Earnings Conference Call

Transcription

1 Second Quarter 2015 Earnings Conference Call Larry Merlo President & Chief Executive Officer Dave Denton Executive Vice President & Chief Financial Officer August 4, 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 Second Quarter 2015 Earnings Conference Call Business Review Larry Merlo President & Chief Executive Officer August 4, CVS Health

4 Second Quarter: Continued Strong Results Q Change vs. Q Adjusted EPS (1) (2) $ % Retail Operating Profit $1,680.8 million (1.4)% PBM Operating Profit $ million 71% 7.1% Free Cash Flow $523 million 32.7% Refer to page 38 for end notes CVS Health 4

5 Pending Acquisitions Definitive agreement to acquire Omnicare for ~ $12.9 billion Omnicare is the leading provider of pharmacy services to long-term care facilities New pharmacy dispensing channel for CVS; enhances ability to provide continuity of care for patients Complementary specialty business will augment our $ capabilities Expect deal to close prior to the end of 2015, perhaps as early as 3Q15 Definitive agreement to acquire, rebrand and operate Target s more than 1,660 pharmacies and Brings together two leading retailers with complementary strengths, brands and cultures Enables CVS to reach more patients, adds a new retail channel, and expands convenient options for consumers ~ 80 retail clinics for ~ $1.9 billion Timing of closing uncertain as it could fall in 2015 or CVS Health 5

6 PBM Business: 2016 Selling Season Gross wins of ~ $12 billion and net wins of ~ $11 billion Includes estimated revenues of Coventry Medicare Part D business based on current enrollment Excludes impact from our individual Med D PDP Spans across client segments; significant portion in health plans Gross win revenue estimates for health plans we ve been awarded may be updated as a result of their Medicare Part D bids and open enrollment Completed nearly 60% of client renewals for 2016, which is typical for this time of year; have seen strong retention 2015 CVS Health 6

7 PBM Business: Specialty Pharmacy Healthy revenue growth of 28.4% year-over-year in Q2 More than double the market growth rate (3) Have cycled addition of Coram and seen a flattening in the utilization trend for Hep C drugs Medical claims management (Novologix) receiving i notable interest t To date, ~ 18 million lives installed, with significantly more being implemented or in discussion Infusion capabilities (Coram) remain significant differentiator Using leading formulary exclusion strategy to effectively manage specialty trend, and expect to employ similar strategies to manage the new class of cholesterol-lowering agents (the PCSK9 inhibitors) Have developed comprehensive approach to the management of this product class to ensure appropriate utilization and cost management for our clients and their members Refer to page 38 for end notes CVS Health 7

8 PBM Business: Formulary Strategy 26 additional products removed from the 2016 standard formulary Guiding principles for CVS/caremark formulary management Maintain clinical integrity Reduce pharmacy cost for plan sponsors Effectively transition members onto the formulary 2015 CVS Health 8

9 PBM Business: SilverScript Overall, we currently serve ~ 7.9 million lives ~ 3.4 million captive lives in our individual PDP, up from ~ 2.9 million at year-end 2014 ~ 1.1 million captive lives in EGWPs ~ 3.4 million lives through our health plan clients Based on preliminary benchmark results from CMS for 2016, SilverScript has qualified in 32 of the 34 regions, as it did in 2015 Positioned well for growth 2015 CVS Health 9

10 Retail Business: Pharmacy Revenue and Script Growth Script comps increased 4.8% on a 30-day equivalent basis (4) Retail pharmacy market share was 21.6% in Q2, up ~ 60 bps versus Q Pharmacy same-store sales increased 4.1% Negative impact of ~ 370 bps from new generic drug introductions Negative impact of ~ 80 bps due to transfer of specialty scripts from our retail segment to our PBM segment (Specialty Connect) Refer to page 38 for end notes CVS Health 10

11 Retail Business: Front Store Revenue and Gross Margin Front store comps declined 7.8% On a comparable basis, adjusting for the impact of tobacco exit, comps would have been essentially flat Decrease in front store traffic partially offset by increase in average customer basket Gained share in health and beauty in both the Drug and Multi-Outlet markets Front store gross margin continued to benefit from the tobacco exit and improved product mix On a comparable basis, adjusting for the impact of the tobacco exit, front store margins still improved notably 2015 CVS Health 11

12 Retail Business: Front Store Updates Focus on being a leading health and beauty destination To date, expanded healthy snack food options in ~ 275 stores; plan to complete ~ 450 by year-end Upgrading beauty department in several thousand stores this year; early results very positive Plan to expand Healthy Food and Elevated Beauty programs in 2016 Extracare continues to be important driver of profitable store growth On rolling 12-month basis through Q2, redeemed savings and Extrabucks totaled more than $4 billion Digital, specifically mobile, tools are powering our personalization More than 10 million customers have downloaded our highly-rated Extracare mobile app 2015 CVS Health 12

13 Retail Business: Store Brands Store Brands saw continued progress in Q2 as its share of our front store sales increased ~ 265 bps to 20.9% ~ 120 bps of this growth is a result of tobacco exclusion from denominator Broad-based opportunities for further store brand penetration; we continue to make progress towards our 25% goal 2015 CVS Health 13

14 Retail Business: Real Estate Update In Q2, opened 25 new retail drugstores, relocated 16, and closed 5, resulting in 20 net new retail drugstores In 2015, plan to add ~ 150 net new stores with an increase in retail square footage of ~ 2% 2015 CVS Health 14

15 Retail Business: CVS/minuteclinic Revenues up approximately 21% vs. same quarter last year Operate 997 clinics in 31 states and Washington, D.C. 11 net new clinics added in Q2 Successfully completed rollout of EPIC EHR (electronic health record) implementation Enables MinuteClinics to interact with major health systems across the U.S. Supports expansion of services as we can broadly expand access to patients with both minor and chronic conditions 2015 CVS Health 15

16 Business Update: Red Oak Sourcing This venture with Cardinal Health celebrated its one-year anniversary in July Since launch, Red Oak has established best-in-class sourcing Has enhanced supply chain efficiencies and spurred innovative purchasing strategies with generic manufacturing through: Unparalleled expertise Business structure simplicity Combined purchasing volume Due to achievement of certain milestones, Cardinal Health s quarterly payment to CVS Health will increase by $10 million for Q3 of this year Additional payments contemplated t in prior guidance 2015 CVS Health 16

17 Second Quarter 2015 Earnings Conference Call Financial Review Dave Denton Executive Vice President & Chief Financial Officer August 4, CVS Health

18 Financial Update: Capital Allocation Dividends of $395 million in Q2; $794 million year-to-date Dividend payout ratio of 28.1%, after excluding impact of non-recurring items Still on track to reach 35% targeted payout ratio by 2018 The $2 billion accelerated share repurchase program that began in Q1 concluded in Q2 Received 16.8 million shares in Q1, and 3.1 million shares in Q2 Year-to-date, purchased ~ 28.9 million shares for ~ $2.9 billion, or $ per share Expect to complete $5 billion of share repurchases in 2015, ~ 25% more than in 2014, despite acquisition-related iti t reduction in buybacks b this year Year-to-date,have returned more than $3.7 billion to shareholders this year; expect to return more than $6 billion for full year 2015 CVS Health 18

19 Financial Update: Senior Notes Issued series of senior notes on July 13 th totaling $15 billion Tranches well-laddered Terms of 3 yrs, 5 yrs, 7 yrs, 10 yrs, 20 yrs and 30 yrs No one year in which maturities are significantly large Favorable blended rate of ~ 3.75% Net proceeds will be used to fund both pending acquisitions, with any remaining proceeds to be used for general corporate purposes New debt increases leverage ratio to ~3.2x adjusted debt-to-ebitda Committed to returning to 2.7x target; strong cash generation should enable us to do so in a reasonable amount of time 2015 CVS Health 19

20 Financial Update: Cash Flows Year-to-date, generated approximately $2.1 billion of free cash Continue to expect to produce between $5.9 and $6.2 billion of free cash for 2015, excluding the impact of acquisition-related costs 2015 CVS Health 20

21 Income Statement: Earnings per Share Adjusted EPS, excluding acquisition-related costs, of $1.22 in Q2 2 above guidance range of $ to $1.20 (1) (2) Growth of 7.7% from $1.13 last year Incurred ~ 3 of deal related transaction and financing costs in the quarter GAAP diluted EPS of $1.12 Retail segment operating profit exceeded expectations PBM segment operating profit within expectations Corporate segment expenses better than expected Much of the outperformance driven by lower-than-expected intercompany profit eliminations due to the mix of business, as well as a favorable tax rate Refer to page 38 for end notes CVS Health 21

22 Income Statement: Revenues Consolidated revenues of $37.2 billion, up 7.4% vs. LY PBM revenues of $24.4 billion, up 11.9% vs. LY Growth driven by specialty pharmacy and increased volume in pharmacy network claims Partially offset by an increase in generic dispensing rate to 83.9%, up ~ 150 bps vs. Q Growth in specialty driven by increased claims due to new products, new clients and impact of Specialty Connect, in addition to inflation Retail revenues of $17.2 billion, up 2.2% vs. LY Driven by solid pharmacy same store sales and healthy script growth despite transition of Specialty Connect volume to PBM segment Partially offset by retail generic dispensing rate of 85%, up ~ 150 bps vs. Q CVS Health 22

23 Income Statement: Gross Profit Margin Consolidated gross margin of 17.2%, down ~ 105 bps vs. LY, in line with expectations Decline due in part to mix shift, as lower margin PBM is growing faster than retail Year-over-year decline intensified by finalization of CA s Medicaid reimbursement rates that benefited retail by $53 million and PBM by $16 million in Q2 of 2014 PBM gross margin of 5.1%, down 40 bps vs. LY Tough comparison to LY due to CA Medicaid, and price compression Partially offset by improvement in GDR, and favorable purchasing and rebate economics PBM gross profit dollars up 3.8% Retail gross margin of 30.9%, down ~ 55 bps vs. LY Tough comparison to LY due to CA Medicaid, as well as pressure on reimbursement rates and continuing mix shift towards pharmacy Partially offset by increase in GDR, favorable pharmacy purchasing economics, benefits to front store margin from tobacco exit and changes in mix of front end sales Retail gross profit dollars did increase slightly despite impact from tobacco exit 2015 CVS Health 23

24 Income Statement: Operating Expenses Consolidated: expenses were 11.1% of revenues, ~ 75 bps YOY improvement PBM: expenses were 1.2% of revenues ~ 20 bps YOY improvement Retail: expenses were 21.1% 1% of revenues ~ 20 bps YOY improvement On a comparable basis, improvement of ~ 60 bps, excluding impact of reduction in sales related to tobacco exit as well as shift of Specialty Connect revenues from retail to PBM Corporate expenses were up 4.6% vs. LY, at $215 million Acquisition-related transaction costs dilutive to EPS by ~ 1 Excluding acquisition-related transaction costs, growth in corporate expenses was better than expected, improving year-over-year 2015 CVS Health 24

25 Income Statement: Operating Profit Margin Consolidated operating margin of 6.1%, down ~ 30 bps vs. LY PBM operating margin of 3.8%, down ~ 15 bps vs. LY PBM operating profit increased 7.1%, in line with expectations Excluding the finalization of CA s Medicaid reimbursement rates from last year s results, on a comparable basis, PBM operating profit growth would have been ~ 200 bps higher Retail operating margin of 9.7%, down ~ 35 bps vs. LY Retail operating profit decreased by 1.4%, better than expected Excluding the finalization of CA s Medicaid reimbursement rates from last year s results and the impact of the tobacco exit, on a comparable basis, retail operating profit would have been ~ 490 bps higher 2015 CVS Health 25

26 Income Statement: Below-the-line Net interest expense of $166 million, up ~ $8 million vs. LY Primarily driven by acquisition-related financing costs Paid $52 million in fees for bridge loan facility for the Omnicare deal Capitalized and amortized as interest expense over period facility was outstanding Facility expired in July when senior notes were issued Recorded amortization of $36 million in Q2; remainder will impact Q3 Effective tax rate of 39.3%, 3% slightly lower than expected; drove less than 1 of the EPS beat Weighted-average share count of 1.1 billion shares 2015 CVS Health 26

27 Financial Update: Guidance Narrowing 2015 full-year Adjusted EPS range by raising the bottom of the range by 3 and bringing the top end down by 1 Assume Omnicare acquisition closes near the end of 2015; close of Target deal is more uncertain and could fall into 2015 or 2016 Guidance includes the impact of the $1 billion reduction in 2015 share repurchases Guidance excludes: Operating results generated by either Omnicare or the Target assets Integration costs associated with the pending deals Deal-related transaction and financing costs, both those recorded as well as those expected 2015 CVS Health 27

28 Guidance: 2015 Full-Year Healthy Enterprise Growth Full-year 2015 Net Revenue Growth 7.5% to 8.5% Adjusted EPS (1) (5) (6) $5.11 to $5.18 Year-over-year Growth (7) 13.75% to 15.25% GAAP Diluted EPS $4.64 to $4.71 Refer to page 38 for end notes CVS Health 28

29 Guidance: 2015 Full-Year Adjusted EPS Walk per share Low High Adjusted EPS (excluding acquisition-related transaction and financing costs) $5.11 $5.18 Subtract: acquisition-related transaction costs recorded through 6/30/15 (0.01) (0.01) Subtract: Omnicare transaction costs estimated through 12/31/15 (0.03) (0.03) Subtract: acquisition-related financing costs recorded through 6/30/15 (0.02) (0.02) Subtract: acquisition-related financing costs estimated through 12/31/15 (0.13) (0.13) Total acquisition-related transaction and financing costs (0.19) (0.19) Adjusted EPS $4.92 $4.99 Subtract: estimated Target transaction costs (could occur in 15 or 16) (0.02) (0.02) costs ~19 to 21 in deal ~3 to 5 in future tra ansaction cos sts Adjusted EPS (including Target-related costs in 2015) $4.90 $4.97 Note: Figures do not include integration costs or operating profit associated with either Omnicare or the Target assets CVS Health 29

30 Guidance: 2015 Full-Year Strong PBM Outlook Full-year 2015 Net Revenue Growth 11.5% to 12.5% Total Adjusted Claims (4) billion to billion Gross Profit Margin Modest decline Operating Expense (% of revenue) Operating Profit Growth Operating Profit Margin Modest improvement 10.0% to 12.0% Flattish Refer to page 38 for end notes CVS Health 30

31 Guidance: 2015 Full-Year Solid Outlook in Retail Full-year 2015 Net Revenue Growth 2.50% to 3.25% Same-store Sales (8) 0.75% to 1.50% Same-store Adjusted Scripts (3) 4.0% to 5.0% Gross Profit Margin Moderate decline Operating Expense (% of revenue) Operating Profit Growth Operating Profit Margin Moderate improvement 4.25% to 5.50% Up 15 bps to 25 bps Refer to page 38 for end notes CVS Health 31

32 Guidance: 2015 Full-Year Consolidated Income Statement Full-year 2015 Corporate Segment Expense $790 million to $800 million Intercompany Eliminations (% of combined segment revenues) ~ 10.8% Gross Profit Margin Notably down Operating Expense (% of revenue) Notable improvement Operating Profit Margin Flat to up 2015 CVS Health 32

33 Guidance: 2015 Full-Year Consolidated Income Statement Full-year 2015 Net Interest t Expense $540 million to $550 million Effective Tax Rate ~ 39.2% Weighted Average Shares (5) ~ 1.13 billion Consolidated Amortization ~ $520 million Consolidated D&A ~ $2.0 billion Refer to page 38 for end notes CVS Health 33

34 Guidance: 2015 Q3 Enterprise Revenue and Earnings Per Share Q Net Revenue Growth 6.5% to 7.75% Adjusted EPS (1) (5) (6) Year-over-year Growth $1.27 to $ % to 13.5% GAAP Diluted EPS $1.13 to $1.16 Refer to page 38 for end notes CVS Health 34

35 Guidance: 2015 Q3 Adjusted EPS Walk per share Low High Adjusted EPS $1.27 $1.30 (excluding acquisition-related transaction and financing costs) Subtract: Omnicare transaction costs estimated 7/1/15 through h 9/30/15 Subtract: acquisition-related financing costs estimated 7/1/15 through 9/30/15 Total acquisition-related transaction and financing costs - - (0.07) (0.07) (0.07) (0.07) Adjusted EPS $1.20 $1.23 Note: Figures do not include integration costs or operating profit associated with either Omnicare or the Target assets CVS Health 35

36 Guidance: 2015 Q3 Segment Performance Q Net Revenue Growth 2.75% to 4.25% Reta ail Pharm macy Same store sales (9) 1.0% to 2.5% Same store adjusted scripts (4) 4.75% to 5.75% Operating Profit Growth 40%to60% 4.0% 6.0% Pharm macy Serv vices Net Revenue Growth 9.0% to 10.25% Operating Profit Growth 2.0% to 6.0% Refer to page 38 for end notes CVS Health 36

37 Guidance: 2015 Full-Year Substantial Free Cash Flow (billions) Full-year 2015 Operating Cash Flow $7.6 to $7.9 Gross Capital Expenditures ~ ($2.3) to ($2.2) Sale-leaseback proceeds (10) $0.6 to $0.5 Net Capital Expenditures ~ ($1.7) Free Cash Flow (6) Year-over-year Growth $5.9 to $6.2 Flat to 7% Refer to page 38 for end notes CVS Health 37

38 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 non-controlling 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 3 cents of acquisition-related transaction and financing costs. 3. Source: Barclays research 4. 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 5. Estimates for weighted-average share count and EPS assume completion of approximately $5.0 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 the impact of acquisition-related costs. 7. Excludes $521 million loss on early extinguishment of debt (~$0.27 per diluted share) recognized in We expect the tobacco exit to have a negative impact on total same-store store sales of approximately 155 basis points for the full year We also expect it to have a negative impact of approximately 525 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 500 basis points for the third 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 38