.com and orders during the quarter were up approximately 50% over the same period last year with approximately two-thirds of our website orders collected in store. At our Analyst Day back in April we talked about the importance of our product brands. We're very pleased with the growth in sales during the quarter of No7, our award winning beauty brand. This was in part due to the May launch of a new marketing program in the UK, the No7 Protect & Perfect ADVANCED Serum. We were able to state for the first time in the UK that this innovative product was the first serum clinically proven to deliver ground breaking anti-wrinkle results that get even better over time. As well as developing our existing product brands we continue to add brands to our portfolio, which resonates with our customers. Following on from the acquisition of Soap & Glory last year we are delighted to announce today that we've acquired Liz Earle from Avon. Liz Earle is an award winning premium skin care range that uses naturally active ingredients and is recognized as one of the leading botanical brands in the UK. So turning now to our Pharmaceutical Wholesale division. Pharmaceutical Wholesale division total sales for the quarter were $5.7 billion. On a pro forma basis, which assumes constant currency and excludes acquisitions and disposals, sales increased 0.2% compared with the same quarter in the prior year. As we discussed in the last earnings call, Wholesale performance in any quarter is impacted by performance in larger geographies, including the UK, Germany, France and Turkey as well as by the unique business model. GAAP operating income for the division was $162 million, while adjusted operating income was $171 million. Adjusted operating income margin was 3%, broadly flat versus the second quarter and consistent with our expectations. The key driver of profit growth continues to be our synergy program. Net synergies in the third quarter totaled $194 million, making a total of $504 million for the fiscal year-to-date. As we've said before synergies this year continue to come primarily from our drug procurement activities. As you can see from the numbers, we're on track to reach our target of at least $650 million of net synergies in fiscal year 2015. For fiscal 2016 we continue to expect at least $1 billion of combined quantifiable net synergies. As we work increasingly close together as a combined management team, there are of course an increasing number of other synergies being identified and actioned, many of which are simply not practicable to quantify. Consistent with our prior reporting these synergies are allocated across each segment and do not include any benefit from our relationship with the AmerisourceBergen. At the same time as driving our synergy program, as you know we are very focused on costs. As previously announced we have a target of $1.5 billion goal of cost saving to be delivered by the end of fiscal 2017. The expected pretax charges associated with this program as previously stated are between $1.6 billion and $1.8 billion of which the cash component is expected to be approximately 60%. Good progress was made during the quarter in reorganizing our retail pharmacy USA field operations, but we're continuing on the optimization of the division's corporate office. Of the approximately 200 planned U.S. store closures in the program nine stores were closed in the quarter with approximately 70 to 80 additional stores planned to be closed by the end of the fiscal year. We've also reduced the IT cost structure in the USA to help enable significant store system investments over the coming years. In addition, during June we announced a reduction of approximately 700 non store-based roles in Retail Pharmacy International. During the quarter we incurred pretax charges of $160 million on the program. These comprised $102 million of asset impairments, $34 million of severance cost and real estate costs of $24 million. So moving on now to cash flow and the deployments of capital. GAAP operating cash flow was $1.8 billion in the quarter and $4.2 billion in the first nine months of the year. Free cash flow was $1.6 billion in the quarter and $3.3 billion in the first nine months of the year. Net debt at the end of the quarter was $11.8 billion. Investing to drive future growth is our first priority for capital deployment, both in terms of capital expenditure and selective M&A. During the quarter we invested $247 million in capital expenditure, making a total of $890 million for the first nine months of the year. Key areas for capital investment continue to store investments as well as IT and digital capabilities, which are vital to building and maintaining a sustainable competitive advantage and are increasing Omni channel work. To some degree this quarter disproportionally benefitted from the imposition of stricter capital investment controls. And while we expect to maintain a rigid control on capital expenditure to assure appropriate returns on every dollar we spend we will clearly not deprive the business of the investment it needs to thrive. You should therefore expect to see future quarters return to a slightly higher level of capital expenditure than we are reporting today. We remain focused on generating cash through working capital efficiencies, particularly in Retail Pharmacy USA. A primary area of focus is inventory management, both in pharmacy and retail products. For the quarter we improved our inventory days of supply in the U.S. by approximately six days versus the prior year quarter. We continue to see further opportunity for working capital improvements over time. At the same time we are working hard to optimize our real estate assets, including carrying out sale and lease back transactions. In the third quarter we executed approximately $300 million of such transactions. As we have said previously our philosophy is to run an efficient balance sheet. As such we completed approximately $237 million of share repurchases in the quarter against our $3 billion authorization, bringing the total purchases under this program to $331 million. The program is ongoing and we remain committed to completing the plan by the end of fiscal 2016. In addition we announced today that in order for us to manage our balance sheet we are intending to redeem legacy Walgreens bonds with relatively short periods until they expire for the total principal amount of approximately $1.75 billion. This redemption will be funded from existing cash resources. You will see that cash and cash equivalents totaled $4.4 billion at quarter end, so you have the capacity to do this and continue to exercise on our share repurchase program. So turning to the dividend, we announced today a 6.7% increase in our quarterly dividend to $0.36 per share. This raises the annual rate from $1.35 per share to $1.44 per share. We remain committed to a long-term dividend payout ratio target of 30% to 35%. So now, let me talk about the full year outlook for fiscal 2015. In our second quarter earnings release we had issued an adjusted EPS guidance range of $3.45 to $3.65 for fiscal year 2015. Given our solid third quarter results and increased visibility as we look to the year-end we are pleased to both increase and narrow our adjusted EPS fiscal year guidance to a range of $3.70 to $3.80. This range assumes adjusted interest expense of approximately $150 million in the fourth quarter, a full year adjusted tax rate of approximately 29%, a fiscal year diluted share count of approximately 1.05 billion shares and estimates for foreign exchange rate that reflect current market rates over the balance of the fiscal year. I remind you that when we issued our fiscal year ‘15 guidance in April we viewed the second half of the fiscal year differently than the first half. Specifically we indicated that adjusted earnings per diluted share would be lower in the second half, with the third quarter being higher than the fourth quarter. As we update our guidance this still holds true. We expect quarter four adjusted earnings per diluted share to be sequentially lower for the following reasons. The primary component is seasonality, which impact sales and product mix. The summer months tend to be our weakest, particularly in our retail pharmacy USA segment. Within the U.S. we tend to see sequential declines in the growth of both pharmacy volume and retail product sales. Also as we continue to work through our cost plan in the U.S. the phasing and timing of certain expenses will impact the fourth quarter relative to the third quarter. So moving on to fiscal year 2016, we are reaffirming our previously stated adjusted EPS goal for fiscal year 2016 of $4.25 to $4.60. This range assumes that annual adjusted tax rate in high 20s, a full weighted average diluted share count of approximately 1.1 billion and no significant changes to current currency exchange rates. Please remember of course that since we established the goal a year ago we’ve seen material appreciation of the dollar. As you know, we have currency translation exposure based primarily on movements in the Pound Sterling versus the dollar. And as a reminder we estimate that a 1% move in Pounds Sterling versus dollar from current levels would impact our adjusted EPS by approximately $0.01 per share. Given the current situation in Greece where we fortunately have no business interest we anticipate a certain level of volatility in the currency markets in forthcoming months. So with that I will turn the call back to Stefano.

Thank you, George. So I hope that you will agree that these are a very solid set of results. This level of [ph] -- and we are far from being complacent about the challenges we face and the hard work it will take to deliver everything we want and that’s our mission. But we are making good progress and traveling in the right direction. And I believe all of my colleagues recognize the challenges and work will be needed to overcome them. But are as convinced as ever about the immense potential of our company as a global pharmacy-led, health and wellbeing enterprise. We are in markets that are changing, here in the U.S. where you are seeing this quite dramatically. But as I have said many times that we are at the beginning of a new chapter for our company and are actively reviewing every opportunity that the changing environment offers us, as we work to deliver the true potential of our company. I strongly believe that we have a significant role to play in shaping the future of our industry. I thank you for your continued support and but also acknowledge that the best way to thank you is to deliver on our plans. And I can assure you we fully intend to continue to do so. With that I think we will open it up for questions, Gerald?

Thank you. Stephanie you want to take over?

Thank you. [Operator Instructions]. Our first comes from Meredith Adler with Barclays. Your line is open.

Thank you very much and I'm asking questions for myself and Eric Percher, who is not available today. I think our main question would be talking about the big difference, the spread between the growth in pharmacy scripts and the growth in dollars. Maybe you could talk a little bit about what the drivers are, some of it is Hep C, but maybe you could talk a little bit about inflation in both branded and generic drugs. And then I will have one other question.

Good morning. Alex here. Thanks for the question. Yeah, the inflation we're managing the effect of that inflation pretty well in the business. We have very good plans and the team has done a good job to get that done. So one of the difference in the space we are seeing is generic inflation, but we are managing that effect really pretty satisfactorily. And that of course is built into our future guidance as well.

Would you describe inflation in branded pharmaceuticals as a positive for the margin?

I think it's marginal at the moment in terms of that. But again, for example, slight improvement because of generic -- as generics come in the market, both this year and next year. But again, the key thing here is that we forecasted this, we're planning it, and it’s really consistent with our expectations.

If I can add something, you have also to take into account that we have different businesses in our company. And some of these businesses like the wholesale business or like WBAD are taking advantage of certain inflation.

Okay, that's very helpful. Thank you. And then I just have a follow-up question to talk about on the front end margin improved and I think you've talked about, not just the operating margin but the gross margin. Maybe you could talk a little bit about changes that you might have made in terms of promotional strategies or the way you are marketing that might have driven a better gross margin in the front end.

Yeah, Meredith, it’s Alex again. Yeah, we've been really on this strategy now for five quarters. So we're pleased with the progress we're making. The key things that we have done is that we stopped really promotions that were driving sales, particularly in some consumable categories, but not really helping the product at all. And we are focused much more on the mix, and making sure that we're much more focused on really the health and wellness in beauty care categories, and that's really proven beneficial and as George said in the script today, we have launched a new platform called Everyday Points and that is to make sure again that people who are coming to us more regularly and are picking up on the destination categories are getting a better platform and more reasons to come back to Walgreens. No, it's still early days. We have a lot of work to do and a lot of opportunity ahead of us and it will be step by step process, but the basic things we're doing is reducing unprofitable promotions and making sure that we focus more investment in our best customers and more investments in our destination categories.

Great, thank you very much.

Our next question comes from John Heinbockel with Guggenheim. Your line is open.

So two questions, one on Walgreen USA costs, what would you guys peg the normal increase, annual increase in SG&A at? It would be 2% to 3% absent cost cutting and then of the $1.5 billion that you identified, did you see any of that in the third quarter, and how much, and what do you think you see in the fourth? And then just lastly it did look like pharmacy margin improved a decent amount sequentially, which was a little surprising, what were the couple of things that may have driven that?

Alex, maybe you can.

Yeah, there are a number of questions there John. So good morning again. So starting over with the cost question, I think as George said really, clearly, we made solid progress against our $1.5 billion cost program, and of course we started a bit earlier in the U.S. in terms of what we announced. And I would say that we are seeing SG&A in the U.S. business down slightly year-on-year on a comparative basis, which is pleasing but also really what we had planned to do. And I think as George also said there is a bit of phasing here between quarter three and quarter four, and importantly from a continuation of business point of view, we are in quarter four this year. We're making sure that we'll continue to invest in the things that customers value the most from us to make sure we keep the growth going forward and investing more in our customers and more in the things that customers sees. Again finally on the cost side, again as George has said, we started some of the restructuring, we closed, I think George said, nine stores in the previous quarter, and we are on track to close another 80 to 90 in the period ahead. Again, that's very much on plan and benefits still to come over a period of time.

I think John, you also asked a question on pharmacy margin, and really just reinforcing what I said earlier, we did see in the U.S. the positive sales growth but that was substantially offset by the pharmacy gross margin pressure, but that was absolutely consistent with our expectation, so there is no change from what we were expecting when we last talked to you.

Did it get better sequentially or no, right.

We're talking about here -- obviously we're reporting John on year-on-year, quarter-on-quarter, but it really was -- it was as we expected. I mean when the renewals come through and what we're seeing is what we were expecting.

The market, it’s Stefano here, of course the market it's evolving. What is important is to be able to anticipate what happens and to take this into account when you budget and I believe that this year we are doing exactly this. We are absolutely aligned with what we were expecting.

Okay, thank you.

Your next question comes from Lisa Gill with JPMorgan. Your line is open.

Hi, thanks very much and good morning. Stefano, you talked about the challenges that the U.S. market and other markets are facing. We hear CMS talking about 50% of payments moving towards what they are calling fee for value. Can you talk about strategically, where do you think Walgreens needs to be positioned, we're seeing lots of consolidation, whether it's managed care or other players, is it that you need to be the biggest retail provider in the U.S. and therefore best positioned to partner with those, that are taking on risks, do you view yourself as more of a risk bearing entity overtime, how do you think about your relationship, whether it’s with managed care or PBMs and strengthening those going forward?

I have said many times, that I believe that the American markets will go through a substantial wave of consolidation horizontally and vertically. I have said very clearly that we want to be part of this, at the right time with the right partner. We are open to any kind of combination which could improve the value of our company and we are looking actively around us to understand which is the best option for us. But please don’t forget that we are looking actively not just in the U.S. but even in other countries because we consider ourselves a global company.

And would you say that the priorities are more U.S. driven or globally driven or does it depend on the specific opportunity that comes across your desk?

Well, the priority is that the deal that you can do, and it depends where you can fit.

Okay great. And then just my follow-up question would just be around the synergies and you talked a lot about them coming from the procurement side of things. Can you maybe talk about where you think you are George, or Alex or Stefano as far as what inning are we in, and as far as on obtaining that the synergies that you expected from WBAD, are we close to getting the full benefit from them or is there still a good portion of the future synergies that will still come from the procurement side?

We are absolutely inline with what we were forecasting and maybe George you can give more details, but we will do what we were expecting and what we announced.

What I would just add to that is what I said is that we are very much on track to achieve the target this year and our -- the goal of $1 billion, from what I would describe as hard quantifiable synergies that we can measure. But what we are really seeing as the -- now that we are a merged organization, we are seeing lots of other areas of best practice and ideas that we are sharing, that we are implementing. But clearly as we become more and more integrated these are the simply the sites that you cannot quantify to the standard that you can put in a number and we are very much moving through this, into this phase. And those types of synergies, as we know from previous transactions I remember from the merger of Alliance UniChem and Boots, these are very important synergies and we can see them time and time again we are moving people around more and these are really what will help us to become a much, much stronger organization.

I would add George, that as you said we are thinking of the buying synergies -- certain synergies which are quite evident and we can easily forecast. But there would be for sure, as you are saying, George many synergies that will appear evident, become evident in future because when you put two companies together you find ways for years, I would say, for three, four years you find new ways to deliver synergies.

Okay, great and congratulations Stefano on becoming CEO. I am glad that they named you so.

Our next question comes from George Hill with Deutsche Bank. Your line is open.

Good morning or good afternoon guys, based upon on where you are and thanks for taking the questions. First one is for Alex. People have jumped in a bit on what margins have looked like. I guess we are further along in the year. Can you talk about what payer negotiations are looking like for kind of 1.1.16 [ph] contract restarts and I guess if things are proceeding according to expectation and how that squares with the fiscal ‘16 guidance that you guys have provided?

Hi George, yeah absolutely. So really as we expected and square on the guidance that we have given as well and I think the team have done a good job again in anticipating and making sure that we’ve projected well and managed, as you said, in a very good way.

Okay and then a follow-up I guess for George and for Stefano, which is, we're not too far away now from March of '16 when the first tranche of the ABC warrants become exercisable. I guess should we think about whether not there is any contribution from ABC equity earnings built into the fiscal '16 guidance and does Walgreens want to be a larger stock owner of Amerisource Bergen or should we think of the warrants as a value creation vehicle for Walgreens? Thank you.

When we did the deal, we did the deal of course to improve our profit but also for strategic reasons because as you know we have always believed that a better coordination between wholesalers and retailers again create quite substantial synergy. So the reason for the deal are still there. So we will -- we have announced that what we intend to do and at the right time you will see the effect of these agreements.

Really not a lot to add to that. I mean we will look at the right time, take the decision at the time. In terms of the accounting again, we will also look at that at the appropriate time. But from where we are today that when we direct the size of the warrant spend we anticipate being able to account for that as an equity method investment but clearly that will be -- it would have to be confirmed and discussed as to where we direct that.

Okay, thank you.

Our next question comes from Ricky Goldwasser with Morgan Stanley. Your line is open.

Hi, good morning and congratulations on the quarter. Just a couple of questions here. First of all, just George you highlighted some of the differences between this quarter and upcoming quarter. Can you just share with us more details on the headwinds versus the tailwinds that we should be thinking of between the fourth and third quarter?

I think really the first point to come through, as I sort of touched in the prepared comments was the primary component that we got to think about is the seasonality between the quarters which impact the sales and product mix. I'm thinking about the summer months very much tends to be our weakest months particularly in Alex’s business at Retail Pharmacy USA segment, where we would see typically the sequential declines in the growth of both pharmacy volume and retail product sales. The other factor is when the phasing and timing of certain expenses are, from in terms of the fourth quarter relative to the third quarter and clearly when you go through the sort of programs that we are letting you try and [indiscernible] with you, but equally you need to keep everyone very focused on the business and driving through all the programs that Alex is working on. So there is always an element of timing on those where they eventually and how quickly we can deliver some of those. We are clearly going as fast as we feel we can in a straight line. There’s other areas I talked about, I mean clearly currency is a factor, as I touched on. But increasingly we have in terms of the internal factors we got pretty good visibility to our forecasting process and hence we're confident to both narrow and increase the guidance range for this year.

And when we -- you talked about, I think shutting -- closing down another 70 to 80 stores in the upcoming quarter. So should we see that through the gross margin line or the SG&A line?

Yeah, you see that particularly through the SG&A line. Obviously we lose a few sales, but mostly sales we’ve successfully transferred into adjacent stores. I think as you know we also closed a number of stores last year and we got up [indiscernible] more and we feel very confident of those. So the SG&A will come down and overall we will benefit and we will lose a few sales and a few bps of margin.

Okay, great and then one market related question. We are seeing a lot of kind of like your competitors making strategic moves around specialty. When you think about kind of like specialty as an opportunity for you, do you think that this is something that you can build internally by leveraging retail infrastructure in the U.S.? Or is this something that you think you need to go outside to add these capabilities. And also how you think about the specialty opportunity, U.S. versus ex-U.S. in Europe?

We don't exclude any opportunities. We are looking around, as I -- as we have said many times that we are analyzing all the opportunities for growth that we have. And at the right time and if the right opportunities come we'll be able to face them.

Yeah and if I can also add as well, Ricky that we are very focused on organic growth as well. We have got a very good model in the USA in community pharmacy and we're building relationships there with the doctors and with also you need access to get [indiscernible], also, and there’s like HIV and cystic fibrosis we have opportunities that we can grow organically. So again we are not talking. This is an important business for us, and we are growing organically specifically in the USA.

Okay, thank you.

Our next question comes from Robert Jones with Goldman Sachs. Your line is open.

Thanks for the questions and Stefano congratulations on the appointment. Obviously a number of moving pieces, but just really trying to get a better gauge of the underlying core U.S. business. And you guys talked about making good progress on the restructuring program, but is there any more details you can share with us on the savings that you've been able to generate to date? And then any break down of those savings, obviously across the segments would be really helpful in us being able to track the underlying business a little bit better.

We have an effort to be as clear as possible.

I really appreciate, I think here is what's [indiscernible] coming through and obviously what we said at the last time we were -- it was not practical for us to work through and try and restate everything on a comparable basis at the cost side and the margin side both. So that's why we tried to give you the adjusted figures. Clearly in terms of the cost savings program that is the big -- it is primarily in retail pharmacy USA, as we said the last time, but we are progressing in international but that is much, much more further on the program. But we're very much on track with where we expect to be, as I said earlier it won’t necessarily [ph] go in a straight line and a disciplined structured way. That's why we tried to give you little bit of a feel when you're actually looking at comparability I tried to touch on the retail pharmacy international margin, which I know some of you felt was perhaps a little bit lower than you were expecting in the second quarter but it only had two months in and that is a seasonable business. And the last quarter was the time when we seasonally we had lower sales, clearly we come out to the important Christmas time then we get the leverage of the fixed cost base, and that when the net margins will start -- will reflect that when you get seasonality. I do appreciate, how tricky it is to model which is why we gave the guidance going forward.

No, I respect that too and I understand the comparability year-over-year is tough. I guess I was talking more specifically about just identifying what the cost cutting was in the actual quarter, this quarter itself. And maybe I missing something but I wouldn't think that would be that difficult to identify store closing, headcount reduction.

If I can maybe help a little bit, I mean we've done a good review of all of the projects that we are focusing in Q2. I think we've been really clear within the business, that we are focusing back in our core business of retail pharmacy frontend products, specialty. And therefore all of the other areas where we are building out, maybe potential future products we looked at to reduce the spend in some of these areas, to get more focused back on the core business. So that really has been visiting our projects and we are really very confidence that the four [ph] and the $1.5 billion in savings that can be achieved.

Yeah, fair enough.

To really reinforce what Alex just said, we've been putting a lot of internal work into the whole process of how we evaluate new initiatives, how we track initiatives. The graphs are not working and then you stop them, you don't let them drag on, if something really isn't working, you give it a good go and you stop it, new initiatives we've got a lot of, what I would describe as financial rigor that has been increasingly put in place really over the last 12 months. Alex you have put a lot in place when you took overall responsibility for the Walgreens business and we're continuing to do that. And I think it's that rigor that we're seeing then in terms of some of the SG&A coming through.

That makes sense. And I guess just one quick follow-up on Part D network specifically, there was a big initiative from your predecessors to get deeper into some of these preferred networks. I am curious how the economics of those networks have compared to your expectation. I know it’s only about six months in. And then based on that feedback, any thoughts on your continued participation in these preferred networks going forward. Thanks.

Yeah, hi, it’s Alex again. No, this is a really important customer, a really important market segment, it’s a segment that’s growing rapidly. So we remain very committed to this and in terms of, as I've said before we are in terms of next year’s plans have almost completed all the contracts to their expectations in terms of margins that we planned for. So very committed to this business and we are [indiscernible], next year. Importantly for us of course we are only at the end of first stage. The second stage we just have, how do you make sure that you really look after the patients and the customers who come to your pharmacy and make sure you get the appropriate level of pull through in volume for your assets and that's the bit we are now turning attention to.

Our next question comes from Alvin Concepcion with Citi. Your line is open.

Hi. Thank you. Congratulations on another great quarter and congratulations, Stefano. My question is just really around beauty, just curious how the tests are going in New York and Phoenix, are there any findings you could share from that? Particularly interested in if you think you're getting a sales lift in the aisle and if you're seeing much traction from No7.

Of course you know the importance that we give to our brands and No7 is having a fantastic brand in the UK and internationally and it's one of our really hope for the future in daily wear [ph], but maybe Alex you can say what you are doing now for No7 and what you are expecting from it?

Yeah. We rolled No7 in to just over 400 Walgreens and Duane Reade stores in Phoenix and then in New York City. And the Phoenix is just over 12 months old and we will be able to measure the impact both on No7 sales, on Boots brand product sales and also on the beauty piece, and we're pleased with what we're seeing. So we are now trying to plan for the next stage of evolution of No7 and the Boots brand in Walgreens and the Duane Reade in the USA and we'll come out with these plans when they're ready, but we are pleased with the results. Personally I am also pleased that we were able to acquire [indiscernible] I think in the previous quarter and also here this morning Liz Earle, going forward the more unique products that we're able to get into the Walgreens beauty and healthcare offer than more unique that will make our offer going forwards in what is a very competitive marketplace. So again very pleased with the brand’s performance, very pleased with the progress that Ken Murphy and the team has made and the brand organization is still very young and looking forward to getting these unique products in front of our customers in Walgreens in the future.

And as a follow-up what were you thinking for the timing of the full rollout?

Yeah, we'll comeback with that. I mean we're really, I said before, we're just doing the work now, we’ve got to get this right. This is a bigger space, it’s fantastic brand as Stefano said in Europe and is growing really well in Europe. So we'll comeback when we're ready but we are not in position.

Great. Thank you very much.

Our next question comes from Mark Wiltamuth with Jefferies. Your line is open.

Hi. I just wanted to inquire how comparable the US SG&A number is on a year-over-year basis, because it looked like there were some overhead allocations that changed versus a year ago.

I mean that they're not directly comparable, because clearly the -- with the corporate expense for example, as I said in my presentation, has to get allocated across the three divisions. Clearly we are also allocating the synergies which we talked about in terms of where the economic benefit is. So those results unfortunately are not directly comparable. And so that -- they come with a very big health warning. But I think what we have said is we are very pleased with the progress that we're making in reducing SG&A and we're very much on target to deliver the program that we announced in the last quarter.

So the numbers that are presented were down, but I guess on an apples-to-apples basis was the SG&A percentage down?

I'd say on an apples -- there isn't apples-and-apples basis. That's the -- I guess that's the challenge that we got and simply and I think we said at the time we did the deal our priority was to get the deal done quickly. But one of the things that, that did enable us to do was to go back and rework everything on an apples-and-apples basis. But we're making good progress, that's the key message that I can see. But I know [indiscernible] it’s not getting everything [indiscernible].

Okay and I understand you're not announcing the international segments year-ago performance as well. But is there anything you can give us in terms of health indicators for margin and profitability on those international segments even though you don’t have a GAAP presentation for us.

I think we can say that we're pleased with the performance at Retail Pharmacy International. Obviously Boots is the largest component that we're delivering solid performance in a market where there are quite a lot of challenges in that market that you see what's happening in some of the supermarkets sector for example. But I think this demonstrates that the strength of the offer, it's very important, of the differentiated retail offer particularly in beauty where Boots is renowned. We got out a very strong loyalty card program out. So obviously the great work that’s been done here and taking Balance Rewards forward, the advanced card program equally important in the UK. And then the piece what I touched on my presentation is really Omni channel where ordering online through Boots.com and picking up in store is important and of course with the geography that we got in the UK and the 2,500 points we can do that. And we can actually leverage our wholesale organization for delivery and we're able to do that in a profitable way that really meets the expectations of our customer. So that's the key point -- component in that. And wholesale, in any year like being in a number of markets you get markets that perform better and markets that are more challenging. It’s just the way it always is but the division’s delivered a solid performance and as its continued to do for many years.

And just on the International Retail Pharmacy, there was some commentary in the analyst meeting that the margin focus for growth was really shifting away to more of a sales growth story. Was there gross margin declines as you go through that transition to driving sales?

We've not -- we've obviously not given the specifics on the comparability, because we don't have the numbers on that same U.S. GAAP, U.S. GAAP basis. But I continue to say that the business has performed solidly, and we are pleased with the performance in what's been a tough retail environment in the UK and that’s fundamentally important. On the NHS side, on the -- the pharmacy side clearly the government seeks to continue to contain growth in healthcare expenditure. And so we haven't seen the details of the settlement yet, that’s probably going to be towards the option, we’ll have to wait and see on the timing on that. But we continue to see pressure in that area as we've seen for a number of years. So no real change but that pressure continues.

Okay, thank you for the color.

Stephanie I think we have time for just one more caller please, if we could.

Our final question comes from Ross Muken with Evercore. Your line is open.

Hi good morning guys and congrats. So as you think about sort of the M&A landscape happening around you, obviously as far as you talked about lots of consolidation happening in managed care, we’ve seen it in generics, we’ve seen in the PDM space, where do you think, in terms of what is happening around you, it’s most relevant to kind of your business or what are you watching most? And how do you think, particularly on the managed care side any of the changes there, how does that make you think about your longer term positioning from a healthcare perspective in this market?

As I have said we can clearly see the need or the opportunity for horizontal and vertical consolidation in our industry and this is happening. In reality I believe that this is a good news for us because the consolidation, the horizontal consolidation will create a clear market and will give us more opportunities in future. What we will be able to do specifically is a little too early to say, but I repeat we want to be one of the players in this space and we see a lot of opportunities and the opportunities are really open along the chain, along the space of this healthcare industry.

And I guess just quickly, just staying on the M&A theme, and I will keep this to my last question, but you and your team have been remarkably savvy deal makers over the course of your long career, and have created maximum amount of value. How much of the challenge is it today with where global equity markets are from a valuation standpoint, obviously understanding the financing markets are wide open, but valuations are pretty elevated and so how do you think about that in the context of your capital allocation goals, particularly on the deal side? Does it argue to smaller transactions or a certain geography? I am just trying to get a sense for how that plays into your thinking and the timing aspects of it.

As you know we have been always [indiscernible] with potential acquisitions, so we will if we will have an opportunity we will analyze this opportunity very rationally and we will do it just if this will create additional value. It’s true the market is now quite bullish but it’s also true that the cost of the money is still quite low and there are other ways to create value, not just acquisitions, so we are analyzing all the opportunities. If we will see an opportunity which fit our strategy and which can create value we will take action.

Great, thank you so much.

Thank you.

Okay, ladies and gentlemen that was our final question. Thank you all for joining us today. Feel free to contact myself or Ashish if you have any further questions. I know some of you do. And with that thank you very much indeed. We will conclude our call. Thank you.

Thank you, ladies and gentlemen that does conclude today’s conference. You may all disconnect and everyone have a great day.