Rick Hans, CFA Divisional Vice
President, Investor Relations & Finance Questions & Answers Wade Miquelon Executive Vice President, CFO, & President, International 2Q14 Financial Review Greg Wasson President & CEO 2Q14 Operating Review Introduction & Safe Harbor Greg Wasson Wade Miquelon 2 2nd Quarter Fiscal Year 2014 Agenda Kermit Crawford President, Pharmacy, Health & Wellness Mark Wagner President, Operations & Community Management Alex Gourlay President, Customer Experience & Daily Living
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 the 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 Form 10-K and subsequent filings for a discussion of risk factors as they relate to forward-looking statements. Today’s presentation includes certain non-GAAP financial measures, and we refer you to the Appendix to the presentation materials available on our investor relations website for reconciliations to the most directly comparable GAAP financial measures and related information. Safe Harbor and Non-GAAP 3
GAAP 2Q13 2Q14 Change Net
Sales $18,647 $19,605 5.1% Operating Income (EBIT) $1,215 $1,275 4.9% Net Earnings attributable to Walgreen Co. $756 $754 (0.3%) Diluted EPS $.79 $.78 (1.3%) 2Q14 Financial Results Non-GAAP 2Q13* 2Q14* Change Adjusted Operating Income (EBIT) $1,398 1,338 (4.3%) Adjusted Net Earnings $915 880 (3.8%) Adjusted Diluted EPS $.96 $.91 (5.2%) $ in Millions except EPS 5 *Excludes LIFO provision, acquisition-related amortization and acquisition-related costs and Alliance Boots related tax in all periods presented. 2Q14 also excludes organizational efficiency costs and the positive impact of fair value adjustments and amortization related to the AmerisourceBergen warrants. 2Q13 also excludes the additional gain on sale of WHI. See Appendix.
Create a Well Experience Customer
Value Innovative Products and Services Systematic Localized Offering Most Relevant Network and Formats Comp FE sales up 2.0% Comp basket increased 3.4% while comp customer traffic decreased 1.4% Performance 9 Continued meaningful promotional investment to meet needs of value conscious customers Majority of product categories gained share Converted or opened 628 Well Experience stores to date
Create a Well Experience 10
Customer Value Innovative Products and Services Systematic Localized Offering Most Relevant Network and Formats Looking Ahead† Enhance omni-channel offering with 9 million touch points of our brand daily Continue to focus on Well Experience by rolling-out No7 beauty offering to 150 stores in New York City Utilize Balance Rewards data to sharpen category plans, now with over 100M enrollees and almost 80M active members - largest retail loyalty program in the industry †Forward-looking statements. See cautionary note in attached Appendix.
Advance the Role of Community
Pharmacy Script comp increased 2.2% with retail market share up 20bps to 19.0% by filling a record 214M prescriptions Significant shift in the generic wave had a dilutive effect on margin in the quarter Administered 8.6M immunizations TY compared to 7.8M LY 11 Strategic Partnerships Differentiated Experience Comprehensive Care Performance 90-day script volume increased 17% over the prior year and represented more than 25% of our total adjusted script volume
Advance the Role of Community
Pharmacy Medicare Part D patients grew 16% in the quarter, as a preferred provider in four of the top national plans we expect continued growth 12 Strategic Partnerships Differentiated Experience Comprehensive Care Plan to add nearly 100 Healthcare Clinics to our existing count of 400 in CY14 Looking Ahead† †Forward-looking statements. See cautionary note in attached Appendix.
Establish an Efficient Global Platform
Strategic partnership with Alliance Boots contributed $0.08 of adjusted EPS accretion Performance 13 Drive Efficiencies Partner for Growth Organize for Success Ownership in AmerisourceBergen equity at ~4.5% as of the end of February Combined synergies in the quarter reached $129M and $236M fiscal YTD Raising full year FY14 combined synergy target range to $375-425M Expect $0.13 - 0.14 of adjusted EPS accretion from Alliance Boots partnership in Q3 FY14
Looking Ahead† Establish an Efficient
Global Platform 14 Targeting end of FY14 for full transition of generic distribution by ABC Preparation for step two of the Alliance Boots acquisition progressing well Partner for Growth Organize for Success †Forward-looking statements. See cautionary note in attached Appendix. Drive Efficiencies Global procurement organization continues to strengthen relationships with manufacturers
Enterprise Optimization - Retail Locations
Store Closure Details Total Locations 76 locations Timeframe April - August 2014 Average Store Age ~10 Years Demographics ~70% middle to high income Rationale Store density Non-optimal real-estate Trade area change 76 Locations Nationwide Expected Financial Impact† 2H FY2014E $240M - $280M charges FY2015E $40M - $50M EBIT accretion FY2015E $0.02 - $0.03 accretion (14) (6) (17) (19) (20) †Forward-looking statements. See cautionary note in attached Appendix. The amounts and timing of all estimates are subject to change until finalized. EBIT and accretion estimates do not include transaction costs or charges 15
2Q14 Adjusted EPS Walk (Non-GAAP
- See Appendix) *Comprised of acquisition-related costs of $.01 and Alliance Boots-related tax of $0.05 and $0.06 of acquisition-related amortization. **Comprised of positive impact of fair market value adjustments and amortization related to the AmerisourceBergen warrants of $0.03. 18 0.00 0.20 0.40 0.60 0.80 1.00 Acquisition Related Items* $0.04 $0.12 GAAP EPS LIFO Provision Adjusted EPS ($0.03) Special Items** Net Earnings $754M Adjusted Net Earnings $880M $0.78 $0.91
2Q13 2Q14 Comparable Store Prescription
Sales (2.7%) 5.8% Front-End Sales (2.6%) 2.0% Total Sales (2.6%) 4.3% Rx Scripts* 4.3% 2.2% Year-Over-Year Percentage Changes 2Q14 Comparable Store Sales *90-day adjusted. 19
Negative Impacts Pharmacy Front End
Meaningful promotional investments across several categories Pharmacy and Front End margins were both positively impacted by purchasing synergies 2Q13 2Q14 Change Adjusted Gross Profit Margin* 30.5% 29.1% -140bps Adjusted Gross Profit Margin (Non-GAAP - See Appendix) *LIFO Gross Profit Margin (GAAP) was 30.1% in 2Q13 and 28.8% in 2Q14, a decrease of 130bps. See Appendix. Significant reduction in the number of brand to generic drug conversions and lower market driven reimbursement 22 Positive Impacts
2Q13 3Q13 4Q13 1Q14 2Q14
Front End + + - - - Pharmacy + + + - - Basis Point Impact Year Over Year +120 +60 -20 -130 -140 Adjusted FIFO Gross Profit Margin % 30.5% 29.2% 28.9% 28.5% 29.1% Adjusted FIFO Gross Profit Dollar Growth 4.0% 5.3% 4.3% 1.2% 0.4% FE & Rx Adjusted FIFO Gross Profit Margin Progression (Non-GAAP - See Appendix) 23
2Q13 2Q14 LIFO Provision $72M
$51M Net Interest Expense $23M $37M Tax Rate 36.6% 34.9% Diluted Shares Outstanding 953M 964M Income Statement Details 33*Represents Walgreens GAAP tax rate including the impact of Alliance Boots.
2Q13 2Q14 % Change Cash
Impact Accounts Receivable $2.5B $2.8B 11.8% - Inventories $7.2B $7.2B (0.6%) + Accounts Payable ($4.4B) ($4.5B) 2.3% + Net Working Capital* $5.3B $5.5B 2.9% - 34 Net WC as a % of Sales 28.7% 28.0% (2.2%) *Net Working Capital defined as Accounts Receivable + Inventory + Accounts Payable Components of Working Capital
*Non-GAAP Financial Measures - see
Appendix. Equity earnings in Alliance Boots exclude the results of Walgreens Boots Alliance Development GmbH, which is consolidated into the company’s results. Q2 FY14 Adjusted EPS Accretion from Alliance Boots (in millions, except per share amounts) Q2 FY14* After-Tax Walgreens Synergies 44 After-Tax Alliance Boots Equity Earnings 100 Adjusted Net Income from AB Investment* 144 Adjusted EPS (Before Share Dilution)* 0.15 Dilution from Share Issue (0.07) Adjusted EPS (Net of Share Dilution)* 0.08 36
37 FY14E† Combined Net Synergies
$375M - $425M Looking Ahead to 3Q14 and FY14 3Q14E† Adjusted EPS Accretion* $0.13 - $0.14 †Forward-looking statements. See cautionary note in attached Appendix. *Non-GAAP Financial Measure – See Appendix. Based on company’s current estimates of IFRS to GAAP conversion and foreign exchange rates, which are subject to change based on future developments. Does not include amortization expense or one-time transaction costs or impact of ABC warrants.
FY 2016 Goals† Revenue >$130
Billion Operating Income (GAAP) $8.5 - $9.0 Billion Adjusted Operating Income* $9.0 - $9.5 Billion Synergies $1 Billion Operating Cash Flow ~$8 Billion Net Debt** ~$11 Billion + Fiscal Year 2016 Goals †Forward-Looking Statements – See cautionary note in attached Appendix. All figures assume constant currency and exercise of option to acquire remaining 55% interest. All financial goals assume no major mergers and acquisitions or strategic transactions. Revenue of $130B includes Alliance Boots share of associates and joint venture sales * Non-GAAP Financial Measures – see Appendix. ** Net debt defined as balance sheet debt less cash and cash equivalents. Net debt excludes lease obligations. ~ 1.1B shares projected to be outstanding in FY 2016. Projected shares outstanding assumes no share repurchases. 38
Appendix The following information provides
reconciliations of the supplemental non-GAAP financial measures, as defined under SEC rules, presented in this presentation to the most directly comparable financial measures calculated and presented in accordance with generally accepted accounting principles in the United States (GAAP). The company has provided these non-GAAP financial measures in the presentation, which are not calculated or presented in accordance with GAAP, as supplemental information in addition to the financial measures that are calculated and presented in accordance with GAAP. These supplemental non-GAAP financial measures are presented because management has evaluated the company’s financial results both including and excluding the adjusted items and believes that the non-GAAP financial measures presented provide additional perspective and insights when analyzing the core operating performance of the Company’s business from period to period and trends in the company’s historical operating results. The company does not provide a non-GAAP reconciliation for non-GAAP estimates on a forward-looking basis where it is unable to provide a meaningful or accurate calculation or estimation of reconciling items and the information is not available without unreasonable effort. The supplemental non-GAAP financial measures presented should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented in the presentation. 41
Alliance Boots Equity Income Walk
(2Q14) Alliance Boots Net Income (IFRS)* 244 IFRS to U.S. GAAP Adjustments 203 Alliance Boots Net Income 447 Walgreens Share (45%) 202 Amortization, net of tax (8) Walgreens Equity Income (GAAP) 194 $ in Millions *Alliance Boots Net Income (IFRS) is presented for the three-month period ended November 30, 2013 due to three-month reported lag. Excludes Galenica and results from Walgreens Boots Alliance Development GmbH. Pounds Sterling to USD average exchange rate of $1.61/£. 42 (Unaudited)
*Non-GAAP Financial Measures. Equity earnings
in Alliance Boots exclude the results of Walgreens Boots Alliance Development GmbH, which is consolidated into the company’s results. Q2 FY14 Adjusted EPS Accretion from Alliance Boots (in millions, except per share amounts) Q2 FY14* Before-Tax Walgreens Synergies, Net 74 Taxes & Non-Controlling Interest (30) After-Tax Walgreens Synergies 44 After Tax Alliance Boots Equity Earnings 194 Alliance Boots Warrant Income (99) Deal Amortization Adjustment 8 Alliance Boots Amortization Adjustment 11 Walgreens Incremental After Tax Interest Expense (14) After Tax Alliance Boots Equity Earnings 100 Adjusted Net Income from AB Investment* 144 Adjusted EPS (Before Share Dilution)* 0.15 Dilution from Share Issue (0.07) Adjusted EPS (Net of Share Dilution)* 0.08 43
Operatin g Income (GAAP) Acquisitio
n Related Costs Hurricane Sandy Acquisition Related Amortization LIFO Provision DEA Settlement Costs Alliance Boots Fair Value of Warrant Adjustment Gain on WHI Sale Organizational Efficiency Costs Adjusted Operating Income (Non-GAAP) Fiscal 2014 Q1 924 25 - 91 58 - (19) - 24 1,103 Q2 1,275 17 - 92 51 - (99) - 2 1,338 53 Reconciliation of Adjusted Operating Income $ in Millions
Net Earnings (GAAP) Acquisition Related
Costs Hurrican e Sandy Acquisition Related Amortization LIFO Provision Gain on WHI Sale Fair Market Value of warrants Adjustment DEA Settlement Costs Medicare Part D Organizationa l Efficiency Costs Alliance Boots Related Tax Adjusted Net Earnings (Non-GAAP) Fiscal 2014 Q1 695 16 - 58 37 - (161) - - 15 28 688 Q2 754 11 - 60 33 - (26) - - 1 47 880 Reconciliation of Adjusted Net Earnings $ in Millions 55
Diluted EPS (GAAP) Acquisition Related
Costs Alliance Boots Share Issuance Effect Hurricane Sandy Acquisition Related Amortization LIFO Provision Fair Market Value of warrants Adjustment Gain on WHI Sale DEA Settlement Costs Medicare Part D Organizational Efficiency Costs Alliance Boots Related Tax Adjusted Diluted EPS (Non-GAAP) Fiscal 2014 Q1 0.72 0.02 - - 0.06 0.04 (0.17) - - - 0.02 0.03 0.72 Q2 0.78 0.01 - - 0.06 0.04 (0.03) - - - - 0.05 0.91 57 Reconciliation of Adjusted Diluted EPS
1Q09 2Q09 3Q09 4Q09 1Q10
2Q10 3Q10 4Q10 Cash Flow from Operations (GAAP) $312 $1,428 $1,519 $852 $1,168 $595 $1,056 $925 Capital Expenditures (GAAP) (638) (454) (442) (393) (304) (220) (262) (228) Free Cash Flow (Non-GAAP)* ($326) $974 $1,077 $459 $864 $375 $794 $697 Reconciliation of Free Cash Flow $ in Millions 58 *Free cash flow is defined as net cash provided by operating activities in a period minus additions to property and equipment (capital expenditures) made in that period. This measure does not represent residual cash flows available for discretionary expenditures as the measure does not deduct the payments required for debt service and other contractual obligations or payments for future business acquisitions. Therefore, we believe it is important to view free cash flow as a measure that provides supplemental information to our entire statements of cash flows.
1Q11 2Q11 3Q11 4Q11 1Q12
2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 Cash Flow from Operations (GAAP) $1,165 $886 $1,230 $362 $809 $1,007 $1,847 $768 $601 $1,198 $1,379 $1,123 Capital Expenditures (GAAP) (273) (196) (230) (514) (419) (304) (379) (448) (336) (245) (293) (338) Free Cash Flow (Non- GAAP)* $892 $690 $1,000 ($152) $390 $703 $1,468 $320 $265 $953 $1,086 $785 $ in Millions 59 Reconciliation of Free Cash Flow *Free cash flow is defined as net cash provided by operating activities in a period minus additions to property and equipment (capital expenditures) made in that period. This measure does not represent residual cash flows available for discretionary expenditures as the measure does not deduct the payments required for debt service and other contractual obligations or payments for future business acquisitions. Therefore, we believe it is important to view free cash flow as a measure that provides supplemental information to our entire statements of cash flows.
1Q14 2Q14 Cash Flow from
Operations (GAAP) $133 1,104 Capital Expenditures (GAAP) (364) (227) Free Cash Flow (Non- GAAP)* (231) 877 $ in Millions 60 Reconciliation of Free Cash Flow *Free cash flow is defined as net cash provided by operating activities in a period minus additions to property and equipment (capital expenditures) made in that period. This measure does not represent residual cash flows available for discretionary expenditures as the measure does not deduct the payments required for debt service and other contractual obligations or payments for future business acquisitions. Therefore, we believe it is important to view free cash flow as a measure that provides supplemental information to our entire statements of cash flows.
Certain Definitions & Assumptions 62
CERTAIN ASSUMPTIONS: Unless the context otherwise indicates or requires: • This presentation assumes constant currency exchange rates after the date hereof based on current rates; • References to the combined company and pro forma combined financial and other information assume that Walgreens has elected to exercise its option in Step 2 during the period in 2015 when it has the right to do so; • Walgreens transaction with Alliance Boots does not include the benefit of Alliance Boots minority interest in Galenica Ltd., a Swiss healthcare group, so Walgreens shareholders will not benefit from the financial performance of Galenica Ltd. even though Alliance Boots proportionate interest in their profits is reflected in Alliance Boots financial statements for periods prior to May 10, 2013; and • All financial goals assume no major mergers and acquisitions or other strategic transactions. Trading Profit - Profit from operations before amortization of customer relationships and brands, exceptional items and share of post-tax earnings of associates and joint ventures Historical Alliance Boots Financial Information – Alliance Boots’ audited consolidated financial statements for the years ended March 31, 2013 and 2012 were filed as Exhibit 99.1 to the Walgreen Co. Form 8-K filed on May 15, 2013. Such financial statements of Alliance Boots were prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS) and audited in accordance with auditing standards generally accepted in the United States. All descriptions of the company’s agreements relating to Alliance Boots and the arrangements and transactions contemplated thereby in this presentation are qualified in their entirety by reference to the full text of the agreements, copies of which have been filed with the SEC. See the Company’s Form 8-K filings on June 19, 2012, August 6, 2012, September 10, 2012 and September 13, 2012. All descriptions in this presentation of the agreements relating to the strategic long-term relationship with AmerisourceBergen announced by the Company and Alliance Boots on March 18, 2013 and the arrangements and transactions contemplated thereby are qualified in their entirety by reference to the description and the full text of the agreements in the Company’s Form 8-K filing on March 20, 2013.
Cautionary Note Regarding Forward-Looking Statements
Cautionary Note Regarding Forward-Looking Statements. Statements in these materials and the accompanying presentation that are not historical, including, without limitation, estimates of future financial and operating performance, including the amounts and timing of future accretion and synergies, are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as "expect," "likely," "outlook," "forecast,” "would," "could," "should," "can," "will," "project," "intend," "plan," "goal," “target,” "continue," "sustain," "synergy," "on track," "believe," "seek," "estimate," "anticipate," "may," "possible," "assume," variations of such words and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are not guarantees of future performance and involve risks, assumptions and uncertainties, including, but not limited to, those relating to whether the costs associated with our store optimization plan will exceed current forecasts, our ability to realize expected savings and benefits in the amounts and at the times anticipated, our commercial agreement with AmerisourceBergen, the arrangements and transactions contemplated by our framework agreement with AmerisourceBergen and Alliance Boots and their possible effects, the Purchase and Option Agreement and other agreements relating to our strategic partnership with Alliance Boots, the arrangements and transactions contemplated thereby and their possible effects, the parties' ability to realize anticipated synergies and achieve anticipated financial results, the risks associated with transitions in supply arrangements, the risks associated with international business operations, the risks associated with governance and control matters in minority investments, whether the option to acquire the remainder of the Alliance Boots equity interest will be exercised and the financial ramifications thereof, the risks associated with equity investments in AmerisourceBergen including whether the warrants to invest in AmerisourceBergen will be exercised and the financial ramifications thereof, changes in vendor, payer and customer relationships and terms, changes in network participation, the implementation, operation and growth of our customer loyalty program, changes in economic and market conditions, competition, risks associated with new business areas and activities, risks associated with acquisitions, joint ventures and strategic investments, the ability to realize anticipated results from capital expenditures and cost reduction initiatives, outcomes of legal and regulatory matters, and changes in legislation or regulations. These and other risks, assumptions and uncertainties are described in Item 1A (Risk Factors) of our most recent Annual Report on Form 10-K, which is incorporated herein by reference, and in other documents that we file or furnish with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. Accordingly, you are cautioned not to place undue reliance on these forward- looking statements, which speak only as of the date they are made. Except to the extent required by law, Walgreens does not undertake, and expressly disclaims, any duty or obligation to update publicly any forward-looking statement after the initial distribution of this presentation, whether as a result of new information, future events, changes in assumptions or otherwise. 63