Rick Hans - Divisional Vice President, Investor Relations and Finance Greg Wasson - President, Chief Executive Officer, Director Wade Miquelon - Chief Financial Officer, Executive Vice President, President - International Kermit Crawford - President - Pharmacy, Health and Wellness Services and Solutions

Steven Valiquette - UBS Mark Miller - William Blair John Heinbockel - Guggenheim Securities Ricky Goldwasser - Morgan Stanley George Hill - Deutsche Bank Mike Minchak - JPMorgan Robert Jones - Goldman Sach Edward Kelly - Credit Suisse Charles Rhyee - Cowen and Company Meredith Adler - Barclays

Thank you, Nicole. Good morning, everyone.

Welcome to our first quarter 2014 conference call. Today, Greg Wasson, our President and CEO, and Wade Miquelon, Executive Vice President, CFO and President International, will discuss the quarter.

Also joining us on the call are Kermit Crawford, President of Pharmacy and Mark Wagner, President of Store Operations. As a reminder, today's presentation includes certain non-GAAP financial measures, and I would direct you to our website at investor.walgreens.com for reconciliations to the most directly comparable GAAP measures and related information.

You can find a link to our webcast on our Investor Relations website. After the call, this presentation and a podcast will be archived on our website for 12 months.

Certain statements and projections of future results made in this presentation constitute forward-looking statements that are based on current market, competitive and regulatory expectations that involve risk and uncertainty. Except to the extent required by law, we undertake no obligation to update publicly any forward-looking statement after this presentation, whether as a result of new information, future events, changes in assumptions or otherwise.

Please see our latest Forms 10-K and 10-Q and subsequent filings for a discussion of risk factors as they relate to forward-looking statements. Now, I will turn the call over to Greg.

Thank you, Rick. Good morning, everyone and thank you for joining us on our call.

Today, I will begin with highlights of our performance in the first quarter year. Next, I will update our strategic progress in light of the continued soft economy and finally I will look ahead into the fiscal year.

Then I will turn the call over to Wade for a more detailed financial review of the quarter in the coming year. Before we get into the highlights, I want to start by saying we are generally satisfied with the topline results, our cost management and our synergy performance this quarter.

Our margins, however, were most significantly affected by the year-over-year negative impact related to generics. This quarter saw a significant shift in the generic wave from a peak in introductions in the first quarter last year to a trough this year.

We also saw an impact from our strategic decision to make meaningful promotional investments in our daily living business. Wade will walk you through the gross margin story in more detail later.

Regarding sales for the quarter, we generated a record $18.3 billion. GAAP and adjusted first quarter earnings per diluted share were $0.72, which include the positive impact of $0.07 per diluted share attributable to a deferred tax adjustment from a reduction to the UK corporate tax rate for Alliance Boots.

We sold a record 213 million prescriptions in the quarter and we increased our pharmacy market share 50 basis points to 19.4% year-over-year. We opened an innovative new store with John Hopkins Medicine which will allow us to codevelop clinical initiatives, designed to improve community health care that we intend to pull throughout the chain.

Walgreens and Theranos also took the next step in our planned national roll-out of groundbreaking new lab services with the opening of Theranos Wellness Centers in two stores in Phoenix. We continue to participate in industry consolidation as we completed the acquisition of certain assets of Kerr Drugs retail drugstores and specialty pharmacy business.

And finally, we opened our NetZero Energy Store in Evanston, Illinois. We are investing in this store to bring what we learned through our other locations and help us reduce our chain wide energy consumption 20% by 2020.

As I have mentioned, we reported first-quarter sales of $18.3 billion, up 5.9% from $17.3 billion a year ago. GAAP operating income for the quarter was $924 million, up 31.1% from $705 million last year.

Adjusted operating income for the quarter was $1.1 billion, up 19.4% from $924 million in first quarter 2013. GAAP earnings per diluted share were $0.72 in the first quarter compared to $0.43 last year, up 66.1% and first-quarter adjusted earnings per diluted share were $0.72, up 24.1% from $0.58 in the same quarter last year.

Finally, we generated operating cash flow of $133 million in the first quarter compared with $601 million in the year ago quarter. The decrease was primarily the result of the tiny working capital changes associated with our transition to AmerisourceBergen.

Looking at our gross profit dollar growth and SG&A dollar growth on a GAAP basis. This quarter the spread was $72 million.

On an adjusted basis, the spread was $44 million. Adjusted gross profit dollar growth increased by $61 million or 1.2% compared to the same quarter last year.

Adjusted SG&A dollar growth increased $17 million or 0.4% compared to the same quarter last year, as we continued our strong focus on cost management. In fact our SG&A dollar growth performance this quarter was among the best we have had in the past several years.

As we made progress on our topline results, we also advanced our three strategic growth drivers, creating a well experience, transforming the role of community pharmacy, and establishing an efficient global platform. Today I will provide an update on that progress beginning with well experience.

We are continuing to see a value conscious consumer and the impact of a soft economy. We responded with meaningful promotional investments in the quarter resulting in an increase in traffic of 210 basis points compared to fourth quarter fiscal 2013.

In addition, basket size grew 2.2% and daily living sales in comparable stores increased 2.4% all compared to the same quarter last year. We also saw aggregate gains in market share in the quarter across Nielsen tracked categories in our daily living business which improved as the quarter progressed.

While these numbers represent solid gains in our daily living business as we go forward into fiscal '14, we will leverage our data and insights from Balance Rewards to improve the effectiveness of our promotional investments. We are elevating our focus on meeting customers' expectations in all channels and are driving our alignment across our organization with the appointment of Sona Chawla, as President of Digital and Chief Marketing Officer.

Through her new role, we bring together the power of e-commerce marketing and insights and analytics teams to help deliver our Well Experience. A key part of that strategy is the continued rollout of our Well Experience store format.

We are pleased with our progress to date on Well Experience with 87 new and converted stores this quarter, totaling 600 across the country. As we continue to refine our strategy, we will bring our innovative format with its updated assortments and integrated healthcare offerings into new markets.

We are also enhancing our beauty offering, which we rolled out in nearly 200 of our Phoenix and Arizona stores this quarter and where we launched Boots No7 product in partnership with Alliance Boots along with a broader assortment of beauty brands. We also created a more engaging, interactive experience for our customers, with specialized training for our beauty advisors, and most importantly performance is exceeding our expectations.

Finally, turning to Balance Rewards, 70% of frontend sales in November were processed through our loyalty program with 74 million active members and 92 million members enrolled. Also with more than 12 months of data, we are gaining valuable insights into our customers' shopping and purchasing habits giving us excellent information to work with as we sharpen our category plans for the year ahead.

In our pharmacy health and wellness business, demand for flu shots remained high despite the low start to the cough, cold and flu season. In the quarter, we administered 1.1 million more flu shots than we did last year, bringing our total for the season to-date to 6.4 million.

In addition, our script comp was up 5.5% in the quarter and our retail pharmacy market share increased 50 basis points to 19.4% year-over-year. We also exceeded the industry prescription growth rate in the quarter by 2.9 percentage points until the record 213 million prescriptions.

However, as I described earlier, our margin was impacted by a negative effect related to generics, including a slowdown in generic introductions as well as an impact to controlled pain medication. The past year, we led the industry to ensure the safe dispensing of controlled medications, working to ensure our patients receive the medications they need and to help control abuse through new processes, procedures and training as part of our Good Faith Dispensing Policy.

As a results of our enhanced procedures we saw some drop off in volume of these higher-margin medications and a 50 basis point impact to gross profit dollar growth. As we begin to look beyond the flu season, we will leverage our success with flu shots to drive our non-flu vaccine programs.

We have seen year-over-year growth in vaccines of 34% and we continue to see tremendous potential to grow our share of the $7.4 billion market. We also will continue to grow our share of Medicare Part B patients as we take advantage of the consolidation of mail order diabetes testing supply companies.

As a result, we have seen significant growth in our testing supply prescriptions and are looking to continue to increase that business. Last year, our share in Med-D outpaced the industry and we are focused on improving our performance this year.

Once again, we are a preferred provider for four of the top national plans offering our customers lower co-pays for medications. We have experience with these programs, know the customers and believe we are well-positioned to improve our Med-D script volume.

Through our Well network, we have brought over 400 healthcare clinics, specialty and infusion assets, hospital on-sites, centers of excellence and other resources together with our 8,200 retail pharmacies and connected them with partners across the industry, including physicians, health plans, payers and plans. Together we are pioneering new kinds of partnerships and models of care that will create better experiences for patients, improve health outcomes and lower the overall healthcare costs.

Next, our partnership with Alliance Boots also continued to add to our results contributing $0.14 per diluted share to Walgreens' first quarter 2014 adjusted results, which included $0.07 per diluted share attributable to the deferred tax adjustment I referenced earlier. As you recall, that compares favorably to our previous estimate of $0.05 for the quarter.

In addition to the company's contribution, we are making solid progress through our joint venture in Bern, Switzerland, building productive relationships with generic manufacturers and integrating the AmerisourceBergen into our global procurement process. In addition with our scale and expertise we can add value beyond procurement, working with manufacturers on a full range of programs that bring together our health care assets to improve service delivery and health outcomes.

16 months into our work, I am more confident than ever in our game changing strategic partnership with Alliance Boots and our strategic relationship with AmerisourceBergen. We are bringing together two iconic retail brands, the leading European integrated wholesale retailer and a leading U.S.

wholesaler to create a truly unique collaborative global retail wholesale model. This combination is powerful in itself.

Three of the world leaders in our respective industry sectors building a global platform that is unmatched in the retail or wholesale pharmacy industry that will allow to not only better serve the U.S. and European health care systems and patients but it will allow us to serve the growing markets around the world.

Wade will give you more details on this as well as our progress toward our 2016 goals shortly. Overall we believe we are well-positioned for future growth.

As we noted in our press release, we anticipate the effect of the generic trough will moderate in the back half of the year and with our joint venture in Bern, we are best positioned to manage the changes taking place across the industry. We are focused on determined execution in our core business, the fundamentals that have always defined this company, disciplined cost management, driving top-line results and meeting the needs of customers every day in our stores.

Finally with Christmas just a few days away, we are in the midst of our busiest season. I want to thank our employees who have done a great job providing extraordinary customer care and ensuring that we execute with excellence during a very critical time for our business.

We wish everyone on our team a happy and healthy holiday season and with that, thank you, happy holidays and I will turn the call over to Wade.

Thank you, Greg. Good morning, everyone and thank you for, joining us on the call.

This morning I will take you through our quarterly results as well as update you on our Alliance Boots partnership and our AmerisourceBergen relationship. As Greg noted earlier, for the quarter, we reported a GAAP EPS of $0.72 per diluted share based on 962 million shares.

GAAP EPS walks to an adjusted EPS of $0.72 for the quarter as illustrated by this chart. A LIFO provision of $0.04, acquisition related items were $0.11 per share consisting of $0.05 of acquisition related amortization costs, $0.02 of acquisition related costs, $0.03 from Alliance Boots related tax and $0.01 of Alliance Boots related amortization.

Finally, special items were a net reduction of $0.15 per share. As noted, there was $0.02 per share in costs associated primarily with the closing of the Lehigh Valley distribution center as the company positions itself to operate on a global platform which was more than offset by the positive EPS impact of $0.17 per share related to the warrant issued by AmerisourceBergen.

GAAP and adjusted net earnings in this year's quarter includes the positive impact of $0.07 per diluted share attributable to a deferred tax adjustment resulting from reduction to the UK corporate tax rate, applicable to Alliance Boots which was enacted in July 2013. Let me now provide more detail on our comparable store sales for the quarter.

Comp prescription sales increased 7.2%. Comp front-end sales increased 2.4%.

Total comp store sales increased 5.4%. Comp prescriptions filled increase 5.5% versus the script comp of negative 4.8% in the year ago period.

Now, please recall the year ago quarter was negatively impacted by our exit from the Express Scripts network. In the first quarter, the front end comp increased 2.4%, traffic increased by 0.2% and the basket size increased by 2.2%.

As Greg has said earlier, our front end has now turned positive on both a one and two-year-stack basis primarily due to the momentum of our new promotional decisions designed to balance traffic and basket with profitability. Looking at comparable store script numbers, our retail scripts were up 5.5%.

This continues to reflect the fundamentals of our underlying business, the return of Express Scripts customers and our continued progress in winning new Medicare Part D customers. It's also worth noting that the two-year stack on script cost has turned positive for the first time in eight quarters.

With respect to margin, our adjusted FIFO gross margin was 28.5% in the current quarter compared to 29.8% last year, a 130-basis point decline. While we always experience some reimbursement pressure, by far one of the most significant factor affecting the pharmacy margin was dramatically slower rate of new generic introductions this quarter versus the quarter a year ago.

The front-end margin was negatively impacted by increased promotional investment designed to drive traffic as well. As Greg mentioned, the loss of some controlled substances in the business impacted the margin negatively.

Taking a look at our longer-term adjusted FIFO gross margin trends this quarter's 130 basis-point decline was up against 140-basis point increase a year ago. In essence, the benefit of the generic wave last year reversed itself this year and we expect an impact of similar magnitude in the second quarter.

As stated earlier both the pharmacy and front-end margins decreased in the quarter, which impacted our overall results. Moving forward, front end margin will continue to be impacted by our new promotional adjustments until we cycle these changes.

This next chart, which we demonstrated and discussed last quarter, illustrates the impact of new generic drug introduction tab on our multi-prescription sales comps. You can see that the generic impact on comp prescription sales was greatest in the first quarter of fiscal 2013, reaching a negative 8.8% versus the generic impact in the most recent quarter of a negative 0.09%.

The highlighted quarters illustrate that the number of new generic drug introduction has slowed dramatically versus a year ago. In our experience, the margin change resulting from generics is inversely correlated and slightly lags the impact of generic changes.

That is the strongest positive effect on margin typically occurs shortly after generic impact on prescription sales and is the most inflationary and conversely the weakest positive effect on margin typically occurs shortly after generic impact on prescription sales is the least deflationary. Transitioning now to gross profit; this slide illustrates our quarterly gross profit dollar growth trends for the past nine quarters on a GAAP basis.

The next slide shows these trends on adjusted basis. Adjusted gross profit dollar growth slowed from 4.3% in the fourth quarter of 2013 to 1.2% in the first quarter of 2014 commensurate with the generic wave shift and the front end investment.

If we go to adjusted SG&A dollar growth, you can see that our GAAP SG&A dollar growth was a negative 0.4% to which we add back 0.3 percentage points from Walgreen acquisition-related amortization and 0.9 percentage points for the Hurricane Sandy offset, summed up by a 0.4 percentage point related to organizational efficiency costs. Netting these items resulted in an adjusted SG&A dollar growth of positive 0.4% in the quarter.

Shown here are the SG&A dollar growth trends for the past nine quarters on a GAAP basis and the follow on slide shows a similar trend on adjusted basis. The adjusted SG&A dollar growth for the quarter was 8.4% year-over-year increase versus the 2.5% increase in the first quarter of fiscal 2013.

This next chart illustrates that our two-year stack for the SG&A dollar growth trends on a GAAP basis for the last nine quarters. Now let's review the two-year stack trends on adjusted basis.

Two-year stack adjusted SG&A trends improved versus a year ago by 450 basis points with a two-year stack of 2.9% growth in the first quarter of 2014, down from 7.4% last year. During the quarter, the rate of growth and adjusted FIFO gross profit dollars exceeded adjusted SG&A dollar growth by 80 basis points.

Given the very powerful margin headwinds we faced, we are pleased with the SG&A effort needed to yield this positive spread. As you can see, this is a third consecutive quarter with a positive spread.

Turning to a few other components of our income statement, this quarter included LIFO provision of $58 million versus a provision or charge of $55 million a year ago. Our effective LIFO rate for the quarter was 2.8%, up slightly from 2.5% a year ago.

Net interest expense for the quarter was $41 million versus $37 million from a year ago. Average diluted shares outstanding were 962 million shares versus 951 million shares last year.

The change is primarily due to the impact of a higher stock price on the number of in-the-money options which are counted in diluted shares. In Q2 you can expect a diluted share count of approximately 960 million shares, subject to changes in the current share price.

You can also expect interest expense of approximately $40 million in Q2. Our blended effective tax rate for the quarter was 36.8% versus 38.2% last year.

On a go forward basis, Walgreens' tax rate is expected to be about 37.5% excluding the various impacts associated with the Alliance Boots partnership. Cash and cash equivalents were $969 million in the first quarter versus $1.8 billion a year ago.

Accounts receivable increased by 20.5% primarily due to the increased business including the return of Express Scripts network prescriptions, while accounts payable decreased by 1.2%. LIFO inventories were down 1.2% and FIFO inventories were up 1.5% year-over-year versus a sales growth of 5.9%.

Overall net working capital decreased by 5.7% versus a year ago. During the first quarter, we generated $133 million in cash from operations versus $601 million a year ago.

The decrease was primarily due to the result of timing of working capital changes associated with our transition to AmerisourceBergen which we expect will work itself out over time. Free cash flow in the quarter was a negative $231 million versus a positive $265 million a year ago.

Shifting to our quarterly Alliance Boots accretion walk, as shown, there was the accretion of $0.14 in the quarter including a $0.07 one-time tax benefit due to lowering of corporate taxes in the UK. A detailed description of this walk is included in the appendix.

Looking forward we estimate the adjusted EPS accretion from Alliance Boots for the second quarter of fiscal year 2014 to be $0.07 to $0.08 per share based on our current estimate of IFRS to GAAP conversion and foreign exchange rates and moving forward, we will continue to provide our accretion estimates on the call each quarter in advance. We are also confirming the combined synergies for fiscal year 2014 and expect them to be in the $350 million to $400 million range.

A key consideration the second quarter each year is a relative population affected by the flu as illustrated in this chart As noted, the red line is the incidence of flu last year with the peak in January and the purple line is the average incidence of flu for the last three years. And the black line is the actual flu incidence season to date this year.

As you can see, the flu incidence this year is less pervasive than last year and is running 5% to 10% below last year. We will keep you posted on how this relative flu incidence plays out throughout the season with our monthly sales releases.

I would like to close today with a brief update on progress towards our fiscal year 2016 goals which we provided to you after we announced our 45% investment in Alliance Boots in June 2012. While still relatively early in our journey, performance to-date with respect our four of our goals is on track with or slightly ahead of our expectations, and these four goals are, sales of $130 billion including Alliance Boots share, associates and joint venture sales, synergies of $1 billion, operating cash flow of $8 billion and net debt of $11 billion.

Performance to-date with respect to our adjusted operating income goal of $99.5 billion is currently tracking a bit below the CAGR required to meet this goal, largely because of gross profit dollars growth pressure domestically as I discussed today and a challenging environment in some international markets. While we recognize there are risks to achieving this goal, we remain focused on delivering it and have identified a range of further opportunities including benefits of our AmerisourceBergen relationship, incremental Alliance Boots synergies, business expansion and new initiatives and accelerated cost savings, also of which can help mitigate these risks.

We intend to continue to update you on our progress against these goals in future calls. In summary, we continue to be very optimistic and excited about our future.

We have made tremendous progress in our well experience journey to become the most relevant retailer in our space but still, we believe we are just scratching the surface of ways we can continue to leverage our best in class footprint with differentiated products and services to please and reward our most vital customers and gain new customers just like them. We believe we have strategies, tools and talent to do exactly that.

We are gaining share in retail pharmacy as we are finding new ways to please and attract pharmacy patients but what gets us even more excited is the tremendous opportunity we have before us to move from a traditional pharmacy, historically participating about 12% of the healthcare market to a company that is increasingly participating much more broadly in areas like specialty, home infusion, workplace health, vaccinations, diagnostic lab, hospital partnerships and primary care. Because of our unmatched infrastructure, over 70,000 healthcare service providers and new emerging technologies, we are extraordinarily well-positioned to capture value will help and deliver better outcomes on healthcare spend across the board, thereby benefiting patients, payers, suppliers and in many cases even other providers.

Lastly, our partnership with Alliance Boots and AmerisourceBergen gives us a unique opportunity to leverage our combined assets and capabilities to be more efficient and effective in our core business and continue our journey to influence health, beauty and well-being on a global stage. We believe that this unique combination will continue to lead to other value creating partnerships.

We have always said there will be some ups and downs in this journey, but if we stay relentless focused, we can achieve our purpose to help people, get stay and live well and continue to reward our stakeholders. Thank you for all your combined and continued support and I hope the holiday season blesses you and all of yours.

Now, I will turn it back to Rick.

Thank you, Wade. That concludes our prepared remarks.

We are now ready to take your questions.

Thanks. Good morning, guys.

I guess with some other large scale generic deals being announced in the pharma supply channel recently, so I was just kind of curious if you guys think you have a first mover advantage with manufacturers given your earlier timing of your JV, and also just overall do you think these type of deals help your cause, they hurt a little, are they neutral? Just curious of more colors given some of these other deals.

Steve, good question. Certainly, I think we do realize we have first mover advantage.

We have been at this for a period of time now and I think Jeff and team, in Bern, John Donovan are doing a great job as we have talked about. Certainly, we are focused on maintaining that first mover advantage and not giving it up.

I think, as I somewhat said in my remarks, we do feel like we have got a truly differentiated model which is not only an integrated retail wholesale model, but certainly two great partners with AmerisourceBergen here in the U.S., Alliance Boots in Europe, so I think we put together an opportunity to serve both the U.S. and the European market, but integrated wholesale retail market with three iconic brands which gives us that opportunity to even go beyond, so we think our model frankly is a superior model, we do not want to lose that first mover advantage.

As far as what it may do the market, we will see. I think certainly with three big buying groups out there, the industry is going to continue to change and we will have to stay ahead of that, make sure we react, but we think we are at advantage.

Okay. That's great.

Thanks.

Hi. Good morning, everyone.

Could you expand on the business expansion and new initiatives, Wade, that you called out to be able to offset for the operating profit tracking thus far a little bit below the long-term plan. Then also the efficiencies and cost savings you alluded to, is that something we are going to see those expenses come through on a quarter-by-quarter basis or might we see a larger restructuring for the company?

Yes. I’ll speak a little to the business initiatives and expansion obviously some of these things are public and known and some of these things are still things that are not, but they’re the kinds of things we’ve talked about, work we are doing with for example you know big pharma to help reinvent their model to help save costs in clinical trials, which we are doing some work with right now.

Also, things like Theranos which we believe has very meaningful potential. We are very excited about.

In various geographies we’ve got a strong footprint but we have got opportunities to do even more breadth of services in those markets and get deeper and broader and working with our partner Alliance Boots. We are doing exactly that.

On the cost side, I think you saw we had very good cost progress. We do a lot of things efficiently, but there's always opportunities to do a lot more and under Tim Theriault's leadership we are brining continuous improvement to a whole another level in the company really looking at every process end-to-end and how we can be much more efficient, much more enabling to our employees, so we have continued opportunities and we are aggressively going after, but it's going to make us, I think, a much better company and it allows to serve our customers even better to boot.

Okay, and then my second question is, there is a lot of adjustments here to get to the underlying performance but, one, I need help with this $0.07 positive impact on Alliance Boots. Is that being added back to the $151 million that's flowing through the equity earnings line so that if we took that out, it would be around $80 million underlying?

Yes, that's correct.

Oaky, thanks.

Thanks, Mark.

Hi, guys. So a couple things.

In your release, you have a statement in here about assessing various debts to optimize assets and cost structure alongside AB and ABC. What are you thinking about there, either generally or specifically?

Yes, John, Greg. I think we did mention that and I think as Wade said in his remarks the first couple of things we looked at for this quarter were some distribution centers but what we want to do is make sure that we are looking to the future with our new partners in AmerisourceBergen and Alliance Boots and if that obviously comes together like we think it will, there is opportunities for us to position ourselves going forward and whether it is looking at the distribution centers and making sure we have got the right footprint we are looking at all types of cost within corporate and making sure that we have got the right initiatives, the right people devoted to those.

Certainly we are looking at all of our assets across the enterprise to make sure that we are set up for the future. So real nothing truly defined but just an effort to make sure that we are indeed positioning ourselves for the future.

As Wade said, I have designated Tim Theriault, who is our CIO and head of Innovation and continuous improvement as our – to lean, and the lean Six Sigma and drive that throughout the organization. I think the one thing that we have seen from our Alliance Boots partnership with the wholesale expertise and cost focus that a wholesaler has bringing to Boots over the years is opportunities to bring cost down in the system.

So it’s really all that, in a nutshell, they kind of make sure that we are positioned for the future.

As you think alongside that, historically I think you looked at an SG&A run rate of maybe in the 3% to 4% range. Obviously you are well below that here.

Is there a new long term run rate well below that prior one?

Again 3.5% to 4.5% is kind of what we have historically said on an organic basis. You know I don't think we are prepared to give a new number today.

I would just say that we think there is opportunities to be increasingly efficient. It is not just SG&A.

It's, by the way, it’s across the board and its really an end-to-end processes but again I think the big idea here is who we are becoming in partnership with both Alliance Boots and AmerisourceBergen is a enhanced and different company than who we have been and we are really readying ourselves to make sure that we can capitalize on that to the maximum extent possible.

All right. And then, one last thing.

When you look about the $1 billion of synergy, do you think some of that will end up getting reinvested back in the business? Maybe not so much at the frontend but pharmacy labor, things inside the store to deal with higher volumes or no, very little of that will get reinvested?

Well, certainly as we go forward, some of it could, John. But I think right now we are focused on a lot of the initiatives we have over and above that to drive the business.

So we think most of the majority of that will indeed come to the bottom-line. At the same time, we haven't really given out what we think we can accomplish with AmerisourceBergen.

AmerisourceBergen, frankly, is indeed in those fiscal '16 goals, but were just beginning to get started on that. So we think there is opportunity over and above that.

Back to the $1 billion, John, to the extent that some of it was reinvested then we will deliver more. I mean that's really a net that we targeting.

Okay. Thanks.

Thanks, John.

Yes, good morning. Can you help us think a little bit in more details on the margin trajectory for fiscal year '14.

So given all the moving parts, when I think about the promotional activity in generics, for second half of the year, should we model gross margin at the year-over-year or only sequentially?

I reckon maybe I will start over and turn it over to Wade. I would say, based on what we are seeing, certainly that I wouldn't think Q2 directionally will be much different than what we have seen in Q1.

I think we are already nearly through the first month and then the biggest month of the second quarter. We are continuing to see a cautious consumer and therefore our promotional activity will probably directionally remain the same.

I think obviously, as you have seen in the one chart that we put up was as far as the sales impact of the generic wave, certainly Q2 has got a significant peak from last year that we are going against another trough, so directionally for Q2, I don't see, I wouldn't think much of a change. Certainly, we have got some help in the back half with generics and as we get more and more Balance Rewards data and insights we want to continue to make our promotional a little more effective, but I would say, I think, Q2 not much directionally and we will try to do what we can in the back half of the year.

Wade?

No. I agree, I think, certainly.

We often joke about Rick's theory of the Heisenberg and certainly principal of generics, you know the more that you try to study and analyze the timing of these the more they seem to change a bit, but you have more information than we do. Certainly the back half looks to be stronger.

Again, I think under Alex’s leadership I think we are doing a lot of things to get us more balanced between both growth and profitability and as we sweeten the mix around health and beauty down the road as well it’s an opportunity for us.

Just to confirm, because I think you mentioned that the promotion activity you had a negligible impact on the front-end margin, so should we just assume that promotional activity spend is going to stay at constant level throughout the year.

The largest impact was, as we said was the waiver, the trough rather of new generics significantly, but then the next largest could have been the front-end promotion with as we said to a lesser degree [50 bps] [ph] from controlled substances and gross profit dollar growth, but it was meaningful, but the largest was the trough in generics by far.

Ricky, with that promotional investment, as we said, we grew our track like a 200 basis points in the quarter before. We increased basket size and it has reached the top, which is good.

We just had to throw a lot more at it than we anticipated and that's what we meant by meaningful investment and that's what I meant directionally, I don't see that competitive commercial environment changing much.

Okay. Then, I know that you have talked sort positively about Theranos.

Can you share with us kind of like your experiences? The technology has been in your pharmacies for a couple of months now.

What are you seeing in the marketplace?

We are very, very positive on Theranos. It's really a one of the disruptive plays.

It's a better patient experience with a prick of blood. It's the highest standards of quality in lab with half of Medicare and the patient feedback we are getting is very good, but it's really a better, faster cheaper, more conveniently play.

You know we are going to, as we here stand here, we will keep learning and perfecting the patient experience, which is really the key thing, but we are very, very positive things. I think it's a one more example of how the pharmacy can play a role in broader healthcare and that's the direction we are going, we got the assets, we have the healthcare professionals, we have the convenience and we have the right to win in the spaces and we are very excited about it.

Just to confirm, are you still in the market buying ABC shares?

We are, but we only gave that information as of the last quarter as you know, but we are doing that.

Okay. Thank you.

Good morning, guys, and thanks for taking the question. I guess, Wade, first, as we look at the synergies you guys have reported today and kind of the buckets that you guys laid out at the analyst presentation in Europe, can you bucket for us where they are coming from and kind of give us a sense for where you are seeing the most traction early?

Yes. I am sure that the biggest benefit we have been getting is generics we have said that hasn't changed.

Other areas where we are getting meaningful early synergies are the things like own brand procurement, [indirect] [ph] spend, our relationship with some of the CPG players, so all of those are providing opportunities. The one that will ramp up over time, but becomes really a point of differentiation in ongoing getting is what we are doing to drive, but the owned brand of the Boots portfolio and again it just today a few select a store, but the broad Phoenix area, but the results are very, very good and we are very optimistic that as we expand this, this will become certainly that becomes a very strong part of our value creating portfolio for many years.

Okay. Then maybe on the inventory, I guess maybe just because I don't see this, you guys ramped the ABC agreement.

How should we think about inventory levels going forward? Are they measured - I don't know if you want to talk about it in an absolute dollar sense or inventory days on hand or change in mix.

I guess kind of ability to extract cash from that line going forward, I guess, could you give us an update on how to think about that?

Yes. I mean, there is a lot of moving parts as you can see in our cash numbers and working capital numbers associated with this transition and this is a non-normal quarter, if you will, because even while we are transitioning inventory, for example, on brands ABC, that reduces inventory for us but our payables go up commensurately but in a very short-term on the cutover date we also get fairly large levels of inventory on that store, for sample, so that we can make sure that we had a flawless transition and that will it work its way out.

So I guess what I would say is two things. One is kind of this pig in the python who will work its way out from the transition over time from a cash flow basis but then beyond that, because we have daily deliveries, because of their expertise, we should be able to over time take out additional days of inventory, although we have put in those specific goal there.

Also keep in mind that starting next month, we will begin the generic transition which will go several months, nine months, region by region, store by store. And that will also create a little bit of timing flux, up and down, with our cash flow working capital but, again, over time these things will work themselves our and lend themselves to a net net inventory opportunity in the future.

Okay, and then maybe just one last one quickly. As we think about the income statement moving through this year, you have got the margin erosion that's a component of the tough generic comp, probably until we get to fiscal '15, you are going to see faster specialty growth and brand drug growth from a dollar basis driving the pharmacy topline.

I guess, how much of the margin erosion should we think of as the tough comp on generic and how much is the erosion as the mix impact of accelerating branded specialty drug growth versus growth in generics?

That's a good question. From a margin percentage, you are right.

Specialty are the lowest and brand will be higher than that and generics the next but from a gross profit dollar growth, it is a little bit different. Obviously we have, for example, when there is brand inflation, we get some benefit on that.

So I guess what I would say, is our model, really think of it in terms of gross profit dollar growth versus the margin percent, per se. And this will certainly probably drive any quarter hits in generics next quarter as about the same as that.

But again, that's what will really swing the gross profit dollar growth once we get into the back half and beyond.

Okay, thanks. I appreciate the color.

Thank you. Good morning.

It is actually Mike Minchak, in for Lisa. Just with respect to the combined Alliance Boots synergy, during the first quarter, the $107 million you reported, it appears to be stacking a little bit ahead of expectations based on the $350 million to $400 the million forecast for '14.

Can you talk about what's driving the upside there and the cadence of those synergies going forward in '14?

Yes, it is driving ahead. Good observation.

It does give us confidence. Actually even more so leading up to those fiscal '16 goals that Wade talked about.

I think the team in Bern has done a tremendous job working with our pharmaceutical suppliers in new and creative ways. Now it will bring in the AmerisourceBergen volume and as I said, that's positive as well.

It could be a little less in 2Q because there is some bumpiness but we feel for the fiscal year that we are ahead of that target that have we given and we feel confident in the $1 billion. We believe there is upside.

Okay, great, and then just as a follow-up. With respect to the pharmacy reimbursement environment, can you talk about how things are trending there and whether you anticipate things getting any materially better or worse from here?

Well, as we say, and as I say all the time, anybody in healthcare, we always say there is ongoing reimbursement pressure and certainly that hasn't changed and frankly won't change. We have deal with that.

I think that we will probably see similar to what we have seen but there is certainly more and more focus on it. I think what we are working to do is to work with people in preferred ways, to create more value and be able to bring more and more services in addition to just the pharmacy provision that we bring.

But I think we have to accept ongoing reimbursement pressures due to a focus on our cost to fill. Also, we think we are positioned better than anyone as far as procurement and to make sure that we are both working all three of those metrics in unison.

Great. Thanks for the comment.

Yes.

Thanks for the questions. Just to follow-up on the cadence of the Alliance Boots contribution.

It looks like you are calling for about $0.07 next quarter, $0.07 to $0.08 next quarter, about same as what we saw organically this quarter. I was just wondering if you could maybe shed a little light on a why that contribution would be flat sequentially?

And then anything you can give us around the balance of the year would be helpful.

Well, there is couple things going on here. One is just, it's a bit iterative, right.

You never know exactly what the accretion dilution is until our numbers are done, right. So as they grow their earnings and we grow synergies, it also is relative to whatever our base is.

Again, you know there is also a flexibility what will those synergies which some of those are known no more normal some are known completely, but I think that we have close enough at the point, because of three months lag to know your general range, but again there are a couple of moving parts that in the end can move around. For example, this quarter we were thinking it would be $0.05 I think was our guidance $0.04 to $0.05.

We ended up at $0.07. Again, because of these moving parts for some of these final synergies and how they come in as well as our relative performance and how you calculate that.

Okay. Got it.

Then just on generic price inflation, obviously, has been a big topic. One of your competitors called this out as a headwind to them in the quarter.

I guess, specifically anything worth calling out in the quarter as far as generic price inflation goes? Then more broadly, how should we think about an environment where it does appear that generic price inflation will continue.

As you guys look at the over the balance of the year, is that a headwind, tailwind, neutral? Any thought there would be helpful.

Yes. There is some inflation in the industry.

In the past, we did see some unusual inflation on select molecules in this past quarter, which did give us a little bit of impact. It's hard to say whether that will be ongoing or not.

Certainly, we think we are very well positioned with Jeff and John Donovan team in Switzerland to make sure that we are working with both, generic and branded pharmaceutical companies to provide value and offset anything that may occur and we saw a little bit of unusual activity, but again our folks in Burn are on top of it and we want to work with these folks in a way that helps them create value as well as the synergies opportunities we see.

Great. Then I guess just the last and if you guys wouldn't mind.

Any update around changing view around ACA contribution as we have seen a little bit more progress I guess on uptake of enrollment and also around Medicaid expansion. Any thoughts you guys have there relative to the rest of the year would be great.

Thanks.

I would just say that it's probably too early for us to know all the implications and timings as we go forward here. I think you know there's lot of opinions out there and one is probably as good as the next, but right now we are not modeling a lot from the early days, but over time obviously it's going to change the structure of the industry and how we participate with players.

Maybe, Kermit, you want to…

Yes. Robert, I would I add - we have seen enrollment has been slow, but we continue to work with our healthcare partners and go help to educate these patient.

We have always said that we expect the Affordable Care Act to bring more people into the healthcare system as a result of coverage, which we certainly would think will benefit from this increase in enrollment. We have built our strategy around an access to quality care over the past decades and we think we are well positioned to serve these patients not only from a prescription perspective, but for additional healthcare services like vaccines and immunizations and also some of the preventive services you now see in our healthcare premise.

Good morning, guys, a few questions for you. Wade, I guess first of all related to the 2016 commentary.

When do you expect to give us some update as to how these numbers are playing out? When you talk about adjusted operating income tracking a little bit lighter, does that also include now the benefit of ABC?

Yes. I mean, I think, we obviously put these goals before ABC and then when we announced ABC, we said that there is additional opportunity, but we wouldn't be changing our goals.

That's in part because $9 billion we already believe is a very meaningful, large goal to hit and an appropriate goal, but the other thing is we also had other projects built in. If we had not gone with ABC, like project GAAP and others, where we would then changed our distribution supply system internally and had meaningful benefits built in for that, so this is really swapping out this for that, albeit a little bit better, but I think the key thing is we really start to reap the benefits of ABC in a meaningful way in 2015, both, on the generic distribution side as well on the procurement side and even other opportunities that we are now starting to work among the two and the three parties, so there is a bit of a hockey stick here versus a CAGR, but that was always to some extent the case, and I think that this is really now just part of our base operating model.

Any sense just on timing of when we will be getting an update you think?

Quarter-to-quarter we look at it and say are these realistic based upon all the risks and opportunities we have internally. I mean, if we ever feel that's not the case, we will certainly tell you.

You can put together a path like we can and take our numbers and put it along that path, but we continue with the assessments and say that we think it is still possible to hit these and do we have the right bullets in the chamber, if you will, and at this point we do.

Ed, this is Greg, I would say that we are doing this quarter-by-quarter. Obviously we are kicking the tires as we go to make sure that we can achieve those goals and we do.

So I would somewhat consider this as an update, but at the same time you can sure rest assured that we will continue to look at those numbers and make sure that we are confident. And I think, to Wade's point, we think that we have got ways to achieve those goals.

The CAGR on the operating adjusted income is a little bit soft but we think the change in the mix of the business will allow us to get it.

I think when you talked about that, Wade, I thought I heard you say something about international as well as the U.S. business.

Is that right? And could you give us a little bit more color on that front?

Well, I mean, that's right. There are business initiatives as well as, I think, global growth opportunities or whatever but these are the series of initiatives that we are working with our partners, Alliance Boots, to strengthen various markets, introduce new services in some case, work with new partners like Global Pharma and create value in unique ways.

Yes, I actually meant the CAGR. When you were talking about the CAGR being a little softer, I thought you had mentioned international too?

Yes. Just, I guess, putting it simplistically there's some markets that had been a bit challenging for AB on an EBIT basis but on the other hand, because of their accelerated cash flow, their accelerated de-levering, excellent work on refinancing on after-tax and also some tax benefits on after-tax basis they are generating great value creation.

So it's a little bit of that EBIT pressure but actually from a bottom line impact we are getting it back.

All right. Just one other question for you on the front-end.

Can we just dig in a little bit more into the promotional strategy here because you are successfully driving better comp growth, better traffic growth. It's not up a ton, right, the traffic year-over-year and on a two year basis.

It's better but not a huge improvement, right, and the gross margin seems to be taking a little bit of a beating. So I am not so sure that your comparable gross profit dollar growth is up.

Could you comment on that? Then just generally, if that's all the case, is it working?

All right. Or do you need to make further adjustments?

And is that what you are talking about when you talk about balancing front end sales and margins?

Yes, Ed, Greg. I agree with you.

I think that good news is, we have made investment. We have got the top line moving.

When I said I am generally satisfied with that, that's what I mean. I am never truly fully satisfied.

With that we did have to make more meaningful investment than we anticipated. We want to make sure that we are getting a bang for a buck for that investment.

We probably had to overinvest based on what we anticipated. I think the opportunity we have, now that we have 12 months of data coming from our Balance Rewards program, there's tremendous insights to help us get much more effective input with that investment that we are having to make, but we obviously want to make sure that the investment we are making gives us a much greater of a return than what it did this quarter.

Now you can't change that overnight. So a lot of the plans and activity, as I said, are in place for the next quarter.

So that's the reason I say, I don't think directionally we are going to see much of a difference but I do think as Alex and team get more and more insights, we are absolutely going to be using that to get a better return for the investment in the promotional activity we are making.

All right. Thank you.

Yes. Thanks for taking the question.

Greg, I think you or Wade, you made a comment about impact from controlled substances reduction in the volumes there. I am not sure, I might have missed it earlier, but Greg did you say that the impact to gross margin in the quarter was 50 basis points?

And is that something that is sort of like just a step down overall because the dispensing of those drugs will just be reduced overall or how should we think about that? Thanks.

Yes, I did mention that and I think we obviously, as a leader in industry, believe it is frankly up to us now, this is on us to make sure that we are indeed leading with best practices. We have Kermit and team.

I will let him talk about in a little bit. He has implemented good base of dispensing efforts.

I think as a result, we are indeed seeing a reduction in some of those higher margin pain control substances. We want to make sure that we are getting them to patients appropriately and the patients that frankly need those medications are able to receive them and frankly those that don't, don't.

And now, it will be ongoing as far as that hit that we have talked about that's an ongoing hit.

Yes, Charles. Just to clarify, it was actually a reduction of 50 basis points in gross profit dollar growth not in margin.

I see. Okay, that's helpful.

I would just add that, we implemented our Good Faith Dispensing Policy back in late April of last year and this probably is really designed to ensure that the patients get the right medication that they need, but while at the same time helping us to a control abuse of these controlled substances.

Thanks for taking my question. Most of my questions have been asked.

I would like to go back and talk a little bit about expense control, you did a great job this quarter. There was some press rumors about actually shrinking the number of people in your corporate office.

I know it's an awkward topic as people listen to your calls, however, it was in the press and I was just wondering whether some of the improvement you are seeing is because you have become more efficient in reduced headcount and are there more plans to reduce headcount in corporate?

Meredith, I think I remember the article you are talking about. I think obviously it got overstated and sensationalized maybe a little bit, so as we go forward part of our lean six sigma is just make sure we have got the right projects, processes in place, we got the appropriate people signed to those and frankly continue to look at optimizing not only our headcount but our assets along the way, but the article you are talking about was extremely over sensationalized.

Does Alliance Boots have any impact on the way you look at becoming more efficient and productive in corporate?

Yes. I think there are some best practices not only in corporate, but even out in the field and Alex Gourlay is not on the call.

Maybe the next one, I will have him on, but one of the things I think we are doing with Mark Wagner and team is focusing on trying to get more and more work out of these stores, the AmerisourceBergen distribution agreement with daily deliveries and so forth, we hope to not have to carry as much inventory and be able to diminish the workload in our stores, but we have a real focus on moving from more and more tasks to more focus on the customer and I think that in itself we are able to bring some of the best practices that Alex is bringing from Boots and what they have done over the years as well.

Then I do actually have a question about something that Wade was saying about synergies and I think there was a mention that you were working on making your distribution network and structure processes more efficient, even if you hadn't done the ABC deal, and that was included in the synergies and that did kind of surprised me, because I thought synergies would be related strictly to whatever happens with Alliance Boots. Are you saying that you are learning?

Is it part of the best practices you learned from them or was that a kind of a separate initiative that you are working on anyway?

No. Actually, I apologize if I confused you.

What I had said was is that the benefit that we anticipate we will get from ABC in distribution and buying is part of our plan to get to our $9 billion goal. This is not included in the $1 billion AB synergies.

That's just with AB. This is separate from that, but, I guess, prior to ABC, we were looking at a variety of different models that would have made us more efficient, which had some savings built into our plans.

These are certainly bigger, but to the extent that this is our partner and our chosen way to go to market with both, generics and with our supply chain those are basically built into our base model and into our goals.

Thank you. That clarification is very helpful.

My final thing is a plea. We would love it, if you guys would give us more data about the healthcare side of the business.

It may not be material, but the forecasting that we do now is kind of weird come up with what incremental revenues you are getting that are outside of the stores. (Inaudible) if you give revenues and profits?

Thanks.

Point taken, Meredith. We will study it and consider it.

Thank you.

Ladies and gentlemen, that was our final question. Thank you for joining us today.

As a reminder, the company will report December sales on January 6th. We will also be hosting our Annual Shareholders Meeting on January 8th at Navy Pier in Chicago.

We hope to see you there. Until then, thanks for listening and happy holidays.