CVS Corporation (CVS)

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CVS Caremark (CVS)

Q4 2011 Earnings Call

February 08, 2012 8:30 am ET

Executives

Nancy Christal - Senior Vice President of Investor Relations

Larry J. Merlo - Chief Executive Officer, President and Director

David M. Denton - Chief Financial Officer and Executive Vice President

Per G. H. Lofberg - Executive Vice President and President of Caremark Pharmacy Services

Mark S. Cosby - Executive Vice President and President of CVS Pharmacy

Analysts

Michael Palahicky

Lisa C. Gill - JP Morgan Chase & Co, Research Division

John Heinbockel - Guggenheim Securities, LLC, Research Division

Dane Leone - Macquarie Research

Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

Edward J. Kelly - Crédit Suisse AG, Research Division

Lawrence C. Marsh - Barclays Capital, Research Division

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

Ricky Goldwasser - Morgan Stanley, Research Division

Steven Valiquette - UBS Investment Bank, Research Division

John W. Ransom - Raymond James & Associates, Inc., Research Division

Eric Bosshard - Cleveland Research Company

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 CVS Caremark Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, February 8, 2012. I would now like to turn the conference over to Nancy Christal, Senior Vice President, Investor Relations. Please go ahead, ma'am.

Nancy Christal

Thank you. Good morning, everyone, and thanks for joining us today. I'm here with Larry Merlo, President and CEO, who'll provide a business update; and Dave Denton, Executive Vice President and CFO, who will provide a financial review. Per Lofberg, President of our PBM business; and Mark Cosby, President of CVS/pharmacy are also with us today, and they'll participate in the question-and-answer session following our prepared remarks.

[Operator Instructions] During this call, we'll discuss some non-GAAP financial measures when 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.

Please note that we also posted slides and supplemental financial schedules on our website this morning that summarize the information on this call, as well as key facts and figures around our operating performance and guidance, so you may want to check those out.

As always, today's call is being simulcast on our website, and it will be archived there following the call for one year.

Finally, please note that we expect to file our Form 10-K by the close of business on February 21, and it will be available through our website at that time. Now before we begin, 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 Larry Merlo.

Larry J. Merlo

Well, thanks, Nancy, and good morning, everyone. Hopefully, you've had a chance to read through our press release this morning. And we're obviously very pleased with the strong financial results we posted, along with the great progress we made across the enterprise last year. Our accomplishments in 2011 set a solid foundation for future growth, and as we outlined for you in our Analyst Day in December, we look forward to an even better year in 2012.

We reported adjusted earnings per share from continuing operations of $0.89 for the fourth quarter, $2.80 for the full year, with Retail results in line with our guidance and PBM results exceeding our guidance. Overall, we generated about $700 million in free cash flow in the quarter, bringing the 2011 total to $4.6 billion, which beats our goal. And Dave will provide the details of our results, as well as guidance during his financial review.

So with that, let me address what I know is the #1 question on everyone's mind: What benefit has CVS/pharmacy seen from Walgreen no longer participating in the Express Scripts Retail network? Well, as we have said previously, the benefit was not material to our results in the fourth quarter, although it did start to ramp up late in the year. Now since the start of this year, we are seeing a significant number of transfers from Walgreens into CVS. In fact, the amount is a bit more than we anticipated. We have spent the last several weeks focused on ensuring that Express Scripts members have uninterrupted, convenient access to pharmacy care and excellent customer service, and the feedback to-date from our new customers has been excellent. Our pharmacy teams have been doing a terrific job in making sure that the transfer process is as easy as possible, and we will continue to do as much as we can to provide superior service to these new customers.

And with that in mind, we have made investments in store labor and marketing that we believe will enhance our success in capitalizing on this significant opportunity. Now based on the early results, we believe we are gaining more than our fair share of this business. And in light of this, we are now projecting that earnings per share will benefit by approximately $0.03 per share in the first quarter should the situation remain unresolved for the duration of the quarter. And as you're aware, that's $0.01 higher than the estimate provided at Analyst Day.

As a result, we are increasing our guidance for the first quarter and full year to reflect this first quarter benefit, and we now expect to achieve adjusted EPS for 2012 in the range of $3.18 to $3.28. As I said, Dave will review the specific details. But that said, please note that we are not increasing our guidance for the remaining quarters of the year as the situation is fluid and is not within our control. And as everyone is aware, Walgreens and Express Scripts could come to an agreement at any point in time. So we are taking this one quarter at a time. We would encourage you to only include the benefit in your models for the first quarter. We will report the estimated impact from this impasse to you on a quarter-by-quarter basis throughout the year if it remains unresolved.

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