CVS Corporation (CVS)

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CVS Caremark (CVS)

Q2 2011 Earnings Call

August 04, 2011 8:30 am ET

Executives

David Denton - Chief Financial Officer and Executive Vice President

Nancy Christal - Senior Vice President of Investor Relations

Larry Merlo - Chief Executive Officer, President and Director

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

Analysts

Mark Miller - William Blair & Company L.L.C.

Edward Kelly - Crédit Suisse AG

Frank Morgan - RBC Capital Markets, LLC

David Magee - SunTrust Robinson Humphrey, Inc.

Lisa Gill - JP Morgan Chase & Co

John Heinbockel - Guggenheim Securities, LLC

Neil Currie - Dahlman Rose & Company, LLC

Eric Bosshard - Cleveland Research Company

Steven Valiquette - UBS Investment Bank

John Ransom - Raymond James & Associates, Inc.

Thomas Gallucci - Lazard Capital Markets LLC

Lawrence Marsh - Barclays Capital

Matthew Fassler - Goldman Sachs Group Inc.

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the CVS Caremark Second Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, August 4, 2011. I would now like to turn the conference over to the Senior Vice President of Investor Relations, Ms. Nancy Christal. Please go ahead.

Nancy Christal

Thank you, Frank. 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] As a reminder, we posted slides and supplemental financial schedules on our website this morning and summarized the information on this call, as well as some key facts and figures around our operating performance.

This morning, we'll also 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 day 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 presentation, we'll make certain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. Accordingly, through 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 recently filed quarterly report on Form 10-Q. And now I'll turn this over to Larry Merlo.

Larry Merlo

Well, thanks, Nancy, and good morning, everyone. I am very pleased with our second quarter results, which came in at the high end of our guidance. We reported adjusted earnings per share from continuing operations of $0.65 with the PBM segment in line with our expectations, and the Retail segment exceeding our expectations, benefiting from solid expense control and higher-than-expected generic utilization, positively impacting our gross margin. Additionally, we generated more than $800 million in free cash flow this quarter and $2.4 billion year-to-date. So we are very confident that we will generate between $4 billion and $4.2 billion for the full year.

Now taking into account our solid year-to-date results and our confidence in the remainder of the year, we are narrowing the 2011 guidance range. We now expect to deliver adjusted earnings per share from continuing operations of between $2.75 and $2.81 compared to our previous guidance of $2.72 to $2.82, and Dave will provide full details on our guidance during this financial review.

Now before getting into the business update, I want to give you our perspective on the recent PBM industry news. Many of you have been asking about the implications of 2 of our largest peers combining into one company, what this might mean for CVS Caremark and the competitive landscape in the prospects of that transaction obtaining FTC approval.

Now I'm not going to comment on the regulatory implications of other company's acquisition announcements. We'll certainly leave that up to the regulatory agencies. But assuming the proposed transaction is completed, I am more confident than ever that CVS Caremark can and will effectively compete in this vibrant industry. That's because we believe that our suite of assets uniquely positions us to assist payers in controlling costs while enhancing member access and improving health outcomes.

And with the evolution of U.S. health care to more consumer-directed care, our multiple consumer touch points make us best positioned to promote cost-effective and healthy behaviors. And the success that we're having in both the 2011 and '12 selling season clearly demonstrates that our model is resonating with payers. So I'm confident that we can continue to gain share, add value for our clients and their members and deliver healthy long-term returns to our shareholders.

So with that, let me turn to our business update, and I'll start with the PBM and address our progress on each of the 5 key elements of our PBM plan for growth that we outlined earlier this year. The first key element of that plan is to achieve continued momentum on new business wins and client retention.

As you know, we had a terrific 2011 selling season, highlighted by the landmark long-term contract with Aetna, and we also had solid retention at more than 96%. And the 2012 selling season has also been very successful to date. More than 50% of the contract scheduled for renewal for '12 has been completed, which is right in line with where we were last year at this time, and our retention rate stands at 98%. Our renewals include the $4 billion FEP Retail contract, AT&T and General Electric among others.

Now we've also had some significant wins. As of mid-July on a 2012 impact basis, we've won $4.8 billion in net new business, including the FEP mail and specialty contracts, CalPERS in the state of Hawaii. Now in addition to the $4.8 billion in net new wins, the PBM contracts associated with our Universal American business that we just acquired, plus Universal American's MAPD business are expected to contribute about $5.5 billion in incremental revenue in 2012. So as we sit today, we'll see net new '12 revenues in excess of $10 billion. And while many of the largest contracts out for bid in 2012 have been decided, there are still opportunities for new business, and we will certainly keep you posted on our progress.

So obviously, we're all very pleased with the progress that we've made in both the '11 and '12 selling seasons and our significantly improved client retention rate. And as we said on our last Analyst Day, we're focused on retaining and adding lives while maintaining a rational pricing strategy. That's because we believe that driving the top line will offset the usual margin compression associated with renewals in this sector, and will be an important component of successfully driving our operating profit growth over time.

Now the second key element of our PBM growth plan is to continue to develop and upsell our unique clinical offerings, and we've made a lot of progress in this area. For example, our Pharmacy Advisor program for diabetes that was launched in January now has 11.2 million active members with another 1.3 million members committed for 2011 implementations. So we'll have approximately 12.5 million active members by year end, and we have an additional 700,000 members already committed for next year. We're also excited about our ability to offer Pharmacy Advisor to Aetna's 8 million commercial lives as they begin the migration to our systems in 2012.

Read the rest of this transcript for free on seekingalpha.com