Walgreens Boots Alliance, Inc. (WBA) Q1 2018 Earnings Conference Call Transcript

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Walgreens Boots Alliance, Inc. (NASDAQ: WBA)Q1 2018 Earnings Conference CallJan. 4, 2018, 8:30 a.m. ET

Contents:

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  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Walgreens Boots Alliance First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Gerald Gradwell, President of Investor Relations and Special Projects. Sir, you may begin.

Gerald Gradwell -- Senior Vice President of Investor Relations and Special Projects

Hello, and welcome to our earnings call. Stefano Pessina, our Executive Vice Chairman and Chief Executive Officer, and George Fairweather, Executive Vice President and Global Chief Financial Officer, will take you through our results as usual. Alex Gourlay, Co-Chief Operating Officer of Walgreens Boots Alliance, is also here and will join us for questions. You'll find a link to our webcast on our Investor Relations website at investor.walgreensbootsalliance.com. After the call, this presentation and webcast will be archived on the website for 12 months.

Certain statements and projections of future results made in this presentation constitute forward-looking statements that are based on our current market, competitive, and regulatory expectations, and are subject to risks and uncertainties that could cause actual results to vary materially. Except to the extent required by the law, we undertake no obligation to update publicly forward-looking statements after this presentation, whether as a result of new information, future events, changes in our assumptions, or otherwise. Please see our latest Form 10-K for a discussion of risk factors as they relate to forward-looking statements.

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As a reminder, today's presentation includes certain non-GAAP financial measures, and we refer you to the appendix in the presentation materials available on our Investor Relations website for reconciliations to the most directly comparable GAAP financial measures and related information. I'll now hand it over to George to take you through the numbers.

George Fairweather -- Executive Vice President and Global Chief Financial Officer

Thank you, Gerald. Overall in the quarter, we have delivered strong business performance both in terms of adjusted profit and cash flow, which gives us a good foundation for what we expect to be a solid year. We are particularly pleased with the continued growth in U.S. pharmacy volume market share. We recognize, of course, that our GAAP numbers have been significantly impacted by some notable special items which I'll talk about in a moment. During the quarter, we completed the $5 billion share buyback program announced in June plus the additional $1 billion expansion announced on our last earnings call.

Of course, our other development was Rite Aid regulatory clearance in September. In October, we started to acquire our first stores. This has gone well, and by the end of December, we had bought a total of 357 stores. Since the quarter end, we have announced our agreement to acquire a 40% minority stake in GuoDa, a leading Chinese retail pharmacy chain with over 3,500 pharmacies across 70 cities. All this transaction in the context of the group is relatively small. We believe it has significant potential for the future.

We have also announced an agreement to reduce our investment in our wholesale partner, Guangzhou Pharmaceuticals Corporation, giving us a cash-on-cash return of 3.6 times. This will leave us with a 20% interest in this successful partnership. Both transactions are, of course, subject to regulatory approval and customary closing conditions.

Moving on to guidance: Today, we have raised the lower end of our adjusted earnings per share guidance for fiscal year 2018 by $0.05. So now, I'll take you through our results for the quarter. Sales for the quarter were $30.7 billion, up 7.9% versus the comparable quarter. On a constant currency basis, sales were up 7.2%. Currency was moderately favorable, the U.S. dollar being around 5% weaker versus sterling than in the comparable quarter last year.

GAAP operating income was $1.3 billion dollars, down 8.6% versus the comparative quarter. Adjusted operating income was $1.8 billion, up 4.8%, and up 4.4% in constant currency. This quarter, GAAP operating income was adversely impacted by our share of AmerisourceBergen's litigation accrual -- as reported in the last quarter results -- and by the hurricane-related storm damage and store closures, which I highlighted back in October. We estimate the trading impact of the hurricanes to be around $90 million sales and a few cents of adjusted EPS.

GAAP net earnings attributable to Walgreens Boots Alliance were $821 million, down 22.1%. This quarter's number was also adversely impacted by an impairment of our equity method investment in Guangzhou to reflect the fair value of our entire holding. Adjusted net earnings attributable to Walgreens Boots Alliance were $1.3 billion, up 7.8%, and in constant currency, up 7.2%.

Diluted net earnings per share benefited from the lower number of shares in issue. As a result, GAAP diluted net earnings per share were $0.81, down 16.5%. Adjusted diluted net earnings per share was $1.28, up 16.4%, and in constant currency, up 15.5%. The adjusted effective tax rate, which we calculate excluding the equity income from AmerisourceBergen, was 24.9%. Our core rate, which excludes discrete tax impact, was marginally higher than in the fourth quarter of fiscal 2017.

So, turning now to the performance of our segments, starting with retail pharmacy U.S.A. Retail pharmacy U.S.A. sales were $22.5 billion, up 8.9% over the year-ago quarter, comparables to those sales increasing by 4.7%. Adjusted gross profit was $5.7 billion, up 3.7% over the year-ago quarter, reflecting an increase in both pharmacy and retail. Adjusted SG&A was 19.2% of sales, an improvement of 1.2 percentage points compared to the year-ago quarter. SG&A spend was higher than in the fourth quarter, in part due to the normal seasonal activity. Adjusted SG&A as a percentage of sales has improved versus comparable quarters for 18 consecutive quarters. Adjusted operating margin was 6.1%, down 0.1 percentage points, resulting in adjusted operating income of $1.4 billion, an increase of 6.8%.

So now, let's look in more detail at pharmacy. U.S. pharmacy total sales were up 14.1%. We filled 260 million prescriptions on a 30-day adjusted basis including immunizations, an increase of 9.5%. We have now reached a significant milestone, exceeding 1 billion scripts for the first time on a 30-day adjusted and rolling annual basis. In the quarter, over 20% of Walgreens retail refill scripts were initiated through digital channels, demonstrating the impact of the work that we're doing to improve our digital capabilities. This includes the progressive enhancement of the Walgreens mobile app, which has been downloaded over 50 million times since its launch and has a 5-star customer rating on the U.S. Apple App Store. This growth in script volumes led to our reported market share of retail prescriptions in the quarter on the usual 30-day adjusted basis, being 20.6%, up approximately 110 basis points over the year-ago quarter.

So, turning back to sales: On a comparable basis for stores -- which excludes central specialty and mail -- pharmacy sales increased by 7.4%, with scripts filled up 8.9%. This was primarily due to strong volume growth from Medicare Part D and the positive impact of our strategic pharmacy partnerships. Within sales, volume growth, mix, and brand inflation were partially offset by reimbursement pressure and the impact of generics. A higher proportion of specialty adversely impacted pharmacy gross margin by around 140 basis points. These factors combined resulted in higher pharmacy gross profit.

Total retail sales were 2.8% lower than in the same quarter last year. Comparable retail sales were down 0.9% in the quarter, partly due to changes to our promotional plans -- which I spoke about last quarter -- as we continue to focus on delivering improved margins. This was a lower rate of sales decline than we saw in the fourth quarter last year. Declines in consumables, and general merchandise, and the Personal Care categories were partially offset by comp sales growth in the Health and Wellness and Beauty categories. This is the sixth consecutive quarter that we've delivered comparable sales growth in both the Health and Wellness and Beauty categories. Gross margin and gross profit this quarter were positively impacted by the changes to promotions I just mentioned and by improved mix as we increasingly focus on higher-margin categories.

The Beauty category today represents around 9% of total retail sales. As discussed in prior quarters, we continue to invest in our Beauty Differentiation Program and are encouraged by the results. As well as developing our offering of own brands, we have now completed the introduction of our enhanced beauty offering to over 1,000 additional stores, bringing the total number of stores with this offering to around 2,900. I'm pleased to report that during the first quarter, the Beauty Differentiation stores performed stronger than in prior quarters. Beauty category sales in these stores continue to be markedly better than in other stores, resulting in higher retail gross margin and higher comparable retail sales.

As I mentioned on the last earnings call, in the last quarter, we launched our brand-new skincare range: Your Good Skin. This has now been rolled out to all our Beauty Differentiation stores. Following the success of the program, we have now extended No. 7 and Soap and Glory to over 4,400 Walgreens stores. Given how well our beauty offering has been received, we are working to widen the range of products offered in our Beauty Differentiation Initiative.

Before turning to Rite Aid, I just wanted to make a comment on December. Since the quarter end, in pharmacy, we continue to deliver strong growth in prescription volume as we begin to annualize pharmacy contracts that contributed to fiscal 2017 volume growth. In retail, while our December comparable sales were lower than in December last year, we delivered a strong performance in our important Health and Wellness category.

Turning now to Rite Aid: During the latter part of the quarter, we acquired 97 Rite Aid stores, and a further 260 stores in December. As we've said before, we're acquiring stores in phases with completion anticipated in the spring. This will be followed by the transfer of the three distribution centers at a later date. And, as we also said, because of our store optimization program, we plan to close approximately 600 stores and related assets over an 18-month period beginning in spring 2018. Our assumptions on synergies, store optimization, timing, costs, and expected savings are as previously announced.

So now, let's look at the results of the retail pharmacy international division. Sales for the division were $3.1 billion, up 4.1%, and in constant currency, down 0.8%. Comparable store sales decreased 0.7% in constant currency. Comparable pharmacy sales were down 0.1% and comparable retail sales decreased 1%, both on a constant currency basis. In Boots UK, comparable pharmacy sales were up 0.1%, mainly due to temporary price rises caused by shortages in certain generic drugs. Boots UK's comparable retail sales were 1.4% lower in a challenging marketplace. Adjusted gross profit for the division was down 0.8% in constant currency to $1.2 billion due to both lower pharmacy and retail gross profit.

Adjusted SG&A as a percentage of sales on a constant currency basis was 0.3 percentage points higher, at 32.9%. On an absolute basis, adjusted SG&A dollars were broadly flat. Adjusted operating margin was 6.8%, down 0.4 percentage points in constant currency. This resulted in adjusted operating income of $210 million, a decrease of 5.6% in constant currency and down 1.4% on a reported basis. Since the quarter end, as we expected, trading has continued to be challenging. However, we are managing our businesses to address this trading environment both in terms of promotional efficiency and costs. As a result, we remain optimistic about our future prospects.

And now, let's look at our pharmaceutical wholesale division. Sales for the division were $5.7 billion, up 4.5% versus the same quarter last year on a constant currency basis. This was behind our estimate of market growth weighted on the basis of our country wholesale sales due to challenging market conditions in certain Continental European countries, partially offset by strong performance in emerging markets.

Adjusted operating margin, which excludes ABC, was 2.6%, down 0.5 percentage points on a constant currency basis, but in line with the fourth quarter of fiscal 2017. This was mainly due to a combination of cost inflationary pressures and lower gross margin, including some generic procurement pressures. Our share of adjusted earnings in ABC was $77 million, up $19 million versus the same quarter last year, mainly due to our increased level of ownership. Adjusted operating income for the division was $224 million, up 0.4% versus the same quarter last year in constant currency.

So, turning next to capital allocation: Operating cash flow in the quarter was $961 million. Our working capital outflow was $745 million. This reflected our seasonal build in inventories, which was substantially lower than in the comparable quarter due to actions we have taken to reduce inventory days in the U.S. Cash capital expenditure in the quarter was $378 million. We continue to invest in key areas to develop our core customer proposition, including our stores and U.S. beauty program, as well as the upgrades to our IT systems, which we've previously talked about. Overall, this resulted in free cash flow for the quarter of $583 million, an increase of $436 million versus the same quarter last year.

So, turning now to guidance for fiscal 2018: We have raised the lower-end level of our guidance and now expect adjusted diluted net earnings per share to be in the range of $5.45 to $5.70. As usual, this guidance is based on current exchange rates, remaining constant for the rest of the fiscal year. And, as we've said before, we do not expect Rite Aid to significantly impact this year's adjusted diluted net earnings per share. In addition, our guidance does not take into account the recent changes to U.S. tax law that have just occurred. Once the detailed tax guidance for the new law has been published, companies such as ours will be able to quantify the full impact, and we will, of course, update our guidance accordingly.

Based on our initial assessment, we believe that these changes will have a positive effect on cash taxes. As in the past, if changes in tax legislation result in material changes to balance sheet provisions, we will adjust for these. Our tax team are working through all this ahead of our 2Q results.

Finally, thinking about the phasing: As I said in our last earnings call, we expect the year to be more balanced between the two halves than in fiscal 2017. I will now hand over to Stefano for his concluding comments.

Stefano Pessina -- Executive Vice Chairman and Chief Executive Officer

Thank you, George. As you can see, it has been a strong start today. Our strategy of geographic and commercial diversification continues to serve us well, giving us both scale and presence when managing our relationship with the pharmaceutical manufacturers and diversity to help us manage the downturns of the business cycle in any individual geography or market. That said, we do not just sit passively. We actively seek opportunities that the changes in our markets offer.

Most recently, we have announced our change of emphasis in China. We have been involving China for some time as a wholesaler with strong local partners, but following regulatory changes, we have taken some time to assess the market and review our position. As a result -- as George said earlier -- we are taking a significant stake in GuoDa, a leading Chinese retail pharmacy chain in a strategic partnership arrangement indirectly with the Chinese state itself. This will allow us to participate more actively in the retail pharmacy sector. I am pleased to say that we have been able to do these transactions on terms that recognize the significant benefit that this strategic partnership will bring to GuoDa.

Around the same time, we announced an agreement to reduce our stake in our main wholesale partner in China, providing them with greater freedom to pursue other roads to develop their business. Also, as you have seen, we have taken a payment charge on this investment. Our holding overall has generated a very good return. We remain committed to our wholesale partners in China and maintain a significant interest in them both, but we believe that we are now best served by focusing on the opportunity that partnership with retail offers.

We are very excited about the potential of the Chinese market. As with every country we operate in, Healthcare and Personal Care are very culturally specific sectors, and we are convinced that our strategy of entering markets through strong local partners with excellent local managing teams is the best approach. But of course, I know it's quite understandable that your focus is on more Western markets and the U.S.A. in particular.

The U.S. continues to be a very dynamic market with a lot going on and many changes under way. We have been contemplating some of these changes for a while. As most of you will know, I have been convinced of the benefit of vertical integration in the U.S. healthcare system for many years. I do not, however, believe that vertical integration can necessarily best be achieved only through ownership or within a single entity. Much can be achieved through close partnerships and collaboration. Looking at the U.S., it is very important to remember that we are partway through a process of transformation. I believe this will set our business in the U.S. on a path of growth for the future.

I know many of you have heard this before, but it is still relevant, and I think sometimes, the significance of what we are doing gets overlooked. As you know, the process of transformation begins with a review and analysis of the world in business. Cost cutting was an important first step. A lot has already been done in this regard, and this work -- together with an ongoing strict discipline on cost -- has given us the runway to begin the process of reinventing Walgreens, while at the same time delivering good results.

We are now well under way with our work to upgrade the existing Walgreens business model in pharmacy and in retail. We have been going through a process of fine-tuning throughout the U.S. business. In pharmacy, we have adjusted pricing on our commercial contracts to bring them more in line with the rest of the market, and in doing so, have generated significant net growth in prescription volume to our dispensaries. In retail, we have continued the detailed and selective refinement of our merchandising, products, and service offerings. I believe we are about halfway through this process, and the benefits it is bringing are, again, helping us continue our record of growth while we develop, trial, assess, and then roll out our vision for the future of Walgreens in the U.S. market.

So, the third phase in our transformation is to rethink our business model -- to adapt to changing markets and changing customer behavior, and look ahead to the future of the U.S. business. We are already extensively working on this at the same time as continuing to optimize the business we have today. We have made a lot of progress in defining what our stores should look like in the future. You will hear a lot more about this during 2018.

We are researching and analyzing how customers are shopping our store to understand the true profitability of each category and area of business, and what our patients, payers, and customers want from us. We have been working hard to put in place the relationship we need to offer a range of healthcare services seamlessly across the group, alongside a far more focused and differentiated retail offering. There is no doubt that the complete transformation will take time to achieve, but I believe we have the potential to do a great deal more with our core assets, particularly given our physical presence and the strong position it gives us in the community, our scale and the purchasing power this gives us, and our unique global brands.

As you know, over the past few years, we have been conducting trial studies in certain U.S. stores to test out merchandising, format, supply chains, and beauty propositions, and a number of new initiatives and partnerships. In 2018, you will see us deploy the first pilot stores, incorporating all the work we have done to date in a single-store format. We will start developing that and fine-tune the format before rolling this new concept out under the ongoing store rejuvenation initiative and within our current capital plan.

However, this is about much more than just our retail offering. It is about rethinking and redefining our presence in and relevant to the communities we serve, and that requires us to rethink our supply chains, the services we offer to our customers, and how we deliver those services. This is why strategic partnerships like the one we have done with FedEx are so important. It gives us an additional role in the community. It provides flexibility in how we physically move things in and out of our stores, and that creates a completely new way of thinking about how we interact with our patients and our customers.

As I say, you will be hearing more from us over time about all of these areas, but behind all of this is the recognition that our best opportunity to grow our business is also the best defense against new competition or changes in our marketplace. Quite simply, we need to offer the best pharmacy service, be a differentiated retailer, and provide services and convenience at the value propositions that keep us relevant to the communities we serve. In doing this, we must make sure that we provide the goods and services that payers and customers want. We must do this across all channels in an integrated manner and to uniformly high standards. We must be agnostic about how they wish to interact with us. That is key.

A payer should know that whatever they want or need in terms of services to their patients, we can provide it, provide it well, and at a competitive price. A patient or customer should know that however they choose to interact with Walgreens -- in person, online, or even through a third party -- they will get quality products and services at competitive prices, delivered to them directly or by our partners in the way they want, when they want, and where they want. To do that, we must actively manage our business, our copays, our product lines, our services, and our partnership. We must ensure our people and our company as a whole can match or beat our competition in all areas, and we must do this without faltering in our delivery to our owners in this venture.

That is all big picture -- very relevant, and in truth, our future, but in the more immediate terms, we have a lot to do in the here and now. As ever, we are facing tough market conditions, and as ever, there are many challenges to be addressed in our business and in our markets, but we are more than up to the challenges, and I am excited for the year end and for the years to come. With a strong first quarter -- which, as George says, gives us a good foundation for a solid performance for the year as a whole -- I remain as confident as ever in this business looking forward. Thank you. I will now hand you back to Gerald for your questions.

Questions and Answers:

Operator

Ladies and gentlemen, if you have a question at this time, please press *1 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, please press #. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Thank you, and our first question comes from the line of Lisa Gill with JP Morgan. Your line is open.

Lisa Gill -- JP Morgan -- Managing Director

Thanks very much, and good morning. I was wondering if maybe you could just comment on 2018 around preferred relationships. I know on the last quarter call, you anticipated that scripts would be up in calendar '18, but now that we know where things have shaken out as far as Part D participants go for 2018 as well as the commercial market, can you just give us an updated thought around that?

Alex Gourlay -- Co-Chief Operating Officer

Hi, Lisa. I don't think we've much to add. We still see the same position as we saw in the last update. We're confident we will grow in 2018, and we're also very confident about the customer care we're providing to our partners. That's actually helping to make customers more sticky and grow and stay with us as well, so nothing really more to add to it. The numbers we gave seem consistent with what we've seen since, and of course, we'll give a further update when we have the full market available -- probably sometime in April, May. As you know, that's when it becomes much clearer.

Lisa Gill -- JP Morgan -- Managing Director

And, how do we think about the margin not on that business? Any changes to 1/1/18 around any of your payer or PPM relationships?

Alex Gourlay -- Co-Chief Operating Officer

Again, we don't disclose -- as you know -- the commercial contracts. We speak all the time about pharmacy reimbursement pressures. That continues to be a feature of the Med D market, but we manage our price to the marketplace, and we do that very carefully, and we're confident that we can sustain the appropriate margin with the volume we've got. Some of the contracts that we became less preferred in, of course, we have improved the payment, and of course, some of the contracts stepped out. That's normal this time of year. So, overall, we feel OK about the margin. It's pretty much on trend.

Lisa Gill -- JP Morgan -- Managing Director

Okay, great. And then, if I -- I'm sorry, go ahead.

Stefano Pessina -- Executive Vice Chairman and Chief Executive Officer

When we approve a new contract, of course, we make sure that we can afford the contract. And so, if we give some additional discounts -- if we reduce our margin from one side -- we analyze during the contract where we can recover all or most of the margins that we are giving away. This is why our results are quite consistent overall, and this is why we are not losing dramatically or at all in our bottom line, in our overall operating margin -- adjusted operating margin, because every contract is studied and approved if we understand or know how to compensate for what we have to give.

Lisa Gill -- JP Morgan -- Managing Director

Okay, great. That's very helpful. Lastly, you talked about the U.S. tax rate obviously being a positive. Is there any way to think about how to quantify this early on? By our math, it could be nicely positive for you -- somewhere in the range of maybe $0.40 or $0.50. Is that a number that would be close to how you're thinking about it?

George Fairweather -- Executive Vice President and Global Chief Financial Officer

Where we are -- as I said in the prepared comments -- is that the tax team is still working through this. All the full details are still in the process of being published, so it would be premature to make any sort of financial comments from our perspective at this point. For me, the key issue that I'm always focused on is the cash taxes. As I said in the prepared comments, we'd expect a positive effect on cash taxes. It's worth remembering, of course, that we are a multinational. It's much simpler for some of the domestic companies to give a fairly quick and dirty estimate, but for us, it takes a little bit of time to work through, and that's what we're doing, but we'll update you in the second quarter, as I said on the prepared comments.

Lisa Gill -- JP Morgan -- Managing Director

Okay, I appreciate it. Thank you.

Operator

Thank you, and our next question comes from the line of George Hill with RBC Capital Markets. Your line is open.

George Hill -- RBC Capital Markets -- Managing Director

Good morning, guys, and thanks for taking the question. Alex, I want to drill into something that you made a comment about. It sounded like you talked about a more challenging procurement environment as it related to generic drugs. Could you throw a little more color on that, talk about what's driving, and tell us whether that was specific to the ex-U.S. business, or is that something that's having a global impact?

Alex Gourlay -- Co-Chief Operating Officer

Hi, George. No, I didn't say that. I apologize. Sometimes, my accent is a bit hard to pick up. I didn't say that at all, but I can still comment on generics. We're really seeing a very similar trend in the marketplace, so we're seeing deflation. Obviously, the market is a bit consolidated, and we feel good about the work of our colleagues in Walgreens Science Development, and we still confidently work with manufacturers in a very consistent way, and over time. So, no change. I apologize that my remarks were picked up wrongly. We see the same trend, and we feel good about the ability we have to manage as well in this marketplace.

George Hill -- RBC Capital Markets -- Managing Director

No, then I apologize for mishearing you. And then, a follow-up for you and for Stefano would be -- I know that we're not even through the Rite Aid acquisition yet, but you talked about some of the growth initiatives in the new store format. With we're at 90-ish percent plus beneficiary coverage in the United States, macro script growth is slowing down. Aside from engaging in a battle for market share with your largest pharmacy competitor, what do you guys see as the best opportunities to continue to monetize the box, or generate earnings in the box, or where's the white space for growth as we think about the next leg for the company beyond the rollout of the CVS stores in the first half of '18? I'm thinking about this more from a top-line perspective as opposed to a margin or synergy perspective.

Alex Gourlay -- Co-Chief Operating Officer

Again, as Stefano said in his concluding remarks, we're working hard to rethink and redesign the box, and we've been doing this, really, for a number of years with a number of tests and trials, and some of them have been scaled. Beauty Differentiation is the best example, but many others -- the mobile app. Again, in his remarks, George announced 50 million downloads and a five-star app. So, putting all this together in a single format trial -- sometime later on this year, we'll give more details as we step into it.

And, we feel very confident that that box -- that single format -- we will be able to generate more value from that in the medium and long term. The data we're seeing as we develop our ability to use balance reward data in a different way, particularly in the front end we're very confident about as we remerchandise, and simplify, and make sure that we have a differentiated offer. We can bring all of that, of course -- not just to Walgreens, but into the Rite Aid stores that we have acquired. And last but not least, we feel good about our access strategy. Again, the numbers are very clear: 1 billion prescriptions for the first time ever in Walgreens. We think we can continue to grow volume by giving good value and great care.

George Hill -- RBC Capital Markets -- Managing Director

Okay. And, the last tack-on would be as I think about the new format, it probably includes the clinic models, includes beauty, it might include the lab work demos. Is there any other what I would call "customer magnet" or "customer-facing" components of the format we should be thinking about?

Stefano Pessina -- Executive Vice Chairman and Chief Executive Officer

We have a clear model, and we are doing certain trials, and we are finalizing agreements with certain partners, but you will understand that we cannot present a full model today. As we said, you will hear more from us during this year, during 2018 at the end of the year, but some of the things that we are doing are commercially sensitive, as you can imagine. So, you can -- we are sure that in our box, you will find all the things we have talked about until now, and I hope something more.

George Hill -- RBC Capital Markets -- Managing Director

Great. I look forward to seeing one. Thank you.

Operator

Thank you, and our next question comes from the line of Glen Santangelo with Deutsche Bank. Your line is open.

Glen Santangelo -- Deutsche Bank -- Managing Director

Thanks, and good morning. I just want to follow up on a couple things. First, on the margin question. When you look at your gross margins and your U.S. retail business, obviously, they continue to come down. As you anniversary some of those commercial wins here as we look forward to 2018, I understand you don't want to give any sort of specific margin guidance going forward, but how do you generally think about the reimbursement environment? Do you think we're in an environment where margins will continue to come down given the competitive nature of the business and the pressure of the PBMs, the goal is ultimately to grow revenues and try to cut SG&A to be able to grow, or do you think we get to an environment where margins eventually stabilize in this business?

Alex Gourlay -- Co-Chief Operating Officer

Hi, Glen. Again, specifically in this period, remember that prepared remark George made about the specialty mix, which is 140 basis points. As you also recall, we announced that with our partners Prime through Alliance Rx, the successful FEP contract which more or less kicks off in this quarter, but not in the last quarter. So, that makes us quite important as you look at the margin. More in the long-term trend, we expect to see the long-term trend remain the same, and we've said that consistently.

That point of view hasn't changed. We expect to lever the same levers which we successfully used and will continue to use -- costs, costs of goods, developing the front-end margin in a way that we described in the previous question, and importantly, volume. Again, we do believe that we're able to drive volume through our pharmacies in the way we've done in the last two years as well. These are all levers we will use to ensure that we drive gross profit dollars and adjusted operating margin -- adjusted operating income, sorry -- in the business.

Glen Santangelo -- Deutsche Bank -- Managing Director

And then, maybe if I could just expand that, any comments on the reimbursement outlook over in Europe, given some of the challenges we faced this year as we head into calendar '18? Comp should ease -- do you expect that to be meaningful?

Alex Gourlay -- Co-Chief Operating Officer

Again, I can comment specifically on the U.K., which is our main pharmacy business. Of course, in Europe, we have many other businesses, but Europe is our main pharmacy business. The governments have taken a large amount of money. We've been very clear on that, and we're into the second phase of that. This is something that is a cycle, as mentioned by Stefano before. Almost every decade, this happens in the U.K., and we're managing our business appropriately. The pharmacy business is very important to our brand and to our customers in the U.K., and we have the scale and we have the presence to manage this appropriately. So again, it's a tough environment in this period because of the government action has been beyond the normal, but it will come back to normal action in the future years again. We've remained confident that we can manage it in that cycle.

Stefano Pessina -- Executive Vice Chairman and Chief Executive Officer

We are used to it because in all the European countries, I would say for the last 20 years maybe, we have seen the government pushing down the margins of the pharmacies, the margin of the distribution... So, it's part of the business, and we know how to react, and we react, and of course, you knew that there has been a great consolidation, there has been a great improvement of efficiency of all the operators. Now, in general, this is quite -- I would say it goes through quite smoothly. We see some shock today in D.C., mainly for Brexit because this has created a lot of instability, not just in the U.K., but also in the rest of Europe.

And also, the strong effects -- we were not used to seeing the pound depreciate 20% in one day or two days. We had a very big depreciation in the past. We created the euro, and the depreciation was much more under control. To see again this big fluctuation and big depreciation has created an environment which was a little difficult to control. Now, these things are coming back slowly into normality and all the business will come back to normality, but this must be considered quite an exceptional situation overall in Europe. And, you see that after all, we and the other operators -- in spite of this big change in constant currency -- have been able to stay more or less where they were before. They are all about there.

Glen Santangelo -- Deutsche Bank -- Managing Director

I appreciate that. Maybe lastly just on the capital allocation -- you decided to pull some of the repo forward here in the current quarter. I understand you still have some authorization outstanding, but do you expect to back that off as we look out to the balance of the fiscal year, or you expect to continue to be active in that regard? And then, I'll stop. Thanks very much.

George Fairweather -- Executive Vice President and Global Chief Financial Officer

We've completed the $6 billion program, and so, other than our normal anti-diluter program, that obviously is something that continues on an ongoing basis. We have no authorizations out at the moment for additional share purchase programs. Obviously, we continue to review our overall position to have an efficient balance sheet, as you'll have seen from our track record.

Stefano Pessina -- Executive Vice Chairman and Chief Executive Officer

You understand that we produce a lot of cash every year, and you have seen this in the last year. We have increased substantially the cash we are able to create, and of course, we have to use this cash. Either we have to do some external acquisition, or we have to buy back shares, or we have to increase the dividend, but in any case, we have to use this cash. We have found ourselves in an awkward situation because we intended to do an acquisition, and where to put the money assigned for the acquisition, and after the acquisition was small than anticipated, and later, so we had some cash to deploy, and we have decided to buy back shares.

We hope that we will not find ourselves in a similar situation in the future and we will be able to deploy our cash in a more orderly fashion in the future. But, for sure, we believe that we don't see any reason why we should not produce the same amount or more cash in the future. Of course, this cash is to be utilized or given back to the shareholders.

Glen Santangelo -- Deutsche Bank -- Managing Director

Thank you very much.

Operator

Thank you, and our next question comes from the line of Alvin Conception with Citi. Your line is open.

Alvin Concepcion -- Citigroup Research -- Vice President/Analyst

Great. Thanks for taking my question. I just wanted to ask about tax reform again. I know you don't want to quantify at this time, but what do you plan to do with the benefit? You just talked about external acquisition. Does this accelerate your timeline or plans for an acquisition, or do you assume most of this just gets competed away?

George Fairweather -- Executive Vice President and Global Chief Financial Officer

I think as we all note, the tax reform has got the potential to help companies such as ours invest -- whether that's jobs, equipment, facilities -- to grow the economy and open up new opportunities for Americans across the country. From our perspective -- again, as I said in our prepared comments, we're continuing to invest in the U.S. here in our Walgreens business and our core customer proposition. Very importantly, as you also know, we're planning to invest substantially in the Rite Aid assets post-acquisition completion and the big conversion program that we've got to convert the stores to Walgreens. So, we welcome the tax reform and see this as reinforcing our opportunities to invest here in the United States.

Alvin Concepcion -- Citigroup Research -- Vice President/Analyst

Thank you. And, just a question on M&A -- you mentioned vertical integration has many benefits, but does this include managed care as part of your thinking, and what part of your supply chain do you think could benefit the most through integration, and also, what are your priorities? U.S., international? Is it more on the retail side or various parts of the supply chain? Thank you.

George Fairweather -- Executive Vice President and Global Chief Financial Officer

We continue to look at M&A opportunities in a very disciplined way. As always, when we're looking at the opportunity for new partnerships, we start with the partnership mentality, and look at what the opportunity is, and look for the best way to extract value for our shareholders. Sometimes that is just a good commercial arrangement sometimes, it's taking an equity method investment or having a minority partner, and sometimes, it's 100% M&A.

But, we always start with the mindset of partnerships, and then in a sense, what is the logical structure from a shareholder value point of view is really based on the opportunity and how best to deliver it. We always approach M&A in a very financially disciplined way, being very clear on what our returns' criteria are, and we continue to look for quantifiable synergies -- hard synergies that underline our key financial models.

And then, what we always do on top of that is look at the soft synergies, which are the ones one cannot quantify, but often create all of the long-term sustained shareholder value. We'll continue to look at opportunities here in the U.S. and internationally, as you've seen in what we talked about earlier in China, but always in a very financially disciplined way. Clearly, the tax reform and some of the changes in the U.S. make the U.S., in some ways, a more attractive opportunity than it was prior to tax reform.

Alvin Concepcion -- Citigroup Research -- Vice President/Analyst

Great. Thank you very much.

Operator

Thank you, and our next question comes from the line of Robert Jones with Goldman Sachs. Your line is open.

Robert Jones -- Goldman Sachs -- Analyst

Great, thanks for taking the questions. You had another strong quarter on the same-store script growth, and I'd imagine that next quarter would be similar, but as you look out to the back half of the fiscal year when you begin to lap some of the market share gains, what kind of script growth or even declines should we be looking for, given some of the competitive changes you've seen in the preferred Part D networks?

Alex Gourlay -- Co-Chief Operating Officer

Again, as we said in the last quarter, we are at very comparable growth at the market or near the market this year. We don't see that as a problem, given the changes that we have seen so far. Remember, on top of that, we do have the additional stores from Rite Aid coming in as nonorganic growth as well to help drive our platform, our buying power, and of course, our efficiency. So again, we have different ways of delivering growth. As you've seen over the last few years, growth is what we intend to do, and I think that's a great example of how as we move from one phase, we're moving into another phase of growth with the same focus and the same intention.

The last thing I would say is that we remain extremely committed to partnership in this sector as well. I believe that we provide great value, and I believe that our partners will see us consistently delivering for them what they need from this marketplace as it changes and becomes more competitive. So, really, no change. We remain confident, and we have a different way of growing in pharmacy this year compared to -- growing above the market this year compared to the previous year.

Robert Jones -- Goldman Sachs -- Analyst

Okay, I appreciate that. And then, George, you made some comments on the performance in December, but I was hoping you could just go back and break down what you were seeing relative to the performance in 1Q. I thought you had mentioned something around generic procurement pressure, but I was just hoping that you could elaborate on the December comments that you provided.

George Fairweather -- Executive Vice President and Global Chief Financial Officer

Sorry, the generic procurement pressure point -- if I can just clarify -- was in relation to the pharmaceutical wholesale division, and just to reemphasize, when we're looking at our generics operation in terms of shareholder value and generic sourcing that we do out of Switzerland, we look at this very much in the round as a whole. Whilst we were impacted in this quarter -- as we were in the fourth quarter last year in wholesale -- we're very pleased with the overall performance of our generic sourcing operation. Sometimes, where it falls can be different, but it's the overall that we're really focused on. In terms of the U.S., obviously, we've just finished December, so we're just closing the books, but what I was trying to do was give you just really a fairly high-level overview of the performance.

As I said, in the U.S. in pharmacy, you saw strong growth in prescriptions volume in Q1. As I said in the prepared remarks, we continued to deliver strong growth in prescription volume in December, and it's what's reminding ourselves that we're beginning to annualize the pharmacy contracts that contributed to fiscal 2017 volume growth, really building on what Alex has just been saying. And then, in retail in Walgreens -- as I said, our comparable December sales were lower than December last year, and it's worth remembering, obviously, what I said in Q1. Again, what's really important for us was we delivered a strong performance in our important Health and Wellness category. So, that's really the December story, and looking into Europe -- again, as I'd indicated, it was relatively tough trading conditions in December, particularly Boots in the U.K., and that's no different than what I believe we're starting to see in the preliminary figures that are coming out from some of the other large High Street-based retailers in the U.K.

Robert Jones -- Goldman Sachs -- Analyst

Got it. Thanks for all that clarification. Appreciate it.

Operator

Thank you, and we have time for one more question. Our last question comes from the line of Brian Tanquilut with Jefferies. Your line is open.

Brian Tanquilut -- Jefferies -- Vice President/Analyst

Hi, good morning. I just wanted to ask if you could give us some color or comments on any improvement you're seeing in the stores that have rolled out at higher-acuity healthcare services, whether it's MedExpress and your partnership with United, or the clinics you've sold to some of the health systems such as Vanderbilt here in Nashville. And then, how far do you think you can push that MedExpress opportunity in terms of rolling that out?

Alex Gourlay -- Co-Chief Operating Officer

Hi, Brian. We're really pleased with the tests we have with MedExpress. It's a strong model, it's a good brand, it's good ownership. To be honest, it's really early to know the success of this. So far, so good, but we'll update you when we have more information and more confidence in the overall model. It would make sense from the customer point of view -- you can pop into a convenient location. We have A corners across America. We know that -- the best corners in America -- so it makes sense from a customer and patient point of view that you can go in and get yourself sorted when you have an accident, or when you need a medical, or something of that type. That's what MedExpress does. So far, so good, but very early on, and too early to give any information that would really make you admire it, to be honest.

I think in terms of the clinics, we're really pleased with the partnerships we've got there. We are local, which is important to the health systems. They are providing different services depending on what they want to do and what the local needs are, and they fit really well into the Walgreens brand. Of course, as we said when we did these partnerships, we have the opportunity to provide more pharmacy services to the healthcare systems alongside that, which is the bit that you don't always see. So again, these are more mature. They are performing exactly as we wanted to. They are different from location to location, but they're providing added value to customers and driving elements of a relationship in our pharmacy business with important healthcare partners.

Brian Tanquilut -- Jefferies -- Vice President/Analyst

Just a quick follow-up to that, Alex: As I think about the FedEx rollout -- you're already rolled out across a big base of stores, so how should I think about how you view that as a defensive strategy, perhaps, or as a way to drive margin and volume into stores?

Alex Gourlay -- Co-Chief Operating Officer

This is absolutely not a defensive strategy. We have got a fantastic supply chain. We are situated closer to America's rooftops than any other retail brand, and we've got 25,000 pharmacies inside that retail brand. So, this is about -- as Stefano said very clearly -- us redefining the properties of our A locations across America. This is not a defensive, and FedEx have been fantastic partners, and we're really pleased with the progress we've made, particularly in the holiday season.

Brian Tanquilut -- Jefferies -- Vice President/Analyst

I appreciate it. Thank you.

Operator

Thank you, and this concludes today's question and answer session. I would now like to turn the call back to Mr. Gerald Gradwell for any closing remarks.

Gerald Gradwell -- Senior Vice President of Investor Relations and Special Projects

Thank you very much indeed, and thank you, everyone, for participating in the call. We'll look forward to speaking to you all again on our second quarter results in three months' time, and we hope to see you all over the next few weeks and months as we go out and about and look to speak to our shareholders in the financial community. Thank you again. If you do have any further questions, please feel free to contact any of the IR team here. We're all around for the next few days. Thank you very much, indeed.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.

Duration: 63 minutes

Call participants:

George Fairweather -- Executive Vice President and Global Chief Financial Officer

Stefano Pessina -- Executive Vice Chairman and Chief Executive Officer

Alex Gourlay -- Co-Chief Operating Officer

Gerald Gradwell -- Senior Vice President of Investor Relations and Special Projects

Lisa Gill -- JP Morgan -- Managing Director

George Hill -- RBC Capital Markets -- Managing Director

Glen Santangelo -- Deutsche Bank -- Managing Director

Alvin Concepcion -- Citigroup Research -- Vice President/Analyst

Robert Jones -- Goldman Sachs -- Analyst

Brian Tanquilut -- Jefferies -- Vice President/Analyst

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