Walgreen Company Executive Insights: Alliance Boots, Possible Medco Cost Cuts

On Tuesday, Walgreen Company (NYSE:WAG) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Alliance Boots:

Dane Leone – Macquarie: I know there’s a lot to discuss this morning. Maybe we can just start with the domestic strategy going forward in light of the transaction with Alliance Boots that you announced. Maybe, Wade, you could touch on how much balance sheet flexibility you think you have going forward, the opportunity you see here domestically in light of kind of the focus on BioScrip’s and Drugstore.com integration that seems to be going well? Yeah, along those lines, any color you can provide us, I’d appreciate it.

Wade D. Miquelon – CFO: Well, I would say that regardless of this transaction, we are going to continue to drive our strategies, and we’ve got the flexibility and resources and capital to do that. I think as we said earlier on the call, we actually believe though that this partnership, this marriage is going to help us not only drive those, but accelerate those. It will allow us to really continue on this journey to become the most relevant retailer in our space to really own the space of health and daily living, and so that doesn’t change at all. We continue to believe we’ve got the nation’s largest, most trusted pharmacy. We’re on the best corners and we’re going to fully drive that experience and increasingly find ways to monetize it and to build deeper relations for customers.

Dane Leone – Macquarie: Okay. And then maybe more specifically on the domestic strategy, I think there you’ve done a great job of adjusting the cost structure for the lower volumes and business as a result of the contract loss with Express Script. But I’m just curious going forward the front-store traffic trends have looked like they’ve deteriorated over the last several months, and we’ve also seen kind of a revamp of the Prescription Savings Club I guess in the hopes of driving more volume through the door. So how do you think about balancing your cost structure, the promos that you’re willing to provide for the volumes versus just managing the business to where it is and also where do we actually see the front-store impact bottom out here, because correct me if I’m mistaken, but was that originally contemplated or is that included in the $0.21 EPS hit from the contract loss with Express Scripts?

Wade D. Miquelon – CFO: Fully contemplated and fully included. I think the step-down you’ve seen which is not by any means the deterioration, the step-down you’ve seen is in part driven because I think we’re being much smarter in terms of how we manage our marketing (indiscernible), so we’re doing more items that are relevant with less items that aren’t at very high discounted prices, so that has changed traffic a bit, but I can tell you the profitability is better as a result and when we look at our customer satisfaction metrics, when we look at our ability for stores to better deliver the items on promotion that people actually want without our-of-stocks, etc. by all metrics we’re improving the customer experience. So, we’re driving profitable volume and I think that’s the right move, and we’re also moving to a much more blended marketing mix, so that we’re not going to be completely dependent upon our role in the future, we’re going to touch consumers in multiple ways that are relevant to them as they are financially best for us.

Dane Leone – Macquarie: One final question from me, just in terms of the long-dated guidance that was given on the call with Alliance Boots, it did imply a decent organic growth rate between the two companies somewhere in the order of 5% CAGR over the next several years. Can you just kind of tease out for us what that means for an expectation for the Walgreen’s business domestically versus the contribution from Alliance Boots.

Wade D. Miquelon – CFO: First, I mean, when we put those goals out, I am not sure CAGR you are talking about, are you talking about top-line CAGR?

Dane Leone – Macquarie: Top-line, yeah.

Wade D. Miquelon – CFO: Well, I think what you have to do is to understand the model and make sure that you get into the generic versus branded mix. So, the sales as you know both domestically and overseas are in this number for value creation. So, for example, as you know our generics are much more profitable in U.S., that will create some sales compression, but we fully anticipate to drive robust volumes overseas in places like Europe, where generics are underpenetrated. They obviously are at lower costs too, but they are more profitable from a pennies per unit basis in wholesaling, et cetera. So, I think that it’s very difficult for you try to imply, well at least to back into what the unit volume growth is we’re anticipating.

Possible Medco Cost Cuts:

Steven Valiquette – UBS Securities: Just a quick question from me on – for 2013 there still seems to be a lot of feedback I’m getting from investors. I am question-marked around the Medco side of the business. I guess, my only question around that is, we do plan an additional set of cost cutting initiatives. If there were some Medco-related volume that may fall off in 2013, or are you – you would assume more recently, assuming that that contract stays intact, and then therefore had no other plans for cost cutting, et cetera?

Wade D. Miquelon – CFO: You know, I can only tell you what we know and what we’ve said. I mean basically we’ve said that we’ve had contract in place for many, many years. We were willing to honor it. We want to keep serving those customers. I think Express Scripts have said the same thing. So, as of now, we continue to serve those customers, right. And I think we now overwhelmingly from those customers that they really want to have us in the network and intend to fully do that. So, I think there is real risk in that regard, but I mean, if there is something fully unanticipated that would happen, I would say that, as a Company, we would fully prepared to do what was necessary in the best interest of our Company and our shareholders.

Steven Valiquette – UBS Securities: So then, I think some of the investor view is that the announcement today was with Alliance Boots may be tied in to some sort of Medco view, but it sounds like what you are saying that the answer to last question is there’s really no tie-in whatsoever to anything that you’re looking at going forward in relation to Medco in particular, is that safe to say?

Wade D. Miquelon – CFO: Yeah, of course, it would be very naive to assume that this is in response to our dispute. I mean, the reality is, is we’ve been working together for almost a year and a half and working on this for over a year. A company our size is not going to do a transformational transaction of this magnitude unless you’re thinking about the strategic fit, the overall financials in the very long haul. I mean, I just think I find it almost affiliate that people would think that this is reactive. And I can tell you when you look at these two companies and our economic interest becoming entwined, all parties are really saying how big could the end game be and is this the best and biggest alternative for the long haul, and we believe there’s nothing even remotely close to this for us.