CVS Health Corporation (CVS)

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CVS Caremark (CVS)

Q1 2011 Earnings Call

May 05, 2011 8:30 am ET


Larry Merlo - President, Chief Executive Officer and Director

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


Lisa Gill - JP Morgan Chase & Co

John Heinbockel - Guggenheim Securities, LLC

Meredith Adler - Barclays Capital

Scott Mushkin - Jefferies & Company, Inc.

Eric Bosshard - Cleveland Research Company

Steven Valiquette - UBS Investment Bank

Robert Willoughby

Kemp Dolliver - Avondale Partners, LLC

Mark Wiltamuth - Morgan Stanley

Thomas Gallucci - Lazard Capital Markets LLC

Lawrence Marsh - Barclays Capital

Matthew Fassler - Goldman Sachs Group Inc.



Good morning. My name is Celeste, and I will be your conference operator today. At this time, I would like to welcome everyone to the CVS Caremark First Quarter 2011 Earnings Conference Call. [Operator Instructions] I would now like to turn today's call over to Ms. Nancy Christal. Please go ahead, ma'am.

Nancy Christal

Thank you, Celeste. Good morning, everyone, and thanks for joining us today. I'm here with Larry Merlo, President and CEO; Dave Denton, Executive Vice President and CFO; and Per Lofberg, President of our PBM business. [Operator Instructions] I want to make sure you're all aware that we posted slides on our website this morning that summarize the information on this call. The slides also include some key facts and figures that you may find helpful, which we won't have time to review on the call. I also want to announce the date for our 2011 Analyst Day. It will be held on the morning of Friday, October 7 in New York City. More details will be forthcoming, but please hold the date.

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. As always, today's call is being simulcast on our website, and it will be archived there following the call. Please note that we expect to file our Form 10-Q by the end of today, 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 call, 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 Larry Merlo.

Larry Merlo

Thanks, Nancy, and good morning, everyone. I'm very pleased to report that 2011 is off to a good start with results slightly above guidance for both our Retail and PBM businesses. We reported adjusted earnings per share from continuing operations of $0.57 for the first quarter, just above the high end of our guidance range. And we generated $1.6 billion in free cash flow, more than doubled what we generated in last year's first quarter. As you know, last week, we announced that we completed the acquisition of the Universal American's Part D business a bit earlier than expected. The addition of the Universal book to our own Med D business makes us a very strong #2 player in this fast growing space, and we continue to expect the acquisition to be approximately $0.08 accretive to our adjusted earnings per share this year.

So with our solid results for the quarter, I am pleased to reaffirm the guidance we provided on our last call for the full year '11. We continue to expect to deliver adjusted EPS from continuing operations of between $2.72 and $2.82 while generating between $4 billion and $4.2 billion of free cash, and Dave Denton will talk more on guidance during his financial review.

Now before getting into the business review, let me address the speculation with regards to the future direction of our company, speculation that has been publicized in both the press and the investment community. I want to hit this topic head on to clarify any misperceptions in the marketplace and set our story and our focus straight. Now despite conjecture in the marketplace, there are no plans to split up the company. We strongly believe that we have the right assets in place to ensure our long-term success in this changing health care environment. Our world-class Retail business that makes up about 2/3 of our company's operating profit is expected to achieve continued healthy growth for years to come. We are shifting the role of our 20,000 Retail pharmacists from primarily dispensing prescriptions to also providing services, and our integrative Pharmacy Services model enables us to enhance access to care while lowering overall health care costs and improving health outcomes, which fits extremely well with the goals of health reform along with the goals of payers.

Over the past few years, we have introduced breakthrough products that capitalize on the benefits of our integrated model, which continue to gain traction in the marketplace. These unique products and services cannot be easily replicated through a partnership or an alliance product such as Maintenance Choice, Pharmacy Advisor, the Patient Care Initiative are already improving the health of our members while reducing costs.

Additionally, we have achieved more than $700 million in annual purchasing synergies and overhead savings from the Retail PBM combination, and we've made the necessary investments to facilitate future growth. At the same time, we know that growth in our PBM segment has been disappointing, and we are keenly focused on returning to healthy operating profit growth. As we've stated in the past, the decline in our PBM's operating profit performance has had nothing to do with our integrated model, and we have taken several steps to address outstanding issues.

In short, there are 5 key elements of our plan. First, achieve continued momentum in new business wins and strong client retention. Second, continue to develop and upsell our unique clinical offerings. Third, drive growth in 90-day mail choice and generic dispensing rates. Fourth, focus on high-growth areas especially Medicare Part D, specialty Pharmacy and Aetna. And fifth, execute successfully on the PBM streamlining initiative, and I'll provide an update on each of these 5 important points in a few minutes.

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