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CVS Caremark (CVS)

Q4 2010 Earnings Call

February 03, 2011 8:30 am ET


David Denton - Chief Financial Officer and Executive Vice President

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

Thomas Ryan - Chairman and Chief Executive Officer


Edward Kelly - Crédit Suisse AG

John Heinbockel - Guggenheim Securities, LLC

Meredith Adler - Barclays Capital

Lisa Gill - JP Morgan Chase & Co

John Ransom - Raymond James & Associates

Scott Mushkin - Jefferies & Company, Inc.

Lawrence Marsh - Barclays Capital

Kemp Dolliver - Avondale Partners, LLC

Mark Wiltamuth - Morgan Stanley

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

Thomas Gallucci - Lazard Capital Markets LLC

Michael Palahicky

Matthew Fassler - Goldman Sachs Group Inc.

Ann Hynes - Caris & Company

Neil Currie - UBS Investment Bank

Eric Bosshard - Cleveland Research



Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the CVS Caremark Fourth Quarter 2010 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Ms. Nancy Christal, Senior Vice President of Investor Relations. Ms. Christal, you may begin your conference.

Nancy Christal

Thank you, Regina. 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, will provide some brief opening remarks about his transition to retirement; Larry Merlo, President and COO, who will take the reins as CEO in March, will talk about his priorities to drive growth going forward. He'll also provide an overview of our 2011 guidance and an update on the business. Dave Denton, Executive Vice President and CFO, will provide a financial review for the quarter and some details around our initial guidance for the year. Per Lofberg, President of our PBM business, is also with us today, and will participate in the question-and-answer session that follows our prepared remarks. We have a lot to cover this morning, and we posted slides on our website that summarize the information on this call. I hope you find that helpful.

During the question-and-answer session, please limit your questions to one to two including follow-ups, so we can provide more analysts and investors a 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 of comparable GAAP measures on the Investor Relations portion of our website. 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 Form 10-K by February 22, and it will be available through our website at that time. Now before we continue, our attorneys have asked me to read the Safe Harbor statement. During this presentation, we'll 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 Tom Ryan.

Thomas Ryan

Thanks, Nancy, and good morning, everyone. Let me touch briefly on the leadership transition that Nancy mentioned before we get into our results and the outlook. As you know, at our annual stockholders meeting last May, we announced a succession plan, under which I would transition to retirement by this year's annual meeting, and Larry Merlo would assume the role of CEO.

Last May, I set up the office of the chairman, so I could work closely with Larry and Per Lofberg, President of our PBM business, throughout the transition. That transition has gone extremely well, and it's time for me to pass the reins to Larry. As you know, we recently announced that Larry will become CEO effective March 1, and I will be non-executive Chairman until our annual meeting this May. At that time, I will retire from the board, and the board intends to appoint David Dorman, a member of our board since 2006, as non-executive Chairman of the Board.

Well, many of you know Larry, but for those of you who don't, he is a seasoned executive with more than 30 years of industry experience. He has delivered outstanding results in every position he has held, and he is the ideal executive to lead our company forward. I am confident in our management team, the assets we have in place, the future of CVS Caremark. Following more than three decades with our company, I can retire with great confidence in the future, and know that we are extremely well-positioned to play an important role in the evolving U.S. health care market, and to generate strong growth and returns to our shareholders.

Now let me turn it over to Larry, who will review the 2010 results, the 2011 guidance and some of his plans, and he will also coordinator the Q&A session at the end. Larry?

Larry Merlo

Well, thanks, Tom, and good morning, everyone. As Tom said, we have worked together for the past 20 years. And I just want to take a minute to thank Tom for his leadership and vision, along with his mentoring and support throughout the years. We certainly have the right assets in place to continue to be a very successful company for years to come, and that is a real credit to Tom's vision of the future of pharmacy healthcare. Throughout his tenure, Tom has built a culture that is focused on innovation, customer service and flawless execution, and I certainly look forward to building upon his legacy.

Now, as part of my transition to the CEO role, I recently appointed our two highest-ranking retail executives to lead the CVS Pharmacy business on an interim basis. Mike Bloom, our Executive V.P. of Merchandising and Supply Chain; and Scott Baker, our EVP of Internal Operations and Real Estate, have taken over the leadership of our Retail business, pending the completion of our search for a new Retail President. These individuals, along with their talented colleagues, have helped make CVS pharmacy number one in our sector, and have consistently demonstrated the highest levels of creativity, leadership and teamwork. And I'm confident this success will continue under Mike and Scott's leadership.

While I'm certainly excited to lead CVS Caremark into the future, I am certainly committed to and confident about our future success. And to be clear, as CEO, one of my top priorities will be to ensure that the CVS Caremark merger is financially successful for our shareholders.

In the past few years, we have accomplished an awful lot. We've set up an infrastructure that will enable the company to be very productive over time. We have the right people in place leading the PBM. We've developed and introduced unique new products and services that have been widely adopted. We completed the rollout of the Consumer Engagement Engine, which is a critical component of our integrated offerings now and into the future. And we saw renewed momentum in our selling season. But quite frankly, some of those things have just taken longer than expected, which has affected both the PBM's performance and the valuation of our company. I am confident that we have the right plan along with the right people, processes, technology and, quite frankly, urgency to deliver on the full potential of this business over the long term. And I'll talk more about how we'll accomplish that throughout my remarks this morning.

But to me, our future success will be defined by three things. First, the flawless execution of our strategy, that being to lower healthcare costs while improving the health of those reserve, leveraging the many benefits of our integrated Pharmacy Services model. And we'll talk more about how we're accelerating the PBM transformation. Second is to stress more cross-functional thinking and action across the company, producing even higher levels of customer service. And three, enhancing value for all of our shareholders in a number of ways, including improvements in dividend payouts and share repurchases.

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