Gerald Gradwell - Senior Vice President, Investor Relations and Special Projects Stefano Pessina - Executive Vice Chairman and Chief Executive Officer George Fairweather - Executive Vice President and Global Chief Financial Officer Alex Gourlay - Co-Chief Operating Officer

Steven Valiquette - Bank of America Lisa Gill - JPMorgan Robert Jones - Goldman Sachs George Hill - Deutsche bank Mark Rosenblum - Morgan Stanley Eric Kutcher - Barclays John Heinbockel - Guggenheim Mike Otway - Wolfe Research Alvin Concepcion - Citi David Larsen - Leerink Eric Caldwell - Robert W. Baird Charles Rhyee - Cowen and Company

Good day ladies and gentlemen and thank you for standing-by. Welcome to the Walgreens Boot Alliance Inc., Third Quarter 2016 Earning Conference Call. At this time all participants are in a listen-only mode. Later, we will be hosting a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. Now, I will hand the conference over to Gerald Gradwell, Senior Vice President of Investor Relations and Special Projects. Sir, you have the floor.

Thank you. Hello, everyone, and thank you for joining us today. Welcome to our fiscal 2016 third quarter earnings call. Stefano Pessina, our Executive Vice President and Chief Executive Officer and George Fairweather, Executive Vice President and Global Chief Financial Officer will take you through our results today. Alex Gourlay, Chief Operating Officer of Walgreen Boot Alliance is also joining us on the call and will be available for questions. You can find a link to our webcast on our Investor Relations Web site at investor.walgreensbootalliance.com. After the call, this presentation and webcast will be archived on our Web site for 12 months. Certain statements and projections of future results made in this presentation constitute forward-looking statements and are based on our current market 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 the law, we undertake no obligation to update publicly any forward-looking statements after this presentation whether as a result of new information, future events, changes in assumptions or otherwise. Please see our latest Form 10-K and subsequent 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 of the presentation material available on our Investor Relations Web site for reconciliation to the most directly comparable GAAP financial measures and related information. With that, I will turn the call over to Stefano.

Thank you, Gerald. As you can see from our results, I am pleased to announce that we have delivered another solid performance. With adjusted earnings per share of $1.18 better than original expectations. We have also made further progress in positioning our company for the future. We are continuing to build strong business partnerships across our markets. In the U.S., we have made particularly good progress in developing a closer relationship with payers and PBM. In March, we exercised our first financial warrants in AmerisourceBergen purchasing common stock. We subsequently extended our pharmaceutical distribution and sourcing arrangements by [indiscernible]. ABC has agreed to make certain working capital investments in their relationship, and we proceed with additional capital investment in its distribution network. Our proposed acquisition of Rite Aid is progressing as planned. As you know, we are in the process of seeking a regulatory approval in parallel our integration team is continuing its work on preliminary planning. In June, we completed a $6 billion public bond offering to support the funding of the acquisition. Also in June, I am pleased to report that we achieved our $1 billion synergy goal for fiscal 2016 from Walgreens and Alliance Boots merger. June was quite a busy month for us. We've also changed our senior management responsibility to structure the company in a way that is more efficient following the successful integration of Walgreens Boots Alliance as we move to operating a unified company. To support me in my role we have created Co-Chief Operating Officer, Alex Gourlay and Ornella Barra, who will oversee the day-to-day activities of the company with the support of George Fairweather as Global Chief Financial Officer and Marco Pagni as Global Chief Administrative Officer and General Counsel and of course with the continued support of our other senior leaders. Over the past 10 years, Alex and Ornella have established an extremely effective working partnership and that created significant value for our company today. They will be instrumental in driving the operations of our company in the next phase of its evolution. This will allow me to focus even more on driving the growth strategy and developing our company. You can be assured; however, that these change will not in anyway reduce my scrutiny and expectations of our businesses and the team. Since the quarter end as you are seeing the U.K. referendum on Europe has created some uncertainty and volatility in our market. Our businesses and management teams have operated through main business cycles in many markets. Perhaps changes normal and the sign of life. We work with and manage it every day. Less volatility and uncertainty create issues that would be overcome, but they also provide opportunity for our company. It is our job to ensure that we meet these opportunities positively and position and structure our company to its best advantage. As events unfold and the uncertainty in the wider markets leave us all, I'm confident that we will emerge well-positioned as we enter more optimistic times. The progress that we have made to-date gives us a stronger platform from which to drive further efficiency. Meet the challenges of current volatility manual market and the potential wide economic impact these may have in many of the region we work in and puts us in an even better position for the company to deliver long-term success. Now, let me hand over to George.

Thank you, Stefano. I would like to start by pointing out that for the first time since the acquisition of Alliance Boots, we have fully comparable quarterly results. Net sales for the quarter totaled $29.5 billion, up 2.4% versus the same quarter last year. These were impacted by currency translation, net sales on a constant currency basis being up 3.3%. GAAP operating income was $1.5 billion, up 9.4%. GAAP net earnings attributable to Walgreens Boots Alliance were $1.1 billion and diluted EPS was $1.01. The decrease in both GAAP net earnings and net earnings per share was due to fluctuations in the fair value of our ABC warrants. Adjusted operating income was $1.8 billion, up 3.7%. On a constant currency basis, this represents an increase of 4.7%. Adjusted net earnings attributable to Walgreens Boots Alliance were $1.3 billion, up 14.7% and adjusted diluted earnings per share was $1.18, up 15.7%. Adjusted effective tax rate which we calculate excluding the equity income from ABC was 24.4%. The rate benefiting from revisions to the full-year tax rate forecast, including certain discrete items. We now expect the full year adjusted effective tax rate to be broadly in line with the year-to-date rate of 27.2%. For completeness, here are the numbers for the first nine months of fiscal 2016. These results are of course not directly comparable with the first nine months of the previous year. I will not go through them in detail, but you will see that GAAP diluted earnings per share was $2.88 was down 28.7%. This reflects a number of accounting factors, including the fluctuations in the warrants and last year's non-cash gain relating to Alliance Boots. On an adjusted basis, diluted earnings per share increased by 17.3% to $3.52. Turning now to our segmental performance, starting as usual with the retail pharmacy USA. Total sales for the quarter and retail pharmacy USA were $21.2 billion, an increase of 3.7% over the same quarter last year. Sales growth was driven by an increase in pharmacy, partially offset by the sale of a controlling interest in our infusion business back in April 2015 comparable store sales increased by 3.9%. As we expected, adjusted gross margin declined by 0.5 percentage points to 26.9% while the pharmacy margin being partially offset by retail products. Adjusted gross profit was up 1.8% to $5.7 billion and adjusted SG&A was $4.3 billion, an increase of 1.1%. As you may recall in the same quarter last year, SG&A was lower than normal. This was because we had a temporary pause in certain investments while we evaluated the returns being generated. We're pleased with our performance and we are well on track towards achieving our overall target savings from our costs transformation program. This program the vast majority of which is in the U.S., will deliver $1.5 billion by the end of fiscal 2017. Adjusted operating margin for the quarter was 6.5%, resulting in adjusted operating income of $1.4 billion up 4.1%. Turning now to look in more detail at pharmacy. Total U.S. pharmacy sales in the quarter were up 5.8%. We filled 235 million prescriptions on a 30-day basis including immunizations, an increase of 3.9%. This reflects our strategy of increasing script volume in our stores. On a comparable basis, pharmacy sales increased by 6%, scripts filled being up by 4.5% primarily due to continued growth in Medicare Part D volume. Our reported market share of retail prescriptions on the usual 30-day adjusted basis was 19.6%. Over the year ago quarter, this was up approximately 30 basis points. As we expected, gross margins were lower, mainly due to reimbursement rates and changes in mix partially offset by procurement efficiencies. Retail product sales on a comparable basis increased by 0.1%. This was primarily due to higher sales in the health and wellness and photo categories, partially offset by declines in certain convenience categories. As we've said previously, we are focused on expanding front of store gross margins and are pleased with the progress we've made this quarter. To further drive performance, we are starting to expand our differentiated beauty offering across over 1800 stores. And expect to complete this phase by the end of calendar 2016. Turning next to our retail pharmacy international division, total sales in the quarter for the retail pharmacy international division was $3.2 billion, an increase of 3.4% on a constant currency basis. Comparable store sales increased by 0.2%, clearly comparable figures are in constant currency. Adjusted operating margin was 8.1%, up 0.4 percentage points in constant currency. This resulted in adjusted operating income of $258 million, an increase of 8% in constant currency. Comparable pharmacy sales decreased by 0.7% due to Boots in the U.K. and the loss of certain institutional sales contracts in Chile. Boots U.K. comparable pharmacy sales were down 1% due to the negative impact of a reduction in government pharmacy funding that was expected. As you may know, the U.K. government has been consulting with the industry on pharmacy funding. The consultation period closed at the end of May and we're waiting to hear their conclusions. Comparable retail sales for the division increased 0.7% with strong performances in the Republic of Ireland and Thailand. Boots U.K.'s comparable retail sales increased by 0.6%. We were particularly pleased with the performance of our Sleek cosmetics brand acquired in November last year and No7 in April we successfully launched our new Lift & Luminate triple action serum. Turning now to our pharmaceutical wholesale division. Total sales in the pharmaceutical wholesale division were $5.7 billion. In April, we sold Alliance Healthcare Russia to 36.6 in return for a 15% stake in the combined group. Comparable sales on a constant currency basis excluding acquisitions and dispositions increased by 6.3%. This was ahead of our estimate of market growth weighted on the basis of our country wholesale sales. In a number of our emerging markets, sales growth was particularly strong. Adjusted operating margin was 3% level with the same quarter last year. Within the pharmaceutical wholesale division, we report a 16% share of ABC's net earnings. This is reported on a two-month lag the quarter included only two weeks of equity method income. Overall, the divisions adjusted operating income increased 4.7% to $179 million. On a constant currency basis, the increase was 7.6% of which 4.7% was for ABC. Next quarter we will recognize a full three-month share of ABC's net earnings based on their quarter to the end of June. Combined net synergies in the quarter from the strategic combination with Alliance Boots were $330 million. This takes a cumulative total up to the quarter end to $947 million. As Stefano said, since the quarter end, we've achieved our goal of reaching at least $1 billion of combined net synergies. Going forward, we will therefore not be breaking them out separately as we have said before. In the quarter, operating cash flow was $2.1 billion. This was due to our solid profit performance and favorable working capital cash flows. Cash capital expenditure was $247 million. This resulted in free cash flow of $1.9 billion. Looking to the full fiscal year results, we have raised the lower end of our guidance by $0.10. Guidance is therefore $4.45 to $4.55. This assumes no impact from the proposed acquisition of Rite Aid and related financing and already assumes currency exchange rates for the rest of the fiscal year. Looking forward to fiscal 2017, our current plan is to issue guidance in October when we announce our full year results. I will now hand back to Gerald. Thank you.

Thank you. Operator, could we now throw the call open for Q&A?

My pleasure. [Operator instructions] Our first question comes from the line of Steven Valiquette with Bank of America. Your line is now open. Please go ahead.

Thanks. Good morning, everyone, and congrats on these results. I guess a couple of things I wanted to touch on was, I guess first just on the renegotiation of the distribution agreement with AmerisourceBergen that was announced a few months ago, seeing that was maybe driven by some shifting of cash flow but just curious if you have any additional color on that and also what would be the timing of that renegotiation? Thanks.

You can understand. Stefano here. That we cannot comment on a contract. We have been quite clear that there has been some agreement on extending our payment terms and also an agreement on the size of their investments to follow us in our future expansion. So we cannot go further ahead, but of course, if we have extended our agreement by three years and we have committed to take them with our main source for the future, we have done this because we had the right risk for doing it.

Okay. Got you. One other quick one just the legacy Walgreens management used to talk about driving gross profit growth and maybe 100 basis points or maybe one percentage point higher than SG&A costs growth. You are seeming to achieve that this quarter in retail pharmacy USA because you have 2% gross profit growth, 1% growth in SG&A dollars. Just curious, should we still think about that relationship in terms of managing the U.S. operations or have the targets change a little bit with obviously some of the management changes as well? Thanks.

We haven't, since the formation of Walgreens Boots Alliance published any targets relating to this. Our focus is obviously on growing our overall profits we're focused on improving our retail gross margin, which I talked about in my presentation. And then on the pharmacy side, we've talked about very clearly that our focus is on growing our profitability on pharmacy in a way linked to building our volume we're clearly pleased with the share gains that we have announced today, which is really continuing the trend we've seen for some time.

Okay. Got it. Thanks.

Thank you. Our next question comes from the line of Lisa Gill with JPMorgan. Your line is now open. Please go ahead.

Great. Thank you very much and good morning. I was wondering if maybe could just give us a little more color around your new relationship with Optum. It appears that have been winning some nice pieces of the business in the marketplace. Do each of those new pieces of business, are they tied to the new relationships that you have. So, any incremental color you can give us around expectations of the types of volumes you could see with the Optum relationship?

Hi, Lisa. Its Alex here. I mean we have had a great relationship with Optum on the cash for many years, so this is very strong historically and as improved in the last period as you have seen. They are doing a nice job I think in the market with their offer. And we are helping particularly with the slight maintain program which gives the customer the choice to go to mail order or augment to their retail. And we believe from the evidence we have seen before the retails are very good option for customers and so does Optum. So with that relationship and with the contract we have in place, to support it, we are working with them on a commercial basis, and we are doing a nice job in winning contracts, which obviously we're very pleased about. Going forward, we hope to see them continue to be successful, and we hope to be their partner commercially for the region for long-term as we have been in the past. So when they win, I believe that we win as we have done in the past we will do in the future.

Alex, is there any way to put any kind of numbers or expectations around that as we think about pieces of business that we have known publicly that they have won? Any thoughts at this point or do you think it's too early?

It is really too early. I mean most of these contracts as you know -- all these contract start in 1 January. The focus that we have are part of the deal is to make sure we give a great customer experience. So they are health plan members as they come into Walgreens so that we can actually make sure that we pill through the customers and they stick with us. And I think that is Richard and the team have done a great job in the last period as you've seen by our volume increase and by our gradual increase in market share. So we're confident that when we win contracts, we can win more than our fair share, but our job is to make sure we do that by providing great service and care in the pharmacy.

Okay, great. And then just a follow up, George, I know you said that included in the guidance is the expectation around currency, but can you just remind us what the EPS sensitivity is to FX? I know you talked about this in the past but I just want to make sure we have this correctly.

Just of course, Stefano, I think you --

I was saying that of course when we do the contract, we were generating multiyear contracts, we analyzed and we made our calculation of the life of the contract. When you see a new contract you don't expect to see the benefits immediately. The benefits will come and it will be of course bigger if we perform well and you will see a growth during the entire life of the contract. So the benefit of all the contract that we will do will be we grow over the next year. Sorry about that.

This is George. I think as we said before in terms of currency translation, a 1% movement in the volume of pound versus the U.S. dollar is approximately $0.01 impact on adjusted EPS.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Robert Jones of Goldman Sachs. Your line is now open. Please go ahead.

Great. Thanks for the questions. Just trying to get a better gauge of the fundamental performance of the retail USA business. You guys have given us details on synergy every quarter. Could you maybe give us a sense of how you are tracking on the SG&A savings relative to the $1.5 billion target by the end of fiscal 2017? And how we should think about how that's contributing to the EBIT growth in the quarter would be really helpful.

Hi, Robert. It is Alex here. So, I think as George said in the script, we are on plan. The majority of the $1.5 million as George said comes from the USA pharmacy business. We had a comprehensive program and our program is on track and delivering to plan. We see more opportunities going forward and the team here in the USA and also across the rest of the group will continue to drive a more efficient business we can and build more cost plans. And we will give an update at the end of the year in terms of how that plan is going and it's a major part of our strategy to use that scale, user efficiency both in the U.S. and globally to make sure that we are cost-effective pharmacy retailer particularly here in the USA.

Okay, got it. Then I guess just one question on Part D. You mentioned prescriptions on a same-store basis being strength. From Part D in particular I know getting bigger in Part D has been specific goal of the company. Can you maybe share a little bit more of how you have progressed in winning Part D and maybe where you think you are today from a market share perspective as it relates to Part D?

I guess -- Alex again. I think it's about partnership philosophy. We worked really well across all of these plans. We've always had a strong relationship with United and that continues. And as we've continue to offer our strong ethos into our store network, the right value, the 90-day retail option in terms of Part D, we've been able to win more contracts and we've been able to get into some of the more narrow networks which are forming actually in the marketplace. So I would put that into partnership and delivering really well in stores. It's a very important segment for us. The market is growing faster than rest of the market, we will continue to go up because of the aging population and our 90-day retailers really, really popular with our population. So partnership and focus is the reasons why we are winning and we will continue to do both as best we can.

Great. Thank you.

Thank you. Our next question comes from the line of George Hill with Deutsche bank. Your line is now open. Please go ahead.

Good morning, guys and thanks for taking the questions. George, I guess two parts, number one, is there anyway that you could quantify for us the impact of the med-D, the increasing med-D mix on U.S. drug margins in Q4? And kind of correlated to that question is, I guess we thought that we would've seen more modest gross margin deterioration given the deterioration in generic drug pricing against math part of the book? I guess just us any kind of qualitative or quantitative color you can put around the gross margin deterioration in the quarter would be helpful with the big moving pieces? Thanks.

Hi, it's Alex here. We see this on plan. So there has been constant reimbursement pressure in the market, we've spoken about this constantly. And we see that pressure going forward we been very open about this -- as the market consolidates and the mix. Remember, we focus on operating margin and that really is the number we pay attention to here. So using our very large fixed assets go into more 90-day we're dispensing once around three times is a very important part of that and also the growth of specialty which is lower margin in terms of percent but higher dollars is another feature of the marketplace. So overall, we are comfortable with where we are and we're comfortable with the strategy we're driving to focus on operating profit rather than just gross margin.

Okay. Then maybe a quick follow-up, maybe Alex, if you just want to rank them, is it and separating pressure and mix, is the change in mix kind of leading to more down drift followed by pressure followed by 90, followed by specialty is that the right way to think about the order of the moving pieces as it relates to the margin profile?

No. I just think that the market is growing through the aging population. So that's why med-D is the fastest growing channel as is all of that people are putting together more comparative offers both in terms of price, but also in terms of care and performance. And that comes as well. So I think that's the driving, is really the market has been driven always by the customer and it's a growth market. So therefore, if you are able to provide the right value through a good cost structure which I think we have through the scale, we have here in the USA and the buying power we have globally. And then, you are able to have the right relationship and partnerships, you can take advantage of the fastest growing channel which is med D in a net profitable way and that is what we're doing. So I don't think one or the other to be honest George, I think it's about our market change and we are just positioning ourselves and was a very important market segment for our model and one we are very well positioned to continue to win.

Okay. I appreciate the color. Thank you.

Thank you. Our next question comes from the line of Ricky Goldwasser with Morgan Stanley. Your line is now open. Please go ahead.

Hi. This is Mark Rosenblum on for Ricky. Can you just talk about the partnership with Valiant and now that you guys are about six months in kind of takeaways and lessons you've learned and just commentary on how you think the relationship is going to-date?

It is Alex, again, here. Yes, we are satisfied and pleased with performance in the dermatology business the volume is as we expected. And remember, we have paid for the service we provide. We're not paid on the margin mix here at all. So we're satisfied the relationship is good. We know Joe well from the past from Pagel where the group had a very good relationship with Joe and Pagel. And we are in constant dialogue with Joe and the management team. Which you see their situation and we are very willing to help them in a positive way. So it's early days a 20-year contract and from our point of view we are pleased. We want to help our partner to be more successful in market.

Got you. And then just on following up on the RAD acquisition, I know you guys are still expecting a second half close, but if the deal were not to get done, how would you rank your capital deployment priorities now that you have the additional cash on the balance sheet?

Oh, we would have a lot of ideas, but I can assure you that we are for the time being we are not taking into consideration because we are very confident that at the end of this deal we will go through. It takes some time, but we knew it. It is normal of this kind of deals which is a complex deal at the end of the day is normal for this kind of deals to take months and months. So I would say that we are on track. Our lawyers are telling us that we don't have any negative signals, and so we are operating on the -- I thought that we will do the deal, you see that we have raised the capital, you see that we have a big team in place starting the integration and they are working hard to prepare the integration. We are trying to find the right buyers for the pharmacy sector for sure we will have to divest and that is it.

Okay. Thank you. That's very helpful.

Thank you. Our next question comes from line of Eric Kutcher with Barclays. Your line is now open. Please go ahead.

Thank you. Maybe focusing on international going back to your comment about discussions with the U.K. authority. Is there a focus on recent cost reduction on any changes that might reduce that? Is it more of a service focused? Could you detail that?

Hi, Eric. It is Alex here. And obviously, from the past, I know the U.K. pretty well and I've caught up with the team in the last two days. So this is a deeper conversation about what you call a global some in the U.K., which is the amount of money they pay our pharmacy a combination of drop cost and services. And the government is keen to get more value from pharmacy and that's a negotiation that has commonly been carried out. It's not just for boots but it's for the whole market. Boots has around about 1/5 of the market in the U.K. pharmacy. It is not typical, we have lived with these sort of pressure and these requests for very many, many years both in the U.K. and Europe and we are used to dealing with it. But there is a particular phase we are going through but that request is slightly deeper, and obviously, the industry is working together to try and give the government the best answer we can.

Thanks for that detail. And then, maybe also on international, the piece in Russia, was that previously consolidated and now has been moved to discontinued? Would we see that in the year ago result?

Correct. It was consolidated. Now, it's not consolidated anymore because we have 15% of the new company. To be honest, Russia was quite volatile accounting the weather, the results were depending very much on the weather. And those over time, they are all selling business which was really the best part of the supply chain of the chain in Russia earning wise is deteriorated because the pharmacies have become more important -- in the past the pharmacy were not particularly profitable because they -- the cost of the rents was really very, very high. Now the situation is normalized. You can have long-term or medium-term rents with way of extending the rents. And so the pharmacies are becoming the most important and the profitable part of the chain. And so, we had the opportunity to contribute our wholesale to the largest pharmacy chain because we have 1000 pharmacies in 36.6 but 1000 pharmacies also in another chain a five and two chains have merged. And so we have had 15% in the company where we had the reality 2000 pharmacies and the opportunity to buy out the company idea, so we will see what happens in five years and we will take the decision. It is a big opportunity for us because this is the best segment of the distribution in Russia today.

Thank you. Maybe just the financial impact from that George, so that sounds a little larger than I was thinking, but is there much of a profit impact from that given your ownership stake?

I mean it's an part working out income is it's very, very small in relation to the size of WBA where we will see an impact is obviously in the sales being a low margin wholesale, the wholesale business, the sales were just under $700 million historically just to give you a size, but that's why we are showing comparable sales on a constant currency basis excluding M&A so that you can really understand the clear performance of wholesale. But really in actual profit contribution terms, this is pretty immaterial.

Thank you.

You have to devaluation of the ruble, you will remember that the ruble has lost quite a lot versus the dollar. And so, the impact has been really low.

Thank you.

Thank you. Our next question comes from the line of John Heinbockel with Guggenheim. Your line is now open. Please go ahead.

So, two things for Alex. Let me start with store level labor. If you can sort of touch on crosscurrents, impact of minimum wage going up and then change in overtime rules. And then, the flipside offsetting that, where do you think there's still opportunity to trim labor hours to get more efficient? Is it a backroom issue how you use the pharmacy tax thoughts on those would be helpful.

I think there's always more opportunity. As you remember, we are investing quite a lot in our core IT systems right now both in retail and a program that is about six months in and also the pharmacy where we are redoing our pharmacy system over the next five years. These too are not far from working capital benefits, we will clearly make the whole supply chain more efficient and allow us to remove a lot of non-customer facing activity out of the drugstores and save money and also put more hours into customer care, which is part of our strategy to become more differentiated in health, wellness and beauty care and pharmacy. So I think there is a significant investment going in, the Board find itself only a couple of months ago really and we are very confident the programs are well set up and we've got the global expertise both here in America and Europe apply to these two very important programs here in the U.S. We will update you on what that means in the future as it becomes clearer about the benefits that we see coming through. We have already -- going back to the first question starting with minimum wage, we've already in the back room we have already for most lower pay people in stores improved the base salary. We've done that already that's already in the cost you see and we will continue to improve minimum wage against the market, putting very cost regions in the market. Second to that, we are also upscaling our people. For example, we're through with a lot of differentiation. We are putting in place a number of beauty consultants in our top 2000 stores who have got deeper expertise and more knowledge and more ability to take care and drive up sales appropriately with customers. That's another investment we're making in labor cost in our stores but with a very clear return on our investment. So, we are feeling good about where we are on these two investments. With the overtime, we studied this very carefully, we have a solution very clearly mapped out and we'll announce that solution at the appropriate time and it's one that will be both good for people and cost effective to our shareholders.

And then secondly, you talked about within the guys at the front-end and the convenience categories, so maybe talk a little bit how you are rethinking that whole part of the business and when you broaden it out to consumables, can that business effectively drive traffic? I mean, you think about, I'm not sure how productive some of those soft drink promotions were, but can that drive traffic or do you want to go back and drive traffic on beauty, the experience and really not use consumables to do that?

Consumables is really important to driving traffic. Particularly, the fill-in shop effectively which is becoming really important to customers across America and we believe that Walgreens in particular can play a much broader role in that. We've only had dates with cards -- bonus or reward cards for just about three years. And now, we are seeing very clearly the opportunities for the fill-in machine. And we are now constructing our offer across, I mean these cash including toiletries that we believe will offer the right brands at the right price not the lowest price, but the right price, I mean on that walk. And it will be different by types of stores for sure and that is quite a complicated piece to get done, but we are well on the journey and you will see that coming through in the months and years ahead. It's very important to our plan. Obviously, we're trying to create destination -- more destination beauty and that plan has already been executed in one third of the stores as we speak. And there will be more to come once we get these stores complete and healthcare has always been a very important casket to us and we continue to drive that casket pretty well. So that's how we see driving football back into a drugstore. Apparently, it's really football, it's the omni-channel, is really important to see that in the U.K., the U.K. team has done a really nice job in the U.K. market here to join our pad, the supply chain and make our effective customers, clearly we can share and borrow some of best practice from Europe and we intend to do that.

Thank you.

Thank you. Our next question comes from the line of Scott Mushkin with Wolfe Research. Your line is now open. Please go ahead.

Good morning, everyone. This is Mike Otway in for Scott. Thanks for taking the questions. First question, the $0.10 raise in the low-end of the guidance, could you kind of parse it out into tax rate versus stronger profitability? How much is due to both?

I think there is a bunch of factors coming into this. Obviously, the tax rate has come in a little bit lower as I talked about in my presentation. I think the most important point I would make is obviously we are continuing as we have -- if you look at the guidance we set out at the beginning of the year our ability to continue to raise the lower end really at the time when we've been able to cope with currency moving in the wrong direction for us in translation really I think illustrates the strength of the -- overall strength of the business. Really not a huge amount more I can add to that at this stage.

Okay. Thanks George. And then, I guess following on John's question earlier, given the focus is on expanding gross margin in the U.S., how should we think about the front-end comp trajectory over the next couple of quarters? Should we expect more of the same until, is there an expectation that the beauty rollout is going to change the trajectory of comps, just any thoughts there?

Yes. I think obviously we're in this transition period for sure as I spoke about before. We are seeing nice improvements in the operating margin and in the gross margin within that. And the expense of some sales lost and [indiscernible] some seasonal cash because we've actually fundamentally overbought. The next phase is to really start to drive sales particularly in beauty that would be progressive over a period of time. And actually this summer into the autumn season you start to see the comps gradually improve quarter-by-quarter. But the key thing really that we keep on repeating is the comps are important but always going to be relatively low in reality in that mature market where we are really shifting the mix the important thing is the operating margin and that's the thing that we've been consistently focused on over the past couple of years and we are pleased with the progress we're making there and we are seeing more progress in the future.

Great. Appreciate the color. Thank you.

Thank you. Our next question comes from the line of Alvin Concepcion with Citi. Your line is now open. Please go ahead.

Great. Thank you. Just wanted to follow-up on Rite Aid, sounds like it's still on track just wondering when you expect to hear more color from the SEC, if you could give us anymore color on the discussions and related to other changes in the number of stores divestiture you expect.

We still believe that our initial estimate is correct. We still believe that at the end we will stay in the range of these stores that we initially indicated around 500. And time wise, we still believe that we will be able to really do the deal -- finish the deal by the end of this financial -- calendar year as we said. So by December, we believe that everything will be done. But of course, it doesn't depend on us, FTC will let us know when they are ready.

Got it. Thank you. And kind of a tough question, I realize it's very early, but as it relates to Brexit, have you seen or would you expect to see an impact in underlying demand, or margins in the U.K. business since the announcement excluding currency impacts of course?

Very, very difficult to say. The situation is very volatile at this time. For sure, the period of uncertainty will be quite long whatever happens because even if the U.K. will leave the Euro, it cannot happen overnight, it will take at least two years. And the consequence of it will be much longer than two years. So, I believe that once the emotional impact is gone, things will settle down and we will have an idea of what is happening, but for now really -- it's really too early, too soon we have seen in the stores days -- very good days, bad. So in a few months probably we will be able to say something.

Hi, Alvin. It's Alex here. Again, just a couple of things tied to what Stefano said. I think historically Boots has been very solid through difficult times. But it tends to over perform the market during recessions or slowdowns because it's got a strong beauty business and people still buy into beauty even in tough times and that's been historically the case. So we feel that that's important. And this is still broadly positioned both in beauty and in healthcare in the U.K., the team have done a nice job there to keep it strong and the model still very strong. So, I think if any retail business is positioned to do okay during these uncertain times, as Stefano talked about I think it is the Boots brand in the U.K.

Got it. Thank you for that color. Appreciate it.

Thank you. Our next question comes from the line of David Larsen with Leerink. Your line is now open. Please go ahead.

Hi. Congratulations on a good quarter. Can you talk about a high level who buyers of these RAD stores could potentially be, especially for stores that are in world markets? Thanks.

We cannot give indication on that.

Okay.

We cannot go even because at the end of the day, we don't know exactly, how many stores and where. We have an idea but we don't know exactly. So, for time being it's really too early.

Okay. And then, let's say the FTC wanted to continue to review the transaction until say March of 2017, I mean, are you willing to allow the process to continue into 2017?

For the time being, we don't have the feeling, our lawyers don't have this feeling. If this will happen, we will see and we will try to understand why the process become so long because if there are just technical reasons of course we will wait. If it is a symptom of something which is going not in the right decision that we will take a decision at the time. But I repeat for the time being, we are -- our lawyers are very quite optimistic, I would say optimistic.

Okay. And then, my last question is, do you have any thoughts on, would you keep the volumes with McKesson or switch them over to AmerisourceBergen, any high level thoughts on that? Thanks.

When we will conclude the deal with Rite Aid then we will see what to do. Of course, we are to take into consideration that we have a good confident and fantastic relationship with Rite Aid. So we will analyze what to do at the right time.

Okay. Thanks very much.

Thank you. Our next question comes from the line of Eric Caldwell with Robert W. Baird. Your line is now open. Please go ahead.

Thanks very much. First, I just have a hopefully an objective and friendly comment here to help, Walgreens both prior to and after this current team's leadership has only beaten revenue three times in the last five years. Even with the Street lowering forward targets after each quarter, I guess what I am saying is, I just really think you need to maybe circle the wagons and provide better insight into things such as pricing, generic launches, conversion rates mix, anything that can help folks get to a better method on the top line, I think would be a huge help. So that's my comment. I would love you to take it under consideration. The question is around tax items, I am curious I did not see this, what were the discrete items in the quarter? How much did they impact the third quarter ended any of the lower expected tax rate for the year , did any of that come from items that might be deemed as more sustainable as opposed to discrete? Thanks very much.

Fundamentally, there was a small amount of discrete items. Typically, obviously, one is prudent and doing provisioning, and then, when one is able to agree numbers with various tax authorities, then one has to discrete items. But fundamentally, we've been doing a lot of work looking at our underlying tax rate. And exactly, what the quite complex structure that we got in place, what is the real underlying rate we've been quite conservative in the first part of the year on this. While, we are doing this work and really the numbers that we have seen in the quarter if you look at the year-to-date as we said in my presentation that really gives us a true reflection of what the rate would be with this mix of profits at the currency rates that we've seen in this year-to-date. So I think it's -- I think you should really look at it as the clear rate. Clearly, if we then -- our going forward, the mix changes and clearly it will change with Rite Aid coming in being U.S.-based and the U.S. being obviously one of the highest tax countries in the mix of where we trade and you will see the tax rate going up and reflecting mix but only mix.

Substantially, this quarter we have taken some provisions that we have made before in the previous quarter for the bulk of it. Being prudent and now we have released it. So overall for the year, this is the real -- substantially the real tax rate and the real dollars that we have paid in tax that we will pay in tax.

Okay. Thanks very much for the comments.

Thank you. Our next question comes from the line of Charles Rhyee with Cowen and Company. Your line is now open. Please go ahead.

Thanks. Maybe going back to the rollout of the Boots products in the U.S. I know you're expanding it now into more stores, can you talk about sort of what the up tick has been in the existing stores as a percent of the front end sales? I know you are historically targeting sort of 5% mix shift over time, but just curious where we are at this point.

Hi, Charles. Its Alex. We have had these products in different tests and trials in New York and more importantly in Phoenix, which is a more normal market for us in terms of stores for 18 months. And we're really seeing two effects, we are seeing bigger baskets across the beauty spend from customers, I'm seeing more repeat customers coming back with particularly No7 skincare in the basket. And these numbers we extrapolated with costs. We also looked at different models of investment from people point of view and investment fixturing. And we created what we thought was a most customer perspective and importantly the best model for return to our shareholders. And as we are implementing right now the summer and roundabout 1600 more stores. And we are very confident because we have seen these customer behaviors more in the basket and coming back more often, specifically for No7 skincare, consistently for 18 months. So that's what we have seen and that's how we have measured it. And clearly, we have long-term goals to shift the mix to more owned and home brands in the U.S. business and this is a start of our journey particularly in the important beauty categories.

Can you talk about, if I recall correctly No7 and some of the other Boots products are sold in other chains today, can you talk about what that mix looks like in those shores in those other chains and how relevant they are to what you expect for Walgreens over time and other ways to also leverage that brand recognition majority have and maybe shift those buyers back to the Walgreens stores? Thanks.

The intention is to grow the brand. So we have good distribution and target and have had for many years and have good relationship and we have distribution growing and also we are doing a nice job with other brands in many other people's brands to be fair to them, that we are doing a good job. So from our point of view, they are different channels to Walgreens. Walgreens is a drugstore channel and the customers -- some customers do swap across both, of course, they do, but we have so much opportunity with Walgreens was 6 million customers about 20% of them are what we call look good, feel good customers who are prepared to buy more beauty products from Walgreens. And that's what we're focused on in the Walgreens channel. The rest of the team led by Kane, who heads up our brands division for WBA are focused on building the brands and across America and building good relationships with the partners outside of Walgreens is a very clear strategy and one where we want to be successful in both and that's what we intend to do.

Great. Thank you.

Thank you. That was the last question. We have time for. Thank you to everyone for participating in the call. If you do have other questions, we did try and slightly restructure the presentation and call today to allow for more time for questions than we normally would have done. If there are other people who do have questions, or queries please feel free to contact anyone at the IR team here, myself, Ashish Kohli, Deborah Walter, Jonathan Spitzer or our new member Patrick Bartoski. And thank you very much indeed.