Walgreen's Management Presents at Morgan Stanley Global Consumer Conference (Transcript)

Nov.20.13 | About: Walgreens Boots (WBA)

Walgreen Co. (WAG) Morgan Stanley Global Consumer Conference November 20, 2013 10:20 AM ET

Executives

Wade Miquelon - Executive Vice President, Chief Financial Officer and President, International

Analysts

Unidentified Analyst

Good morning, everybody. It's my pleasure to introduce our next presenter for today. Wade Miquelon, here to my left, Walgreen's CFO and Head of International. After Wade's prepared presentation, we will host a 30 minute Q&A session at room 401 and 402.

And with that, let me pass it to Wade.

Wade Miquelon

Thank you very much, for letting me speak here today. It's a real privilege. Just please take one quick second to read the Safe Harbor and non-GAAP comment, and then we'll take it away from there.

So today, I hope to convey you a related story about Walgreens, and the story I'd say is really one of transformation, innovation. I don't use those words lightly. But I hope by the time I show a few of the examples of where we're coming from and where we're going, that you'll be as energized about our prospects for the future as I am.

Our purpose at Walgreens is to help people get stay and live well. And we've often said to be the first choice for health and daily living for everyone in America, but now we're seeing beyond. Because through our partnerships now with Alliance Boots and with AmerisourceBergen, we believe there is really an opportunity to transform our business model overtime and capture and crate a lot of value for all of our stakeholders.

Now, we've always said before that location, location, location is what matters in retail. And we certainly have 8,131 of what we think are the best locations in America, really A corners, pre-standing 14,000, 15,000 square feet drive-thrus, parking. But we're also doing a lot of work to redefine what convenience means and it's not just about location, it's about a lot of other things. And we think we're very well-positioned to capture our consumers' patience and payers' hearts and minds and their veins.

We also believe that healthcare is changing and the whole convenience factor and the fact that healthcare is moving from really in many cases a pay per use to an outcome driven model place to our suits. We've grown from being really a pharmacy that fills pill bottles to being much more than that.

To being heavy into safety, into adherence, into various therapies, being number one in United States in immunizations, vaccinations. A 90-day retail program, which is exploding and growing and to being best-in-class in a variety of other things and filling on a footprint, which is going to really transform healthcare, as I'll talk about it later in the presentation.

But just before I do that, just a little word on our business. If you've been following our comps, you've seen that the last couple of quarters our business has been strengthening. This is our front-end comps as it relates to our top two competitors. And you can see that in the last quarter here, Walgreens was up over 2% in the front-end comp, while our competitors were both negative.

It's a tough environment out there, but I think we've done a good job of balancing our promotional mix and really focusing on what we call swinging the doors, we're moving the traffic and we feel very good about that. We also have momentum in our prescription side of our business, where you can see that not only are the comps very strong, but the GAAP versus others in period-on-period is also strengthening and improving.

We have three core strategic drivers, I want to talk about today and give you a little bit of insight into each of those as well as show some of the innovation that we're doing to change the nature of the space. And the first one is, what we call, creating a well experience.

But what is creating a well experience? It's really changing how we leverage the box, becoming much more relevant to our shoppers, much more contemporary, and doing in a way to leverage the phenomenal infrastructure that we have. It's providing better customer value, and that doesn't mean just price, it means how we communicate value, how we differentiate with own brand, bringing innovative products and services, I'll talk about as you can see, creating really a systematic way to localize our offering.

When you have 8,000 of best corners, you want to make sure that each one of those has the right topspin to capture the hearts and minds of the local community, and finally really having innovative and relevant formats in various networks. We've had a lot of progress on this initiative, so many of you may have seen some of our well experience stores. We have 500 stores. We're reimagining what the pharmacy can be, reimagining what the front-end can be, reimagine the customer experience and we have 12 flagships as well.

If you want to see what's really happening at the bleeding leading-edge of Walgreens, a flagship is a great place to do it. We're reinventing beauty and we believe we have a right to be much bigger in beauty, both through our own experience that we bring, how we strengthen the range, how we change the service model. But importantly through Boots, who is bringing items like No7, the number one skincare line in the U.K., at Walgreen for us to move across the country, and I'll talk about that later as well.

We launched a Balance Reward Program, which is our form of rewards for our loyal customers about 14 months ago. We have over 85 million people enrolled to date, which makes it the largest active program in the world as far as I know and we are off to a good start, where over 70% of purchasers are now on card and the feedback from customers is very strong.

And my comrade over here, Rick Hans, always says that loyalty is not about a card. In fact, we spend in over 100 years and over $30 billion to get the best corners in America to really create that kind of loyalty. But having this card actually does allow us to stitch together the data and provide unique individual customer propositions, and I'll come to that later as well.

And finally, our own brand proposition, those brands only available at Walgreens. We've really upped our game in the last few years here and launched even over more than 2,000 items in last 12 months alone.

So well experience is really again about reimagining the box, it's about changing the lighting, the open space, the sidelines, the refresh; it's changing how we do things like food; to be more relevant changing what we do with our own brands as a said the beauty experience and also reimagining the pharmacy.

A pharmacy where a pharmacists is out in front of consumers, taking to patients; a pharmacy where technology enables a much better workflow, where you have healthcare concierge just talking to people, helping them navigate the store; where you have healthcare clinics in many respects; and within get primary care, where you have private rooms for things like vaccinations and things like lab.

And I'll talk about flagships for a moment. And a flagship is a good place, where you can see, again like I said, the bleeding edge of what's happening at Walgreens, just happens to be in my hood, in Bucktown, which you can see that a very contemporary different looking feel, if any of you have been to 40 Walls and seen what we've done there with Duane Reade as akin to some of our flagships.

But again, 12 flagships is not going to take the chain to glory, but I think it does help with our halo effect and there is also a place for innovation that we're able then to take and funnel out to different places across the country, where it's relevant. And I think it really gives you kind of a feel for where we're taking the brand and where we're taking Walgreens in general.

Here is another flagship at Sunset and Vine, which I think was the first store where we launched Women's No7 and that's doing very, very well there. You can see the pharmacy, in the bottom right, where you've got basically a much more open space. The pharmacist are interacting, you've got the clinic, the privacy rooms and the area for the healthcare concierge, if you will.

Boots brands, I'll talk about Boots in more detail later, but Boots has really a fantastic own-brand portfolio. They have about 400 people in research and development in Nottingham that have been there for many, many years. A very extensive portfolio of thousands of items developed. They have relationships with many academic institutions, with people like Botanical Gardens, Kew as well as a very big sourcing. About 200 people in Shanghai and Hong Kong, which source on behalf of it.

This is really akin to in some ways a CPG engine that we can leverage at Walgreens to really differentiate and drive our value proposition even further. This happens to be in Phoenix, where we launched in about a 180 stores already. The No7 line as well as other items like Mark Hill, Botanics, et cetera.

This is our first real big market launch of these come into United States through a partnership. And so far we're ahead of our metrics and off to a very good start. So we think this is going to be a very big opportunity for us to create value and win shoppers going forward.

Over the past few years we've also been on a journey at Walgreens to improve our own brand portfolio. And we've historically been a leader in own brand in the drug channel with about 20-ish percent of sales coming from our own brand, but we can do a lot more here and we are.

And historically, for many U.S. retailers, including our self a lot of the own brand was a like all compare and save. So like a national brand, only maybe 20% or 30% cheaper. And that's good, and that's a great way that we can create value for our shoppers, but we're really making huge inroads now is what I call, differentiated top down. So items like Delish, items like Ology, items like Pet Shoppe, and of course the Boots' items like No7 and Botanics and others.

These are ways that we can really provide items that are not just like another brand only cheaper, but are items that are unique to us, and in many case a premium price, but can only be found at Walgreens. And we've actually just in last year alone grown our share over 200 basis points in own brand and we've got really just a phenomenon of portfolio of items, just like I said over 2,000 in 12 months alone and a lot of momentum in this area.

We're also doing other kinds of customer-led innovation, not just in products, but in services. So for example, Walgreens has more stores than any other retailer in the U.S., and what I call the underserved financial or under-banked population over 2,000 of our stores are in areas, where a lot of people don't have access to their financial resources.

So we've just launched our balance financial card, which is a financial, a prepaid debit card, which has very, very, very low fees. It allows people to put their paycheck on a card, have it there for safety, with again small fees, where they can access 8,000 ATM's for free. They can do online bill pay and a variety of other services.

We believe this is another way in which we can really capture the hearts and minds, and ultimately a share of wallet with our customers. And so far and this launch is so good. But like I said, what makes it unique is not only the breadth of services they can do from this, but the fact that it's very low fees across the board.

I talked before about Balance Rewards. Again, in September of last year, we launched our Balance Rewards loyalty program. In the first 14 months, we've enrolled over 85 million people, which is a quite stagger when you think about that. For the first several months, it was over 200 people per day per store. And again, over 70% of purchases are on the card.

We have a wonderful opportunity to keep leveraging this, now as we start to personalize various promotional items for people, as we start to really incent them to be able to treat themselves. And I'll just talk about this program is, is approaching what I call the point of really critical mass.

So when you think about watching rewards program the first six or 12 months, you don't get a lot of benefit from it, because your employees are busy enrolling people, you're trying to explain the program, it takes time to sign them up. And then they start to build points, which is nice.

But really when a reward program hits that what I call magic, is when you're able to really leverage it to start treating people, which start really rewarding them and it's the joy of redemption is how you move the needle. And right now we have enough people and enough points on it that we can start to really use the lever to drive the joy of redemption across the business.

Transforming community pharmacy is our second big strategy, and as I said, it's moving from what we traditionally did was, filled prescriptions to get much broader in terms of healthcare. And you can see here we've made a lot of progress, we're the biggest immunizer now in United States, outside the U.S. government, of essentially the flu and all other vaccines.

We have 400 clinics that are in our stores and that's going to grow to international footprint as well as another 400 that we run on corporate campuses for corporate healthcare and wellness. We have announced a 90-day program with Express Scripts, where it's effectively a very strong competitor we believe to Maintenance Choice for those people that prefer Walgreens to CVS. Our partnerships with Theranos, which is a lab diagnostic, I'll come on to in a moment, and many, many, many other partnerships.

But underlying all of this and some things I'm going to talk in a moment is a big tectonic shift that I see happening in the U.S. landscape, and that is, historically, healthcare has been very much an environment of pay per use. And in that environment, Walgreens has been historically participating on $0.12 on the $1, that's how much goes towards base of prescription.

And in that $0.12 we're always typically negotiating with third parties over so much fee per script and there is intermediary in there and that's fine. But what's changing in healthcare now is one thing, is us. So we're now the largest vaccinator in the U.S. We're in primary care. We're going to expand our presence there. We're number one in infusion. We're very in large and plan to grow very large in specialty. We are the largest player on hospital campuses. And we're also moving into areas like lab and diagnostics.

That means that directly now we'll be participating at about $0.40 on the $1 in healthcare. But what's even more important than that is rather than these $0.40 in a pay per use model, what's now happening is with the shift to outcomes is we can actually influence almost the whole dollar. And I've never seen the number of managed care and payers and other people in the ecosystem, ACOs, physicians, et cetera, wanting to work with us in the way we can.

But when we can do things better, faster, cheaper and more conveniently, when we can help prevent a hospital admission, when we can work with the hospital and help prevent a readmission, these things save the healthcare system a lot of money, and that changes our entire reason for being in our rank in the ecosystem. And that's going to be I think a big story and this probably is going to keep unfolding, not only for the next few years, but for the next decade.

This well network I talked about, again we have 8,000 pharmacies, we have 75,000 healthcare professionals, and we're closer to anybody in the entire country for what we do. We also have, again the number one infusion business. We're number one in hospitals. We've got a very large specialty, which is multi-channel specialty. You can have it through [ph] Central Mail. You can have it in the pharmacy, if you wish. And we have the retail footprint clinic, 800 in total, when you think about what we have in-store and in corporate campuses. The well network is going to grow.

And again, in a world with healthcare, where we have a lack of primary care physicians, where we need more distributed health, where we need better outcomes, for many of the things we do, we can do it better, faster, cheaper and more conveniently and we can also help save others in the ecosystem, money and time.

Another innovation I talked about, and if I had another hour, I could easily talk about it for another hour is, Theranos. Theranos is really a one of the most I think transformative companies I have had the privilege of working with. But effectively Elizabeth Holmes and her team has been able to miniaturize, if you will, lab testing, moving with akin to data in a mainframe form to a laptop, where she can do any clinically approve test, and she can do it within being CLIA-certified and all the rest with a single drop of blood 1/1,000 what happens there in phlebotomy, a single finger prick, which alone is amazing, but not only that as a test are more accurate, in general, and can be done in four hours.

So it really is an example where we can now do lab testing across the full spectrum of test. We can do it more conveniently, we can do it cheaper, we can do it faster, we can do it better. And when you get those kind of disruptions, I'd tell you it has to give anybody goosebumps.

And we initially launched in Palo Alta in September. I was out in Phoenix last week, where we opened our first two stores of Phoenix, that will be growing. We had a host of officials there, in fact the Mayor got his blood tested, right after I had mine tested, the physician came in and wrote himself six lab orders, so he could understand the process for his patience. But this is going to be very, very exciting. And I think if you really think about the place that lab has within the healthcare ecosystem with 70% of diagnosis coming from a lab test and what we can do to disrupt the model, it really opens a world of opportunities in a variety of different areas.

The last strategy is really creating an efficient global platform. And I'll talk a bit about our partnership with AB and also with ABC, maybe one day ABCD, if there was one. But really the deal thesis for this is that a variety of things, but one of the things that's changing is all of the suppliers that we work with, by in large are global, and we have commonalties in that global footprint such as molecules, the ability to buy generic molecules anywhere and ship to anywhere and be able to get that scale.

But we've got many milestones as we've been establishing this footprint. One was a transaction with Alliance Boots, I'll come on in a minute. Also the AmerisourceBergen partnership, which is the way of us creating a virtual integrated supply chain in North America. And we're really off to a great start.

You probably know something about Boots, they're sort of $40 billion U.S. revenue company. They operate in about 25 countries. Outside of the U.S. for pharmacy, I think that Boots is really the preeminent retailer in that regard, and not only a great pharmacy, but they've got a terrific front-end of really best-in-class with almost 40% beauty for example in the U.K. alone. They also were a wholesale operation in a little bit about 21 countries. And in most countries in the world, if you're not familiar with it, part of the key of building a pharmacy over time is to have an effective wholesale business.

There is a variety of reasons for it. Sometimes because many countries have a law of one pharmacy, one pharmacist, and other times in developing markets like China, most of the pharmacy moves through hospitals, the wholesaler serve those. But it becomes a platform for efficient scale, which you can then build on overtime as laws change and as markets change, and that's exactly what Alliance Boots has done, exactly what we plan to do with them overtime in many different markets.

Alliance Boots is, again more than a retailer and more than a wholesaler. They actually have very strong branding capabilities, really the best own brand portfolio, if you will, in the entire global retail space, and probably the only one who has ever been able to really trade successful own brands in beauty.

And it's hard to do, because as I'd like to say, building an own brand in beauty is hard because you're selling hope in a bottle, but hope has high margins, and it's very expensive, so it has to look like hope with clinical trial support, products that are efficacious, the ability to have nice packaging, to have the right in-store environment, to be able to have testers and to be able to have a variety of people who can give good advice. It's not easy to do, but if you can do it, the rewards are immense. And that's what they've done, that's what they're helping us do as well.

They also have a very strong Advantage card, the Boots loyalty card, it's probably the most emotive, as I say, card in the entire retail field globally, where 16 million active users, mostly women will work hard to spend responsibly for their family, but then build points and be able to treat themselves. By linking those treats to very emotive beauty products and often own brand products, they're able to bring people into the franchise in a very unique way. It's not done as far as I can tell with any other retailer. So we're learning from that as well.

And then finally they have a very strong Almus brand, which is there kind of own brand for generics. It has high award-winning packaging. It has consistency of quality and has allowed to change the paradigm with some respect in various markets, so we think there is strong opportunity for Walgreens to leverage that in the U.S. as well.

AmerisourceBergen, I am sure you know who they are, really one of the premier wholesalers in the U.S. healthcare distributors, as I'd like to say, a fantastic company. We have now worked to deal with them as well. So if you think about, Alliance Boots has taught us the power of integrating wholesale and retail, they've done that with the two premier players outside the U.S., we believe that we can do that in the U.S. as well, but we've done that in a virtual fashion.

So by virtual, what I mean, I mean we have a three-part agreement. One is AmerisourceBergen is now distributing all of our branded drugs, and starting January, we'll have a nine months transition for all of our generics. So rather than having us a have brands and generic distributed to Walgreens once a week, AmerisourceBergen will be doing that at every single store, every single day. And that's not only great for service levels and great for us being able to drive down inventory, it's also great because it will change the model overtime with things like multi-channel specialty on demand, where you can have that kind of pulsing.

But we're really excited about what they're going to do to leverage our core competency here. On the other hand, we'll be procuring and negotiating the drugs for them out of Bern, which we've already set up, which is our joint venture with Boots, because Walgreens and Boots, the biggest procurer of generic drugs in the world are also we believe the most efficient. And now with the three parties' volume we will be by far, the largest buyer of generic drugs in the world. And again, we'll be using added advantage to purchase on their behalf.

And then the final piece is equity alignment. We're in the process right now of buying 7% of AmerisourceBergen stock in the open market. We have a warrant for $51.50 that strikes of 8%, that strikes in '16. We have another warrant that strikes in '17 for 8%, and altogether we have a standstill 30% ownership of the company, so that's for three years in our collaborative process.

They'll be doing all the distribution of our drugs, every store, every day. We'll be buying all of their generics as the worlds biggest buyer by far of generics, and we will be a 30% owner in what we believe is going to be a deep partnership with long tentacles, and to other things we can do with specialty and serving independents and how we work in areas like oncology with physicians and hospitals. So we couldn't be more excited to have these three parties coming together to really create, if you think about it domestically and internationally, the biggest retailer and the biggest wholesaler/healthcare distributor play anywhere.

You can look at this chart for yourself, which add all up. We have 12,000 stores of our own, but if you add in the other franchise, like I said, like Alphega, which is the virtual franchises that Boots has overseas, which does not only drug delivery, but does things like, bannering protocol work, provide systems unique front-end items for sale, as well as if you add in with what AmerisourceBergen has in their Good Neighbor Pharmacies, over 20,000 pharmacies that will be serving in over 25 countries. Again, all of them either owned or in a partnership with us, which is by far the biggest footprint of any player in our space.

Not to mention we'll be going to over 200,000 touchpoints every single day, which means owned pharmacies, independent pharmacies, chain pharmacies, hospitals and physicians. When you think about that what we're trading and what we're going to trade, I'd like to say is by far the world's biggest health and distribution delivery system, where we can deliver drugs, other products, services, information, even ultimately things that haven't been contemplated, but in a world of global suppliers, and in the world of healthcare that needs to be distributed locally, this is going to become very, very significant.

So I'll just wrap up. with some goals, we put out there. We're all about capturing and creating value for our shareholders and other stakeholders. By 2016, our goals combined with the AB are to be $130 billion in revenue. And we feel that we're in a good stead to do that. Our goal is that we'd have a combined EBIT of over $9 billion on a FIFO adjusted basis.

So here I'll let you read through yourself, and that includes not only the progress of Walgreen's and Boots, but it also includes our target of $1 billion in synergies through these six pillars that you can see, mostly procurement, but some as we grow the topline and build that over time through expanding the own brand portfolio.

We have a goal of generating strong cash. And our goal in 2016 is to have $8 billion in operating cash flow, which would be kind of $6 billion more or less in free. We were about $6.8 billion and $6.9 billion last year. But again, we believe that the two entities are going to have very strong cash flow.

And this cash flow has a couple of things. Obviously, it will continue to enable us to pay nice dividends through the past 13 years. We've got a 17.5% CAGR and we would see continuing to increase our dividends, again commensurate with our earnings progress as we go forward here and in our targeted 30% to 35% range payout.

And also the strong cash has enabled the ability to keep paying down our debt. And we've had very strong cash flow and very strong de-leveraging through this. And we believe that we're on track to do this, as a goal as well. And this also assumes in our recent restatement that we can absorb the 7% purchase of ABC stock along the way as well. So that would imply that we think we're a little bit ahead of our initial target there.

And lastly, like I said, if we do all these things, we believe that we'll have a chance to create values for our shareholders, which is what we wake up every morning, working very hard to do. You can see the one year, two year and three year returns for yourself. And we feel good about that because it's not as if we didn't have a tough moment and tough days. We had some tough battles with some tough players and had to make some hard decisions, but at the end of the day, we're doing all of this for the long-term.

I know, we've talked a lot about the goals in 2016 before, both here and also in many different meetings. But I don't want people to think that 2016 is the end of the story. I think the big idea is 2016 for me is the beginning of the story. Once we put these pieces together and once we've fully integrated the things that we have to do, what we can really do I think is change the way healthcare and wellness gets done in many respects. Change, how we work with global suppliers.

I mean I use the example the other day of one of the large pharma players and it's true of almost all of them, but we are their biggest buyer of brands, their biggest buyer of generics, their biggest buyer of specialty pharma, the biggest buyer of vaccinations, the biggest buyer of their OTC and we're their biggest customer/buyer or distributor in the world. And that's all great and that gives rise to probably some ways to drive some efficiencies and procurement and supply chain things, but it also gives rise for us to change the nature and how we work with them on a much broader basis.

So for example, we're already working with one big player and how we can reinvent, how clinical trials get done, right. We're working with multiple players as big pharma wants to go to fewer and fewer distributors, they can do more than just distribute drugs, but can do fee for service, value-add activities like detailing. I mean education, right.

And these relationships and our ability to do that across multiple markets with the kind of touch points we have is going to change the game in many different ways that aren't even contemplated today. So you can tell I'm excited. I hope I left some room for a question or two, but I think it's a great story. And I think we've got a lot of opportunity and the key would be picking the right ones and then executing flawlessly.

All right, with that we'll go right to break. Thank you for your time and I really appreciate you being here.

Question-and-Answer Session

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