Gerald Gradwell - SVP, IR and Special Projects Stefano Pessina - Executive Vice Chairman and CEO George Fairweather - EVP and Global CFO Alex Gourlay - Co-COO

Robert Jones - Goldman Sachs Eric Percher - Barclays Lisa Gill - JPMorgan John Heinbockel - Guggenheim Securities Steven Valiquette - BofA Merrill Lynch Brian Tanquilut - Jefferies Ross Muken - Evercore ISI Ricky Goldwasser - Morgan Stanley Michael Cherny - UBS Alvin Concepcion - Citi David Larsen - Leerink Scott Mushkin - Wolfe Research Ajay Jain - Pivotal Research Group

Good day ladies and gentlemen and welcome to Walgreens Boots Alliance Fiscal Second Quarter 2017 Earning 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 would like to introduce your host for today's conference Mr. Gerald Gradwell. Sir, please begin.

Hello and welcome to our second quarter earnings call. I'm Gerald Gradwell, I'm here with Stefano Pessina, our Executive Vice Chairman and Chief Executive Officer; and George Fairweather, Executive Vice President and Global Chief Financial Officer. He will take you through our results as usual in a moment. We're also joined by Alex Gourlay, Co-Chief Operating Officer of Walgreens Boots Alliance, who will be joining us for questions. You will find a link to our webcast on our Investor Relations website at investor.walgreensbootsalliance.com. After the call, this presentation and webcast will be archived on the 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 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 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 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 in the presentation materials available on our Investor Relations website for reconciliations to the most directly comparable GAAP financial measures and related information. I will now hand you over to George again to take you through the numbers.

Thank you, Gerald. Our performance this quarter was in line with our expectations despite challenging conditions in a number of our markets. We were particularly pleased with growth in U.S. pharmacy volume and market share as the early benefits of our new pharmacy contracts started to come through. We continue to work hard to secure regulatory clearance for the Rite Aid transaction and we are reiterating our guidance for fiscal 2017. So now let's look at the financial highlights for the quarter. As we expected, currency again had a negative impact, the U.S. dollar being around 16% higher versus sterling than in the comparable quarter last year. Sales for the quarter were $29.4 billion down 2.4% versus the comparable quarter. On a constant currency basis, sales were up 0.9%. Without the extra day in February last year, this would have been up 2.2%. GAAP operating income was $1.5 billion, a decrease of 20.5%. GAAP net earnings attributable to Walgreens Boots Alliance were $1.1 billion up 14% and diluted EPS was $0.98 up 15.3%. Adjusted operating income was $2 billion down 4.9% and constant currency was down 2.7%. We estimate this would have been broadly flat taking into account the leap year impact. Adjusted net earnings attributable to Walgreens Boots Alliance were $1.5 billion, up 3.7% and in constant currency up 6.2%. Adjusted diluted net earnings per share was $1.36 up 3.8% and in constant currency up 6.1%. The adjusted effective tax rate which we calculate excluding the equity income from AmerisourceBergen was 23.7%. This was lower than in the same quarter last year primarily due to reduced estimated annual tax rate associated with our current year pretax earnings, an incremental discrete tax benefits. Year-to-date the tax rate on the same basis was 24.5%. For completeness, here are the numbers for the first half of fiscal 2017. I will not go through this in great detail but you will note that GAAP diluted net earnings per share was $1.94 up 3.7% versus the same period a year ago. Adjusted diluted net earnings per share was $2.46 up 5.1% and up 7.7% on a constant currency basis. So let me now turn to the performance of our divisions in the quarter beginning with Retail Pharmacy USA. Retail Pharmacy USA sales were $21.8 billion, up 1.5% over the year ago quarter, comparable store sales increasing by 2.4%. As 2016 was the leap year, when we calculate comparable sales and prescription figures, we exclude the 29 February, 2016. Adjusted gross profit was $5.9 billion down 0.6% over the year ago quarter with the impact of the extra day in 2016 holding back growth and adjusted gross profit by over 1%. Lower retail gross profit was partially offset by an increase in pharmacy. Adjusted SG&A was 20% of sales, an improvement of 0.1 percentage points compared to the year ago quarter. Adjusted SG&A as a percentage of sales was improved versus comparable quarters for 15 consecutive quarters. As a result of the lower adjusted gross margin, adjusted operating margin was down 0.5 percentage points of 7.1% resulting in adjusted operating income of $1.6 billion down 4.9%. So now let's look in more detail at Pharmacy. U.S. Pharmacy total sales were up 3.7% mainly driven by increased retail script volume. We filled 246.7 million prescriptions on a 30-day adjusted basis including immunizations, an increase of 5.9%. On a comparable basis for stores which excludes central specialty, pharmacy sales increased by 4.2% with scripts filled up 7.9%. This was the highest quarterly growth rate in more than seven years and was primarily due to strong volume growth from Medicare Part D and strategic pharmacy partnerships which we announced last year. We are pleased both with the progress of Medicare Part D an early indications of the benefits derived from our new pharmacy contracts. Within sales volume growth and brand inflation was partially offset by reimbursement pressure which was in line with what we had anticipated and by the impact of generics. Our reported market share of retail prescriptions in the quarter on the usual 30-day adjusted basis was 20.4%, up approximately 100 basis points over the year ago quarter. Total retail sales were down 2.7% on the same quarter last year. This includes the impact of previously announced closure of certain e-commerce operations and the impact of the leap day in the prior year. Comparable retail sales were down 0.8% in the quarter and what was a challenging environment. The claims in the consumables and general merchandize and personal care categories partially offset by solid growth in the health and wellness and beauty categories. Adjusted gross profit was lower than in the same quarter last year primarily due to the decline in sales. Despite the difficult market conditions, we were pleased with growth in our key categories. This was reflected by our absolute performance, as well as recent market share gains. Based on the latest Nielsen data for the 13 weeks ended 25 February, we gain share in the health and wellness, beauty and personal care categories. However, we know there is more to do and after taking further actions to help drive future performance. These include simplifying our product offering, further emphasis on our omni-channel capabilities, and expansion of our beauty differentiation program. While still early in the journey, our own brands are performing well and currently represent over 15% beauty sales in our beauty differentiation stores. We have now recruited beauty advisors across more than 1800 stores which is helping to drive No7 sales and gross profit. Repurchase levels of No7 products are been very encouraging and Soap & Glory has also got off to a good start. Following the successful introduction of No7 and Soap & Glory, we are planning to introduce another of our own brands Botanics, into our existing beauty differentiation stores in the next six months. Looking ahead we are now developing plans to introduce our enhanced beauty offering to over 1,000 additional stores by the end of the calendar year. So next, let's look at the progress of our cost transformation program. In our previously announced cost transformation program, we set ourselves an ambitious target of delivering $1.5 billion in savings by the end of fiscal 2017. I'm delighted to announce that we achieved this target ahead of plan. We now expect that the cumulative pretax charges associated with this program will be approximately $1.8 billion. This is in line with our expectations with an expanded program was announced in April 2015. These costs are higher than we anticipated in October primarily as we now expect to close around 60 more stores. The program will be completed as expected by the end of fiscal 2017 and the full benefits will be realized in future periods. We continue to expect but approximately 60% of the program costs will be in cash over time, the principle items being future lease obligations. So now let's look at the results of the retail pharmacy international division. Sales for the division were $3.1 billion, down 1.9% in constant currency again impacted by the leap year. Comparable store sales decreased 0.9% in constant currency. Comparable pharmacy sales were down 3.7% on a constant currency basis due to decline in the U.K. which is partially offset by growth in other markets. In Boots U.K. comparable pharmacy sales were down 5.2% mainly due to the reduction in government pharmacy funding. Comparable retail sales for the division increased 0.6% reflecting Boots growth in the U.K., Republic of Ireland, and Thailand. Within the U.K. Boots comparable retail sales increased 0.7% versus the year ago quarter supported by solid December trading. Adjusted gross profit for the division was down 4% in constant currency to $1.2 billion mainly due to lower pharmacy margins in the U.K. reflecting the reduction in funding and the impact of the leap year - leap day in the prior year. Adjusted SG&A in constant currency dollars was flat versus the year ago quarter. However adjusted SG&A as a percentage of sales on a constant currency basis was 0.6 percentage points higher of 31% as a result of the largely fixed cost elements of the cost base. Adjusted operating margin was 7.8% and 1.4 percentage points in constant currency. This resulted in adjusted operating income of $242 million, a decrease of 16.7% again in constant currency. So now let's look at our pharmaceutical wholesale division. Sales for the division were $5 billion up 0.6% versus the same quarter last year on a constant currency basis. Growth was held back by the sale of Alliance Healthcare Russia in March last year and also by the leap year. Comparable sales on a constant currency basis were up 5.2%. This was behind the Company's estimate of market growth weighted on the basis of country wholesale sales. With challenging market conditions in Continental Europe partially offset by growth in emerging markets and the U.K. Market growth is particularly strong in certain emerging markets due to the timing of price increases. Adjusted operating margin which excludes ABC was 2.9% up 0.2 percentage points on a constant currency basis. Adjusted operating income was $226 million up 59.4% in constant currency. Excluding the $79 million and adjusted earnings from ABC, adjusted operating income was up 8.4% in constant currency reflecting procurement and cost benefits. Operating cash flow in the quarter was $2.9 billion. During the quarter, our working capital inflow was $1.4 billion. This reflected our seasonal reduction in inventories, as well as an improved receivables position. Cash capital expenditure in the quarter was $261 million. This was lower than in the first quarter mainly due to phasing. As I said last quarter, we continue to invest in our core customer proposition including our stores and U.S. beauty program, as well as the upgrades to our IT systems which we have previously talked about. This resulted in free cash flow for the quarter of $2.6 billion. Today, we announced a new share repurchase program of up to $1 billion in this calendar year with the flexibility to do this due to the changes to the pending Rite Aid transaction announced in January. So turning next to our guidance for fiscal 2017, we have maintained guidance and continue to expect adjusted diluted net earnings per share to be in the range of $4.90 to $5.08. Remember our guidance assumes current exchange rates remaining constant for the rest of the fiscal year and no material accretion from Rite Aid or from the new strategic alliance with Prime announced on Monday. So I’ll now hand over to Stefano for his concluding comments.

Thank you, George. So, as you have seen we have once come to you with quarterly results pretty much in line with our expectation. However, the drivers behind the results given depending on where we are with the development and continual transformation of our businesses, but we have many different levers to pull to fine tune the company and that is our some confidence in our ability to deliver solid financial performance. This quarter much of the most visible work we are reporting have been in driving efficiency within the company further improving the cash flow from the businesses and the cost factor. We are doing this while we continue to operate as likely and efficient balance sheet as we work to complete our proposed acquisition of Rite Aid. Even in the balance sheet however, you can see the signs of our drive for constant improvement. We are returning an element of value to the shareholder through our new share buyback program without undermining our intention of profitable leverage the company following the closing of the proposed Rite Aid acquisition. The U.S. Prime pharmacy market is performing very much, as we believe it would. Pricing pressures are increasing. Further rest the steady and our relenting volume growth in the use of medication. To meet these challenges, we believe that collaboration and corporation is vital. It is vital across healthcare system as a whole and between all the components of Rite from the regulators to the individual pharmacy who serve their communities every day. We have proved time-and-time again that by shaping our business to anticipate and address what is clearly identifiable trend, we can operate growing and thriving businesses in this environment. As we grow and develop our company, we seek to ensure whether the structure and nature of our business is properly aligned with the needs of the market. In this we will never do anything that we are not convinced if in the long-term interest of our shareholder. If we do not believe this to be the case we will not do it. A very good example of our commitment to working in partnership is our strategic alliance with Prime. This puts in place a new pharmacy contract between our two companies and brings together our central specialties and mail order businesses, infrastructure in which we have just over 50%. It is designed to improve our scale and competitive position in our service, competitive pricing and improved market access. Relationship like this are about more than just improving what we have today, they can create an entirely new set of opportunities for us to approach the market, achieving more together quicker than either of us could do alone and in a structure that has ensured we both benefit fairly as a result. While this will not have a significant infrastructure on our adjusted earnings per share this fiscal year, it is benefiting our volume and sales and as we integrate this business over time we believe it will benefit our adjusted operating income. Equally important, it establishes a strategically beneficial alliance to deliver future growth by better addressing the needs of a changing market. Since the announcement our strategic alliance has already contributed to Prime winning two significant contracts which demonstrates how well it is being received by the market. And we are addressing some of the legacy business issue in Walgreens and are seeing a script volumes return, we are in a much better position to begin to address the operational challenges which market demands will continue to place upon us. The retail market in the U.S. has it's own economic and the competitive pressure. There is no doubt that it is harsh and unforgiving economic climate in which to be reviewing and updating a retail offering, but we are making progress. You have heard George talk about the early indication of success in our strategy for beauty of using our strategy and brands to differentiate our trend. The growth we have seen in the health and wellness and beauty category sales and underlying margin in our stores is encouraging. Our decision to expand the beauty differentiation of strategy reflects the positive response we have heard from our customer. With revolution of our Walgreens beauty offering, we expect to see leading surpass the beauty brands sowing in path of the growing range in our store. Of course our work in beauty is only part of the changes we intend to make to change and enhance this retail mix and offering record outdoor. This work is mainly simple, not quick as we do it we must constantly monitor each individual change, carefully balancing the space and location of each product needs, and the overall customer experience. There are however plenty of example of how successful this can be if you get it right. Turning to Rite Aid, I am still optimistic that we will bring this deal to a successful conclusion, but there is no doubt that the process of getting clear for the transaction is taking longer than we expected. We are constantly and currently cooperating with FTC, Rite Aid and Fred's to get the necessary approval and close the transaction. At the same time we are working to be in a position to certify compliance. We believe that we can achieve these in the coming weeks and we are still working towards our revised timetable to obtain a clearance by the end of July. The changes to the bill that we agreed in January demonstrate our absolute commitment to ensure all transactions that meet our demanding financial and strategic requirement, while allowing us the ability to address any reasonable demand that may be made for us in obtaining regulatory approval. In terms of guidance as George said, we are reiterating our estimate range for the full fiscal year. Looking to the second half and beyond, there are some big challenges ahead and there's a lot of hard work but a huge amount of opportunity. Overall therefore we have confidence that in our ability to continue to generate and capture true value for our shareholder for this year and beyond. Thank you. Now I will hand you back to Gerald.

Thank you, Stefano. We will now open the lines for questions. Vince?

[Operator Instructions] Our first question is from Robert Jones of Goldman Sachs. Your line is open.

Great, thanks for the question. Given the really strong same-store script comp this quarter, that's 7.9% you guys highlighted, can you share any thoughts on maybe why you didn’t see a stronger corresponding increase in the front end? Seems to be a little bit of a disconnect between the strength and the script count and then the performance on the front end comp.

Hi Bob, it's Alex here. Yes, I think in the prepared remarks George and both Stefano said, it was a tough market first of all. So we saw good growth in a tough market, particularly in healthcare which you expect to see the link to the pharmacy business and also through investment in beauty care we saw again some solid growth. Where we didn’t see growth in the front end was really in the seasonal businesses. It was a tough Valentine's Day for the whole market. And also in food where there's quite a lot of deflation driven by competition and some commodity pricing that sort of affect us last summer is still running. We do track as best as we can link sales and we are confident that we are seeing the link we expected. I'm also very confident as the market moves on this new volume and the new food will improve the front end performance against the strategy that we have clearly laid out.

Okay, great. Thanks. And then I guess just going back to the Rite Aid deal on the timing. Stefano you talked about this obviously dragging on longer than you anticipated, I guess where exactly are you in the FTC seeing eye-to-eye? And then I am curious, do you think the deal can get approved given the current configuration of the FTC or does there need to be more commissioners added in order to gain approval?

Well, as I said, I am still positive on this deal. I believe that we have a strong argument to defend this deal. I cannot comment on the organization of the FTC. It will be up to them to decide whether they have enough people or not to judge on the quality of this deal. We are doing what we can together with Rite Aid and Fred's. We are collaborating very well with the FTC and as I said, we are preparing our Fred's to be ready to 35 compliance if we will decide to do so.

Okay, great, thank you.

Our next question is from Eric Percher of Barclays. Your line is open.

Thank you. Stefano, I’d like to come back to your comment around Prime. The FEP win was notable and not something we expected to see on their own. So it seems like early success. As you talk about the opportunities mid-term and long term, do you see a role as enabling fulfillment in dispensing, or do you see Walgreens as having a role in enabling pharmacy benefit management as well?

We believe that we are in the market. We have to follow the needs of the market and to be as useful as possible.

So are there elements of Walgreens negotiation with manufacturers of purchasing that you think are value in the pharmacy benefit space? Can you add on to what Prime has already created there?

To be honest, I believe that the market is evolving, is changing. And for sure, we will have a role to play in this market and we will try to, let's say, face all the opportunities that we will have in this market.

Okay, fair. Two words quickly, is the buyback at all impacting fiscal year '17 guidance?

Given the timing that we've just earlier this week announced that would be the buyback of up to $1 billion. It won’t have any material impact in this year's earnings where we stop buying back shares.

Thank you.

Our next question is from Lisa Gill of JPMorgan. Your line is open.

Thanks very much and good morning. Just given your comments around the challenging front-end environment and the comments of not seeing as much pull through on uncertain whether you talk about seasonal or more commodity or food, how do you think about the layout of your store going forward? Alex, I think I heard you say that you did peephole through on a little bit of beauty, as well as healthcare. Do you think about your strategy around retail clinic and maybe perhaps growing that more. How do you think about a strategy around lab, not talking about Theronas, but more of blood drawing, more services in that aspect as we think about healthcare, and to Stefano's comment around the changing and evolving landscape as we think about healthcare needs.

I think you are absolutely right. We've clearly got great corners. We had a platform of course is a great digital platform. So we have definitely got the right presence in the market. We don't have the right products in this space so we have physically in our stores. And we are doing something about that. I mean, as George said in his prepared remarks, we are now going to accelerate the reduction of our unnecessary SKUs. We've already been working hard in areas like seasonal before this I’m going to go further particularly as we look our lower volume stores are going forward. We are very committed to finding the right products on the right healthcare solutions for this space that we free up and we've got good experience in Europe, for example, with our opticians business and with the health and care business. And of course, we've got good experience here in America with clinics. So you’re absolutely right. We are really thinking very hard in testing and trialing different ways by which we can offer customers more particularly as we move more health, wellness, beauty convince model. And that's very much part of our thinking. But it will take some time. I think as we said before to get the right customer experience, the right partnerships, and particular under economics but we are comfortable to find that model in this marketplace.

Great. And then just one follow-up for George. If I look at the comps were basically up 8% on the pharmacy side but sales were up about 4%. How do I think about that? I mean, clearly I am sure generics was part of that but there is something else, is that the reimbursement component of it that's a drag?

It's the combination if you look at the relativity of generic deflation relative to what's happening on the brand mix is always the other factor and to much lesser extent, the reimbursement element.

Okay, great. Thank you.

That's a combination.

Our next question is from John Heinbockel of Guggenheim Securities. Your line is open, sir.

How do you guys think about the evolution of limited networks going forward, the composition of those, in a lot of cases, is the economics more likely to be around Walgreens versus CVS in some of those networks or can it be kind of be more of kind two of you and other retailers not participating? How do you think that evolves?

Hi, John, it's Alex here. I think we play in the marketplace and the marketplace is definitely evolving towards narrower networks. We really work hard to figure out what the payer or the marketplace wants, whether that be the commercial marketplace or Med D, and obviously Medicaid as well, and we work on economic model to see what the volume evolves look like. So we don’t try and drive the marketplace in that direction. We believe strongly in partnerships. We have no best interest apart from looking after our customers and giving good value, a combination of price and service. But there's no doubt the marketplace is evolving towards narrower networks and we have to operate and participate in that marketplace.

Okay. And then completely different, given your expertise in beauty, is there an opportunity for stand-alone beauty stores? And I say that from a perspective of getting access to brands that you might not be able to - and sort of Walgreens box. Is that an opportunity, you simply have too much to do inside a drugstore to think about that?

We think the opportunity is very much inside of a drug stores and new towards more of a health and beauty convenience specialist, that's what we’re seeing the investment and the growth rate now. The future of the business will be focused on many ideas, but at the moment we’re absolute focused on making the very most of the 8 million customers who use Walgreens today both online and in the pharmacies. And also developing a more appropriate beauty offer and we're seeing some really good things happening in the early stage of this promotion of this strategy and we're going to continue to drive it and as George has said already, this will be remarks we’re moving to another close in stores with a beauty differentiation project. So that tells you the confidence we have in the strategy.

Okay, thank you,

Our next question is from Steven Valiquette of Bank of America, Merrill Lynch. Your line is open.

Thanks, good morning everybody, congrats on the results. Yes I guess just on the Prime Therapeutics the network deal that started back on January 1. Does that care if there's any more color on whether the amount of additional arts volume was in line with your expectations or perhaps slightly better. And also are you able to comment on how many of the 14 Blue plans have signed up for the Walgreens network deals so far?

Hi Steve. I can’t obviously again comment on the second one, but we can tell you that’s absolutely in line with expectations and I can also tell you that we are pleased and also Prime are pleased on the owners of Prime are also pleased the Blue’s plans who own Prime. So we satisfied with the progress we’ve made the next phase for us is to give the members of the Blue’s a better value and obviously we’re looking at ways we can do that as the market evolves.

Okay. And just quickly on Rite Aid not sure if you can comment on this or not, but if for some reason the FTC were to decide that Fred's cannot be buyer of the Rite Aid stores the divestitures. Should we assume that one option would be that Walgreens could then still go back to drawing board with other potential buyers of those that in stores or if Fred is not the buyer does that essentially kind of bring it in to the potential Walgreens Rite Aid merger just that you’re able to comment on that or is too early to think about that next scenario?

For the time being Stefano here, for the time being we believe that Fred is the right buyer we believe that they have particular in the configuration – we are proposing now. They are absolutely a legitimate player in this industry if for some reason this will not be the case than we will review our options of course and we will take a decision.

Okay. All right, great thanks.

Thank you. Our next question is from Brian Tanquilut of Jefferies. Your line is open.

Hi, good morning guys. George it looks like you're continuing to make good progress in lowering G&A obviously tracking ahead of schedule in that $1.5 billion target. So how should we think about the opportunity going forward and the flow through for the rest of the year of the - efforts that you put in the past in terms of driving more G&A dollars down?

I mean on the particular program that we talked about today we obviously are very pleased to have achieved our target the program will conclude as we previously announced – around the end of this fiscal year. Some of the benefits of that will obviously – it will continue to see and see more of in the coming years. Given that nevertheless looking for opportunities to drive efficiency in our sort of businesses is just a way of life. So we will absolutely continue to look for opportunities year after year. They will come in different places they may be in different geographies, but there are always opportunities to drive efficiency. And so it's just a never ending we’ll continue this program will finish, but we’ll continue to look for more opportunities.

Got it, thank you.

Stefano here sorry people say well cutting cost is something that – is an end you cannot really rely on it forever, but it’s not just a matter of cutting cost synergies and savings are not just coming from reducing cost. Very often it depends they can depend on a different organization. And so if you have let’s say an approach to the business which is completely open minded you can continue to drive efficiency and reduce cost. Just changing the organization and this is really worth what we have done for many, many years and worked I believe we are relatively good at doing. And so we continue to believe that we will able to drive efficiency for many years independently on the obvious cost cutting that everybody can see.

Yes appreciate the color Stefano. To follow-up Eric’s question earlier on FTP and specialty I was just wondering how would you describe – the pipeline do you have right now in terms of that partnership with Prime on the specialty side in terms of pipeline for new contract or should we think of this as a, kind like one-off wind where it’s kind choppy and also what is the pitch that you guys make to potential client and what differentiate the Walgreens and Prime specialty offerings?

Hi guys Alex here, I think – it’s pretty clear about what has gone here is got the attention particularly with the Blue’s plans which we are very pleased about and really the pitch is really quite a simple one. Prime Therapeutics really wants that to make sure that the value they create is passed through the Blue’s members in different ways and what we do is really as a back shop operator particular of meal order and also specialty. I feel is to make sure that we’re really efficient and give great service to at least and a dispensing process. So this was a win for Prime Therapeutics FTP and obviously we believe with our greater scale and our expertise in dispensing prescription and specialty and central fill. So that’s gives extra capability to Prime and not use to be seem to be marketplace as well.

Got it. Thanks guys.

Thank you. Our next question is from Ross Muken of Evercore ISI. Your line is open.

Just following up on the specialty questions so how was your sort of view of that market and the right competitive landscape and the right level of profits sort of evolved as you thought about the launch of Alliance Rx because it’s obviously been area there is a lot of scrutiny, there is a lot of questions on what the right dollar level per script or what services should be required or should not be required. How do you feel like you bring a bit of different viewpoint to may be a market that had been somewhat stagnant in the last couple years in terms of its evolution?

Yes, it’s Alex again, I think that - we bring is that forward that efficiency it’s the marketplace but that went all over and they’re not for sure you know there is others who are larger of being that efficiency as well. But secondly we bring the opportunity of the network pharmacies as I said before we don’t just a central fill we actually own independent of Alliance Rx you the special network that are those in the center of excellence primarily based during the HIV. And also we have now a couple of hundreds specialty pharmacies we’ll show you a host of hospitals a host of specialist doctors. So again we offer you know with different register market and we offer a different approach. And we also believe strongly in this area that we should be paid for the service and the care we provide these are expensive complicated medications. We have pharmacists who are playing to the top of the certificates when they’re taking care of patients who are on these medications and we want to make sure that we are adequately remove to that part of the process and other remuneration belong to the other bits in the system. For example the PBM for example the insurance company we want to be well rewarded for giving the care that are pharmacy gets in that way.

And may be on the big picture side one of the managed care organization have talked about sort of more integrated model or have talked about running a presence closer to the individual obviously you have some of the best real estate and you have also been quite great at lowering cost and prices for individuals and varying that high level of service. How of your conversations with managed care around sort of what else you can provide to them or how you were sort of dispensing organization and other services fits in with their goals. How is that conversation evolved over time and what should we be focused on in terms of sort of future opportunities high level or big picture that could go on in those relationships?

Yes I can talk again, so again you know we have that I just seen - are sourced effectively a couple hundred and over clinics in different ways. And in these conversations they focus on really our strategic ability to become a very efficient and very localized dispensing service for them not really resonates with them. And secondly, we have as you said the real estate whether they can actually come in and have the lower cost ways of delivering services in the community outside of their more expensive systems. So these really are the two areas that we talk about a lot and we have a lot of different ways of doing that, a lot of ways of working whether it be with advocate here in Chicago. So again it's - and anyway for sure the conversation are good and we are learning together and again goes back to partnership we know what we’re good at I mean all of the areas where we want support and for sure clinic started to integrate is example of that.

Great. Thank you.

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

Yes, good morning. A couple thought questions here, first of all when we think about the script comps up 90 basis points quarter-to-quarter. Should we think about these comps continuing to accelerate through the back half of the year when you think about the opportunity to capture membership and volume from these partners? Do you think that it was all captured in the first quarter or we'll see an uptick later in the year? And second question is about kind of like the cadence of margin, should we expect to start seeing margins that are associated with these groups improving in the back half of the year?

Hi Ricky, it’s Alex again. Yes, I think that we did have a helpful uptick in seasonal illness on this flu side for weeks which spiked some of the numbers for us presently in Q2. So the way I think about it is that these are driven by two factors the smaller uptick in flu and also all of these contracts and the main started 1/1, so two months and then with beauty started as 1/12 and the member Med D which again we sort of a good season Med D again started 11. So we are confident that the way we have at the moment is what we expected on the strong volume we’ll therefore continue. In terms of margin, I would think again I’ll go back to the operating margin for us it really is leveraging our fixed assets as we continue to offer market competitive prices not below market but market competitive prices and drive volume through our fixed assets. I mean spent levers are more as they have always said in the second half of the year compared to first half of the year. It's important to look at the annual results as George has reiterated and again we are keeping our guidance for the full year between 7% and 11% EBIT growth.

But remember Stefano here, but remember that our goal has always been to keep the overall operating margin as flat as possible and the dynamic in these market and many other market is that the U.S. to give more to your customers you can get a little more from your suppliers and you can become more efficient. And so at the end combining these three elements you have to manage to have a margin overall year-on-year more or less flattish if possible.

Okay. And following up on that when we think about getting more from the suppliers and getting more efficiencies on the back-end. Do you still see opportunities to improve kind of fact purchasing efficiencies or growth scale for WBAD? One contract that is going affect up in the market it comes to mind is the Express Scripts AmerisourceBergen contract. Do you see an opportunity there?

It had always opportunities in the market and we are looking at the market very carefully and we will try to see all the opportunities that we will see in the market.

Okay. But is there something that is kind of fact already included in guidance or is that could be potential outside?

When we give our guidance we try to put in the guidance all the elements that we believe certain or very likely I cannot give you more details as you can easily understand.

And then lastly on the tax rate, tax rate came in lower than we anticipated how should we think about the tax rate George for the remaining of the year?

I think really it always looks at the year-to-date effective tax rate and if you look at that from an adjusted basis as I said that was around 24.5%. So I think tax obviously you know mix can change quarter-by-quarter but looking at year-to-date I think it’s perhaps the best way of thinking about this discrete items of course the timing of those, there was a little bit uncertain and they can go up or down but think of the year-to-date.

Okay. Thank you.

Thank you. Our next question is from Michael Cherny of UBS. Your line is open.

Good morning everyone, and thank you for all the details so far. Maybe to ask Ricky's WBAD question a little bit of a different way. As you think about the general deflation you’re seeing across the market, how do you think about the trade-off in terms of what you're seeing across the market what you can't control versus what you're doing with regards to sourcing. And on go forward basis depending on how you’re planning for what an uncertain scenario to place in an environment how is that positioning you in terms of being able to drive either incremental sourcing or essentially eating some of the potential challenge you have on the pricing side?

We make certain functions and on the basis of these assumptions we have our internal targets. And I repeat the assumptions are taking a really into account all the different pieces of information that we have on the market.

And so it's all in here, and I think we're in the market so we see how the market is changing in terms of price pressure and we except that. And we’re always working on the 1 areas. One is sort of we actually buy that and how do we continue to not just save money as Stefano has said but to recreate the organization and move money we’re into invest and as we can grow, and grow volume. So I think – we've never had and I defy that the pricing pressure is there but it’s never and we’ve always been aware of it and always trying to anticipate that in our guidance. So is the market and got to operate within it and for sure we believe we have a strong strategy for the market in the U.S.

Great. That’s all for me. Thanks.

Thank you. Our next question is from Alvin Concepcion of Citi. Your line is open.

Thank you. Just wanted to follow-up on the question about operating margin in the back half of the year how should we think about it by segment international retail operating margins in the back half should that continue to be challenge at a similar level as you in the quarter or are there opportunities there and also the U.S. is that something that you expect to flatten out in the back half?

I mean obviously we haven’t given specific guidance by segment we had first provide by reiterating our overall guidance figures I mean in terms of thinking about sort of the modeling. There is going to be a number of factors that you've got to think about and firstly we will we are consolidating the new Prime deal from Monday when we completed it. You need to think about that in factoring the U.S. model recognizing obviously that is a specialty on mail business with different dynamics. In terms of the international businesses, I think as we've said in the prepared remarks there is still the challenge in the U.K. with the NHS having cut the reimbursement that will continue the basis has performed robustly as we said over key customer period. But retailing is still itself quite challenging particularly in the U.K. which is our largest market. And then on wholesale sales, wholesale always a its kind of business or division that operates in a number of markets you can always get certain mix affect quarter-by-quarter. So it's tough to model I know quarter-by-quarter but I did point out in the prepared remarks that in certain of the emerging markets we had some growth really in the period when you get price changes in the market where people tend to buy ahead of customers buy ahead of the price change and that was the notable impact in the second quarter.

And it’s Alex again. Just really quickly on the U.K. as George has said the reimbursement pressure was the main reason for the decline, really there was two things government did one they normally do which is they buy margin which is normal in the U.K. contract. But secondly this year on December they actually remove some of the service payments, practice payments. And again if you look on new deals, you’ll see that’s a big issue in the U.K. So that really is the reason why we’ve had our increases and operating profit. These two business had a good December and that we’re focusing and controlling our costs it’s really driving as we always do, you need a bit of products particularly in beauty and some marketplace and developing new pharmacy services. So we’re looking to stabilize our business, but the impacts or the government action has been strongly share our main U.K. business.

Great, thanks for the color. And just a quick follow-up on the beauty initiatives and the remodel just wanted to get an update on what you’ve seen from those if you’ve seen an uplift of comps not only beauty section but also the overall store and some these mover of markets and if so could you quantify that at all?

Hi Alex again, I mean really it so wildly on the 2,000 stores if you would call we had about a marketplace in Phoenix which we tested and trials I mean took the best model and remained that really last year into the first 2,000 stores. So far so good we’re seeing that the beauty brand is growing we should expect it to do and over time we’ll develop you know the offer in the marketing around that new beauty offering. But this trial is to tell the affect that is going to have on the rest of our business but we remain confident and will have a positive impact.

Thank you very much.

Our next question is from David Larsen of Leerink. Your line is open.

Hi, can you talk a bit about how you’re going to roll up the Prime partnership into your P&L. So like for example obviously with this $2.9 billion contract that Prime just won in specialty. Like how much of that is going to flow through your P&L like when we think about central fill for specialty I guess what portion of specialty would that be any kind color there would be great? Thanks.

Well just on the accounting side I mean we will account for it on a fully consolidated basis. So when you're looking at our of sales, our adjusted operating income then you will obviously see a 100% of the entities results coming through, but then when you're actually looking at an earnings attributable to our shareholders to the WBA shareholders, we strip out and align the proportion that is attributable to Prime itself and I think as we said we own just over 50% of the business. So when you thinking of EPS then it will be our share if you thinking of operating it's a 100% also in the accounting books.

That’s great. So for FEP win that $2.9 billion in revenue all of that is going to flow through onto your P&L and then if they win say mail in a year or so that would also all flow through into your P&L that full $2 billion or $3 billion for now and $2 billion or $3 billion for specialty for revenue?

Anything that goes through the venture that the new combined venture as to say we show a 100% in revenue 100% in adjusted operating income but then we strip as I say at the lower end of the P&L that the Prime share. So when we are looking at adjusted earnings attributable to Walgreens Boots Alliance staffs got their share netted out.

Okay, great. And then I think Prime uses WBAD as well, right through ADC. So the value-add or pitch to managed care clients is both - I mean there's a significant cogs benefit there I would imagine right for the managed care…

We cannot comment on that. We cannot comment on the contact that Prime have or we'll have.

Okay, thanks. Congrats on a good quarter.

Thank you. Our next question is from Scott Mushkin of Wolfe Research. Your line is open.

Hi, thanks guys. Most of my questions have been answered but I just had one regarding the U.S. profitability in the pharmacy as we look out, you know, if the Rite Aid deal does not get approved, how should we frame it as we move out over the next year or two or three with all these contracts that has been signed specifically the profitability of the pharmacy?

Hi Scott, it’s Alex here. Again, as we have been really clear, we are independently working hard on our pharmacy strategy independent already and we feel very confident with the network we have already is strong enough to be very competitive in the marketplace. Anything that we achieve when the FTC gave a decision to approve Rite Aid will be incremental as George has indicated in the EPS numbers and also in terms of the synergies we announced as part of the deal.

And also you will appreciate that we will not be able to integrate all the stores of Rite Aid overnight. There will be a period portfolio of certain number of years where we will have to rely mainly on our stores. And in the meantime, we will integrate all the stores of Rite Aid. So you cannot see the effect immediately.

Right. And then looking at the front-end, obviously the beauty part of it seems to be working out that well and I just want to clarify, do you see another 100 stores are going to get the enhance beauty between now and the end of the year? I just want to make sure is that number correct.

Yes, it's roughly under 2000 just now, and it moves up to roughly 50,000 over a state of just under – we're going to see just approaching 8300. So, 3000 will have this by the end of this – really the end of the summer effectively.

Okay. And then any thoughts on what those stores do in comparison to the rest? I think you are a negative 0.8 comp on the chain but those stores perform 100, 200 basis point better, any parameters you have on that?

No, again it's really early on and the way we measure this really is about the underlying retail margin, the operating margin in particular and the more we see increases, relatively speaking, in beauty care and healthcare but in the beauty care, the more we see the retail underlying margin improving over time in a sustainable way. We are working around, I'd say, the rest of the model. As Stefano said in his opening remarks, we are changing this model in quite a torrid time in the U.S. for market changes. So we are very pleased with the progress we are making. But that's how we measure it.

So then my final one is pretty good quarter considering all the headwinds that the business faced. As we look out over the next 6 to 12 months, do you see any change in the headwinds that the business is facing? Do you think it's abating? Is there any light at the end of the tunnel, or is it going to continue to be this difficult as you move through the next 6 to 12 months? And that's it for me, thanks.

Well there are headwinds but we hope that we will be able to have also some tailwinds. And so we hope that at the end we will be able to deliver what we have promised.

I would just reiterate. If you just think of the guidance that we've given, we have maintained our guidance today. If you do the maths, then that implies to 7% to 11% year-over-year growth and that includes approximately a 12% headwind for currency. So if you exclude the headwind and obviously currency can go one way or the other but if you exclude the headwind then the guidance implies 9% to 13% year-over-year growth and underlying adjusted EPS. So I think that really I think gives us strong indication of what our thinking is and what we see how the businesses is performing overall. And as we said at the start of the year, this would be a more second half weighted in the year. The first quarter, second quarter has come out very much in line with our expectation. So that's really how we're thinking about how the business is performing at the moment.

Perfect guys. Thanks for taking my questions.

Our next question is from Ajay Jain of Pivotal Research Group. Your line is open.

Hi, thanks for taking the question. Most of my questions have been answered already, but I just wanted to clarify why you feel like you have more flexibility. I think in your prepared remarks, you tied together the new buyback program would be the latest Rite Aid developments. Maybe I am reading too much into it. But did the earlier comments just reflect any - do they reflect any greater or less confidence in a merger going through, or is the flexibility just a function of the lower offering price for Rite Aid?

The flexibility is simply obviously the lower price and the timing. I mean, we've been very clear that in terms of our policy is solid investment grade. We worked very closely with the credit agencies as you would expect which is important for our debt investors. And with the timing of the transaction with the revise consideration and with - what continues to be a very strong cash flows, I think you’ve seen again from this quarter's results that simply is why we've decided to announce what is the relatively modest buyback program. It's fine tuning is how I would describe it.

Great, thank you.

Thank you. At this time, I'm showing no further questions. I'd like to turn the call back over to Mr. Gerald for any closing remarks.

Thank you very much indeed, ladies and gentlemen. Thank you for our calls. Sorry for the technical problems we had at the beginning, but I believe you could all hear after we restarted. So thank you very much indeed and the IR team are available to take all and answer any questions you might have in the coming days, weeks, months whatever. And we will look forward to talking to you again next quarter. Thank you very much indeed.