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Walgreens Boots Alliance, Inc. (NASDAQ:WBA)
Q3 2018 Earnings Conference Call
June 28, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Walgreens Boots Alliance, Inc. third 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 follow at that time. If anyone should require operator assistance during the conference, please press * then 0 on your touchtone telephone.

I would now like to turn the call over to Gerald Gradwell, Senior Vice President of Investor Relations. Please go ahead.

Gerald Gradwell -- Senior Vice President, Investor Relations

Good morning, ladies and gentlemen, and welcome to our 2018 third quarter earnings call. As usual, I am here today with Stefano Pessina, our Executive Vice Chairman and Chief Executive Officer of Walgreens Boots Alliance; Alex Gourlay, Co-Chief Operating Officer of Walgreens Boots Alliance and President of Walgreens. And this quarter, for the first time, we would like to welcome James Kehoe, our Global Chief Financial Officer, who joined us at the beginning of the month.

Before I hand you over to Stefano to make some opening comments, I will take you through the legal safe harbor and cautionary declarations. 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 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.

In today's presentation, we will use certain non-GAAP financial measures. 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. You will find a link to the 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. I will now hand you over to Stefano.

Stefano Pessina -- Executive Vice Chairman and Chief Executive Officer

Thank you, Gerald. Hello, everyone. I must start today by welcoming James as our new Global Chief Financial Officer. A role for which he is perfectly qualified and say how much I am looking forward to working with him. I would also like to thank George Fairweather, who is here with us today. Despite stepping down as CFO, he will remain with us working, albeit in corporate development projects.

George has made a huge contribution to the company over now 16 years and it has been a pleasure to work closely with him through many great adventures and challenges. George has worked tirelessly for the company and has delivered true value for shareholders. It is characteristic of George than when he wished to stand down as the CFO, he brought his usual diligence to helping find an extremely well-qualified successor, and went out of his way to plan an extensive [inaudible].

But as I say, George is still very much with us, both in body and spirit. And so, while I am delighted to welcome James and look forward to his contribution in the coming year, I thank George for his work today and look forward to his continuing contribution as well after he has been allowed a short vacation. So, we are three-quarters of the way through the year and we are here reporting a respectable overall performance.

It has been a quarter of continuing hard work toward putting in place the elements of our strategy to grow our presence and maintain our relevance in the valued markets that we serve. We have made solid progress against our strategic goals. It has only been a matter of weeks since we hosted our public webcast sell-side event. So today, I will only cover a few key highlights. We have taken the farthest steps in our walk to announce the relevance of our stores here in the U.S. as true community hubs with an attractive range of services and products.

As you know, the development of healthcare services within our stores is a priority for us and we are continuing to make good progress identifying and a strategic partnership that offers a balance and high-quality range of services to our stores. We have announced a trial with Humana in the Kansas City-area to bring full primary care clinics into our stores for the first time to complement the new [inaudible] and the urgent care clinics we have been working with and evaluating today.

Given the profile of Humana's patient population, these new clinics are intended to be heavily focused on supporting the doors who will benefit most, from readily available community-based care, endowing excellency to our existing services. We are also continuing to look for ways to further announce our retail offering in stores by announcing and focusing our merchandising and services, as well as improving our procurement and customer insights in convenience retailing. Our strategic partnership with FedEx is continuing to grow and strengthen and we are now rolling it out across the acquired Rite Aid stores.

Internationally, in China, we have completed the sale of a percentage of our holding in Guangzhou Pharmaceuticals Corporation and shortly expect to receive the final approval. And, of course, we are continuing the work to upgrade our systems and processes. This will not only keep us up to date, but will also create a platform for further development. We expect these to drive our efficiency and understanding of our business markets, as well as the overall customer experience.

In this way, we are once again looking at how potential partnership [inaudible] on the work we have been doing internally. We are also looking at how working in partnership could give us the potential to engage with leaders in technology to help us review everything, how we deliver a true omnichannel experience for our experience, and how, in an ever-changing world, we remain a décor of their daily lives.

So, we have made solid progress in this quarter and I am convinced that all the work we are doing today will deliver benefits in the future. Of more immediate relevance is the significant share buy-back authority we have announced today -- $10 billion, coupled with a 10% increase in our dividend. While our top priority for deployment of cash is value-enhancing corporate development investments, the open-end duration of the share buy-back program provides us with the flexibility to return cash to the shareholders. This is a sign of our confidence in the continued performance of our company. It reflects that we are confident we will continue to generate strong cash flows and that these cash flows will give us the flexibility to deliver on our strategic investment aims while returning excess cash to shareholders.

Before James goes through the key quarterly numbers, Alex will take you through some of the things that we are doing today. Alex?

Alex Gourlay -- Co-Chief Operating Officer

Thank you, Stefano. Not just for the introduction, but actually for the very good summary of where we are here in the U.S. As we explained at our webcast sell-side analyst event, we have made a lot of progress behind the scenes, with financial efficiency, structural changes, and efficiencies at a central and operational level. And, of course, in both supply chain and procurement benefits. We are continuing this work and there is still a lot we can achieve in all of these areas. It is a non-stop process, as every improvement, however small, often leads to another one.

As you know, we've been improving both the capture and use of data on our businesses and our customer's shopping habits and preferences. We are now in a strong position to start thinking about the types of services and retail offerings we want to have in our stores. Our action to reprice pharmacy over the past few years was a key part of this. Our work showed we were not pricing competitively to the market and did not have enough regular volume going through our pharmacies to optimize our in-store economics. As a result, we did the math. We spoke to our peer partners, and we addressed the situation. While we still have more to do, we are making good progress, as we have seen our market share continue to grow.

Since the formation of Walgreens Boots Alliance, our market share has grown by more than 300 basis points. Similarly, all our insight validated or we've heard anecdotally that our pricing for convenience retail needed to be more competitive. In part because we had not moved with the market and in part because of changing consumer expectations. To come up with a new environment to test some of our ideas in a geographical area where we can try them out without interfering with other stores in the network and without the results of the trials being impacted by other stores.

Of course, we now have a test set up for those areas we need to study in a degree of isolation. But this does not necessarily mean we're going to test all concepts in this area. We're continuing to trial concepts across America and will over time want to validate what product/price ratios work, what is right in terms of the ideal number and mix of SKUs and the different blend of elements we can put in our stores. This is important. It not only improves our customer offerings in retail, but also identifies how and where we can free up space to deploy the range of services we aim to provide in our stores.

In the quarter, Lab Corp. opened a number of clinics in our Gainesville stores as part of the extension of the trials, we have been running with Lap Corp. in the last months. These clinics have performed well. Our relationship continues to prove advantageous for both partners. We're looking at how we can expand this service further and faster throughout our network. Also coming out of the work in Gainesville is the early success of a trial we've undertaken with Sprint. This offers their services with their own expert staff alongside our customer service associates.

Despite the comparatively limited timing and nature of this trial, it is proving very promising and we are already discussing the potential to expand the trial beyond Gainesville. As Stefano has said, our partnership with FedEx continues to go from strength to strength. Volume through the stores have continued to increase steadily and we now have a FedEx offering in the majority of our portfolio. New high-profile customers have signed up to the FedEx hold at Walgreens. The service has already proved increasingly popular with many customers.

Stefano also mentioned the new strategic partnership with Humana to trial fill primary care clinics in our stores to complement the drop-in and urgent care clinics already available. These clinics will accept the majority of Medicare Advantage insurance plans. If we and Humana decide to expand this trial and roll out these clinics to a wider estate, it would bring us the additional benefit of broadening the access of primary care to our stores to a wider population of customers.

Humana's customer base is heavily skewed toward Medicare patients, a group we serve extensively. These patients are less likely to access the other types of clinics that we have in our network, which are primarily cash paying. Elsewhere, it has been business-as-usual for us, but good business, given the markets and the stage we are in the year. While it's hardly new news, we've also made further good progress with the integration of the acquired Rite Aid stores.

Clearly, our numbers this quarter reflect the contribution from these stores. The work to properly integrate them into the network is progressing well and we have already begun to trial a number of conversions to the Walgreens format. As at the end of last week, we have closed 131 stores under a store optimization program, successfully retaining customers to plan and transferring their pharmacy files to our stores nearby. We have continued to make progress with the updates in our core systems and processes.

In pharmacy, we have continued to grow overall script numbers, despite the Medicare Part D network changes that you are already aware of. The Medicare Part D selling season for 2019 has just finished and despite the current dynamic nature of this market, we are feeling positive about our prospects. Additionally, our script numbers [inaudible] by a year-on-year contribution from the acquired Rite Aid stores.

Our current work on digital is also continuing to be well received. Our app has now been downloaded around 52 million times. And it was reported around 22% of Walgreens retail refill scripts were initiated through digital channels, up over 2 percentage points versus the comparative quarter last year.

We've also recently launched Find Care Now, a digital navigator for health services on the Walgreens mobile app and Walgreens.com. Find Care Now guides customers to the most convenient, cost-effective, and relevant healthcare options in their local area, provided by Walgreens and our healthcare partners.

As I have said, the work in stores, both in identifying services and initiatives and on updating our retail and furthering the development of our future offerings, keeps driving on. Underlying all of this work is a move to update and modernize some of our basic operating models to renew the focus on the customer and promote a customer-centric approach to everything we do.

This clarity of focus can bring us many benefits far beyond the improved relationship with our customers and the improvement in economic performance that typically offers. It allows us to streamline the running of our stores and our supply chain and forms the structure within which we can integrate all aspects of customer contact to provide a truly omnichannel experience. It also allows us more direct management and agile decision making and revitalizes a culture that will benefit our customers, employees, and suppliers, while creating a strong yet responsive platform for future development.

So, it has been a quarter of simply continuing the hard work to deliver efficiency, growth, and evolution of our business through initiatives that can all be linked back, in some way, to one or more of our core strategic principals, as we've heard Stefano describe so often before. To drive growth and consolidate volumes through organic growth, partnerships, or acquisition. To control costs, optimizing efficiency and leveraging our financial strength. To differentiate ourselves where we can through value, quality of service, exclusivity, or innovation, our owned-brands form another strong point of differentiation. To build a portfolio of complementary businesses across a broad geography. To provide protection from the unique cycles in any one area, and to reinvest for both organic and external growth and foster a portfolio of opportunities to give us multiple levers for growth.

And now, I'd like to welcome James to our company. He'll update you on the numbers.

James Kehoe -- Executive Vice President and Global Chief Financial Officer

Thank you, Stefano and Alex. I'm delighted to be here today. We are pleased with our overall progress this quarter. The results were broadly in line with our expectations and we continue to expect to have a solid year. Today, we raise the lower end of our Fiscal 2018 guidance and we now expect an adjusted diluted net EPS growth of 16% to 19%.

Turning now to the quarterly results. On a reported basis, our key profit metrics were up in the quarter. Sales advanced 14%, including the impact of the acquired Rite Aid stores. Adjusted operating income was up 1.7%, and adjusted diluted net earnings increased 5.6%. Importantly, adjusted diluted net earnings per share increased 15% to $1.53 per share. This strong growth benefited from last year's share repurchase program, a lower tax rate, and growth in adjusted operating income.

GAAP diluted net earnings per share increased 26.2%. The key differences between GAAP and adjusted EPS are the cost transformation program in the comparable quarter last year and a downward revision in our transition tax accrual. The adjusted effect of tax rate for the quarter was 16.7%. This was 2.4 percentage points lower than the same quarter last year due to the impact of U.S. tax law changes.

Turning now to our results for the first 9 months of Fiscal 2018. Here again, our key profit metrics were up. Sales advanced 11.4%. Adjusted operating income growth was 4.6% and adjusted diluted net earnings per share increased by a strong 19.8% to $4.54 per share.

Let me now turn to retail pharmacy USA. Total sales and adjusted gross profit increased versus the comparable quarter last year, with sales and adjusted gross profit growth in both pharmacy and retail. Retail pharmacy USA sales were $25.9 billion, up 15% over the year-ago quarter, mainly due to the acquired Rite Aid stores and Central Specialty. Comparable store sales decreased by 1.2%, entirely due to retail. Adjusted gross profit was $6.1 billion, up 7.7% over the year-ago quarter, reflecting growth in both pharmacy and retail, and benefiting from the contribution from the acquired Rite Aid stores.

Adjusted SG&A was 17.8% of sales, an improvement of 0.9 percentage points compared to the year-ago quarter. On the same basis, adjusted SG&A as a percentage of sales has improved for 20 consecutive quarters. This resulted in adjusted operating income increasing by 2% to $1.5 billion.

As you review the numbers, please bear in the mind the following factors. First, these results include the acquired Rite Aid stores for almost two months. These stores have a higher cost mix. Second, we are incurring additional costs due to the Rite Aid transition services agreement. This means that we do not expect our Fiscal '18 adjusted EPS to be significantly impacted by Rite Aid. And finally, our adjusted operating income growth was held back by a $109 million curtailment gain in the prior year relating to an amendment to post-retirement benefits.

Now, let's look in more detail at pharmacy, where we have continued to make good progress. Total pharmacy sales were up significantly, increasing 19.3%. This was primarily due to higher prescription volume from the acquires Rite Aid stores and Central Specialty. Excluding Rite Aid and prime contributions, the business is growing nicely at mid-single digits, led by specialty.

On a comparable basis, pharmacy sales were in line with the year-ago quarter, with brand inflation offset by reimbursement pressure and the impact of generics. The number of retail prescriptions filled on a 30-day adjusted basis, including immunizations, increased by 11.8% and our third quarter market share increased to 22.4%, up 190 basis points compared to last year. On a comparable basis, prescription filled were in line with the year-ago quarter.

The positive impact of our strategic pharmacy partnerships was offset by the Medicare Part D network changes. As in the first two quarters, we delivered higher pharmacy gross profit. This was achieved despite ongoing reimbursement pressure and a higher proportion of specialty, which this quarter adversely impacted pharmacy gross margin by about 180 basis points. As Alex mentioned, we are feeling positive about the Medicare Part D selling season for 2019 and we also expect to an increased year-on-year contribution from the acquired Rite Aid stores. We would expect these factors to be reflected in our prescription numbers.

Turning next to retail, retail sales increased 5.2%, reflecting the sales contribution from the acquired Rite Aid stores. Comparable retail sales declined 3.8%, as we continued to focus on delivering improved margins. This sales decline was greater than we experienced in the first half of the year, mainly due to a slowdown in the health and wellness category in the third quarter, as we face weaker cough, cold, flu, and allergy sales. The year-on-year sales evolution reflects our continued focus on improving retail profitability through both promotional optimization and procurement efficiencies. As a result, retail gross profit and percentage gross margin are both higher than in the comparable quarter last year.

Remember that this was the last quarter before we start lapping the promotional optimization program. We were also pleased that sales in the beauty category increased this quarter, reflecting strong performance in the beauty differentiation stores, which continued to outperform our non-beauty differentiation stores.

Next, let's look at retail pharmacy international. Retail pharmacy international sales declined 2.1% on a constant currency basis, as market conditions continued to be tough. Comparable pharmacy sales decreased 1.7%, with Boots U.K. down 2%, mainly due to lower prescription volume and government funding. Comparable retail sales declined 1.3%, with Boots U.K. 2.1% lower in a challenging marketplace. Adjusted operating income was down 9.3% on a constant currency basis. Over 80% of the decline was due to phasing of certain SG&A expenditures. The remaining decline reflects lower gross profit, largely offset by cost containment measures.

Turning now to our pharmaceutical wholesale division. Sales increased by 4% on a constant currency basis. This was behind our estimate of market growth due to market conditions in certain continental European countries, partially offset by strong performance from emerging markets and in the U.K. Adjusted operating income was up 0.4% on a constant currency basis, reflecting higher adjusted earnings from AmerisourceBergen. Excluding the AmerisourceBergen, generic procurement margin and cost inflationary pressure more than offset the favorable impact of higher sales.

Moving now to cash flow. We continued to deliver strong cash flow. Operating cash flow in the quarter was $2.2 billion, up $354 million on the comparable quarter last year, reflecting lower cash taxes paid and higher operating income. During the quarter, our working capital inflow was $344 million, reflecting continued improvement in inventory management. Cash capital expenditures were $317 million. We continued to invest to develop and differentiate our core customer proposition and upgrade our IT systems. This resulted in free cash flow of $1.9 billion, compared to $1.6 billion in the comparable quarter last year. This brings our year-to-date free cash flow to $4.4 billion.

Today, as Stefano mentioned earlier, we announced a new $10 billion share repurchase program. The program does not have an expiry date but absent large M&A, we would expect to complete the program during the course of the next three years. After due consideration, we have also announced a 10% increase in our quarterly dividend to $0.44. The increase reflects our refined dividend policy, which quite simply is to increase our dividend each year. In fact, today's dividend increase marks the 43rd consecutive year of dividend increases.

On a related topic, we have agreed to sell our minority interest in Premise Health, and we expect the deal to close in July. This has been a good investment for us and we expect to book an after-tax gain of approximately $270 million. We do look forward to maintaining our commercial relationship with Premise Health, both as their exclusive pharmacy partner as a corporate customer.

Turning next to guidance. We have revised our EPS guidance for Fiscal Year 2018 and now expect adjusted diluted net earnings per share to be in the range of $5.90 to $6.05, compared to our previous guidance of $5.85 to $6.05. This guidance equates to adjusted EPS growth of approximately 16% to 19% versus Fiscal Year 2017.

So, in summary, we had a solid quarter with adjusted EPS up 15% year-on-year, bringing our year-to-date adjusted EPS growth to 19.8%. We are also making progress on our strategic initiatives and our dividend increase and new share repurchase program demonstrate our commitment to shareholder returns. Thank you and I'll now hand you back to Stefano.

Stefano Pessina -- Executive Vice Chairman and Chief Executive Officer

Thank you, James. So, if you have heard, a solid quarter and a good outcome. For us, change is about opportunity, growth, and creating value. It is an essential part of our daily life and the constant need to change or invent our company is an indication of how core it is to the lives of the people we serve. Our task is to stay relevant and as people's lives change, we must make sure we change with them. That is why we are developing our omnichannel offering and working on our plan for our U.S. stores, to create [inaudible] in the communities we serve with an attractive range of services and products.

We remain convinced about the value of our presence in the community and of the strong relationship our extraordinary local teams have been in their communities. We remain convinced about the opportunities accompanying us and our ability to deliver on those opportunities. We remain convinced that being the most efficient, convenient, and differentiated provider of the highest quality services in the communities that we serve will position us to meet and beat the competition and continue to grow both operationally and financially.

We remain confident in our immediate prospect, as you can tell from our guidance for the year. We remain committed to create value for our investors and using that for future growth, while realizing it as you can see from our $10 billion share buy-back program and dividend policy. Most of all, however, we remain absolutely convinced about the strength of our company and its potential to deliver real value growth, not just this year, but for many years to come.

Thank you. We will now take your questions.

Questions and Answers:

Operator

Ladies and gentlemen, if you have a question at this time, please press * then 1 on your touchtone telephone. If at any time your question has been answered or you wish to remove yourself from the queue, please press the # key. Our first question is from Lisa Hill with J.P. Morgan. Your line is now open.

Lisa Hill -- J.P. Morgan -- Analyst

Thanks very much and good morning. I just wanted to ask a couple questions around the gross margin in the quarter. Can you talk about what the headwind was from (1) Rite Aid? I know that they carry a lower gross margin. (2) The specialty business? Just trying to parse out how we think about your core business gross margins. And then secondly, as we think about script growth being flat in the quarter on a same-store sales basis, how do we think about that going forward? I remember in January you talked about your core business expectation that that might be more like 3% to 4%. So, I just want to try to square those two banks.

Alex Gourlay -- Co-Chief Operating Officer

Hi, Lisa. It's Alex here. I'll start with the script business first of all. We're at 4% so far this year, as you know, on the line. And 7% last year. So, we continue to really grow share in pharmacy. [Inaudible] basis points [inaudible]. We feel pretty good record market share to a 2.4, albeit in this quarter driven by non-organic or organic growth. In terms of in the quarter, we saw the gains we had with strategic partnerships with Prime and with United balanced out by the loss we had to Aetna, specifically, in terms of moving from structured from preferred to non-preferred.

I think, as James said in his prepared remarks, we're feeling OK about the selling season for '19 in Med D and we have the extra volume coming in from Rite Aid next year as well. So, one of our key strategies is to consolidate volume and grow volume. We feel good about that over the long term. I think script volume is more affected by the Aetna business than we had expected, but underlying we feel pretty confident going forward and continue to drive good value to the marketplace and the partnerships continue to grow rather than decline outside of that particular partnership.

In terms of margin, I think we said before it was 190 basis points due to specialty business, more or less. 180. Sorry, 180 to the specialty business. That's through the major bulk of the situation in the margin, along with the SG&A cost within the Rite Aid business. Remember, we had two months of Rite Aid acquired in the quarter, which was obviously an impact to that margin.

James Kehoe -- Executive Vice President and Global Chief Financial Officer

James here. Just to confirm that. The margins in the U.S., gross margin were down 140 basis points in the quarter. That's entirely 190 basis points due to the specialty business and as you look at the growth profile in the U.S. business, if you take out the Rite Aid growth plus the Prime business, the actual organic sales were up 6% in the quarter, which is, is quite impressive, actually. However, the majority of the growth this quarter came out of the actual specialty business and has created the adverse mix on the margin. But the, the margins on the specific businesses are fine. The issue is we have a mix impact in the quarter.

Stefano Pessina -- Executive Vice Chairman and Chief Executive Officer

This is Stefano, if you'll allow me. In reality, it's very difficult to compare the business this year with last year because the structure of our business has changed and that's the reality. So, we try, of course, to guide toward the work, but it's a different structure. So, when we compare, it's difficult to understand what is happening.

Lisa Hill -- J.P. Morgan -- Analyst

And Stefano, it was announced this morning that Amazon is buying a small company called PillPack. I know you've said in the past you don't expect them to be a big player or have a lot of impact on your business. I'm just curious as to your initial thoughts around this small acquisition by them?

Stefano Pessina -- Executive Vice Chairman and Chief Executive Officer

Well, we knew of course that the company was for sale. It had been for sale for a while. We have followed this company, we follow everything that happens in our market. To be honest, as we are also working in that direction, of course, one of the things that we are doing is to prepare mainly different services for our customers. We were not particularly worried and we are not particularly worried.

Of course, we are not complacent. We know that we have to change the level of our services to the customers and we are working quite hard on that direction. But we are not worried because at the end of the day, it's still a small company. Yes, it is a declaration of intent from Amazon and I'd say so. But you see, the pharmacy world is much more complex than just delivering a certain pills or certain packages.

And I believe, I strongly believe, as I have said, even because in my closing remarks that the whole of the pharmacy, so the physical pharmacy, so we continue to be very, very important in future. Yes, there is a lot of emotion in these kinds of things, but we have to compare the emotions with the facts and the fact is that we have grown since the merger with -- delivered 15% and more of growth in earning per share. We have delivered a strong cash flow. We have increased our cash flow substantially. And we are in good health and ready to continue to grow in future.

Alex, can you say something?

Alex Gourlay -- Co-Chief Operating Officer

Yes, Stefano. Understand, we've followed this company and we offer this service locally through our physical pharmacies and we have that service plus many others that we service our communities with. As technology changes, we are continuing to invest in technologies that support patients in these circumstances and specialty. I think we are confident we can compete. More than confident. Of course, we're building out our services around this on a local community basis, as Stefano has said.

Lisa Hill -- J.P. Morgan -- Analyst

That's helpful. Thank you.

Operator

Our next question is from Ricky Goldwasser with Morgan Stanley. Your line is now open.

Ricky Goldwasser -- Morgan Stanley -- Analyst

Yeah, hi, good morning. A couple follow-up questions here. Firstly, on the PillPack Amazon acquisition. Stefano, obviously when we think about the market, we think about the convergence of both the digital [inaudible] and the traditional brick-and-mortar. So from your perspective, does Amazon's move, and a move that signals also a focus on the patient population that is a high user of drugs, [inaudible] the chronic population. Does that accelerate your timeline in unveiling the strategic initiatives and does it change your thoughts about deploying capital into M&A or the pace at which you should deploy that capital?

Stefano Pessina -- Executive Vice Chairman and Chief Executive Officer

I have always said that we have to separate the emotion from the facts. We don't see any reason to be worried. We are not complacent. I repeat this. We have a clear plan. I believe that we will continue with the execution of our plan. If we did M&A just under the pressure of emotions without respecting our financial discipline, at the end, we would destroy value. Sooner or later, we would pay for it. So, I believe that, as you know, as we have always said, we are hoping for M&A at the right price. If we can buy something and see the return for what we buy, we will do it. We will not do something just because we feel that we have to do something. We know that our plans are quite solid. We know exactly what is our strategy. We have the means and the abilities in the company to execute our strategy. This is what we'll do. You will never see us panicking or acting under the pressure of emotion.

Ricky Goldwasser -- Morgan Stanley -- Analyst

Do you think that today's announcement though might mean that some of the other players in the marketplace and potential partners of you might be more willing to come to the table now?

Stefano Pessina -- Executive Vice Chairman and Chief Executive Officer

What can I say? Let's see. We are always open. Our door is always open. Provided that the people who come through that door are sensible, we are always ready to welcome them.

Ricky Goldwasser -- Morgan Stanley -- Analyst

Okay. Then lastly, just to follow up on specialty, you talked about specialty as one of the biggest contributors to the year-over-year growth. Can you just give us a little bit more color on where you are in the progression with the purchasing with ExpressScripts, with Prime, and what do you expect your specialty market share is now?

Alex Gourlay -- Co-Chief Operating Officer

Hi, Ricky. It's Alex here. The relationship with ExpressScripts is a very good one. The buy-in group has just been set up and obviously we remain confident that working together with another major buyer in the marketplace will bring better value for us and to our customers and to our peers. So, that's how it is and so far, so good. We continue to develop our specialty strategy. I can't give you market share, of course, because it's not something we report specifically.

But we have two models. We have a model of Central Specialty that we do with AllianceRx, and then we have the community model, where we continue to invest in small community specialty pharmacies close to where patients live and to where doctors practice. They have proven to be very successful and they continue to grow that brick-and-mortar out there as part of our strategy. We think these two things together, with the right relationships and the right partnership philosophy, will allow us to grow in a very important marketplace for us.

Last but not least are the relationships that we have with the global manufacturers. [Inaudible] has built this with staff over many years and we continue to work very closely. For example, we have increased the number of LDDs as a result of our global and local relationship.

Ricky Goldwasser -- Morgan Stanley -- Analyst

Thank you.

Operator

Our next question is from Ross Muken with Evercore. Your line is now open.

Elizabeth Anderson -- Evercore ISI -- Analyst

Hi, this is Elizabeth Anderson in for Ross. I was wondering if you could comment on, there have been a number of questions about gross margin pressure so far, but so far you've been able to really offset it with a very good degree of opex management. I was wondering if you could comment on the sustainability of that and how you view the opex management opportunities going forward?

Alex Gourlay -- Co-Chief Operating Officer

You know, we remain very confident that we can remain very efficient. We always have opportunities, as I said in the prepared comments. The investments we're making in information technology will improve or processes and we continue to really focus on it. I think we've said this really since the beginning of Walgreens Boots Alliance. You know, we come from European markets, most of us.

We're used to reimbursement pressure and therefore we plan for efficiencies. We plan for investment efficiencies importantly, in advance, to ensure that we can remain competitive. And we continue to scale. I mean, scale is really important to us. The addition of the Rite Aid stores earlier this year gave us more opportunity both in synergies but also in scale. So, again, we remain confident, Elizabeth. That's part of our job. It's what we do.

Elizabeth Anderson -- Evercore ISI -- Analyst

Perfect. Then speaking of your European experience, can you give us a little bit more color on your thoughts on the U.K. and EU businesses, both on the retail and wholesale sides, just in terms of what you're seeing in terms of market challenges and then reimbursement pressures in consumer spend?

Alex Gourlay -- Co-Chief Operating Officer

I'll pick up the U.K., particularly. Boots in the U.K. [inaudible] very well. Again, it's no secret that Brexit and [inaudible] Brexit and the government are reacting really to increasing healthcare costs in the U.K. And pharmacy was impacted directly about a year and a half ago. We see two things happening. We see an unusual period of reimbursement pressure, which has come through, and also a reduction in volume of prescriptions, as the government is encouraging through the [inaudible] doctors to not prescribe so many things available outside of a normal pharmacy for some conditions.

So, these things are impacting both the margin and the volume in this phase. Clearly, we are also looking in terms of how do we work more closely with our wholesale business. We have a very strong position wholesale in the U.K. and we continue to work on efficiently in the supply chain and work very closely, as I've said already, with Arnella and her team to make sure that we really bring services that manufacturers want to the marketplace. So, we work, as usual in these conditions. We're used to it. This is a phase for sure we're coming through, which has been more challenging than usual. But we remain a strong business and we have a lot of opportunity in the future.

Stefano Pessina -- Executive Vice Chairman and Chief Executive Officer

On the wholesale business, of course the pressure that the pharmacies have on the governments, of course is reflected on the wholesale by definition, of course. And the wholesaling business is difficult, relatively difficult, more difficult than I think the past, let's say, in continental Europe, but particularly in Germany and in France, very good in emerging markets. Very good in Turkey. Very good in Egypt. Very good in other markets like Romania.

And overall, the fact that we have a portfolio of business gives us a certain stability, and this business is quite predictable. You'll see it's been quite stable over the years, a little more, a little less. And, of course, we have to take into account the contribution of the business is not just the cash, the substantial cash that the selling business is generating because it's generic because it's a cash-generating business, of course. But also the fact that with their relationship with the suppliers, with their relationship and their volumes contributing quite substantially to our purchasing power.

You see the importance of certain parts of the business, like we [inaudible] substantially is managed by the people wholesaling, the importance of this business for the group could be very important. And also, the wholesaling business has another important function for us. It's virtual pharmacy chain as in most of continental Europe, the pharmacy chains are not allowed. We have a virtual chain, a kind of very loose, franchise, if we can define it like that, of 6,500 pharmacies across many European counties and, of course, this is improving our overall business, it strengths our overall business because where we don't have our own pharmacies, we have [inaudible] and also where we have our own pharmacies, as in the U.K., we still have almost 1,000 [inaudible] pharmacists.

So, overall, the importance of the business is not just on the cash that it can deliver us, which is quite significant, not just on the profit it delivers, which is stable, but on the different additional services and opportunities that it creates for the business as a whole, for the group.

Elizabeth Anderson -- Evercore ISI -- Analyst

Good. Thank you.

Operator

Our next question is from Robert Jones with Goldman Sachs. Your line is now open.

Nathan Rich -- Goldman Sachs -- Analyst

Good morning. This is Nathan Rich on for Bob this morning. Stefano, maybe to start, how are you thinking about the longer-term strategic positioning of the company, given how the industry appears to be changing around you with the deal that was announced today and some of the vertical deals that are in process? How does that change the way you're thinking about the type of assets that you might need to add on to the current business as you think about the future?

Stefano Pessina -- Executive Vice Chairman and Chief Executive Officer

Well, we know very well that the space is changing. We have said this very clearly. We have said this since we are out here. We know that the space is changing and we have tried to steer this business toward those changes. As we said many, many times, we had to create the platform on which we could build these changes because we had to reorganize the business after the merger three years ago. I believe we have done it. We have reorganized everything practically in this business.

You have seen that we have increased our profit substantially and cash flow substantially. We have created a strong business and I can assure you that we are working toward adopting this business to the future needs of the market. It's what we have said. We have just said this in our remarks. And so I believe we don't have to change our strategy because our strategy goes exactly with what you were saying. This is what we are working toward. Alex, maybe you can add something?

Alex Gourlay -- Co-Chief Operating Officer

Hi, Nathan. All we're doing right now, as Stefano said, is we've spent the last few years of taking care of the reorganization. Now, we're just looking forward and all of our efforts and energies, and a lot of our money is now being spent on tests and trials, as I described in the prepared remarks. We're really doing some interesting work with customers. All of our effort is really looking forward and making sure that we're still relevant to [inaudible] we are in the U.S., as the costs in the market change. So, it's really enjoyable getting on with it.

Nathan Rich -- Goldman Sachs -- Analyst

Okay, thanks. Maybe just to follow-up, looking at SG&A in the U.S. business' quarter, costs were down, I think almost $60 million sequentially, despite having the full impact of Rite Aid stores for most of the quarter. I think you said those were a higher cost mix. So can you maybe just give us a little more detail about what drove the decline in SG&A and more importantly, when we look forward, how we should think about the run rate, thinking about having the Rite Aid stores on for a full quarter and also the wage increases that you've previously announced.

Alex Gourlay -- Co-Chief Operating Officer

Yeah, it's really what I said to Elizabeth. We have programs that span two, three years where we're working on efficiencies. We have many opportunities across stores, central offices, [inaudible] for resale and the list goes on. I think the costs are consistently coming down because we're consistently working on it.

James Kehoe -- Executive Vice President and Global Chief Financial Officer

It's James here. I just want to add one point. The result is actually quite more impressive because we're cycling through this one-time curtailment benefit in the prior year period, so not only were the results, as you said, quite impressive, but we were cycling through these one-time items. I think as you look forward, as Alex said before, we also have the opportunity to make the Rite Aid stores more efficient and generally the management overall. As I come on board, I would reflect that the extremely strong work over the past eight or nine quarters, but there's always opportunities in any business. I'm actually quite impressed by the focus in the business on making sure the SG&A is tightly managed. There's continual programs. Part of my job is to make sure that continues as well.

Nathan Rich -- Goldman Sachs -- Analyst

Thanks for the questions.

Operator

Our next question comes from George Hill with RBC. Your line is now open.

George Hill -- RBC Capital -- Analyst

Good morning, guys. I want to talk a little bit about the share repo announcement and I guess I wanted to ask how you feel about the share repo announcement as it relates to timing? Is this something you guys would step on the timing to the $10 billion through an ASR and do you feel like the, does the repo announcement kind of limit your deal optionality at all, I guess? Maybe just thinking about capital deployment priorities going forward? I guess it looks like the stock is going to open up weak today. Stefano, you highlighted not being emotional about how you work with effect on capital deployment, but you must also recognize when opportunity presents itself.

James Kehoe -- Executive Vice President and Global Chief Financial Officer

It's James here. Maybe I'll pass it on to Stefano. I'm relatively new coming on board, but the capital deployment options are quite clear. One is internal investment. Two is partnerships and/or M&A. Then it is the dividend and share repurchase. Don't let is be lost on you that we're communicating the dividend and the share repurchase at the same time. As we look at the program, I'll respond directly to your question, I think if I was to make an assumption, we will pursue the program absent major M&A over the course of the next three years.

I think you can work that out for yourself. It doesn't have an expiry date because we do want the flexibility if the right transaction comes along. We are pretty convinced through the strong cash generation. Just look at what happened in the quarter. Up from $1.6 billion last year to $1.9 billion this year. It's pretty impressive. We expect that to continue. So, I think we need to walk and chew gum. We should be able to do deals and return cash to shareholders and that's the essential communication that Stefano was giving in his prepared remarks.

George Hill -- RBC Capital -- Analyst

Okay. And if I could have a quick follow-up for Alex. Alex, can you talk anecdotally about what's going on in script trends with some of the larger buyers? I imagine this was the quarter where we saw the final tail on AllianceRx. I don't know if you can talk about are you still seeing a boost from the Optum relationship? How quick has the fall-off been form Silver Script growing preferred? We know the Aetna business is going away. Any color that you can give us on sources of scripts and where scripts are walking out the door would be helpful.

Alex Gourlay -- Co-Chief Operating Officer

Sure, George. As I think I said before to Ricky and to Lisa, we just closed the Med D season for 2019 in terms of the contracts. We feel about that, as James said in his prepared remarks. We continued to grow with Optum and United in our bigger business. We also continue to do well with Prime. So all these things are proven to be successful. The issue we've had is really Aetna moving from preferred to non-preferred.

George Hill -- RBC Capital -- Analyst

Okay, thank you.

Operator

Our next question is from Erinn Wright with Credit Suisse. Your line is now open.

Erinn Wright -- Credit Suisse -- Analyst

Great, thanks. Could you speak to your relationship with AmerisourceBergen and then just give us an update there? What are some of the limitations, as well as opportunities under the current ownership structure? I guess what more can you do with Amerisource here? Thanks.

Stefano Pessina -- Executive Vice Chairman and Chief Executive Officer

With Amerisource, we have a good relationship. We work together well. We are happy overall and I believe that they are as well. At the time being, we don't see an absolute need to change the situation. Of course, things could change over time. But for the time being, we are happy as we are.

Erinn Wright -- Credit Suisse -- Analyst

Okay. Thanks. Can you give us an update or speak to what your initial thoughts are on the implications from the drug pricing blueprint and some of the commentary from the new HHS Secretary just on general drug pricing and potential changes to rebate structures? Thanks.

Alex Gourlay -- Co-Chief Operating Officer

Yeah, we support price transparency. We've been very consistent with that from Day One. That is what the HSA is saying. So, supportive, we had pharmacists on Capitol Hill to understand the recommendations. It's too early to tell the impact, to be honest, on things like rebates. But we remain supportive of giving the customers more visibility and giving them an easier and simpler healthcare and pharmacy system.

Stefano Pessina -- Executive Vice Chairman and Chief Executive Officer

I am convinced that if we had a more transparent system, overall the pharmacists would be better off. Because we are an element in the chain of distribution drugs, an element that is giving their service at a reasonable rate. I believe that whatever would be, even a system where we would be paid by a fee-for-service, would improve our situation because on our side, probably we would have similar margin or just a smaller margin, but it would allow us to streamline in a more transparent world to streamline our cost quite substantially. We are very in favor of a full transparency.

Erinn Wright -- Credit Suisse -- Analyst

Thank you.

Operator

I'm showing no further questions. I would now like to turn the call back to Gerald Gradwell for any further remarks.

Gerald Gradwell -- Senior Vice President, Investor Relations

Thank you very much, indeed. Thank you, everyone for participating in the call. The IR team are around to take any further questions you may have and anything we didn't get to on the call today. Thank you all and we will speak to you in the fourth quarter. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. You may now disconnect. Everyone, have a great day.

Duration: 64 minutes

Call participants:

Stefano Pessina -- Executive Vice Chairman and Chief Executive Officer

Alex Gourlay -- Co-Chief Operating Officer

James Kehoe -- Executive Vice President and Global Chief Financial Officer

Gerald Gradwell -- Senior Vice President, Investor Relations

Lisa Hill -- J.P. Morgan -- Analyst

Ricky Goldwasser -- Morgan Stanley -- Analyst

Elizabeth Anderson -- Evercore ISI -- Analyst

Nathan Rich -- Goldman Sachs -- Analyst

George Hill -- RBC Capital -- Analyst

Erinn Wright -- Credit Suisse -- Analyst

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