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Walgreen Co. (NYSE:WAG)

January 11, 2012 3:00 pm ET

Executives

Alan G. McNally - Chairman

Gregory D. Wasson - Chief Executive Officer, President and Director

Joseph Greenberg -

Thomas J. Sabatino - Executive Vice President, General Counsel and Corporate Secretary

Mark A. Wagner - President of Community Management

Kermit R. Crawford - President of Pharmacy, Health, Wellness Services & Solutions

Wade D. Miquelon - Chief Financial Officer and Executive Vice President

Operator

Please take note of the information on the screens at the front of the room. Certain statements and projections of future results made in this presentation constitute forward looking information that is 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 for a discussion of risk factors as they relate to forward-looking statements. Today's presentation includes certain non-GAAP financial measures. You are directed to our website at investor.walgreens.com for a reconciliation of these measures. Thank you.

[Presentation]

Alan G. McNally

Good afternoon, ladies and gentlemen, and I hope everyone will experience well at Walgreens this afternoon. On behalf of your Board of Directors, a warm welcome in balmy Chicago to each of you to Walgreens Annual Meeting of Shareholders, as we celebrate the new year and your company's 111th year of operation. Thank you, thank you.

I'm Al McNally, Chairman of the Board, and it's a pleasure and a privilege for me to serve as chair of this meeting. Thank you for spending your afternoon with us, and we'll work very hard to make it informative and productive for you.

Three years ago, we introduced our "plan to win" to get more from the core for you, our shareholders, to be America's most trusted and convenient provider of consumer goods and services and Pharmacy, Health and Wellness Services, and to return Walgreens to strong double-digit growth in earnings per share and top-tier shareholder return just as early as we possibly could.

In the past 3 years, your company has made enormous progress on a broad-based agenda of innovation, disciplined execution and profitable growth. Thanks to the outstanding leadership of our President and Chief Executive Officer, Greg Wasson, and the world-class leadership team he's assembled, and the dedication, the talent and the hard work of 247,000 members of the Walgreens team.

Today, we'll provide you with an update on the company's performance and progress in 2011, and look ahead to becoming My Walgreens, the first choice for health and daily living across America, a central part of people's lives and the communities where they live and work.

After we conclude the specific matters of business presented in your proxy statement, Greg will review the highlights of the past year and our strategies for growth and value creation going forward. Strategies that position Walgreens well for the opportunities and the challenges that lie ahead, challenges including the Express Scripts situation and substantial reduction in our share price these past 6 months, and turning challenges into opportunities as we advance the role of community pharmacy across America,

Our Chief Financial Officer, Wade Miquelon, will then review Walgreens' financial performance and condition, including a record-setting year in fiscal 2011, our largest increase in net income in a decade and our largest growth in earnings per share in more than 15 years. Following which we look forward to your questions and your comments.

Let me now open the business meeting by recognizing and introducing our new Corporate Secretary, Tom Sabatino. Tom joined Walgreens in September as Executive Vice President, General Counsel and Corporate Secretary having previously served in this capacity with several major U.S. corporations. Tom succeeds Dana Green, who retired from Walgreens after 37 years of incredible service and commitment to our company, the Board of Directors and our shareholders. So welcome, Tom, and your comments?

Thomas J. Sabatino

Thank you, Mr. Chairman. The Board of Directors set the close of business on November 14, 2011, as the record date of shareholders entitled to receive notice of and vote at this meeting. The company's 2011 annual report, notice of this meeting, proxy statement and proxy form were provided beginning on November 18 to all those shareholders of record as of November 14. We have copies of these documents available for inspection today along with affidavits as to their distribution and a list of Walgreen shareholders on the record date. This list has also been available for inspection at our corporate office for at least the 10 days preceding the meeting. Hedburg and Associates have been appointed as inspectors of election. They've examined the proxies received up to the time of the meeting and determine the number of shares represented by proxy and their vote on the proxy matters. Proxies must be delivered to the inspectors of election before they may be voted. If you have not turned in your proxy, please raise your hand so that it may be picked up now. Thank you.

There were 877,861,721 common shares outstanding and entitled to vote on the record date. The company's bylaws state that a quorum consist of a majority of the common shares outstanding, which are at least 438,930,861 shares. The inspectors of election have informed me that they have received proxies representing shares in excess of the majority.

Alan G. McNally

Thank you, Tom, and since our quorum is present, I declare the meeting open for business. The first matter before us is the election of Directors, for which there are 11 nominees. Dr. David J. Brailer, Chairman of Health Evolution Partners; Steven A. Davis, Chairman and CEO of Bob Evans Farms; William C. Foote, retired Chairman and CEO of USG Corporation; Mark P. Frissora, Chairman and CEO of the Hertz Corporation; Ginger L. Graham, President and CEO of Two Trees Consulting; Nancy M. Schlichting, CEO of Henry Ford Health System; David Y. Schwartz, Independent Business Advisor and Consultant and a former partner at Arthur Andersen; Alejandro Silva, Chairman and CEO of Evans Food Group; James A. Skinner, Vice Chairman and CEO of McDonald's Corporation; Gregory D. Wasson, President and CEO of Walgreen Co.; and me. Nominations are now closed.

Our second matter of business is to ratify the Audit Committee's appointment of Deloitte & Touche LLP as the company's independent registered public accounting firm for fiscal 2012. The Board of Directors unanimously recommends this appointment.

The third matter of business is to approve the Walgreen Co. 2011 cash-based incentive plan. The Board of Directors unanimously recommends a vote for this proposal for the reasons explained in the proxy statement.

The fourth matter of business is to approve on an advisory basis the compensation of our named executive officers, otherwise known as a say on pay vote. The Board of Directors unanimously recommends a vote for this proposal for the reasons explained in the proxy statement.

The fifth matter of business is to conduct an advisory vote on the frequency of future say on pay votes. The Board of Directors unanimously recommends a vote every year as explained in the proxy statement.

The sixth and final matter is a proposal by shareholder Mr. John Chevedden regarding an executive equity retention policy. Mr. Martin Glotzer will speak regarding this proposal on behalf of Mr. Chevedden, and we've asked Mr. Glotzer to kindly limit his comments to 2 minutes, please, Mr. Glotzer.

Martin Glotzer

Thank you,, Mr. Chairman. Martin Glotzer, Chicago. Once again, I am well pleased to be at an annual meeting of Walgreens. And like I've said, look out the window, it doesn't look like a Walgreens meeting because there's no snow on the ground, thankfully.

As to Mr. Chevedden's proposal, it's found on Page 65 of the proxy statement. And let the record indicate that I've read the proposal as printed in the proxy statement and the reasons. And in addition, during the course of attending so many annual shareholder meetings from time to time, a shareholder sends me a letter criticizing company policies unsigned. And all I request that a copy of this letter be put in the records of the meeting. And if any shareholder into the future we have provision in the proxy statement if any shareholder would like to communicate with the Board of Directors, there's a program on how to do it. And I'll leave it up to the management's rebuttals.

Alan G. McNally

Thank you very much, Mr. Glotzer for bringing that letter to our attention. Appreciate it. The Board of Directors unanimously recommends a vote against this proposal, again, as explained in the proxy statement. We'll now conclude the voting. If you've already voted by phone, Internet or mail, you need not vote on any of these matters by ballot. Your votes will be cast in accordance with your proxy. If anyone wishes to vote in person by ballot, please raise your hand and a ballot will be distributed to you and collected momentarily. So let me pause for a moment so that ballots can be distributed.

Thank you, ladies and gentlemen. Before I turn the floor over to our President and CEO, Greg Wasson, I'd like to make a few introductory comments from the perspective of your Board of Directors.

In his 3 years as CEO, Greg has led one of the most important strategic and operational transformations in the company's history, leveraging the best store network in America, enhancing the customer experience and achieving major cost reduction and productivity gain. Fiscal 2011 was a year of strong performance for Walgreens, with record sales and record earnings, double-digit growth and earnings per share in all 4 quarters with a dividend increase of more than 28%, the largest in your company's history, bringing our compound annual growth in dividends for the past 10 years to nearly 20% per year.

The company's broad-based transformation continued to accelerate and gain momentum in 2011, with a new look and feel of our refreshed stores now enhancing the customer experience and customer relevancy in more than 6,400 stores nationwide. New concept stores opened in New York, Chicago and Indianapolis, as we transform our traditional drugstore to a retail health and daily living destination and redefine, even revolutionize the drugstore experience.

New selections of fresh, healthy food transforming food deserts into food oasis in underserved communities. And as a leading multi-channel retailer, completing the acquisition of drugstore.com and providing new and innovative services in e-commerce and mobile technology, like Refill by Scan and Web Pickup.

In 2011, your company continued to transform community pharmacy, providing a growing range of health care services, expanding choice and access to care, and lowering costs through community-based health and wellness solutions. Walgreens continues to forge new partnerships with community hospitals, health systems and physician groups to deliver pharmacy health and wellness services to more people and more places. Increasingly, we're becoming part of the solution to America's health care challenges.

In providing convenient, quality, affordable health care choices, we seek fair and predictable reimbursement for the value we provide. And in this regard, Greg and his team have worked hard in their effort to negotiate a contract renewal to remain in Express Scripts' network of pharmacies. They also demonstrate the courage to say no and hold the line when Express Scripts demanded unacceptable rates and terms, which would undermine the value of Walgreens and the value of community pharmacy on which millions of patients depend.

It was a big decision, but a very clear decision in terms of where the health care market is heading, our leadership in community pharmacy and protecting and growing long-term value for you, our shareholders. You'll hear more on this from Greg. And with that, let me turn the floor over to an outstanding leader, Walgreen's President and CEO, Greg Wasson. And I also want to say that Greg is sick with a stomach virus, and this guy has more energy, more capacity, more commitment than any other human being I know, and he refused to miss this opportunity to talk with you, his shareholders. Greg, the floor is yours.

Gregory D. Wasson

Thanks, Al. And I guess, if you're going to have a stomach virus, there's no better place to be than a company surrounded by pharmacists. So I feel like I'm in good company. As Al said, certainly, I wouldn't miss this. It's great to see so many familiar faces and be able to tell our story, and I think we've got a great story to tell this afternoon. Thanks, Al, for the great recap of the year as well. And we -- I hope that everyone got an opportunity to visit the exhibits we had set up outside and meet many of our team members. Our goal was to really give you a feel for what we mean by well experienced. We're going to talk a lot about that this afternoon, myself and Wade. And -- but I'm going to spend most of my time -- I want to start with some of the highlights from last fiscal year, but I want to spend most of my time looking ahead and looking to the future and talking to you about what we're so excited with this great company and what we're about to do.

So for the year, we did fill 819 million prescriptions, 1 out of every 5 retail prescriptions in America. I will talk about and touch base on what the ISI issue means to that going forward. We administered 6.4 million flu shots, which is second to the U.S. government, and this gives us a great foundation to expand even more into immunizations and vaccinations as we go forward. We met our goal to convert or open 5,500 stores to our Customer Centric Retailing format. In fact, we actually converted 6,400 stores. So we feel really good about that. Wade will talk a little bit more about the economics that we are seeing from those stores. We acquired drugstore.com, as you know, back in April, and this was to accelerate our multi-channel strategy, and I'll spend a few minutes on that as well.

We're proud to and still be on Fortune's most admired companies list for the 18th consecutive year. I'll go back one, we're really pleased to have exceeded our rewire for growth initiative goal as we talked about last year of $1 billion in cost savings at the end of this fiscal year. We successfully integrated Duane Reade and, at the same time, we're beginning to pull a lot of the Duane Reade initiatives that we talked about last time back through the remainder of the chain, a lot of which, if you got down to our State and Randolph store that opened yesterday, you'll begin to see. And we're really excited to have created and launched what we're calling our well experienced store concept and store format that we'll talk about in detail.

And finally, we had a record sales and profit year. And I'd like to take this time to thank our associates, 247,000, some of them are in the room today, many that will be listening to this on webcast, if not live, later, for all the hard work that they put in everyday to make this happen. So thank you very much,

So moving onto our financial highlights. This was our 36th consecutive year of record sales. We turned in $72 billion in sales, up 7.1%. Turned in $4.3 billion in operating profit or EBIT, which is up 26.2%. And if you remove the sale of our PBM Walgreens Health Initiatives, we were up 16.7% in operating profit, which was the largest in over a decade. Turned in $2.94 per diluted share in EPS, which is up 38.7%. That does include the sale of WHI. And all this allowed us to return $2.4 billion to you, our shareholders. And I want to remind you that was in a continuing challenging economic climate.

So turning to our dividend. We increased the dividend 28.6% in this past July, which is our greatest 1-year increase in company history. Our 5-year compound annual increase was nearly 24% and our 10-year, nearly 20%. And our payout ratio currently is 28% and we talked about last year our payout ratio over time remains 30% to 35%.

So turning to our stock performance. Quite frankly, we are not real pleased with our recent performance. Since we announced on June 21 that we would most likely not participate in Express Scripts network, our stock is down 24% for the year with the S&P being nearly flat. Now this was a clear decision, as Al said, that we knew would have short-term impact on earnings and our stock in order to create value in the long run. This was certainly a big decision, as I'll talk about in a little bit. But I want to assure you the underlying health of your company remains very strong. Even with the Express Scripts decision factored in, our stock is up 31% since we announced our "plan to win" 3 years ago on this stage. So we remain committed to returning this company to top-tier shareholder returns, and we absolutely are convinced we have the strategies in place to do so.

So that's it. I'd like to switch gears to our strategies and to our transformation that Al talked about earlier. For years, as you know, our core strategy has been location, location, location. We've had some of the best corners in America. And our predecessors have left this management team the best corners in America to leverage from this great location in Miami to the Strip at Las Vegas, all the way to old San Juan. So it's up to this management team to leverage these locations and carry on with the opportunities we see. 75% of the U.S. population as a result of the last couple of decades of store growth live within 5 miles of a Walgreen drugstore. 84% of African-Americans and 85% of Hispanics. So our opportunity is to combine those great locations, the great locations we have across the country, with experience, experience, experience to create what we're calling the "Well Experience", the new store concept. And frankly, the "Well Experience" across the country. And as to support our vision to be My Walgreens here in America their first choice for health and daily living.

Our goal is to create an experience unmatched in this industry by focusing on wealth. And I'll take you through what we mean by that. In fact, what do we mean by that and how will we make it happen?

We have 5 key strategies to make this happen. First is to transform our traditional drugstores to what we call a health and daily living destination. We're stepping out the traditional drugstore format and creating something completely new and unique and special. We're combining cutting-edge design with an improved product assortment, such as enhanced -- expanded fresh food and enhanced beauty experience, a growing private brand offering and much more.

Now recently, we hosted our nation's First Lady, Michelle Obama at one of our pilot stores, our "Well Experience" stores here in Chicago on the south side of 75th and State. And this is a store where we have greatly expanded fresh food, among other things, but to create a real food oasis within that community. So I'd like David to play some video of the First Lady's visit. David?

[Presentation]

Gregory D. Wasson

Maybe back home as well. And one of the lines that she said that I liked the best is that this is a story that we should want to tell across states and cities across this nation. This is big stuff. We agree, this is big stuff. What's exciting is we're leveraging the real estate that we have in communities across the country to be able to do, as I said, good business while doing good.

So our second strategy is to advance the role of community pharmacy plays in health care. And we've made significant design areas, design changes in this area of our stores as well. Some of the most significant is we brought our pharmacist from out behind the counter to be out front to where they can spend even more time with patients, to help fill a void in access to health care in this country. We've also created a new health guide physicians. Someone who can help patients, not only navigate through the services and the products that we offer, but also the health care industry at large. And we've also more tightly integrated our retail nurse clinics with our pharmacies to create a real community health corner.

Recently, we had a second visitor to the 75th and State store. And she is the Secretary of Health and Human Services, Secretary Sebelius. And she came to see the future of pharmacy and what we were doing and left very excited about the future that the community pharmacy can play in health care going forward.

By doing this, by positioning and redesigning this area of the store, it enables us to quickly and more easily expand the scope of services that we're offering our patients, whether it's our pharmacists with immunizations and much more, our nurses or our physicians on location to provide more acute care and primary care and health screenings as we go forward. So listen to what the Secretary had to say about this location. David?

[Presentation]

Gregory D. Wasson

So if you're wondering, I did get a flu shot. I'm told this is a stomach virus. So in case you don't know, the Secretary of HHS is certainly this country's or maybe the world's leading health care official. And the Secretary did not come to Walgreens to see the pharmacies that we run today and have run successfully over the years. The Secretary came to Walgreens and to this pharmacy to truly see what community pharmacy can do and how community pharmacy can step forward, play a big role going forward. And she was excited when she left.

I could have spent a day in her office in Washington trying to explain what we're doing, an hour in this store, I think, was extremely productive. Now the Secretary wasn't the only one to get a flu shot at Walgreens, David?

[Presentation]

Iris Arnold

Ellen, we're supposed to be up there already.

Frances Labinger

Yes, what are you talking about? Greg's going to call our names.

Iris Arnold

Yes, then it's going to take you 10 minutes to get up the stairs.

Frances Labinger

What stairs? We just walk up the ramp, dummy.

Iris Arnold

There is no ramp, moron.

Gregory D. Wasson

Hi, Nice to meet you, Nice to meet you. Edith and Ellen, I want to thank you for the terrific job you did helping us with our flu program this season and just one of the best flu commercials, one of the best commercials we've ever had. So thank you very much.

Frances Labinger

Thank you.

Iris Arnold

Everybody recognizes us.

Gregory D. Wasson

They do.

Frances Labinger

And I actually had a flu shot at Walgreens.

Gregory D. Wasson

That's good. Did you get a flu shot? Well, thank you very much.

Iris Arnold

You're very welcome.

Frances Labinger

You're very welcome.

Gregory D. Wasson

We appreciate all that you did for us.

Frances Labinger

Thank you.

Iris Arnold

Thank you.

Gregory D. Wasson

Bye bye.

Iris Arnold

Bye.

Gregory D. Wasson

So on a serious note, what you heard from the Secretary, and thank you by the way, Edith and Ellen. What you heard from the Secretary and what she really is excited about with advancing the role of committee pharmacy is why we took the stance that we are with Express Scripts. Now as you know, we've been working most of the year to extend our contract with Express Scripts to receive fair reimbursement for the value of the services we provide.

Unfortunately, as Al said, we were not able to reach an agreement. Express Scripts proposal would have reimbursed us far less than the industry average cost to provide a prescription. That's not good for Walgreens. In fact, it's not good for the community pharmacy industry at large. So we made the decision to move forward without Express Scripts and without participating in their network.

As Al said, this was a well thought out, tough decision, but it was the right decision for you, our shareholders, our employees and our customers, I can assure you. The long-term ramifications of accepting their proposals, I've said publicly, would have been far greater than the short-term implications we may see.

So I want to make sure that Wade, in his remarks, comments a little bit more on the economies of this decision so that you understand the large, how large this decision was, but it is absolutely the right thing to do for this company long term.

Now the good news is that many other PBMs and health plans that we do business with and have done business with over the years are looking for deeper, more preferred relationships with Walgreens in order to compete with Express Scripts and health plans that use Express Scripts that no longer have Walgreens in their network next year. And we intend to help them win. We intend to work closely with them, as we are already, to help them win business. To date in addition, over 120 health plans, employers and other Express Scripts clients have already changed PBMs or taken steps to maintain access to Walgreens within their network and within their contracts. And we are in active negotiations with many more now.

Really encouraging was a survey of more than 800 employers commissioned by Walgreens, administered by a third party entity, where we found that 80% would not exclude Walgreens for less than 5% savings across their pharmacy network. 60% said they would not exclude Walgreens for less than 10% savings across their network, and 21% said they wouldn't exclude Walgreens for any amount of savings.

Now we've done a lot of research, both internally and externally, and we believe there are little or no cost savings without Walgreens in a network. And in fact, in many cases, removing Walgreens will actually cause an employers' cost to go up. So that's why we believe Express Scripts will have difficulty competing and selling in a marketplace without Walgreens in their network, especially when health plans are looking to partner more closely with us to differentiate themselves.

More encouraging, we are issuing record numbers of our Prescription Savings Club cards this month than we ever have. As you know, this is our prescription drug plan, where we have over 8,000 drugs that have discounted prices. So patients who are being forced to leave Walgreens and the pharmacists that they've known and trusted for years, we have a 30-day month of January promotion on our PSC card, where we've lowered the enrollment fee for individuals and families, and we're seeing record enrollment numbers as a result. Patients are looking for ways to not have choice taken away from them, and they're using our PSC card.

So if you're an Express Scripts member, I encourage you to go to your Walgreens, talk to your pharmacist about this opportunity because it may be able to help you stay with Walgreens.

So to wrap up on this issue, we are moving on. And we look forward to working with all the partners and all the health plans that I talked about earlier, they are looking forward to working with us. Besides Secretary Sebelius and First Lady Michelle Obama, we've had key stakeholders from all across the health care landscape, CEOs of just about every major health plan in the country, employers in our new "Well Experience" concept stores. The #1 comment they have when they leave every time is this is exactly what we need, how fast can you do this?

Folks, the future is pulling us to it. That's where we're headed. We're headed there fast. We're not going to remain in a world that Express Scripts wants us to stay in. So to move on to our third strategy, to deliver the "Well Experience". We want to deliver outstanding customer experience through even more enhanced employee engagement. And we know that transforming our drugstores to this new "Well Experience" format can't be done with just design and new product assortment. You have to have highly engaged employees to deliver highly satisfied customers. That's just the way it is. We understand that.

Never in my 31 years with this company have I ever seen customer satisfaction jump like it is in these "Well Experience" stores. The #1 comment I hear when I'm in these stores, and I'm in them a lot, from customers is that I want to stay in this store longer. Folks, that's a retailers dream. Now if we can't sell them more goods, Mark, when they're in there longer, that's what we want. So our people have made this company for years, always have, always will. Let me show you an example of this at its best. David?

[Presentation]

Gregory D. Wasson

What made me most proud is that I did not make one call to initiate any of that. Our people did this because they wanted to help their community. And in fact, at this point, I'd like to introduce the young man who saved lives who's with us today, Adam Simmons [ph]; his wife, Amy [ph]; and their 3-month daughter, Ella [ph]. Could you stand up, Adam [ph] and Amy [ph]?

Thanks, Adam [ph]. What an awesome response to an emergency and all that you did. So thank you very much.

So our fourth strategy is to expand across new channels and markets to become the leading multi-channel retailer. No brick-and-mortar retailer is safe today unless they're embracing the online channel. We think that we have a terrific opportunity to combine the best corners in America that our predecessors have left us with a sophisticated, customer friendly online offering to create something truly special and unique and give us a competitive advantage. We bought drugstore.com, as I said, to accelerate this strategy for us. I want to give you one more example of bricks and clicks convenience that no one in America can match. David?

[Presentation]

Gregory D. Wasson

How many moms can relate to that at some point in time? I was thinking this morning, a few years back, we rolled out drive-through pharmacies to help mothers with these types of situations. Today, it's Web Pickup. We've launched Web Pickup in 400 stores in Chicago and some other pilot stores. We're really encouraged with what we're seeing and the traffic that we're seeing come through it.

So our fifth and final strategy is to ensure that we have continuous improvement innovation and cost reduction in our DNA and it remains in our DNA. As you know, we completed the Rewire for Growth initiative that I talked about. We've now kicked off a program called Fuel Well, that Wade will talk about. And so that we're constantly looking for new and improved ways to run our business.

A couple examples would be or one example would be our new point-of-sale system, which is our new cash register system that we're in the process of rolling out across the country. This will make it easier for our cashiers to ring the register, which will save time, reduce costs, more importantly, improve the customer experience at checkout, but also allow us and give us the sophistication to launch new tools, like our loyalty program, which we're going to launch this calendar year, and others. So we're really excited about where we're headed there.

So as I said, our 5 key strategies are designed to help us truly become the first choice for health and daily living for everyone in this country. I'll close with giving you a glimpse into our future. We just opened, as I said, our flagship store here in Chicago at State and Randolph yesterday. We had a store here in 1926. This store is what we mean when we say we are stepping out of the traditional drugstore format, creating something completely new, unique and special to leave our competition to compete with each other in the old traditional drugstore format. We are extremely excited with the response we're getting. We are absolutely intent on advancing the role that community pharmacy plays with this format. I hope that you're as excited as we are with the future of this great company, with the strategies we have in place to return this company back to top-tier shareholder returns. Yes, Express Scripts issue is a detour that we must and will go around because the future is pulling us to it. That's where we're headed and that's where we're going. So thank you very much for your support and your investment. This time, I'd like to introduce, our Chief Financial Officer, who by the way, was just voted the best CFO for the retail in food and drug chain sector by Institutional Investor magazine, my strategic and financial business partner, Wade Miquelon. Wade?

Wade D. Miquelon

Thank you, Greg, and thank you, Al. It's hard enough following Greg and Al, let alone having the First Lady, the head of Health and Human Services, the twins and our hero, Adam [ph] from Joplin. So with that, geez, I'll do my best.

What I want to do in my presentation is talk about 3 main areas. First is I want to talk about the progress we've made since the "plan to win" and, really, our growth progress as a company. Then I want to talk about how Greg's 5 strategies he outlined are basically conveying themselves, turning themselves into meaningful results for this company and for you, our shareholders. And then, finally, I'll talk a little bit about creating shareholder value in aggregate, especially in the context of Express Scripts, and I'll provide some more color around that issue as well.

Okay. So 3 years ago, on the stage, we came to you and we shared our "plan to win". And in that plan, we said we would get this company back to really our industry-leading top line growth, that we would get back to double-digit EPS, that we would get back to those strong cash metrics in terms of not only operating cash flow and free cash flow, but also return on invested capital. And I'm pleased to report to you that here, 3 years later, we've delivered on all those measures. So I want to thank you for your support and your time and now we're moving forward to the future.

Speaking about top line growth, as you recall, 3 years ago, we also talked about how we were going to slow our store openings. And for really a decade, our rate of store openings and new store count was about 8%, 1 every 16, 17 hours, we were building stores. And that was good. That served us very well. And as Greg said, we now have a wonderful foundation of the best corners of America that we can build upon. But the big idea here, the reason that we slowed our store openings is because the most valuable thing we can do in this company for our shareholders and the best thing we can do for our customers is really to focus on the current stores we have and make them absolutely more relevant and more productive, a better experience. I'd like to call it putting all of the wood behind the arrow. So focusing our people, our time, our capital, our money to make that current footprint of over 7,700 stores as good and as relevant as they can be.

Now over the last 10 years, we've had good top line growth, and that's been driven in part to strong prescription growth. We've driven our prescriptions by about 9% over that last decade. Very strong, from 336 million prescriptions, up to about 820 million last year. Very good progress. In fact, we've grown market share in a growing market. And as Greg said, we crossed that 20% threshold, 1 in 5 retail prescriptions coming to Walgreens in this past year, and we're very proud of that. And even without the Express Scripts network, we estimate that in 2012, the fiscal year, that we'll still do between 97% and 99% of the prescriptions that we did in fiscal year 2011. And I think that speaks to the real underlying fundamental strength of this company and the value proposition that we have with people who really value Walgreens and want to go to Walgreens.

With respect to sales dollars, we've had a very nice run of 11% over the past decade, very strong growth. And in fact, we've tripled our sales basically from $24.6 billion in 2001 to $72.2 billion in 2011. And earnings have been strong, too. We've had 12% earnings growth over the decade. And as you can see, even though in fiscal '09 and '10, we had some transition issues while we're investing in our "plan to win". We also had a very down economy. In 2011, we turned to record profitability, even excluding the benefit of the PBM sale. In fact, excluding that, we still had our best year in over a decade in earnings. So we're back to where we want to be, and we feel very good about that progress.

Now let me spend time talking about how those 5 strategies convey into results for our customers. And as Greg said, the first thing that we've been focusing on is transforming our traditional drugstore experience. It's really the leader in health and daily living. And we've made tremendous progress in that regard. Now as Greg said, we've also -- we've done a lot of things with CCR 1.0. We've had over 6,400 stores that we've refurb-ed and refreshed, I think 3,400, 3,700 in the last year alone. And in some weeks, that was 140 stores a week that our operations people were executing on.

And for $43,000 per store, we were able to improve the assortment. We were able to improve the look and feel, to do a refresh package, have better sight lines, better shelf height and overall better experience, a very good investment. And I can tell you that, that investment over that past couple of years has really paid off. Now how do I know? One of the ways I know is for the last 5 quarters, we have been basically out indexing in our front end or daily living, as I call it now, our sales in each of those 5 quarters versus our top 3 competitors: CVS, Walmart and Rite Aid.

And I'll just show you a little couple of slides here. You can see versus competitor 1 in the last 4 quarters, Walgreens being the blue and competitor 1 being the dark blue, we've performed nicely in all 4 quarters. Versus competitors 2, you can see the same trend. And versus competitor 3, the same trend. And the point here, it's a very tough economy, but this is no accident. This is really the work that the teams have done to really get more relevant and improve the experience so that our shoppers and our patients and others really want to come to Walgreens more often and buy more things. And I think a lot more good stuff to come. This is only 1.0, but Greg has shown little glimpses of the future. And I feel terrific about where we're heading.

Greg also talked strategy, too, about advancing community pharmacy to play a much greater role in healthcare. There's so much more we can do beyond the traditional prescription business that we're in. And as you know, we had about 1.2 million prescriptions in 2009. In '11, we did over 6 million flu shots. So about a fivefold increase in 2 years in our flu shots. On top of that, over the last 2 years, we've added 600,000 of all other immunizations and vaccinations, things like Zostavax, GARDASIL, PNEUMOVAX and travel vaccinations, et cetera and so forth. In those 2-year period, our increase in sales from vaccinations and immunizations have increased almost 10x. And this is just one of the many things we can do. You could also see our prescriptions of 90 days, allowing people to have the convenience of 1 refill versus 3, plus allowing them to have some benefit because they can cost us less to fill those prescriptions, has grown about 40% in the last 2 years. One more simple way that Walgreens is making it more convenient, more affordable to come to us and to be part of what we do.

I'd also like to say that, as Greg talked about, we're really just scratching the surface of the role we can play on the frontline of healthcare. We have 700 retail and worksite health clinics. We're the leader in home infusion. We're a leader in specialty. We're a leader in hospital. There's so many more things that we can do to help drive down overall healthcare costs. Pharmacy is about $0.12 on the dollar at healthcare. And yes, that's very important to drive it down and we keep working on that. But what we're doing to also help in prevention, helping acute issues, helping people who have chronic conditions to be more healthy. All those things we're doing are chipping away at the other $0.88 on the dollar of healthcare. And we're affordable, we're convenient and we can play a huge role in partnering with the healthcare ecosystem.

I mean, for perspective, just helping a payer potentially drop their overall healthcare costs by 2% by moving well beyond the things we've traditionally done will be the equivalent of saving 15% on all pharmacy spend. So again, we're moving beyond just $0.12 on the dollar to really help people deliver better outcomes at lower cost across the board. And I think we're phenomenally positioned to do that.

Greg talked about delivering an outstanding customer experience, and in part, through enhanced employee engagement. We've done a lot of things as a company to improve the experience. We've invested in technology, things like the point-of-sale system, wireless technology to help enable employees, right? We're doing lots of innovation on the way we're innovating in our photo counter or Web Pickup or online other activities, lots of good things are happening. The way we're investing in beauty, in food and other things that you've seen in the video here today. But one of the key elements of driving a better customer experience is to really drive better employee engagement. So we're doing lots of things in terms of training, motivation and investment in our employees to make sure that they're able to give their very best to our customers and make them happy, and it creates a really great virtuous [ph] loop.

About 2 years ago, we set a goal for customer delight, the percent of people that we want to be able to delight. We felt it was a very stretching goal. But I'm also proud to say that 2 years later, we're 90% of the way towards that goal, which tells me it's good progress, but it's time to set an even higher goal. And that's exactly what we'll do.

Expanding across new channels and markets, lots of different activity there, but one thing that we focus on today is the multichannel experience. Walgreens is clearly the #1 multichannel player in the drug store retail space. But we want to be the most ubiquitous company in health and daily living. It's not just about shipping products online to home. It's about the whole experience. It's about how we provide information, how we help support you when you're ordering prescription, how we can make your life easier in general, all these things we're doing. And without belaboring the point, we're ahead of the pack here, drugstore.com, which included Beauty.com and others, is a huge, vital part of that, giving us 3 million new consumers, a lot more understanding about all the things we can do in health and daily living. But we have award-winning applications. Our app for mobile last month just had a record-breaking 500,000 downloads. As you can see here, our traffic per pharmacy online is up 30% year-on-year, and we're just getting started. But this is going to become important because I think, as Greg said, the winners of the future in retail, we really believe, will be the ones that are able to expand multichannel, not just products, not just solutions, but advice, information and play a much more relevant part of people's lives.

And the last one is recall that we set out as part of our "plan to win" to take $1 billion out of our cost structure over 3 years. And I'm proud to tell you that we've not only met that, but we've slightly exceeded that. So that has been one of the key drivers, in addition to slowing our store openings, that's really helped drive down our rate of growth and operating expense from what was over 9% in fiscal '08 to over -- to about 6.7% in '11. And this has been really critical to us getting back to that double-digit EPS growth, and as you know, last year, setting a record year-on-year sales or earnings growth, the best in about a decade. So we're very focused on cost. We're deliberately [ph] wired for growth. But now moving forward, it's all about continuous improvement. We don't want to be in a position where we're announcing big cost programs. Everybody, every employee is looking for ways every single day to find some improvement, big or small, to keep driving the culture of never-ending improvement.

Okay. These strategies have also driven cash flow. Cash flow is very, very important, as important as profit, maybe sometimes even more so. And over the last 4 years, we've delivered between $3 billion and $4 billion of operating cash flow. We're very focused on it. As you can see over the last 3 years, even in a very tough environment, we've been able to be well above $3 billion. But cash flow for us is really a hallmark, I think, of the things that we're doing to drive discipline, not just in the general earnings, but also in terms of how we spend our capital and how we manage our working capital and our inventory and things like that. And again, we're making lots of progress and we'll continue to focus on that as we move ahead.

So if you're driving good cash flow, one of the obvious questions is what you do with that cash flow? And again, 3 years ago, we talked about our balanced capital allocation strategy, which we said we want to make sure as we drive good cash flow, we're keeping 4 things in good balance because they're all important. Number one is we said we need to keep investing in our core strategies. You've seen our 5 strategies now, we're making progress on all of those. If we keep driving those and executing with excellence, we're going to keep differentiating ourselves from others, and that will be good for shareholders and that will be good for customers. We have to keep investing those strategies. Number two, is we will invest in strategic opportunities that support that core. Things that make our strategies even stronger. So drugstore.com and Duane Reade will be 2 great examples of that. Things that are really supporting our core and making us even stronger as a company as we go along.

We also believe it's very important to return cash to shareholders in the forms of dividends and share buybacks. We've accelerated the pace of that, and I'll talk to that in a moment. And finally, we believe in maintaining a very strong balance sheet. This company has had that as a hallmark for several years. We're in very strong investment grade, and we believe it's very important to maintain them.

Despite of those ratings, you can that Walgreens is very strong. We've been A-rated by S&P, and Moody's, A2, very strong investment grade. I think that the key point of this chart is that even despite tough financial situation, we believe we're positioned very well to be able to have access to the capital that we need, to do the things that we need in even tough, tough storms.

Returning cash to shareholders. Obviously, this is one of the key things we balance. And you can see that in the last 2 years, we've really accelerated our rate of buybacks and dividends. And in fact, last year was a record year of $2.4 billion that we gave back to shareholders in the form of dividends, which was at 28.7% or 29% rate and in buybacks. Again, this is one more way that we can actually, we think, that we can reward our investors for supporting us and helping us drive our strategies and drive outstanding cash flow. And in fact, I think our buybacks, since we announced our "plan to win", I think, have totaled just slightly over $4 billion, which I think shows that we intrinsically believe in this company. And I believe over time, that will prove to be a very good move.

Talking about fiscal first quarter just little bit. The quarter was a little softer than prior quarters. Sales was up 4.7%, earnings were down 4.5% and earnings per share, up about 1.6%. Really, the key factors in this is we were cycling a very strong base. We had very low flu this year versus last year's flu. We had a low generics this year, introductions versus the prior year. And the third point is we had some impact from the Express Scripts issue, which I'll talk more about in a moment. I think one of the highlights of the quarter was that we actually returned a record $803 million, highest quarter ever, to our shareholders. And again, I think it reflects the fact that we've got really strong discipline in cash flow, and we will as we move forward as well.

Stock performance. Greg gave you a little perspective on. I want to give some more perspective. If you could go back to 3 years ago, we announced the "plan to win" to get our core metrics back on track and to help drive shareholder value over time. Our stock price over the next year did pretty well. We announced the plan, and 1 year later, when Greg and I were up here on stage now, we're about 40%, 42% up. Then as we went through some of the transition investment in our "plan to win" and the economy, overall, softened a little bit, we had some generic hits year-on-year. We fell back a little bit. But effectively within 2 years, through some of the strong rises we had in our business operating performance, even going through the 11-day CVS issue resolution, we were up almost 60%. And then just prior to ESI, the Express Scripts issue, we were up over 70%, so pretty strong performance. Now what happened since then obviously is that we've had a fallback, as there were some concerns about some of the sales we'll lose, et cetera. And while nobody would like to have a drop in stock, I can tell you absolutely and we'll get to it, that what we're doing is absolutely in the best interest of shareholders long-term. But nevertheless, over 3 years from the time we unveiled the "plan to win", we're still up over 30% on a stock price basis and about 39% when you include dividends for total shareholder return. So again, I think the key thing is that these issues come and go. But I can tell you that for the long-term, that this is just a bump in the road, and we believe it's absolutely in the best interest of shareholders to move forward and move on.

Protecting shareholder value. Let me talk a moment about Express Scripts. Express Scripts was a very, very big decision. And in many respects, you can say a very difficult decision. But I would tell you that all things considered when you have all the data that we have, it was a very easy one. And why was it an easy one? It's an easy one because for us to be successful and to be a world-class company, we have to drive our reimbursement off of 2 core principles. It's really as simple as that. Principle #1 is we need to get fair compensation for what we do with the people -- the payers that we work with, right? And that's not fair in our mind, Wade's mid, Greg's mind, management's mind, it's fair versus the market. We need to be compensated fair for how people value us and for how others get paid. And I'll talk about that in a moment. Principle #2 is we don't see any reason why we should give any one payer, any one PBM a substantial discount to the others, unless they've done something to warrant it. And if we can't sit by those principles with hundreds of payers, it's really -- I'd say almost a house of cards.

And the fact is that we have a very narrow range that we get paid from all of our payers, and it's competitive with the other pharmacies, and I'll come to that. We try to treat them fairly because they're our partners, they're our customers, they deserve that. Express Scripts was already paying us substantially below that, below what others were getting. And first off, that doesn't feel very fair. But regardless, it is what it is. What they were asking for, a level even significantly below that. In fact, the level was so low that, that level was below the industry average cost to fill. Now apart from the principles of being treated fairly and then treating others fairly or in the same ecosystem, I think we can all agree that nobody should be in business in pharmacy or any other to basically do business at a loss. When you think about it, if we're going to accept that deal. And then to be fair to all the others and give everybody else that deal, then you have a problem which is 10 times bigger than that. So it's simply just isn't going to work. And I can tell you, despite the rhetoric that we're much more expensive than others, whatever, it's simply not the fact. Our rates are competitive, and this is not an issue over our costs, this is an issue over a middleman who wants to expand their profit from us. They want to get between the payer and the provider and expand their profit on what has been really a declining organic base. We can't let that happen. I'll tell you one thing. For many, many years, and it's true today, Walgreens earns between $0.03 and $0.04 on the dollar for the prescriptions that we fill. Between $0.03 and $0.04 of profit on the dollar for what we do. And for what we do, we're not ashamed to apologize for that nor should we.

So let's talk about the value of Walgreens. As I said before, we know we're competitive in pricing. How do we know? Well, we work with hundreds of other payers, so we know what they pay in that narrow band. We owned the PBM for many years, WHI, which we sold, so we know what fair PBM contracts look like, right? And finally, we buy hundreds of pharmacies. And typically, most of the time, we find out that those pharmacies even much smaller than us were getting compensated much more by Express. So we know what fair is. And we have no incentive as a company to ask anymore from Express Scripts than any others because our ideal situation is where everybody's treated fairly.

So if an employer decides to exchange a plan, we could just focus on taking care of patients, not moving profit around. It's really as simple as that. And I think, as Greg said, we're confident that in any case, a payer could not save even 1% on their network by excluding us, let alone if you add on things that we do in generic utilization, conversion, 90-day, whatever. In fact, we believe for most, it would be more expensive. One PBM recently put out a study and said that when they compare Walgreens cost versus all other in their network, we were 10% more price-effective, 10% cheaper. And largely because of things we do like generic utilization and conversion. So don't believe that. The fact is that we expect to be paid fair for what we do, and it's really as simple as that.

Now beyond that, right, assuming that we are cost-effective and we know that we are, there's other things we do to add benefit to. We have the most convenient locations, #1, we have the most 24-hour stores, which are expensive to run. We have the most drive-throughs. We're moving well beyond typical pharmacy to other services, other services in prevention, in acute management and chronic maintenance. All these things also provide value. And as a company, we should not forget that.

So a little perspective for you. Obviously, this is a dispute, and shareholders have angst and nobody likes uncertainty and management doesn't like uncertainty either. But the reality is that our job is to make sure that we're protecting our shareholders for long-term value creation. And we don't do anything on the short-term that we'll very much regret for the long-term. If you think about this amazing company, this 111 years and 37 consecutive years of sales growth, this amazing company, this is not the first time this company has seen challenges. The leaders of this company, our forefathers, my forefathers in this company, have seen many. We saw discount stores, that was a massive threat. We survived that. We saw food and drug combos. That was a massive threat, we survived that. We saw deep discount drugstores, of which I think are gone today. But that was a real risk, we survived that. Internet drugstores, we survived that. Of course, mail-order was to be the death nail, and we survived that. And mail is now declining. CVS Caremark merger, $4 generics, on and on and on, and Express. This company has had a legacy of winning. We're well positioned. We have phenomenal assets, phenomenal people and very good strategies. So the reality is, is that we're going to be successful.

So I just want to say a couple of final words. We are looking out for the long-term shareholder value. We have got great strategies. We have the dual tailwinds of aging population in generics. We have 245,000 amazing employees. We have a set of assets in terms of our footprint, our brand strength, our balance sheet that's really unmatched in the industry. And we are set up for success. And with or without Express Scripts, we will be. And so I guess, I would just end where I began, right, which is we had a "plan to win" and we delivered on it for you, right? Now we have a "plan to win" moving forward with or without Express Scripts, and I believe we'll deliver again. And with that, I'd like to turn it back over to our Chairman.

Alan G. McNally

Nice job. Thank you. Well, thank you, Wade, very, very much. And thank you, Greg, so much. Terrific presentations and terrific leaders. I'd now like to recognize Joe Greenberg, who will announce the results of the election of Directors, the ratification of Deloitte & Touche LLP and the other 4 proposals. Joe?

Joseph Greenberg

Mr. Chairman, the inspectors of election have informed me that they have received and canvassed the votes cast for all 6 proxy matters. Based on that preliminary tabulation, the results are as follows. For proposal 1, the inspectors certify that all nominated Directors were elected for the term fixed by the bylaws. Proposal 2, the ratification of the audit committee's appointment of Deloitte & Touche LLP, has received the affirmative votes of at least the majority of the votes cast. Proposal 3, to approve the Walgreen Co. 2011 cash-based incentive plan, has received the affirmative votes of at least the majority of the votes cast. The vote totals are 93.9% in favor and 6.1% opposed or abstained.

Proposal 4, to approve on an advisory basis, the compensation of our named executive officers has received the affirmative votes of at least the majority of the votes cast. The vote totals are 93.4% in favor and 6.6% opposed or abstained. Proposal 5, to conduct an advisory vote on the frequency of future shareholders say on pay votes. The annual option has received 88.7% of the votes cast, the 2-year option has received 0.7% of the votes cast, the 3-year option has received 9.9% of the votes cast and 0.7% abstained. Accordingly, the board will consider shareholders to have recommended the annual option.

I'm missing the last sheet. Proposal 6, regarding an executive equity retention policy, has not received the affirmative votes of at least the majority of the votes cast. The vote totals are 35.6% in favor, 64.4% opposed or abstained.

Alan G. McNally

Thank you, Joe. I appreciate it. And now congratulations and thank you to each of our Directors. Your deep commitment to our company, your time and your energy and your expertise are very, very much appreciated. And I'd ask you please do stand as a group and be recognized.

I now ask for a motion for adjournment so that we can move to your questions.

Lisa Meers

Mr. McNally, I'm shareholder Lisa Meers, and I move to adjourn today's meeting.

Alan G. McNally

Thank you.

Nicholas Zangler

Mr. Chairman, I'm shareholder Nick Zangler. I second the motion.

Alan G. McNally

Thank you, Ms. Meers and Mr. Zangler. The meeting stands adjourned. And I'd now ask Greg and Wade to take center stage, please, as we open up the floor to your questions and your comments. I'd ask that you please make your way to 1 of the 6 microphones, and that you kindly identify yourself before asking your question. We have microphone #1. And we have Marty Glotzer. And I didn't have a chance to wish you a Happy New Year, and hope you're doing well, Marty. The floor is yours.

Question-and-Answer Session

Martin Glotzer

I hope so. The first thing, Mr. Chavez's [ph] proposal. We want to thank all the shareholders who took the time to vote on the proposal, but especially the ones who voted yes. We certainly appreciate the yes votes. On the general questions, listening to the transforming of the stores, I don't believe you told us how many stories we plan to convert in the year -- this particular year.

Gregory D. Wasson

Yes, we have set aside the capital and we have stores identified, Marty. They're still pilot stores, so we're still measuring and tweaking. So we really don't want to commit to a number, but we're pretty encouraged with what we have set aside and what our plans are.

Martin Glotzer

And then you must be in the process of determining the payback time of doing the work.

Gregory D. Wasson

Absolutely. Anything that we would do would have to meet our internal goals and internal hurdle rates that we expect.

Martin Glotzer

And looking at the video, I saw this item snap cards. I'm not familiar with the program. How does this program help us sell products? Could you explain more about the program?

Gregory D. Wasson

Yes, those are food stamps. And unfortunately, during the past couple of years with this recession, the use of food stamps across the country are up almost double-digit. So we accept food stamps in the majority of our stores. And we want the public to know that we do, and when they come in, they can use those and we are a provider of food stamps.

Martin Glotzer

The only comment, personal comment, a general comment I can make about the Scripts programs, I know in life, the hardest thing is to say no. It's very easy to say yes, yes, yes to everything. But it's so hard to say no.

Alan G. McNally

Marty, thank you for your questions, your thoughtful questions and your thoughtful comments, appreciate it. We'll now move to microphone #2, please.

Jane Garcia

[Spanish] Mr. Chairman, Jane Garcia from Detroit. Mr. President, you did a wonderful job in the presentation. I've never seen anybody express and make sure that we're fully informed as a stockholder. And I know that whatever you do, will do the best for us. [Spanish] for that. I wanted make sure that I stood before you to thank the Board of Directors, all the staff of Walgreens, my fellow stockholders. It's a great pleasure to go anywhere in the country, where you're at and have great service. The reflection of the DNA that you were talking about, Mr. President, it's in all the staff and it's all in the Board of Directors, who give back to the community. You have such a diverse group and we're very thankful for that. When I saw the young man that had the Detroit cap, I loved it. I want you to know that it as Jane Garcia, I represent a lot of agencies. I represent SER Metro Detroit. And I want you know and [indiscernible] and Kevin from Michigan has been very supportive. I want to make sure that we thank the people, the people from Missouri. [Spanish] for all you did to help restore people to make their quality of life better. I don't know how more. It was so moving. I come from a very tough city, Detroit, Michigan, it's crawling back, it really is. And I just want you to -- we're doing the auto show this weekend, and we have a lot of support from Walgreens and everybody else. But I just wanted to make sure that you all know how excited I am. And I trust your judgment, that you make the best decisions, you and the Board of Directors for our benefit. [Spanish] Mr. Chairman.

Alan G. McNally

Thank you very much. Jane, thank you so much and thank you again for making the trip from Detroit to be with us today. Thank you so much. We'll now move the microphone #3, please.

Unknown Shareholder

Gail Anderson [ph]. I'm glad that some stores have natural lighting and other environmentally friendly designs and energy. However, I'm emphatic that as a stockholder and as a citizen of the world, that all green initiatives must be in all stores and not just a few new or remodeled ones. So I'd like you to implement immediately a bag credit to encourage customers to bring their own reusable bags. Of course, using one's purchased at Walgreen could be an option. And also, I just cringe in the video when I see all those plastic bags. Also, following up on my query at last year's meeting, I'd like to know further on the green policies, what you've done to make prescription viables renewable, reusable.

Gregory D. Wasson

Maybe I'll take the first one. We want absolutely roll our green initiatives across as many stores across the country as we can. Obviously, it takes cost and expense, and there's got to be a plan for that. But we have no intent to just leave those initiatives in our new stores. We have every intent to roll out as we can. We are adding solar panels, not only in our stores, but across our distribution centers, our corporate offices. We just put solar panels in our corporate office in Deerfield. So we're expanding not only across the stores but across other buildings. As far as the vials, we do have a prescription return program, where customers can come back in the stores, and we will collect vials and return those so that they don't end up cluttering landfills. And I'm sorry, the third point was?

Unknown Shareholder

About plastic bags. And also to say, to respond, at my local Walgreens, they're not aware of that.

Alan G. McNally

Okay. We will make it -- we're -- you come upfront and we'll find out where you are. We'll make sure that they are. It's a nationwide program.

Gregory D. Wasson

I think one thing to add, it was almost 8,000 stores, I think we're just trying to be very thoughtful about making sure we get it right before we expand it everywhere because sometimes, it might look right, but we didn't below, it's not as green as you thought, and there's a better alternative. And so I think we're trying to be thoughtful about piloting before we expand.

Alan G. McNally

Your suggestion on prescription bags on the credit, we'll take that in consideration and have some folks explore it. But we want to move forward as many areas as we can. I will say, and I think our folks that work in this area for us are extremely proud with what we are doing, and we have every intent to do as much as we can in this area, so thank you for your comments. Microphone #4, please.

Unknown Shareholder

Mr. Chairman, my name is George Polish [ph] and I'm a shareholder and also with the investment Group. My question is -- my comments are for Greg. He's doing a very good job, but the board and yourself is not that great over this neglect scripts program. You didn't do your fiduciary duties properly, and also, it's very difficult for the clients that you have that just been left on the street, having to go find another place to do their thing, and I'm sure a lot of these shareholders agree with me that you're letting the shareholders down with this Express Scripts and it's going to hurt the company. We heard your comments about being so great, but losing $6 billion worth the business, all the analysts are talking about you that this is going to hurt the company and the press is reporting this is going to hurt the company, and it's not a good sign for the company what you did with that. And I'm wondering if there's going to be any lawsuits against you for not doing your fiduciary duties properly. And my last comment is, I live in Burbank and the store at 79th and State Road, my family spends over $15,000 a year in merchandise there in drugs and they have a lot of outdated stuff and you take it back and you always have a hard time getting it returned. I'd like to have somebody that's a district manager in that area talk to me.

Alan G. McNally

Thank you very much, sir, for your comments, much appreciated, understandable. I think Greg and Wade did a -- I think, a terrific job in explaining the fact that the long-term implications of accepting a below-market price reimbursement from Express Scripts would have been far worse than the short-term impact on the earnings. And I think with respect to your second comments, if you, Greg, we can arrange for that -- and if you want to come up to the front afterwards, we can have our Market Vice President of the area talk to you and find out more about your local store.

Gregory D. Wasson

The only thing I would add is we certainly didn't want any patient disruption, and we did our best. But we didn't give everybody 7 months notice because we felt it was only appropriate if there was a potential that employers and patients such as yourself would have some time to transition. Again, in the end, we shouldn't have it happen, it was unfortunate. But given what it is, I don't see a better alternative.

Alan G. McNally

Sir, thank you for your comments. Microphone #5, please. Seeing none, hearing none, we'll go to microphone #6, please.

Unknown Shareholder

Good afternoon. My name is Pauleen Quirk [ph] and I'm a shareholder for many years and I have a great pharmacy manager, Erica, in the Evanston store. I am severely gluten intolerant, and I was wondering if there is a plan in place to be able to add, must be gluten-free, to the profile. From my understanding, it is not currently available. For many people, corn and soy are also a problem, and identifying this in our profiles would be very helpful so that when we call in with the prescription or our doctor calls in with her prescription, they can contact the manufacturer to make sure this -- the products are safe for us or figure out something that we can take. And it would be very helpful and not all pharmacy managers are as helpful as mine. I've had a friend who is also gluten intolerant who gets absolutely no help from her pharmacy manager and they say, "Well, we can't do anything. I don't know if the medication is gluten-free or not." And I find that very disturbing and it can be very detrimental and harmful to our health.

Alan G. McNally

Well, thank you for bringing it up. And I don't know the answer to that. The good thing is I have Kermit Crawford, our President of Pharmacy sitting here. I know he took the note and I think we should actually look to see if we can. I don't know if you have any comments Kermit or not.

Kermit R. Crawford

We can do it.

Alan G. McNally

So we need to make sure that our pharmacy manager knows that, and we make sure that -- thank you for the comment.

And we're back to microphone #1, please.

Unknown Shareholder

Great. My name is Neane Stu-Lay [ph], and I'm 81 years old and one year into coming back from a brain aneurysm. And I was lucky, it was a miracle, at Rush Hospital. But I want to tell you, I love my Walgreens. The pharmacists are great. Anytime I have a question, they always answer it. We have a wonderful Manager, Mr. Penny, and it's at 71st and Pulaski. And they had a move because of other companies coming in, and did a great job moving from one place to another. But I must tell you that you must proofread this material because every time you said "that come", it came out ".com". And thank you very much. I'm very happy to be here.

Alan G. McNally

Well, thank you so much for your comments. We're so happy for you. And we're a learning organization. We have to learn to spell now, right? Thank you so much. That's terrific.

So microphone #2 please.

Unknown Shareholder

I'm Jim Stolka [ph], a shareholder, ex-employee. My first question is about Express Scripts. They have been in the process of merging with another PBM. If that succeeds, what more affect will they have on us this fiscal year?

Alan G. McNally

I'll let Wade kind of handle the effect part. As far as Medco, we absolutely understand that Express Scripts has a proposed merger. Medco is another big PBM, for those who may not know. Medco, to give some -- maybe some facts a little bit, Medco today is much smaller than the PBM they were even a year ago. They've lost a lot of major clients across the country, so they're a significantly reduced PBM as far as how many prescriptions they manage. Secondly, we frankly believe that they will have a tough time in the next year selling season, selling new business as well. Because there's going to be a lot of uncertainty if the merger happens as to where -- from clients, as to whether they will have Walgreens in their network or not. And we think that, that's going to be difficult for them next year. As far as the merger itself, we don't know what will happen as far as the outcome of that. We do know that the FTC is reviewing it. We also know that there are 34 state attorneys generals that are looking into it at this point in time. We think that we agree with the community pharmacy industry at large, that patients are going to lose access and service if indeed that merger happens, and we think employers are going to lose access and have cost increase as well. So we think there's a lot that needs to be understood about that proposed merger. But if indeed, if the merger occurs, whether it's an unacceptable rate from Express Scripts or a combined entity, we still cannot do business if we're not receiving fair reimbursement.

Wade D. Miquelon

I would go to those 2 principles. I mean, principles are principles, right? And the reality is Medco today is a good customer. They pay us fairly in that fair band I talked about. And I suppose if it did happen and those customers still made sure we got paid fair in that band, we'd still want to serve them, because it's what we do, is we want to serve patients. But at the end of the day, the reality is that most customers don't even know what we charge. One of the great side effects of this, of now assigning on over 120 clients, of going out in the market, is for the first time, many of those payers, those corporations and others actually see our rates. Because before, we were prohibited by sharing those. Express would keep a spread in the middle, and then tell them whatever rate they want to charge the end client. What we're finding overwhelmingly is when people see our rates, they go, wow, Walgreens is very cost competitive and they're the number one pharmacy. So I think back to those principles, we'll serve prescriptions to anybody who treats us fairly. That's the business we're in.

Gregory D. Wasson

To answer your question, though, is to say we've anticipated it. If it happens, were prepared for it. And if the rates are unacceptable, we will not do business.

Alan G. McNally

We'll go to microphone #3, please.

Unknown Shareholder

My name is Gregory Filas [ph]. I have been a shareholder for about a 15-year period or so. And regarding the earlier question about snap, which I happen to understand, something along the lines of this depressed economy would be why is it that Walgreens does not accept a coupon beyond its expiration date, whether it's 1 week, 2 weeks or 30 days. Because I have been told by Walgreens employees if they took the coupon, 1 day beyond the expiration date, they would be fired. #2, as regards to the floundering stock and its wavering price, has anybody considered maybe doing a split of some kind to see if it would maintain its market value?

Gregory D. Wasson

I'll take the first, and I'll let Wade, the CFO, take the second. As far as coupons, I appreciate your comment. We run hundreds of coupons, if not thousands, as you know, in our weekly circulars and the other instruments that they have. And if we extended the dates on coupons for every one of those, then that would be very difficult to manage. So we do try to stay disciplined, understanding that we are going to have another set or new coupons coming out very frequently. I don't know, Mark, if you've got thoughts on that or not. Mark Wagner runs our store operations.

Mark A. Wagner

Gregory, sorry about that. We don't fire anybody, but there are always one-offs. Really, it's more of a systematic challenge because the bar codes on the coupons really are scanned up with our systems. But we do have overrides and we can always do manual interventions, and if you go and speak to the manager, there's always something we can do for you.

Wade D. Miquelon

Yes, I guess on the second one, I would say is, I mean, with regard to stock splits, there's no real inherent value created by splitting. Sometimes people perceive it, it might be a sign of bullishness, whatever. But the reality is the number one thing we have to do to drive our stock price is execute on our strategies and deliver on the promises we made. The unfortunate thing is last year was our best year-on-year fiscal in 17 years, well, because of a little bit of this dispute, it's put some overhang, but the reality is if we execute on the strategies that Greg outlined with excellence and we play our game, I'm confident that the market will find us.

Alan G. McNally

We'll go to microphone #4, please.

Unknown Shareholder

Good afternoon. My name is John Philips [ph], and I'm please to say that I have been a Walgreen shareholder for over 30 years. And in buying in the ups and downs, and mostly ups, thank you very much, I have never sold a share of stock. Don't plan on any sale shortly. My main comment is in the design of our new stores, which seem to be going up everywhere. There's an awful lot of brick along the sidewalks and I've noticed some of our competitors, who shall remain unnamed, they seem to have a lot of windows along the walkway and as you pass by they just seem a little more friendly than Walgreens. And I'm just wondering as the model that we seem to have going up on a lot of corners with the -- like main entrance right at in the corner and a lot of bricks down the side, is that going to become a little more friendly in the future.

Gregory D. Wasson

Yes, first John, thanks for being a 30-year shareholder. We appreciate that. Actually, our new concept is indeed removing bricks and actually creating more -- expanding window space. So we let the sunshine in. That's why the biggest comments that we've had from customers is that it feels more friendly in the store, even inside and outside, because of the windows. So we're actually going away, we're actually expanding window space.

Unknown Shareholder

I've noticed -- and I haven't been to the State Street and Randolph store yet, but it looks like -- it appears there's an awful lot of windows in that one.

Gregory D. Wasson

Yes, that's where we're headed. Let the sun in.

Alan G. McNally

Do we have anybody at microphone #5? We don't. 6, please.

Unknown Shareholder

My name is Paul Mom [ph], I live in Wilmmette. My wife and I have owned Walgreens stock for a long time. I'm concerned about the buyback program, the stock buyback program. Last year, you said you're going to use $1.1 billion to buy back shares of stock. The graph that you showed show that you bought back indeed about 2x that much over the last 2 years, and although we can blame Scripts, but in the last year, our Walgreens stock has gone down $7 from the last meeting to this meeting. I really question the value to stockholders of the buyback program where we're spending over $1 billion each year to buy back stock, whereas we could use $888 million to give us, each stockholder, another $1 in dividend, cash dividend. That would give our return on investment or the value of the stock over 5%, which I think would have a much more impetus to the value of the stock than the buyback program does. Thank you.

Gregory D. Wasson

That is a very good question. There's a lot of different theories, academic and otherwise, about buybacks. But I think it all comes down in the end, if you really intrinsically believe in the value you're going to create over the long-term, then it can be a good thing to do and we are. We believe in this company, a long-term prospect. And so 1 year, 1 quarter, 1 summer does not a lifetime make. I think we're looking out over the longer picture. But to your point, also, when we set that policy up of those four balancing priorities, we did a lot of work with our different shareholders. And as you would expect, we have lots of different shareholders and have lots of different beliefs. Some want only dividends. Some want only buybacks. Some want a blend. Some want one-time special dividends. And what we really tried to land down was with respect to our overall financial priority of a strong balance sheet with respect to our own intrinsic belief in the value of this company and then trying to understand shareholders. We tried to basically hit the sweet spot. So I understand that it won't work for everyone, I think it a very good question, and it's not black or white. That's how we view it.

Alan G. McNally

Thank you for that.

Unknown Shareholder

A follow-up please.

Alan G. McNally

Please go ahead.

Unknown Shareholder

The buyback program, if -- you just did it for one year. I mean, to think that you could almost double -- you could double our dividends in one year with about 60% of what you spent on the buyback program, which don't you believe that the value of Walgreens stock instead of being $33 with a $2 a year dividend would be closer to $50?

Wade D. Miquelon

I mean, look, we'll factor you're thinking as we keep evolving our policy. One thing I would say is if you did it one year and decided the next year it wasn't the right thing, it's very hard to go back. We've been very aggressive over the 10 years, 20% has been our average increase, last year it's 28.6%. But look, it's a good input. You're a shareholder like everyone else, and we'll factor that into our thinking as we move forward.

Unknown Shareholder

Can you cite any studies that have shown that buyback programs do better to the stockholders and the dividends? In addition, people with large amounts of money, the 1% I would say, receive, when that stock goes up, they can sell their stock and receive capital gains, which is taxed at a much lower rate than the ordinary income tax.

Wade D. Miquelon

I think we absolutely heard your point and we appreciate you being a shareholder. And we will absolutely try to manage that wing walk. But I think as Wade said, we're trying to manage both, and we'll absolutely take your point into consideration.

Unknown Shareholder

Just to finish, though, the ordinary stock, ordinary dividends, with the ordinary income, which could be much more beneficial to maybe the large group of shareholders as opposed to the people on the board.

Gregory D. Wasson

We hear you and maybe we'll have Rick Hans, our Investor Relations, survey our shareholders, and make sure that we're striking the right balance.

Alan G. McNally

Thank you for your insights, much appreciated. Now, I think we're reaching the point where we have time for one more last question from the floor and that will be microphone #1. But it would say, for those of you who haven't had the chance to ask your questions, would you please come upfront after the meeting, and the management team will stick around, and we can respond to your questions and comments at that time. So we'll go to microphone #1, please.

Unknown Attendee

My name is Wayne Barton. I worked for Walgreen company for 28 years. I'm neurologically handicapped, and what I don't want to do is offend anybody who I'm talking about. If I can go ahead and say something. This is directed to Mr. Wasson. Mr. Wasson, I've written you a couple letters, and I'm pretty disturbed and upset that you yourself did not answer them. You had your henchmen handle it. And I know Chris Neary [ph] well, and I know he didn't say any -- wasn't going to say anything I wanted him to say. So I don't know. I just think that next time I write a letter to you or to anybody, that they themselves would directly answer it. Maybe I think I know why you were probably too busy thinking about your own increase as the company goes teeter and totter, and your upset stomach is probably from the sushi you eat. But anyway, I said I'd like to talk to you in private, and that was never -- I got no answer on that, and if you would like to do that any time, I'm sure you can handle it.

Gregory D. Wasson

Sure, I apologize for not responding, and we'll try to -- find the time that we...

Unknown Attendee

Everybody knows Dan Jorndt [ph]. Dan Jorndt and I got along real well. We were buddies. I spoke highly of Deidra Byrd [ph], a lot to him, and he accepted that. I just feel that I've been shunned aside because -- I don't know why. I guess I've been discriminated again.

Gregory D. Wasson

Well, I try to respond to everyone that I can. So I apologize I haven't. And certainly, we can follow-up and you can write my office, and you can call me, I can talk to you.

Unknown Attendee

Well, in the letter I wrote, I said we could go out to lunch and you're buying.

Alan G. McNally

Sounds like a deal.

Unknown Attendee

Not sushi.

Alan G. McNally

The gentlemen here looks like he wants to say something.

Unknown Shareholder

I sure do. I came all the way here. I want to thank you very much. I'm a shareholder and I go to Walgreens all the time. Matter-of-fact was there 3x this week. Earlier in the week, milk, my wife called me, "Honey pick up milk." And then it was coffee the other day and then we needed to get some school supplies for my kids. And so you know who wears the pants in the family, I'm the one that got it all the time. With that said, I want to thank you for supporting veteran programs, Walgreens does a lot with that. I just had a friend, he works for you at the Mount Prospect Communications, building Kevin Keyhoffer [ph] came back, some of your other employees, and they said you guys do spectacular. You really take care of them. And I want to thank you very much from the military. I like your company so much, my son worked for you this summer at the Elk Grove store, and Brian McHugh [ph] is the manager. Now the reason why I'm here, I retired out of the Air Force a couple of years ago, and after that, my son and I were eating. I was a master sergeant in the Air Force. We're eating Chicago deep dish pizza. And he said, Dad, could we send some to the military, they have pizza like it there. I said, "Well we could probably send some." So I e-mailed General Petraeus. I did some work for 3 Presidents, and General Petraeus said, "Okay, send us some pizzas." So the goal was 500 pizzas and we contacted DHL, one of our partners, Ken Allen [ph] And Ian Cloth [ph], they said, "Yes, we'll give you free delivery." Well now, we're up to delivering 2x a year, Super Bowl and Fourth of July, we deliver 10,000 pizzas each time. And another one of our partners is AT&T, Randall Stephenson and Anixter Corporation, David Storch, Motorola to name a few, Uno's Corporation [ph], Frank Darrah [ph], a veteran. With that said, I go down to talk to the generals a couple of times a year at Central Command, which runs the conflict area in the Middle East. And they proposed me a question this time, they said, "Mark, can we send more pizza?" As well, I raise money, I pay for the pizzas, I work for AT&T, and I said, "What do you have in mind?" Well they said, "We'd like to -- how about 100,000?" And my answer was, "Are you crazy?" They said, "Well, we ship 1 million pounds of food and they serve a million meals a day to the troops in the Middle East." I said, "Well, you know what, I'd give a heck of a try but have to raise more money." And you're such a great corporation, I was in the store the other day. And I thought I would approach you if you could help us out, we have great partners, like I said AT&T, Randall Stephenson and that, this is a great project. It really helps the morale of the troops. Well, at the highest brass, a 4-star General Kip Ward of Horn of Africa, we have soldiers still over there where Ethiopia is in Africa, and in the Persian Gulf and everything. But if you could please help us out in any way, we would love you as a partner. You probably -- I bet almost everybody here has seen me on television, Fox and Friends, Fox Chicago, CNN, The Today Show. I've been on several for over 3 and a half years, and Walgreens would make a great partner to support our military.

Gregory D. Wasson

First, thank you for your service to the country.

Unknown Shareholder

Thank you, sir.

Gregory D. Wasson

Secondly, if you come up right here I'm going to ask our Vice President of Public Affairs, Chuck Greener, to come up and talk to you right up here at the front.

Unknown Shareholder

Thank you very much sir. Could I take a picture with you? We also have [indiscernible] of Boeing. Great, great patriots. Our troops really need that. You think pizza, it's crazy. I went from a -- God made a pizza delivery guy from a master sergeant. And it's really profound when they receive it. Your own kids, you raise them and they did well in school or that or yourself in college, it's pizza and it's a vegetable, it's good for you. So I don't own a pizza place to get that straight, I just take orders even though I'm retired.

Alan G. McNally

That's a great high note to end this meeting on. Thank you so much. And let me just say, thank you all very much for being here today. We wish, of course, you had a very, very happy and healthy new year. And I hope everyone will experience well at Walgreens all year long. Thank you so much.

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Source: Walgreen Co. - Shareholder/Analyst Call
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