28 March 2007
  • Full year results expected in line with management's targets
  • Delivery of cost synergies on track
  • Rebranding of UK Community Pharmacy announced
  • Outlook positive with Group well positioned

Alliance Boots plc is providing the following update on trading ahead of entering its year end close period on 31 March 2007.

Commenting on current trading, Alliance Boots Chief Executive Richard Baker said today:

"The Group is performing well in the fourth quarter and we are confident of delivering full year results in line with management's targets.

In a year of extraordinary change for the Group we have delivered against our plans for bringing our businesses together, for continuing to grow them successfully and for delivering the initial merger cost synergies. This has been achieved in the face of continuing strong competition and is a testament to the dedication and expertise of all our people.

We are announcing today a number of future initiatives which will enhance our ability to deliver earnings growth over the medium term. In particular, I am delighted to announce the biggest single expansion of the Boots brand in its history with the rebranding of the majority of our UK Community Pharmacy network under a new "your local Boots pharmacy" format.

These plans, allied to our 2006/07 results, reaffirm the Board's view that, as a leading international pharmacy-led health and beauty group with attractive prospects, opportunities and synergies, Alliance Boots can drive sustained growth in shareholder value."

Alliance Boots today

Our merger was completed in July 2006 and we believe that the combined business offers shareholders attractive prospects, opportunities and synergies. In particular:

We view our pharmacy related markets as being particularly attractive:

  • they are typically large, have relatively stable growth rates and are expected to continue to exhibit sustained long term growth as people live longer, have higher levels of demand for medicines and spend more on looking and feeling good
  • we believe that scale within countries and in terms of the overall Group is becoming increasingly important in providing the range and quality of products and services at competitive prices that manufacturers and governments require
  • there is scope for continuing consolidation of operators in many markets and, in certain European countries, there remains the prospect for future deregulation of retail pharmacy.

We have strong and profitable positions in the major geographical markets in which we operate:

  • we are the leader in pharmacy and beauty retailing in the UK and own retail outlets in a further six countries
  • we have a leading European pharmaceutical wholesale and distribution business operating in eight countries and through associates in a further four countries
  • we have leading brands in the UK such as "Boots", "No.7", "Soltan" and also our "Almus" brand for generic medicines, supported by a strong product development and sourcing capability.

We believe that we have the management capability and financial resources to capitalise on the significant potential we see in these markets:

  • experienced customer focused retail and wholesale management teams
  • proven capability in successfully identifying, acquiring, integrating and profitably growing new businesses and associate investments in existing and new geographical markets
  • strong balance sheet and cash flow to fund future growth.

We plan to continue delivering sustained growth in shareholder value through:

  • profitable organic revenue growth from our core retail and wholesale operations
  • driving efficiencies from the Group's scale and reach, including the exploitation of synergies between our businesses
  • value enhancing acquisitions and associate investments.

Current trading

Retail
In the UK on a reported basis like for like growth is expected to be around 1.6% with trading margin to date for the quarter ahead of management's previous expectations. Our Health & Beauty business like for like growth is expected to be marginally ahead of this figure while our Community Pharmacy business is expected to be lower due to its greater proportion of dispensing income.

Our underlying like for like revenue growth in the UK in the fourth quarter, which is adjusted to exclude the impact of the generic reimbursement rate in relation to prescription drugs and the calendar effect, both outlined in our third quarter trading update, is expected to be around 2.3%.

Trading margin to date for the quarter in the UK is ahead of management's previous expectations, particularly in our Health & Beauty business, as a result of improved stock management following recent infrastructure investments, better buying (partially as a result of merger synergies) and better targeted marketing programmes.

Sales have benefited from management initiatives which have delivered strong underlying performances in both UK retail businesses in what continues to be a highly competitive market.

In the Health category in the UK we have seen good growth in our dispensing volumes in the fourth quarter. We continue to develop our service offering and again increased the number of Medicine Use Reviews carried out across both businesses. Our Health & Beauty sales benefited from a strong New Year "change one thing" marketing campaign for the second consecutive year and the impact of the programme designed to address historic under investment in smaller stores.

In the Beauty & Toiletries category in the UK, where we have leading market positions and brands, our trading performance has again been strong, benefiting from good revenue growth in cosmetics and fragrances as well as a successful post Christmas sale. In January we launched the Expert range which has sold over one million units to date and will be backed by a new marketing campaign in the first quarter.

Our Health & Beauty business is on track with its systems rationalisation and supply chain reconfiguration programme announced in March 2006. Of the £40 million exceptional costs before tax identified when this programme was announced, approximately £22 million will be incurred in 2006/07. In addition the business is to exit certain third party logistics activities in Nottingham which will result in incremental exceptional costs before tax of approximately £5 million in 2006/07.

Our international retail businesses have overall to date in the quarter traded in line with our expectations.

Wholesale
Revenue in our Wholesale Division to date in the fourth quarter has continued to grow in line with our expectations, with government price cuts and the trend towards the increased use of generic medicines as in previous quarters holding back market value growth but generally not impacting volumes.

In Northern Europe, revenue growth has benefited from the acquisitions of Cordia Healthcare in the UK and Apteka Holding in Russia, both in 2006, and increased intra-group sales to our Health & Beauty business. Trading to date in the quarter has benefited, as we anticipated, from increasing merger related cost synergies from harmonising buying prices.

In Southern Europe, following the additional healthcare tax levied by the French Government on pharmaceutical wholesalers and distributors at the end of 2006, trading has been within management's expectations in what remain competitive markets.

In March, UniChem, our UK wholesale business, successfully commenced its previously announced sole logistics services contract with Pfizer under which it provides a delivery and related services to all pharmacies in the UK. Implementation of the contract was well planned and executed, resulting in high service levels since its launch. We are aware that other manufacturers are also contemplating whether to change their existing arrangements.

During the quarter the restructuring of our French wholesale network to improve operational efficiency and better position our business has continued in line with management's plan. As previously announced, this will result in an exceptional charge before tax of approximately £10 million in 2006/07.

Other Commercial Activities
At the time of the £1.9 billion disposal of Boots Healthcare International in February 2006, Reckitt Benckiser entered into certain contract manufacturing arrangements with us. They have recently served notice of their intent to exit these arrangements at the beginning of 2008. To mitigate the impact of this decision on the efficiency of our manufacturing operations we have announced the need for around 300 redundancies in our Nottingham factory.

A review of our own brand export business has concluded that its activities should be focused on our own international businesses and selected large export markets. Accordingly, we are withdrawing from a number of smaller markets in Asia and Europe.

Together these will result in exceptional charges before tax of approximately £25 million in 2006/07.

Net borrowings
Net borrowings for the Group at year end are expected to be slightly lower than the £1,169 million reported at the half year.

Merger update

Phase one - cost synergies
The key focus for the first two years of our integration plan is delivery of our cost synergy plan.

Good progress has been made against our initial integration priorities of harmonising buying prices and reducing corporate costs and we are on track with the longer term project to streamline our combined distribution network. We remain confident of delivering our target annual pre-tax cost savings of at least £100 million per annum by the fourth full year following completion of the merger with over 60% of the run-rate savings being accrued by the second year. The one-off costs related to achieving these synergies are not expected to exceed the £53 million estimate provided at the time of the merger, of which approximately £20 million will be taken as an exceptional charge before tax in 2006/07.

Phase two - UK retail
The development of our UK retail offer commenced shortly after the merger was completed. Following detailed work and various pilots we are now announcing a major programme to capitalise on the pharmacy-led opportunities that we have in the UK market:

  • "your local Boots pharmacy"
    During the last four months we have successfully trialled a new "your local Boots pharmacy" branded format for our community pharmacies. This combines a strong Boots branded retail offer, including own label products and the Boots Advantage Card loyalty scheme, with a tailored community focused prescription and service proposition. Following the success of this trial, in which we have seen substantial increases in both retail sales and dispensing volumes, we have decided to roll-out this new format, investing around £65 million of capital to rebrand and refit the majority of the Community Pharmacy network over the next two financial years, starting in the summer.
  • Property optimisation
    Since the merger we have reviewed our combined UK retail property portfolio to identify opportunities to optimise our position in local markets to best serve the needs of our retail and prescription customers. This review has identified around 100 localities where we will seek to relocate or, in a limited number of cases, rationalise our portfolio over the next three years at a capital cost of around £35 million.
  • Systems harmonisation
    We have also decided to harmonise our UK pharmacy management systems over the next three years utilising "Nexphase", a system originally co-developed by our UK wholesale business for its customers and used in our Community Pharmacy business.

The phase two projects will result in approximately £75 million of exceptional costs before tax of which around £30 million will be in respect of non-current asset write offs. In 2006/07 these exceptionals are expected to total £2 million.

Phase three - international product offer
The third phase of our merger related plans is focused on opportunities to internationalise the Boots brand and access new markets and territories utilising the skills and resources of the combined Group. While these plans are at an early stage of development we remain confident about the potential available to shareholders over the longer term.

Corporate developments

In January, we announced that we are to enter the rapidly growing Chinese pharmaceutical market, currently the ninth largest in the world, through an agreement, which is subject to regulatory approval, to form a 50:50 joint venture in Guangzhou Pharmaceuticals Corporation, the third largest pharmaceutical wholesaler in China. This follows our entry into Russia last year with the purchase of Apteka Holding.

The programme to comply with the undertakings given to the Office of Fair Trading at the time they approved our merger is now close to completion. Of the 96 pharmacies in the UK originally identified for disposal, the Office of Fair Trading has said, that subject to consultation, it is minded to agree to the withdrawal of two pharmacies from the agreed divestment list (after new pharmacies were opened which alleviated local competition issues). The OFT consultation period closed without comment from third parties on 16th March 2007. We expect, therefore, that the OFT will agree to withdraw two pharmacies from the agreed divestment list. Conditional contracts have been signed to date to sell 89, of which 68 are expected to be completed by 31 March 2007 with the rest in April. Active discussions are taking place for the sale of the remaining five pharmacies. The exceptional profit before tax on those Health & Beauty pharmacies is estimated at around £7 million.

While fulfilling the Office of Fair Trading requirements to dispose of these pharmacies, our Community Pharmacy business has not acquired pharmacies at its historical rate. This will reduce the contribution from pharmacy acquisitions in the coming year. Since the beginning of 2007 we have stepped up the rate of acquisitions in the UK, acquiring 16 pharmacies to date.

Outlook

Alliance Boots is an international pharmacy-led health and beauty group. The Board is convinced that the attractive prospects, opportunities and synergies available can drive sustained growth in shareholder value. It expects the good trading performance it has seen in 2006/07 to continue into the next financial year.

                                       - Ends -

Richard Baker, Chief Executive and George Fairweather, Group Finance Director, will host a conference call for analysts at 08.00 UK time.

UK dial in number 020 8515 2305
International dial in number +44 20 8515 2305

Quote conference title - Alliance Boots pre-close statement

A replay facility will be available for seven days:

UK dial in number 020 7190 5901
International dial in number +44 20 7190 5901
Access number 135367#

For further information, please contact:

Investor Relations
Gerald Gradwell/Chris Laud
Tel: +44 (0)20 7138 1167

Media
Donal McCabe
Tel: +44 (0)20 7138 1167

This announcement includes "forward-looking statements" under the United States securities laws. In some cases, these forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "plans", "prepares", "anticipates", "expects", "intends", "may", "will" or "should" or, in each case, their negative or other variations or comparable terminology. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Alliance Boots plc group ("Alliance Boots Group"), or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding the Alliance Boots Group's present and future business strategies and the environment in which the Alliance Boots Group will operate in the future. As a result, the Alliance Boots Group's actual future financial condition, performance and results may differ materially from the plans, goals and expectations set out in the Alliance Boots Group's forward-looking statements contained in this announcement or any other forward-looking statement it may make. Except as required by the UK Listing Authority, the London Stock Exchange, the City Code, or by law, Alliance Boots plc does not undertake any obligation to update any of the forward-looking statements contained in this announcement or other forward-looking statements it may make.

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