Fourth Quarter Earnings Conference Call

Transcription

1 Fourth Quarter Earnings Conference Call Larry Merlo President & Chief Executive Officer Dave Denton Executive Vice President & Chief Financial Officer February 10, 2015

2 Forward-looking Statements During today s presentation, we will make forward-looking statements within the meaning of the federal securities laws. By their nature, all forward-looking statements have risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements for a number of reasons as described in our SEC filings, including the risk factors section and cautionary statement disclosures in those filings. During this call, we will also use some non-gaap financial measures when talking about our company s performance, including free cash flow and Adjusted EPS. In accordance with SEC regulations, you can find the definitions of these non-gaap items, as well as reconciliations to comparable GAAP measures, on the investor relations portion of our website CVS Health 2

3 Fourth Quarter 2014 Earnings Conference Call Business Review Larry Merlo President & Chief Executive Officer February 10, CVS Health 3

4 2014 Was a Great Year Full-year 2014 Change vs Adjusted EPS (1) (2) (3) $ % Retail Operating Profit (4) $6,762 million 7.9% PBM Operating Profit (5) $3,514 million 13.8% Free Cash Flow $6,516 million 48.1% Refer to page 37 for end notes CVS Health 4

5 Fourth Quarter: Solid Close to 2014 Q Change vs. Q Adjusted EPS (1) $ % Retail Operating Profit $1,780 million 6.5% PBM Operating Profit $909 million 0.9% Refer to page 37 for end notes CVS Health 5

6 PBM Business: 2015 Selling Season Update Gross wins of $7 billion Net-new business of $3.6 billion, up ~ $400 million from Analyst Day update Excludes any impact from our individual SilverScript Medicare Part D PDP business Success again reflects high levels of service and execution, competitive pricing and unique integrated model New business encompasses ~ 150 new clients serving millions of new members Largest and most complex welcome season in history of company, with extremely positive feedback from clients and consultants 2015 CVS Health 6

7 PBM Business: Specialty Pharmacy Strong results, with revenues up 56% year-over-year in Q4 Key drivers: new business; hepatitis C drugs; and the addition of Coram infusion business Continue to see client interest in and adoption of our medical pharmacy management offering through NovoLogix Increasingly, specialty drugs are part of our highly proactive approach to formulary management 2015 CVS Health 7

8 PBM Business: Hepatitis C Therapies In January, Harvoni and Solvaldi became exclusive on CVS/caremark Standard Commercial, Exchange, Medicare Part D and Medicaid formularies Harvoni is the preferred agent for genotype 1 Solvaldi is the preferred agent for other genotypes We believe this creates lowest net-cost solution for all hepatitis C patients while meeting patients needs and delivering excellent value and options to clients and plan members We recognize cost challenges and remain committed to provide solutions for clients that choose to treat all their patients as well as those that feel it makes more sense to prioritize patients with more advanced stages of liver fibrosis 2015 CVS Health 8

9 PBM Business: SilverScript Ended 2014 with ~ 2.9 million individual PDP lives Successful enrollment period with ~ 3.4 million lives enrolled in our individual PDP, consistent with expectations Significant opportunity to grow individual PDP business over the long term 2015 CVS Health 9

10 Retail Business: Tobacco Impact Our stores have been tobacco-free since September of 2014 Magnitude of tobacco effect on most impacted categories has been a bit less than expected Beyond categories expected to feel impact, other front store categories have not been negatively impacted Former tobacco sales appear to have migrated to convenience stores and gas stations No discernible impact on pharmacy business, as expected Brand awareness has increased with very positive response Notable increase in customer perception of CVS Health as a leader 2015 CVS Health 10

11 Retail Business: Revenue and Script Growth Script comps increased 5.3% on a 30-day equivalent basis (6) Retail pharmacy market share was 21.1% in Q4, up ~ 55 bps versus Q Pharmacy same-store sales increased 5.5% Incidence of flu picked up a bit, adding ~ 40 bps to pharmacy comps Negative impact of ~150 bps from new generic drug introductions Negative impact of ~190 bps due to transfer of specialty scripts from our retail segment to our PBM segment (Specialty Connect) Pharmacy margins increased again, in line with expectations Refer to page 37 for end notes CVS Health 11

12 Retail Business: Medicare Part D For 2015, we have contracted with 20 regional and national Med D plans, where CVS/pharmacy is preferred provider We will continue to use our economic model to make sound decisions with respect to participation 2015 CVS Health 12

13 Retail Business: Front Store Trends Front store comps decreased 7.2% Adjusting for the tobacco impact, comps would have increased 0.7% Impact of tobacco exit was ~ 800 bps, which is ~ 100 bps less than anticipated Front store margins improved modestly year-over-year on a comparable basis, including adjusting for the tobacco elimination Improvement reflects our discipline in making responsible investments in promotion along with the continued growth in store brand sales 2015 CVS Health 13

14 Retail Business: Store Brands Store Brands saw notable gains in Q4 as its share of our front store sales increased ~ 310 bps to ~ 22% ~ 190 bps of the improvement reflected removal of tobacco from the product mix Remaining ~ 120 bps reflects underlying progress of store brand penetration Gains across health, beauty, general merchandise and edibles 2015 CVS Health 14

15 Retail Business: Real Estate Update In Q4, opened 50 new retail drugstores, relocated 30, and closed 7, resulting in 43 net-new retail drugstores In 2014, opened 151 new retail drugstores, acquired 33, relocated 60, and closed 22, resulting in 162 net-new retail stores New markets included Little Rock, Arkansas, and Seattle, Washington Our 2014 increase in retail square footage was 2.4%, in line with expectations 2015 CVS Health 15

16 Retail Business: CVS/minuteclinic Revenues and customer visits up more than 36% and 33%, respectively, vs. same quarter last year Operate 971 clinics in 31 states and Washington, D.C. 35 net new clinics added in Q4 171 net new clinics added in 2014 Plan to open more than 100 new clinics in 2015 Recently added 2 new health system alliances, bringing total to 51 affiliations throughout the U.S CVS Health 16

17 Business Update: Cardinal Health Venture: Red Oak Sourcing To date, Red Oak Sourcing has transitioned suppliers representing more than 95% of the combined generic spend Received the first fixed payment of $25.6 million from Cardinal in Q4, as expected Extremely pleased with rapid progress to date, and we look forward to its future contributions 2015 CVS Health 17

18 Business Update: FDA Approval of Teva s Generic Nexium Still many questions regarding the launch of generic Nexium, including potential legal maneuvers, the timing of launches, and the number of other manufacturers who could potentially launch We need clarity and answers to those questions before we can provide any more specifics 2015 CVS Health 18

19 Fourth Quarter 2014 Earnings Conference Call Financial Review Dave Denton Executive Vice President & Chief Financial Officer February 10, CVS Health 19

20 Financial Update: Capital Allocation Returned more than $1.5 billion to shareholders in Q4; approximately $5.3 billion in 2014 Dividends of $317 million in Q4; ~ $1.3 billion in 2014 Finished 2014 with payout ratio of 27.7% Still on track to reach 35% targeted payout ratio by 2018 Repurchased more than 14.1 million shares for $1.2 billion in Q4; 51 million shares for $4 billion in 2014 $12.7 billion in share repurchase authorizations remain at year end In 2015, expect to repurchase $6 billion of shares during the year, and return $7 billion overall to shareholders an increase of more than 30% year-over-year 2015 CVS Health 20

21 Financial Update: Cash Flows Generated more than $2.9 billion of free cash in Q4 Driven by improvements in collections and payables management Generated more than $6.5 billion of free cash in 2014, $500 million above the high end of our goal Driven by early receipt of some late-year payments Still expect between $5.9 and $6.2 billion of free cash for CVS Health 21

22 Income Statement: Q4 Earnings per Share Adjusted EPS of $1.21 in Q4 (1) At high end of guidance range Reflects strong growth across our operating segments, particularly in retail GAAP diluted EPS of $1.14 Refer to page 37 for end notes CVS Health 22

23 Income Statement: Q4 Revenues Consolidated revenues of $37.1 billion, up 12.9% vs LY PBM revenues of $23.9 billion, up 21.7% vs. LY Growth driven by specialty pharmacy and increased volume in pharmacy network claims Partially offset by an increase in generic dispensing rate Generic dispensing rate of 82.1%, up ~ 125 bps vs. Q Retail revenues of $17.7 billion, up 2.9% vs. LY Strong performance driven by strong pharmacy same store sales growth despite transition of Specialty Connect volume to PBM segment 2015 CVS Health 23

24 Income Statement: Q4 Gross Profit Margin Consolidated gross margin of 17.9%, down ~ 140 bps vs. LY, in line with expectations PBM gross margin of 5.2%, down ~ 100 bps vs. LY PBM gross profit dollars up 2.2% Increase due to increase in volumes, improvement in GDR, and favorable rebate economics Partially offset by impact of client and drug mix, and continuing client pricing pressures Retail gross margin of 31.4%, up ~ 65 bps vs. LY Retail gross profit dollars up 5.2% Improvement driven by 140 bps increase in retail GDR to 82.4%, benefits to front store margin from tobacco exit, increased store brand penetration and quarterly payment from Cardinal Health as part of the Red Oak Sourcing venture Partially offset by continued reimbursement pressure 2015 CVS Health 24

25 Income Statement: Q4 Operating Expenses Consolidated: expenses were 11.6% of revenues notable YOY improvement PBM: expenses were 1.4% of revenues ~ 20 bps YOY improvement Spent more than expected on 1/1 readiness for welcome season, but were able to deliver modest improvement with over-delivery of revenues Retail: expenses were 21.3% of revenues ~ 35 bps YOY deterioration Driven by reduction in retail sales related to tobacco exit as well as shift of Specialty Connect revenues from retail to PBM On an underlying basis, improvement of ~ 50 bps Corporate expenses were up ~$7 million vs. LY, to $205 million, within expectations 2015 CVS Health 25

26 Income Statement: Q4 Operating Profit Margin Consolidated operating margin of 6.3%, a decline of ~ 50 bps vs. LY PBM operating margin of 3.8%, a decline of ~80 bps vs. LY Strong operating profit growth of 0.9% vs. LY Retail operating margin of 10.1%, an improvement of ~ 35 bps vs. LY Retail operating profit increased a very healthy 6.5%, exceeding expectations by ~ 25 bps 2015 CVS Health 26

27 Income Statement: Q4 Below-the-line Net interest expense of $131 million, down ~ $4 million vs LY Primarily driven by lower average interest rates Weighted-average share count of 1.2 billion shares Effective tax rate of 39.6% 2015 CVS Health 27

28 Financial Update: Guidance Full-year guidance remains essentially unchanged from Analyst Day First quarter guidance also remains unchanged As we highlighted at our December Analyst Day, several timing factors affect the cadence of profit delivery throughout the year While 2015 is expected to be a strong year, the cadence of profit growth is expected to be significantly back-half weighted CVS Health 28

29 Guidance: 2015 Full-Year Healthy Enterprise Growth Full-year 2015 Net Revenue Growth 7.0% to 8.25% Adjusted EPS (1) (7) Year-over-year Growth (8) $5.05 to $ % to 15.50% GAAP Diluted EPS $4.77 to $4.91 Refer to page 37 for end notes CVS Health 29

30 Guidance: 2015 Full-Year Solid Outlook in Retail Full-year 2015 Net Revenue Growth 1.25% to 2.50% Same-store Sales (9) Same-store Adjusted Scripts (6) (0.5)% to 0.75% 4.0% to 5.0% Gross Profit Margin Flat to up Operating Expense (% of revenue) Operating Profit Growth Operating Profit Margin Modest improvement 4.75% to 6.50% Up 35 bps to 40 bps Refer to page 37 for end notes CVS Health 30

31 Guidance: 2015 Full-Year Strong PBM Outlook Full-year 2015 Net Revenue Growth 11.0% to 12.25% Total Adjusted Claims (6) 1.13 billion to 1.15 billion Gross Profit Margin Modest decline Operating Expense (% of revenue) Operating Profit Growth Operating Profit Margin Modest improvement 6.75% to 10.75% Down 5 bps to 15 bps Refer to page 37 for end notes CVS Health 31

32 Guidance: 2015 Full-Year Consolidated Income Statement Full-year 2015 Corporate Segment Expense $785 million to $800 million Intercompany Eliminations (% of combined segment revenues) ~ 10.6% Gross Profit Margin Notably down Operating Expense (% of revenue) Notable improvement Operating Profit Margin Flat to up 10 bps 2015 CVS Health 32

33 Guidance: 2015 Full-Year Consolidated Income Statement Full-year 2015 Net Interest Expense $540 million to $550 million Effective Tax Rate ~ 39.3% Weighted Average Shares (7) ~ 1.12 billion Consolidated Amortization ~ $520 million Consolidated D&A ~ $2.0 billion Refer to page 37 for end notes CVS Health 33

34 Guidance: 2015 Q1 Enterprise Revenue and Earnings Per Share Q Net Revenue Growth 8.5% to 10.0% Adjusted EPS (1) (7) $1.06 to $1.09 Year-over-year Growth 4% to 7.25% GAAP Diluted EPS $0.99 to $1.02 Refer to page 37 for end notes CVS Health 34

35 Pharmacy Services Retail Pharmacy Guidance: 2015 Q1 Segment Performance Q Net Revenue Growth 1.5% to 3.0% Same store sales (10) Same store adjusted scripts (0.5)% to 1.0% 4.0% to 5.0% Operating Profit Growth (1.5)% to 0.5% Net Revenue Growth 14.5% to 15.75% Operating Profit Growth (5.0)% to Flat Refer to page 37 for end notes CVS Health 35

36 Guidance: 2015 Full-Year Substantial Free Cash Flow (billions) Full-year 2015 Operating Cash Flow $7.6 to $7.9 Gross Capital Expenditures Sale-leaseback proceeds (11) ~ ($2.3) to ($2.2) $0.6 to $0.5 Net Capital Expenditures ~ ($1.7) Free Cash Flow Year-over-year Growth $5.9 to $6.2 Flat to 7% Refer to page 37 for end notes CVS Health 36

37 Endnotes 1. Adjusted EPS equals income before income tax provision plus amortization, less adjusted income tax provision and other (comprised of earnings allocated to participating securities), less net income attributable to noncontrolling interest, divided by the weighted average diluted common shares outstanding. The adjusted income tax provision is computed using the effective income tax rate computed from the consolidated statement of income. 2. Excludes $72 million gain from a legal settlement (~$0.04 per diluted share) recognized in the third quarter of Excludes $521 million loss on early extinguishment of debt (~$0.27 per diluted share) recognized in the third quarter of Excludes $61 million gain from a legal settlement recognized in the third quarter of Excludes $11 million gain from a legal settlement recognized in the third quarter of Includes the adjustment to convert 90-day, non-specialty prescriptions to the equivalent of three 30-day prescriptions. This adjustment reflects the fact that these prescriptions include approximately three times the amount of product days supplied compared to a normal 30-day prescription 7. Estimates for weighted-average share count and EPS assume completion of approximately $6 billion in share repurchases in 2015 as part of a $6.0 billion share repurchase program authorized by CVS Health s board of directors in December 2013, and a $10.0 billion share repurchase program authorized by CVS Health s board of directors in December Excludes $521 million loss on early extinguishment of debt (~$0.27 per diluted share) recognized in the third quarter of We expect the tobacco exit to have a negative impact on total same-store sales of approximately 175 basis points for the full year We also expect it to have a negative impact of approximately 575 basis points on front store same-store sales for the full year We expect the tobacco exit to have a negative impact on front store same-store sales of approximately 900 basis points for the first quarter of CVS Health finances a portion of its store development program through sale-leaseback transactions. Use of sale-leaseback financing is subject to change, as we evaluate a variety of financing vehicles for future development; this may also result in changes to our definition of free cash flow CVS Health 37