Ladies and gentlemen, thank you for standing by, And welcome to the Walgreens Boots Alliance, Inc. First Quarter 2021 Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session . Thank you. Please be advised that today’s conference is being recorded. I would like to now hand the conference over to your speaker today, Gerald Gradwell, Senior Vice President of Special Projects and Investor Relations. Please go ahead.

Good morning, ladies and gentlemen, and welcome to our earnings call for the first quarter earnings of fiscal year 2021. On the call with me today are Stefano Pessina, our Executive Vice Chairman and Chief Executive Officer of Walgreens Boots Alliance; James Kehoe, our Global Chief Financial Officer; and Alex Gourlay; Co-Chief Operating Officer of Walgreens Boots Alliance. Before I hand you over to Stefano to make some opening comments, I will, as usual, take you through the legal Safe Harbor and cautionary declarations. 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. We undertake no obligation to update publicly any forward-looking statement after this presentation, whether as a result of new information, future events, changes in assumptions or otherwise. Please see our latest Form 10-K and 10-Q for a discussion of risk factors as they relate to forward-looking statements and note in particular that these forward-looking statements may be affected by risks relating to the spread and impact of the COVID pandemic. In today's presentation, we will use certain non-GAAP financial measures. 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. You will find a link to the webcast on our investor relations website at investor.walgreensbootsalliance.com. After this call, the presentation and webcast will be archived on the website for 12 months. Before I pass you on to Stefano, there is one change in definition we use in today's earnings that I would like to draw your attention to. Moving forward, comparable retail sales are now inclusive of our digitally-initiated sales as we believe this more adequately reflects our global omni-channel retail strategy. The full definition and historical restatements can be found in the appendix tables of this presentation or in our 10-Q to be filed later day. I will now hand you over to Stefano.

Thank you, Gerald. Welcome everyone. We are delighted to be announcing a start to the financial year that is better than we had initially expected. As you all are well aware, the retail market has seen many ups and downs over the five months. With the current increasing COVID infections in recent weeks, things have once again proved more challenging. In these difficult conditions, I am pleased to say we have adapted well through the continued dedication of our people and as a result of work and investment that we have undertaken in recent year.

Thank you, Stefano, and good morning. Our first quarter performance was better than expected as we delivered improved operational performance across a number of fronts. In particular, we exceeded expectations in Boots UK and Boots Opticians. Adjusted EPS was $1.22, a 11.6% lower than prior year on a constant currency basis. The year-on-year decline was entirely due to an adverse COVID-19 impact of $0.26 to $0.30. Overall, our markets encountered a widespread surge in COVID-19 incidences. And as a result, we saw increased restrictions or lockdowns across those markets. We estimate a COVID-19 AOI impact of approximately $290 million to $325 million, and this was worse than the guidance range of $250 million to $300 million we provided earlier. Nevertheless, the impact was much lower than the third and fourth quarters of last year.

Thank you, James. Before I highlight the progress on the strategic priorities and continued transformation, I must express my sincere gratitude to the hundreds of thousands of Walgreens associates across the country. They continue to provide essential pharmacy services and health and wellbeing products to their local communities during what has been an extraordinary difficult time facing challenges we've never experienced before while putting the safety of our patients and customers first. Walgreens continues to provide clarity during uncertain times and this quarter results show the strength of the Walgreens brand, people and organization. Today, I'll update you on some of the significant progress we've made in modernizing our pharmacy to create a more customer focused and healthcare driven offering while transforming our retail business, all powered by our investment in digital capabilities. I'll begin with pharmacy. We're accelerating our investments to more than either pharmacy operating model and we start to unlock the benefits. We are improving our processes and we’re increasing automation to free-up our pharmacist time, allowing them to provide more value-added healthcare services to our patients and customers. This model will also reduce working capital while freeing up cash to further accelerate our transformation of Walgreens. We have grown our pharmacy services rapidly since we last spoke to you, further validating the future role that pharmacists can play. We've administered more than $2.8 million diagnostic COVID tests since testing began, and we're well on our way to be able to offer COVID testing in over 3,000 of our stores by the end of this month. We're also very excited to be part of the COVID recovery and healing process as part of Operation Warp Speed. On December 18th, we began administering vaccines to high-risk elderly individuals in long-term care facilities and medical care providers, and we have plans in place to provide vaccines in over 35,000 long term care facilities in 49 states as part of Phase Ia of the national COVID response. We are also well into the planning of Phase Ib which is anticipated in most states to cover the over 75s essential workers and people with certain chronic health conditions. Today, we have over 30,000 qualified healthcare associates ready to deploy to the mass COVID vaccination program, and we're in the process of growing that number to over 45,000 in the next three months. We have the storage and infrastructure in place to facilitate our role in the mass COVID vaccine program. We have the capacity and are ready to vaccinate tens of millions of Americans. Our fine care platform, which connects patients to telehealth providers has grown exponentially, driven in part by the pandemic. In the quarter, traffic to the site increased the 13 times versus last year to over 18.9 million visits. We also continue to develop our physical healthcare locations alongside our digital offering to provide a broader range of healthcare services to our patients and customers. In December, we announced plans for 14 new Village Medical at Walgreens clinics to open by the end of the summer in Texas, Arizona and Florida. And we have just announced that we are now accelerating our applies with VillageMD to open at least 600 Village Medical at Walgreens clinics in more than 30 markets. As you can see, there's a huge amount going on in our pharmacies. And as Stefano mentioned in his opening comments, you will hear a lot more about this in the coming months. Turning next to our retail transformation. As you know, we are executing an extensive program of modernization across the company, driven by a holistic omnichannel and customer experience strategy. We are unlocking the 100 million Walgreens loyalty member’s data through implementing new data tools and analytical capabilities via Microsoft and Adobe. We accelerated this process further during the quarter. We're harnessing our data to develop a new way of marketing through our mass personalization strategy, which already boosted retail sales by 155 basis points in the quarter. And we are rolling out My Walgreens, our new loyalty program, redefining convenience and customer engagement. We launched My Walgreens in November. This is the most visible customer facing part of the strategy to date. It offers new loyalty benefits, a refreshed health and wellness focused brand with personalized products and services for all members. Approximately 40 million customers have already joined the program to date, and we're actively driving membership further in 2021. Over time, we anticipate that My Walgreens will become a vehicle for very targeted and personalized promotions and will play a key role in updating our customer proposition. On the theme of convenience, we have acted swiftly throughout the pandemic to give our customers access to Walgreens products online. Orders placed through walgreens.com or via the app can now be picked up in store, at curbside or drive-thru, in as little as 30 minutes. We believe this makes Walgreens the fastest same day retail pickup on a national basis. Over 1.7 million retail pickup orders were completed since launch in November. Total retail digitally initiated sales were up over 40% as a result of all the progress we are making and we believe this will only continue to grow. In summary, despite the tremendous challenges created by the pandemic, our team has worked tirelessly to adapt to the new market realities and ensure our patients and customers have access to healthcare, retail products and services where and when they need them. I'll now hand you back to Stefano for his closing comments.

Thank you, Alex and James. As you have heard, it has been a very busy time for the company. We have achieved a great deal already in the year and the pace of work is not slowing. What we are doing is completely transforming our company to bring us greater focus and to concentrate our investment of time and resources where we can achieve most. We are doing this without losing any of the financial benefits we have delivered over the years, in terms of efficiencies or synergies. In a time when there has been much uncertainty and noise, we have pursued a consistent and delivery plan to modernize our company, our businesses and our customer offering. What you are seeing from us now as seen in recent months and will see much more of in the coming months is the output of a lot of our work within the company. But it was just the beginning in terms of our plans, in both the application of technology in our business and the delivery of health service through our network. I know there is an understandable interest in who I will be handing over the role of CEO to, when and what direction that person will take the company. Despite the added complexity that restrictions in travel and communication have created in the recent months, the Board have been very active in their search for the right candidate for this role. And I am hopeful we will have news to share with you about my successor soon. It has been a huge privilege to lead such great businesses and work with such a dedicated and talented team of people across many countries and companies. Of course, I very much look forward to working with the new CEO to ensure a smooth and effective handover and deliver long term growth and the profitable future for the company. I am pleased to be in a position to handover the reigns as the company is facing so many opportunities and there's such positive momentum. The progress we have reported today and the work we have done to modernize the company and build an infrastructure that is both flexible and robust reassures with me. I will be ending the role over at the time when my successor will have all the tools they need, as well as my full support and assistance to drive the business to deliver continued, reliable and consistent growth looking forward. Thank you. We will now take your questions.

Your first question comes from the line of Ricky Goldwasser from Morgan Stanley. Your line is now open.

Yes. Hi, good morning and Happy New Year. My question is focusing on the divestiture of the wholesale segment, and it's a three-part question. So one, is there any strategic rationale of keeping some of the market to Germany, Italy and China? And then as we think about the new portfolio, you have the relationship with VillageMD and with LabCorp, are there any other healthcare areas that you are looking to invest in? And how important do you think is an anchor payer relationship as you think about the strategy?

Well, Stefano here. Good morning and Happy New Year. I have to say that the strategic rationale, as you know, we have had a very long relationship with AmerisourceBergen. I have met three of the Chief Executive, probably people you don't remember, like McNamara or David Yost or now, of course, Steve Collis, and we have always discussed doing something together. In reality, the first tangible signal that we were able to achieve was during our merger, the merger of Alliance Boots with Walgreens, an agreement that was allowing Walgreens to take a stake in ABC and was granting ABC a long-term contract, 10-year contract for Walgreens. This has been really a physical and important relationship, which has gone through very well, and our relationship which were already very good have become better and better. And in these years, we have spoken many time of putting together our wholesaling business and – in the market. You have heard here and there something, and we have analyzed all the possible combination, us buying them, them buying us, merging. And now we have come to a point, where we have, due – even due to the acceleration of COVID, we have really decided that this was the right time to concentrate on our core business of the pharmacies and to sell our wholesaling business to them. And as the wholesaling business is a very good business, our wholesaling business, of course, it has commanded a good price. And so I believe that now both of us have done a good deal. We have the money to repay some debt at above all to invest in our core business, particularly in U.S., but also in UK, as they have the possibility to get a global business. This is - the second question is VillageMD, if we have other targets? Yes, we have other targets. Of course, we cannot talk too much about it. But one of the reason why we are happy now to have additional cash is because we have a target. And, of course, we will invest in our own business, as Alex was saying before and maybe we'll reiterate after, but also we have a target to buy. You had the third question, which one sorry? Germany. Germany, it's an obvious question. Germany, we have a joint venture with McKesson. And so what we have done this deal without talking to our people, of course. But the real reason is that Germany, the merger that we have done with McKesson in Germany will deliver a lot and lot of synergies. We are talking of many, many, tens of million of synergies, we believe. And so the business will have a different value in three or four years when we will have been able to deliver all these synergies. And so, of course, we have to keep develop the synergies and after we will see what to do.

And Ricky, it’s Alex here. On the anchor point, we're still a very open ecosystem, working closely with all of our commercial partners, payers and, of course, PBMs, and that's still our strategy at this point in time.

Thank you.

Your next question comes from the line of Robert Jones from Goldman Sachs. Your line is now open.

Great. Thanks for the question. I guess maybe just on the VillageMD strategy. Clearly, this seems like the strategy to kind of transform the company more towards healthcare. I know you talked about taking some of these proceeds and now targeting 600 to 700 over four years, I believe the old target was 500 to 700 over three years. I know there's probably a lot of differences in cadence there. Can you maybe just talk about the timeline of the roll out? And I guess more importantly, how quickly can you get to enough stores where you think it really could start to matter to the economics of the business? Obviously, you have a large store base beyond just hundreds of clinics. And so just really curious kind of what pace we should be thinking about and how this could really impact the overall financials of the company? And anything just on a store-by-store basis to help us think about a Walgreens with a VillageMD and what that could look like versus a Walgreens without a VillageMD? Thanks.

Yes, I’ll take a shot. It’s James here first. I just want to put some perspective on around the deployment of funds. I think, yes, they will principally be focused on healthcare. And VillageMD is just the first example and we expect a number of moves over the coming weeks and months. And we won't be measuring this in years, we'll be measuring it in months. VillageMD, if you take it as a specific is, it's got two dimensions to it. It's not just the contribution to the business, where it is -- helps us to become relevant in as a location in reducing healthcare costs over time. That's got one financial return and it's got an overall benefit of improving the ability of Walgreens to influence healthcare longer-term. The other one is don't forget it's a financial investment as well, and we are actually strongly encouraged by what we're seeing in the stores. We're hitting NPS scores of 90%. And as we stared at the performance, we decided this was the time to accelerate the investment. We believe VillageMD, as just even as a financial investment of 30%, is extremely attractive and it's getting more attractive by the day. So we're inclined to view this two ways: one is the financial investment and two is integral to the core premise, which is improving the cost of healthcare.

Yes. Hi, Robert. And just one building up point is the cadence. We announced 40, the rest of this year. So we're increasing the cadence as we get going here. And so therefore, it's the length of time we're doing this over has stayed the same. So we'll clear up that point, it's going to be 600 in the same length of time as the 500. And beyond that, also remember, we're integrating digitally as well, particularly around the pharmacy business and the way that all the pharmacies works with the doctors. And extending the scope of practice of pharmacy is now a real possibility in many states, and we believe this model will be advantaged in that situation as well. And the last thing I would say is that remember that VillageMD also managed many risk-based contracts, almost 20%, I think, will be a bigger business. And therefore, you can imagine working with them closely on risk-based contracts as another opportunity in the future.

Don't forget also that the VillageMD has also clinics outside our pharmacies, the clinics are there or the clinic they buy because they are quite an aggressive buyer. And of course, this is another synergy for us because they are trying to organize -- coordinate these clinics that they have with our pharmacies. Even if they are not physical in our pharmacies, there is a coordination. And part of the money that they have will be used for sure to buy additional clinics. Over time, we will try to really relocate as many as possible of these clinics into our pharmacy. But even if they are not in our pharmacies, they are coordinated with our pharmacies.

Your next question comes from the line of Elizabeth Anderson from Evercore.

Good morning guys and congratulations on the deal that was announced yesterday. I have a question on the core business. I was wondering if you could provide a little bit more details on how you see the cadence of gross margin progressing as we go across the year, maybe particularly in the US business but then for WBA as a whole? Thanks.

First of all, we were actually pleasantly surprised in the first quarter in the US. Margins were pretty robust on the pharmacy business, and I would say, slightly better than we would have anticipated. And as usual, some of that is always timing but we had a pretty good start to the year, it's promising. And correctly so, you highlight that there will be a first half, second half to mention here. So you could look at the first quarter and second quarter as being the low points of the year in terms of margin and the second half, the margin is rising. But the strength in Q1 and you've obviously seen, is broad based. And I do want to -- I'll take this opportunity to highlight that. We had overperformance in all of the divisions, at a moment when actually the COVID impacts across the business are higher than we anticipated. And at the same time, we slightly increased the pace of the investments we're making, particularly in the US business. So we're actually -- I would say in the US, retail was slightly weaker but the retail margins were better than we expected. And then on pharmacy, the scripts were weaker because of COVID but the margins were better. So I would say, in general, we were pleasantly surprised by the upside, particularly in the US in Q1.

Your next question comes from the line of A.J. Rice from Credit Suisse. A.J. Rice: Thanks for the comments on the vaccine. I might pursue that a little more. I think you're saying that, the vaccine outlook is part of the reason why you're maintaining the low single digit outlook, in spite of the lockdowns. Do you have updated thoughts on the economics of the vaccine to you? Also maybe thinking about it in terms of right now, you're mainly helping in the long term care facilities but obviously, at some point, I assume there will be some administration in the retail? Do you have any sense of timing on that and how the economics of that versus what you're doing in the long term care facilities?

I'll take a shot at that. And you're right, your first comment was dead on. And I mentioned we've seen COVID impacts in Q1 about $15 million more negative than we expected. And we expect to see the same in Q2. And we're actually -- we can't predict this but we expect COVID core impacts, mostly coming through a tough cough/cold/flu to be about $200 million negative. And we do expect that to be offset by vaccinations and other opportunities. So the base business is also doing better. Just on the economics, clearly, that's commercially sensitive but we don't want to provide it. But I'll give you one insight. So in the second quarter, when you would expect the contribution from vaccinations, and we have a contribution, we have no profit upside coming from vaccinations. So the administration of vaccinations to care homes is not a particularly profitable business. It's extremely labor-intensive and the costs are incremental. But that's part and parcel of what we have to deliver as probably a member of the healthcare community. That being said, the vaccines will be accretive to the profile in the second half of the year. And that's why we're relatively -- we did change the tone of our guidance, if you like. We confirm low single digit. But please don't lose the sentiment of the last part of that phrase was, and the profile is tilted to opportunity. So we don't have brilliant visibility to the availability of stock on vaccination. So there's a large amount of uncertainty. However, with the pieces of the puzzle we know, we believe we have opportunity in the second part of the year. So maybe, Alex, if you want?

I think, as James had said, we've really invested upfront here appropriately, in my view, to make sure that we are ready to get these vaccinations out as fast as we possibly can. And you saw our press release yesterday morning, we said that we've got all our long term care facilities now actually ready to be administered with the first stores by January 25th, I think it is. So we feel that we are -- we don't feel we know we're on track with what we committed to do. And we're also on track with resourcing up the pharmacists and the farm technicians and retraining a number of farm submissions to be able to administer those. And our teams are really motivated to get this done. So we're really in really solid shape to administer the vaccines in a more complicated long term care facilities. Let me go back to being able to administer these vaccines inside of our facilities, which happens in Ib, and that really starts about now. We are very confident that we'll be able to speed and be able to keep up with demand and therefore move forward. The whole program, I believe, will accelerate as we go through the spring. That's all that we're hearing from the new administration, in particular. And we're in close contact with both Operation Warp Speed and incoming by the administration to make sure that we are ready to do our job for America and also to make sure that we do it in the most efficient way for our shareholders as well.

Your next question comes from the line of Michael Cherny from Bank of America.

I think following up, James, on that last line of commentary regarding the way you view opportunity. I'm hearing clearly the potential if the vaccination process accelerates at a faster clip than expected. But how else do you think about the puts and takes of the drivers of opportunity? And especially how do you balance them against the trade-off you're making in the growth investments versus the potential for any cost ramp down or cost adjustments tied to the current spend you have around COVID that's impacting the overall profitability?

I think if you look at the full year and just simplistically say you've got two big positives. One is vaccinations and the second one is we had a really strong start to the year, and it was largely driven by operational execution, really strong in the UK, Ireland opticians and a positive start, especially to the pharmacy business in the US. And actually wholesale came in above plan as well. So we actually have everybody on all the cylinders. The big negative and the big question mark and it's the reason why we basically maintain guidance is we actually have a lockdown in the UK right now that runs through the middle of February. Now we think we're much better at managing through a lockdown now, which is good but still, it is a cloud in the future. And then secondly, you see the large number of incidences in the US, that does pretty quickly drive through to lower medical visits. So in December month, the medical visits were worse than they were, on average, in the first quarter. So we're just being cautious in saying, hey, the opportunity on vaccination will offset the negative on COVID. The really strong start to the year and we are actually already reinvesting some of that. So we're taking -- when you think about the whole deal that was announced yesterday, it's a catalyst for accelerating change if you think about it. So we've accelerated some of the omnichannel investments in the US You've seen My Walgreens go out there. You've seen us get the curbside up in 9,000 stores. We're driving at a pace that is quite fast. I think over the next six months, you'll see increasing investments in healthcare, with probably a skew to tack-on acquisitions focused on generating synergy with the pharmacy business and with a very technological bend to it. So there's going to be a lot of news on the way. So I think you have to balance vaccinations versus COVID adverse impacts and then simplistically, a very strong start to the year, which gives us additional confidence to increase investments in the coming months. And it's as simple as that. It's not any more complicated than that, and that's the way we're thinking about it. Well, we did add into the overall guidance that's skewed to opportunity and I don't want that to be lost to the community on the phone.

Your next question comes from the line of Eric Percher from Nephron Research.

Building on that commentary, can we speak to the EU pharmacy and specifically the return to profitability was encouraging, it sounds like much of this is cost mitigation or cost management, but clearly some NHS timing and benefit? How should we think about the continued contribution from NHS? And I think that really comes down to what we've seen this quarter sustainable moving through the year?

The overall impact of the NHS funding, I think, was -- like it's in the region of $15 million. It's not a huge number but it did give favorable margin contribution in the quarter. And that's a little bit -- there's always a timing issue on when this stuff gets recognized in the P&L. So it added about $15 million of positivity. I think the biggest trend in the UK, I think if you look at the overall segment, I'll give you two numbers. The gross profit was down 11% because footfall is still very weak in a lot of markets but our e-commerce business, in general, across in international, is on fire. So the UK was up 106% and we make nice margins on our e-commerce business in the UK and in Ireland. So we're getting this -- and the second positive dimension is overheads in the first quarter were down 12%. So you think about it this way, a high fixed cost structure when COVID hit us at the end of last year, has a significant impact on the segment's profitability. But as we start to recover from COVID, the significant and quite decisive cost reductions taken will dramatically improve the leverage going forward. So there will be a fairly -- I think Q2 is a wait and see kind of moment in the UK. There will be quite a lot of lockdowns. And then when you get to the second half, there will be significant growth in the second half. But I think we mentioned this before, we see the recovery in the UK over an 18 to 24 month period. And you could almost draw a straight line between the pre-COVID profitability and two years from now, and estimate what the segment will look like at the end of this year…

And we are adding a lot of capabilities to deliver online. Also investing to create, not a new warehouse, but to increase dramatically the size of the warehouse that we have dedicated to this. And so overall, we will be able to follow the trend of the online. And we see that the reduction that we have had, overall in sales in this lockdown compared to the lockdown that we had a few months ago, now we are much better. Of course, we are suffering but much less because the ability that we have to deliver online is definitely higher. And we have also found a way, as James was saying, to have a decent margin on these sales.

Our next question comes from the line of George Hill from Deutsche Bank.

Actually, it's two quick questions and they're basically housekeeping questions. Number one is, could you quantify what US script growth would have been ex-flu vaccines? And number two is, can you remind us of the split of pharmacy revenue versus non-pharmacy revenue in the Boots business? If I remember right, it tended to skew closer to 50-50 as opposed to the 75-25 split in the US? Thank you.

So I can -- from memory, particularly, I can take the second one. It's about two thirds front end, one third pharmacy in the Boots business. And in terms of the first question, obviously, it's been a really strong flu season, around over 40% increase in flu. But it really is still the core business that drives the scripts. So the numbers that James gave in his prepared comments, our underlying comp growth of 2.7%, is primarily driven by the core business.

And bear in mind that the 2.7% is after what we estimate a negative COVID impact of 210 basis points. So I'd almost asked the question in a different way, if you didn't have COVID, what would your script growth have been? And it would have been in the 4.5% to 5% range. And the vaccinations were stronger in Q1 but it didn't have a material impact on the result.

There are no further questions at this time. I will turn the call back over to presenters.

Thank you. I'm aware that not everyone who wants to do got to ask a question. As ever, we are out of time. But if anybody didn't get to ask questions, the IR team are here still. So please come through to us by e-mail or phone and we'll be happy to answer you. Thank you very much indeed. We look forward to speaking to you next quarter.

Ladies and gentlemen, this concludes today's conference call. Thanks for participating. You may now disconnect.