CVS Health Corporation (CVS)

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CVS Caremark (CVS)

Q3 2010 Earnings Call

November 03, 2010 8:30 am ET


David Denton - Chief Financial Officer and Executive Vice President

Thomas Ryan - Chairman, Chief Executive Officer, Member of Executive Committee, Chief Executive Officer of CVS Pharmacy Inc and President of CVS Pharmacy Inc

Nancy Christal - Senior Vice President of Investor Relations

Per Lofberg - Executive Vice President and President of Caremark Pharmacy Services

Larry Merlo - President, Chief Operating Officer, Director and President of CVS Pharmacy - Retail


Edward Kelly - Crédit Suisse AG

Meredith Adler - Barclays Capital

Lisa Gill - JP Morgan Chase & Co

John Ransom - Raymond James & Associates

Scott Mushkin - Jefferies & Company, Inc.

John Heinbockel - Goldman Sachs

Helene Wolk - Bernstein Research

Steven Halper - Stifel, Nicolaus & Co., Inc.

Robert Willoughby

Lawrence Marsh - Barclays Capital

Mark Wiltamuth - Morgan Stanley

Thomas Gallucci - Lazard Capital Markets LLC

Deborah Weinswig - Citigroup Inc



Good morning. My name is Cynthia, and I will be your conference operator today. At this time, I would like to welcome everyone to the CVS Caremark Third Quarter 2010 Earnings Conference Call. [Operator Instructions] I would now like to turn today's call over to Nancy Christal, Senior Vice President of Investor Relations. Please go ahead, ma'am.

Nancy Christal

Thanks, Cynthia. Good morning, everyone, and thanks for joining us today. I'm here with our senior management team, Tom Ryan, Chairman and CEO of CVS Caremark, who will provide a brief business update; Dave Denton, Executive Vice President and CFO, who will provide the financial review; and Larry Merlo, President and COO; and Per Lofberg, President of our PBM business, both of whom will participate in the question-and-answer session that follows our prepared remarks.

During the question-and-answer session, please limit your questions to no more than two, including follow-up so we can provide more analysts and investors the chance to ask their questions.

This morning, we'll discuss some non-GAAP financial measures in talking about our company's performance, namely free cash flow, EBITDA and adjusted EPS. In accordance with SEC regulations, you can find the definitions of the non-GAAP items I mentioned, as well as the reconciliations to comparable GAAP measures on the Investor Relations portion of our website at

As always, today's call is being simulcast on our IR website. It will also be archived there following the call to make it easy for all investors to access it.

Please note that we expect to file our 10-Q by end of day today and will be available through the website at that time.

Now before continue, our attorneys have asked me to read the Safe Harbor statement. During this presentation, we will make certain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. Accordingly, for these forward-looking statements, we claim the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

We strongly recommend that you become familiar with the specific risks and uncertainties that are described in the Risk Factors section of our most recently filed annual report on Form 10-K and that you review the section entitled Cautionary Statement Concerning Forward-looking Statements in our most recently filed quarterly report on Form 10-Q.

And now I'll turn this over to our CEO, Tom Ryan.

Thomas Ryan

Thanks, Nancy, and good morning, everyone. Today, we reported adjusted earnings per share from continuing operations of $0.65, which was at the high end of our expectation, and we generated $1.7 billion in free cash flow year-to-date, so we are well on track to meet our $2.5 billion target for the year. Obviously, we are very pleased with our third quarter result. I thought I'd keep my prepared remarks a bit shorter than usual today. Since we provided a fairly in-depth update of our business at the recent Analyst Day. For anyone who missed that, the slides and the video are still available on our website, so let me just jump right in.

I'll start with our Retail business, which produced industry-leading same-store sales growth, improved margin and solid expense control, all of which led to a significant improvement in our Retail operating margin. As Larry mentioned at our Analyst Day, same-store sales increased 2.5%, with Pharmacy comps up 3% and front comps of 1.4%. This is especially strong, obviously, given this economic environment. We continue to gain share in Pharmacy with our market share up 22 basis points nationally versus the same quarter last year. And according to IMS, our growth has outpaced the chain drug industry by almost 170 basis points through September year-to-date. Our adherence admission is that Retail continue to drive industry-leading results. We are now best in class retailer on adherence in key therapeutic classes such as diabetes, hypertension and depression. As you know, in October, we completed the rollout of our Consumer Engagement Engine to our stores providing our pharmacy team's with unmatched capabilities to communicate with patients at the right time, with the right messages and in a personal and confidential manner.

In the third quarter, our pharmacy comps were negatively impacted by about 280 basis points from new generics, a greater impact than the 180 we saw in the second quarter. Now on the flip side, pharmacy comps were positively impacted by about 310 basis points on a gross basis or 240 basis points on a net basis due to continued growth of Maintenance Choice. So for the first time this quarter, we are providing the impact for Maintenance Choice on both a gross and net basis because what we are seeing now is a greater conversion of existing 30-day scripts to 90-day scripts under Maintenance Choice. As we expected, this is happening more as voluntary mail clients adopt Maintenance Choice.

As you know, the early adopters of Maintenance Choice were really mandatory mail programs so there were, obviously, fewer 30-day scripts at our stores that were really impacted. In 2010, nearly 50% of the clients adopting Maintenance Choice previously had voluntary mail programs. As more voluntary mail clients choose Maintenance Choice as a way to lower cost and improve outcomes, this will be a better measure looking forward.

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