Third dquate Quarter 2015 Earnings Conference Call Larry Merlo President & Chief Executive Officer Dave Denton Executive Vice President & Chief Financial Officer October 30, 2015
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. 2
Third Quarter 2015 Earnings Conference Call Business Review Larry Merlo President & Chief Executive Officer October 30, 2015
Third Quarter: Continued Strong Results Q3 2015 Change vs. Q3 2014 Adjusted EPS (1) (3) $1.28 11.5% Retail/LTC Operating Profit (4) (5) $1,655 million 8.4% PBM Operating Profit (4) $1,162 162 million 70% 7.0% Free Cash Flow $1.3 billion (10.6)% Adjusted EPS of $1.29 (1) (2) versus guidance of $1.27 to $1.30 Refer to page 48 for end notes. 4
Financial Update: 2015 Guidance Expect 2015 full-year Adjusted EPS of $5.14 to $5.18 Narrowing guidance range by raising lower end by 3 Guidance includes: The addition of Omnicare s operations beginning on August 18th and the costs associated with the July 2015 debt financing Assume that Target deal closes near year end Guidance excludes: Operating results generated by the Target assets Deal-related integration costs Deal-related bridge-financing g and transaction costs 5
Steady State Targets Provided five-year financial targets in December of 2013, which included many assumptions. For example: Expected revenues to grow faster than operating profit, suggesting continued margin compression Our growth strategy is to focus on winning lives and gaining enterprise share to offset margin pressures; assumed we would continue to gain share in core business while making value-enhancing acquisitions Would employ disciplined approach to capital allocation to further enhance EPS growth rate Targeted adjusted EPS to grow 10% to 14% annually, on average, from 2013 to 2018 6
Preliminary 2016 Outlook Preliminary 2016 Adjusted EPS range of $5.68 to $5.88 Reflects a growth rate of ~ 10% to 14% from the $5.16 midpoint of our 2015 Adjusted EPS guidance range Assumes completion of acquisition of Target s pharmacies and clinics near year-end 2015, and excludes integration and transaction costs for both Omnicare and Target Assumes $4 billion of share repurchases in 2016 2013 through 2016 estimates reflect 13% to 14% CAGR 7
Preliminary 2016 Outlook Omnicare and Target Omnicare Expected to be ~ 20 accretive to Adjusted EPS in 2016, excluding transaction and integration costs Target s pharmacies and clinics Expected to be ~ 6 dilutive to Adjusted EPS in 2016, assuming the acquisition closes near the end of 2015 Includes impact of previously-announced reduction in 2015 share repurchases Includes financing costs Excludes transaction and integration costs 8
Preliminary 2016 Outlook Operating Profit Expectations Total enterprise: mid- to high-single digit growth Focused on an integrated enterprise strategy to drive long-term growth Retail/LTC segment: mid-single digit growth Continue to grow and gain share while experiencing ongoing margin compression, due to business mix shift to lower margin lines of business, mainly Medicare and Medicaid, and reimbursement pressure from payors PBM segment: high-single to low-double digit growth In addition to usual margin compression, significant new business wins 80% of gross new business from health plans typically have thinner margins in first year as our unique programs are sold in over time Continue to grow and gain share, both organically and through acquisitions, in line with our targets 9
PBM Business: 2016 Selling Season Gross wins of ~ $13.3 billion and net wins of ~ $11.4 billion Excludes impact from our individual Med D PDP Completed 80% of client renewals for 2016, consistent with past years Continue to have strong retention of about 98% (5) Refer to page 48 for end notes. 10
PBM Business: Specialty Pharmacy Growth Outpacing Market Healthy revenue growth of 32% year-over-year in Q3, outpacing market growth rates and gaining share Driven by claims growth, inflation and inclusion of Omnicare s specialty business Comprehensive set of programs to effectively manage specialty trend Will provide deep dive at our Analyst Day 11
PBM Business: SilverScript SilverScript qualified in 32 of the 34 regions, enabling SilverScript to retain vast majority of auto-assignees currently served Well-positioned in 2016 annual enrollment period, offering Two plans that have $0 deductibles, Premiums in many states that are lower than prior-year levels, and Low co-pays for several frequently-prescribed drugs SilverScript recently received 4-star rating from CMS for the 2016 plan year Delivering value, clinical outcomes and customer service 12
Omnicare: Performance, Reporting and Integration Business performing as expected Long-term care business provides new pharmacy dispensing channel, enhancing our ability to provide continuity of care for patients as they transition through the health care system Segment reporting: The long-term care operations, commercialization services, supply chain solutions and patient support services of Omnicare now included in the newly-named named Retail/LTC segment Omnicare s specialty business integrated into CVS/specialty within the Pharmacy Services segment Integration: Integration well underway and focus is on ensuring a seamless transition for clients and patients Expect to complete majority of integration activities by end of 2016 13
Retail/LTC Business: Pharmacy Revenue and Script Growth Script comps increased 4.4% on a 30-day equivalent basis (7) Retail pharmacy market share increased ~ 55 bps versus Q3 2014, to 21.7% Pharmacy same-store sales increased 4.6% Negative impact of ~ 450 bps from new generic drug introductions Refer to page 48 for end notes. 14
Retail/LTC Business: ScriptSync TM Successfully Launched in Q3 Pharmacy service that aligns eligible maintenance prescriptions to be ready together for pick-up at the same time More than 400,000 patients have signed up for ScriptSync so far, surpassing enrollment projections Expect this enterprise program to contribute to improved medication adherence and customer satisfaction Will be rolling out to mail order customers 15
Retail/LTC Business: Front Store Revenue and Gross Margin Front store comps declined 5.8% On a comparable basis, adjusting for the impact of tobacco exit, comps would have been ~ 490 bps higher Decrease in front store traffic partially offset by increase in average customer basket Gained share in core health and beauty businesses Front store gross margin rate continued to benefit from the tobacco exit, growth in the higher margin health and beauty businesses along with increased store brand sales 16
Retail/LTC Business: Store Brands and Health & Beauty Store Brands saw continued progress in Q3 as its share of our front store sales increased ~ 150 bps to 21.8% While about two-thirds of the improvement results from tobacco no longer being in the denominator, the rest is driven by new products and increased customer loyalty Continues to be a great deal of opportunity from our focus on positioning ourselves as a leading health and beauty destination to drive profitable growth Early results from the updated stores have been positive Will update more on Analyst Day 17
Retail/LTC Business: Real Estate Update and CVS/minuteclinic New stores: In Q3, opened 43 new retail drugstores, relocated 11, and closed 2, resulting in 41 net new retail drugstores In 2015, plan to add ~ 150 net new stores with an increase in retail square footage of ~ 2% MinuteClinics: Revenues up ~ 13% vs. same quarter a year ago Operate 1,020 clinics across 32 states and Washington, D.C. 23 new clinics added in Q3 18
Retail/LTC Business: Enterprise Digital Vision is to create a connected health experience to make it easier for people to save time, save money and stay healthy To date, 27 million customers have engaged digitally with CVS Health Engaging 36% of all specialty patients, making it the highest penetrated digital program that we have 19
Third Quarter 2015 Earnings Conference Call Financial Review Dave Denton Executive Vice President & Chief Financial Officer October 30, 2015
Financial Update: Capital Allocation Dividends of $391 million in Q3; $1.2 billion year-to-date Dividend payout ratio of 28.9%, after excluding impact of non-recurring items Still on track to reach 35% targeted payout ratio by 2018 Repurchased ~ 9 million shares in Q3 for $937 million Year-to-date, purchased ~ 37.8 million shares for ~ $3.9 billion, or $102.47 per share Expect to complete $5 billion of share repurchases in 2015, ~ 25% more than in 2014 Year-to-date, have returned more than $5 billion to shareholders this year; still expect to return more than $6 billion for full year 21
Financial Update: July 2015 Senior Notes In support of acquisitions, issued series of senior notes in July totaling $15 billion Assumed ~ $700 million of remaining Omnicare debt As expected, new debt increased adjusted debt-to-ebitda leverage ratio above targets Committed to returning to 27xtarget; 2.7x strong cash generation should enable us to do so in a reasonable amount of time 22
Financial Update: Free Cash Flow Year-to-date, generated approximately $3.4 billion of free cash Continue to expect to produce between $5.9 and $6.2 billion of free cash for 2015 23
Income Statement: Earnings per Share Q3 Adjusted EPS, excluding acquisition-related activity, of $1.29 (1) (2) Near high end of guidance range Excludes 1 of acquisition-related dilution from the net effect of the July 2015 debt financing partly offset by the inclusion of Omnicare s operations Incurred ~ 10 of acquisition-related bridge financing, transaction and integration costs in the quarter GAAP diluted EPS of $1.10 Adjusted EPS, excluding acquisition-related bridge financing, transaction ti and integration ti costs, of $1.28 in Q3 Includes 2.5 months of senior note financing costs, partially offset by a month and a half of Omnicare operations during Q3 (1) (3) Refer to page 48 for end notes. 24
Income Statement: Revenues (8) Consolidated revenues of $38.6 billion, up 10.3% vs. LY PBM revenues of $25.5 billion, up 13.3% vs. LY Growth driven by specialty pharmacy and increased volume in pharmacy network claims Growth in specialty driven by increased claims due to new products and new clients, in addition to inflation Partially offset by increase in GDR to 83.8%, 8% up ~ 130 bps vs. Q3 2014 Refer to page 48 for end notes. 25
Income Statement: Revenues (8) Retail/LTC revenues of $17.9 billion, up 6.9% vs. LY Excluding Omnicare s long-term care business, revenue growth was solidly within guidance range Growth driven by inclusion of LTC business, strong pharmacy same store sales and script growth Retail/LTC GDR of 84.8%, up ~ 140bps vs. Q3 2014 Refer to page 48 for end notes. 26
Income Statement: Gross Profit Margin (8) Consolidated gross margin of 17.2%, down ~ 125 bps vs. LY Decline due in part to mix shift, as lower margin PBM is growing faster than retail/ltc PBM gross margin of 58% 5.8%, down ~ 45 bps vs. LY Decline due to ongoing price compression and business mix resulting in stronger growth of lower-margin areas, such as Medicare and Medicaid Partially offset by improvement in GDR, and favorable purchasing and rebate economics PBM gross profit dollars up 4.7% Refer to page 48 for end notes. 27
Income Statement: Gross Profit Margin (8) Retail/LTC gross margin of 30.0%, down ~ 125 bps vs. LY Decline due to continued pressure on pharmacy reimbursement rates, continuing mix shift towards pharmacy and addition of long-term care business, which carries a lower overall margin rate than retail Partially offset by increase in GDR, favorable pharmacy purchasing economics, and increased front store margins due to changes in the mix of products sold Retail/LTC gross profit dollars up 2.6% Refer to page 48 for end notes. 28
Income Statement: Operating Expenses (8) Consolidated: expenses were 10.9% of revenues ~ 120 bps YOY improvement PBM: expenses were 1.2% of revenues ~ 20 bps YOY improvement Expenses declined by $10 million despite addition of Omnicare specialty business Refer to page 48 for end notes. 29
Income Statement: Operating Expenses (8) Retail/LTC: expenses were 20.8% of revenues ~ 140 bps YOY improvement Driven by higher legal costs in 2014 Excludes ~ $12 million of costs related to Omnicare integration Corporate expenses increased to $309 million Driven by acquisition-related transaction and integration costs, which totaled $115 million Excluding these costs, corporate expenses better than expected and improved year-over-yeary Refer to page 48 for end notes. 30
Income Statement: Operating Profit Margin (8) Consolidated operating margin of 6.4%, down ~ 5 bps vs. LY PBM operating margin of 4.6%, down ~ 25 bps vs. LY Retail/LTC operating margin of 9.2%,, up ~ 10 bps vs. LY Refer to page 48 for end notes. 31
Income Statement: Operating Profit (8) PBM PBM operating profit increased 7.0% PBM operating profit increased 6.2%, exceeding guidance of 2% to 6%, after excluding all acquisition-related items Retail/LTC Retail/LTC operating profit increased by 8.4% Core retail operating profit increased by 4.9%, versus guidance of 4% to 6%, after excluding all acquisition-related items Refer to page 48 for end notes. 32
Income Statement: Below-the-line line Net interest expense of $261 million, up ~ $108 million vs. LY Driven by acquisition-related financing costs associated with bridge loan facility ($16 million) for Omnicare deal, and interest associated with the July 2015 senior notes Effective tax rate of 40.2%; year-over-year increase primarily due to nondeductible transaction costs associated with the Omnicare acquisition Excluding acquisition-related items, tax rate slightly lower than expected Weighted-average share count of 1.11 billion shares 33
Financial Update: 2015 Guidance Expect 2015 full-year Adjusted EPS of $5.14 to $5.18 Narrowing guidance range by raising lower end by 3 Guidance includes: The addition of Omnicare s operations beginning on August 18th and the costs associated with the July 2015 debt financing Assume that Target deal closes near year end Guidance excludes: Operating results generated by the Target assets Deal-related integration costs Deal-related bridge-financing g and transaction costs 34
Guidance: 2015 Full-year Healthy Enterprise Growth Full-year 2015 Net Revenue Growth 9.75% to 10.25% Adjusted EPS (1) (9) (10) $5.14 to $5.18 Year-over-year Growth (11) 14.25% to 15.25% GAAP Diluted EPS $4.69 to $4.73 Refer to page 48 for end notes. 35
Guidance: 2015 Q4 Enterprise Revenue and Earnings Per Share Q4 2015 Net Revenue Growth 9.75% to 11.50% Adjusted EPS (1) (9) (10) Year-over-year Growth $1.51 to $1.55 24.75% to 28.25% GAAP Diluted EPS $1.41 to $1.45 Refer to page 48 for end notes. 36
Guidance: 2015 Q4 Adjusted EPS Walk per share Low High Adjusted EPS $1.51 $1.55 Subtract: estimated Target transaction costs (could occur in 2015 or 2016) (0.02) (0.02) Adjusted EPS (including Target-related costs in 2015) $1.49 $1.53 Note: Figures do not include operating profit associated with the Target assets or any acquisition-related integration costs. 37
Guidance: 2015 Q4 Retail/LTC Segment Q4 2015 Net Revenue Growth 90%t 9.0% to 105% 10.5% Same-store Sales 0.75% to 2.25% Same-store Adjusted d Scripts (7) 3.5% to 4.5% Gross Profit Margin Moderate decline Operating Expense (% of revenue) Operating Profit Growth Operating Profit Margin Significant improvement 19.25% to 21.25% Up 95 bps to 100 bps Refer to page 48 for end notes. 38 2014 CVS Health
Guidance: 2015 Q4 Pharmacy Services Segment Q4 2015 Net Revenue Growth 10.5% to 12.0% Total Adjusted Claims (7) 295 million to 300 million Gross Profit Margin Moderate improvement Operating Expense (% of revenue) Operating Profit Growth Operating Profit Margin Modest improvement 24.0% to 27.0% Up 45 to 50 bps Refer to page 48 for end notes. 39 2014 CVS Health
Guidance: 2015 Q4 Consolidated Income Statement Q4 2015 Corporate Segment Expense $215 million to $220 million Intercompany Eliminations (% of combined segment revenues) ~10.8% Gross Profit Margin Modestly down Operating Expense (% of revenue) Notable improvement Operating Profit Margin Up 80 bps to 90 bps 40 2014 CVS Health
Guidance: 2015 Q4 Consolidated Income Statement Q4 2015 Net Interest Expense $275 million to $280 million Effective Tax Rate ~39.3% Weighted Average Shares (9) ~1.11 billion Consolidated Amortization ~$190 million Refer to page 48 for end notes. 41 2014 CVS Health
Guidance: 2015 Full-year Adjusted EPS Walk per share Low High Adjusted EPS (excluding acquisition-related bridge financing, transaction and integration costs) Subtract: acquisition-related bridge financing, transaction and integration costs recorded through 9/30/15 $5.14 $5.18 (0.12) (0.12) Adjusted EPS $5.02 $5.06 Subtract: estimated Target transaction costs (could occur in 2015 or 2016) (0.02) (0.02) Adjusted EPS (including Target-related related costs in 2015) $5.00 $5.04 Note: Figures do not include operating profit associated with the Target assets or any acquisition-related integration costs. 42
Guidance: 2015 Full-year Strong PBM Outlook Full-year 2015 Net Revenue Growth 13.25% to 13.75% Total Adjusted Claims (7) 1.1616 billion to 1.1717 billion Gross Profit Margin Modest decline Operating Expense (% of revenue) Operating Profit Growth Operating Profit Margin Modest improvement 12.75% to 13.50% Flattish Refer to page 48 for end notes. 43
Guidance: 2015 Full-year Solid Outlook in Retail/LTC Full-year 2015 Net Revenue Growth 5.25% to 5.75% Same-store Sales (12) 1.00% to 1.50% Same-store Adjusted Scripts (7) 4.25% to 4.75% Gross Profit Margin Notable decline Operating Expense (% of revenue) Operating Profit Growth Operating Profit Margin Notable improvement 6.25% to 6.75% Flat to up Refer to page 48 for end notes. 44
Guidance: 2015 Full-year Consolidated Income Statement Full-year 2015 Corporate Segment Expense $790 million to $800 million Intercompany Eliminations (% of combined segment revenues) ~ 10.9% Gross Profit Margin Notably down Operating Expense (% of revenue) Significant improvement Operating Profit Margin Flat to up 45
Guidance: 2015 Full-year Consolidated Income Statement Full-year 2015 Net Interest t Expense $785 million to $790 million Effective Tax Rate ~ 39.2% Weighted Average Shares (7) ~ 1.13 billion Consolidated Amortization ~ $610 million Consolidated D&A ~ $2.1 billion Refer to page 48 for end notes. 46
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 (13) $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 48 for end notes. 47
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 10 cents of acquisition-related bridge financing, transaction and integration costs as well as a net loss of 1 cent from the addition of Omnicare s operations midway through the third quarter, partly offset by the financing costs related to the July 2015 debt financing. i 3. Excludes 10 cents of acquisition-related bridge financing, transaction and integration costs. 4. Excludes integration and transaction costs; includes Omnicare s operations as of August 18, 2015. 5. Client retention rate is defined as: 1 less (projected 2016 lost revenues from known terminations occurring after January 1, 2015, divided by estimated 2016 PBM revenues) expressed as a percentage. Both terminations and PBM revenues exclude the individual PDP business. 6. Excluding $12 million of acquisition-related integration costs, operating profit for the Retail/LTC segment increased $128 million, or 8.4%, from $1,526.9 million for the three months ended September 30, 2014 to $1,654.6 million for the three months ended September 30, 2015. 7. 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 yprescriptionp 8. Results include Omnicare s operations, except where noted. 9. 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 2014. 10. Excludes acquisition-related bridge financing, transaction and integration costs; includes Omnicare s operations and financing costs related to July 2015 debt financing. 11. Excludes $521 million loss on early extinguishment of debt (~$0.27 per diluted share) recognized in 2014. 12. We expect the tobacco exit to have a negative impact on total same-store sales of approximately 155 basis points for the full year 2015. We also expect it to have a negative impact of approximately 525 basis points on front store same-store sales for the full year 2015. 13. 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. 48