Earnings Conference Call

Size: px

Start display at page:

Download "Earnings Conference Call"

Buddy Brown
5 years ago
Views:

1 First Quarter 2015 Earnings Conference Call Larry Merlo President & Chief Executive Officer Dave Denton Executive Vice President & Chief Financial Officer May 1, 2015

2 Forward-looking Statements During today s presentation, we will make forward-looking statements within the meaning of the federal securities laws. By their nature, all forward-looking statements have risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements for a number of reasons as described in our SEC filings, including the risk factors section and cautionary statement disclosures in those filings. During this call, we will also use some non-gaap financial measures when talking about our company s performance, including free cash flow and Adjusted EPS. In accordance with SEC regulations, you can find the definitions of these non-gaap items, as well as reconciliations to comparable GAAP measures, on the investor relations portion of our website CVS Health 2

3 First Quarter 2015 Earnings Conference Call Business Review Larry Merlo President & Chief Executive Officer May 1, CVS Health

4 First Quarter: Strong Start to 2015 Q Change vs. Q Adjusted EPS (1) $ % Retail Operating Profit $1,727 million (1.3)% PBM Operating Profit $734 million 14.6% Free Cash Flow $1.6 billion (11.2)% Refer to page 34 for end notes CVS Health 4

5 PBM Business: Selling Season Updates 2015 Gross wins of $7.5 billion and net wins of $4.1 billion, both up ~ $500 million from last earnings update Increase driven primarily by growth in membership within some health plan clients as well as some additional wins 2016 Completed about a third of client renewals, which is typical this time of year Remain well-positioned to provide differentiated products and services that generate savings for clients; resonating strongly in the market 2015 CVS Health 5

6 PBM Business: Managing Trend Recent Insights report highlights our efforts to manage trend for clients With gross trend up from 3.8% in 2013 to 12.7% in 2014, more clients are receptive to solutions to bend the cost curve High-performing (trendsetter) clients used a number of our solutions to get ahead of trend in 2014 Formulary management: our Value formulary reduced gross trend to only 0.5%, more than 1200 bps better than the overall book Managing specialty pharmacy: Advanced Specialty Formulary, Specialty Connect and Specialty Guideline Management produced a trend of 23.9%, nearly 1000 bps better than the overall book 2015 CVS Health 6

7 PBM Business: Specialty Pharmacy Strong results, with revenues up 46% year-over-year in Q1 Key drivers: volume, new products, inflation, impact of Specialty Connect Healthy growth in Specialty Infusion (Coram) Number of infusion patients serviced grew 15.7% from Q Using our leading formulary strategies to control Hepatitis C costs, and anticipate using similar tools to manage PCSK9 inhibitors 2015 CVS Health 7

8 PBM Business: Biosimilars First biosimilar approval is just the beginning of approvals that could unlock additional savings and provide options to clients For the foreseeable future, we expect biosimilars to behave more like brands than traditional generics Expect to employ our formulary strategies to generate savings for our clients 2015 CVS Health 8

9 Retail Business: Revenue and Script Growth Script comps increased 5.1% on a 30-day equivalent basis (3) Retail pharmacy market share was 21.5% in Q1, up ~ 50 bps versus Q Pharmacy same-store sales increased 4.2% Positive impact of ~ 70 bps from incidence of flu Negative impact of ~ 280 bps from new generic drug introductions Negative impact of ~ 190 bps due to transfer of specialty scripts from our retail segment to our PBM segment (Specialty Connect) Plan to launch new products in 2015 as part of our unlock adherence initiative Refer to page 34 for end notes CVS Health 9

10 Retail Business: Front Store Trends Front store comps decreased 6.1%; would have increased ~ 2% after adjusting for the tobacco impact Impact of tobacco exit was ~ 800 bps, which is ~ 100 bps less than anticipated Solid growth in core health and beauty categories, including the strong cough/cold season Gained share in health and beauty in both the Drug and Multi-Outlet markets Front store margins improved notably year-over-year on a comparable basis, including adjusting for the tobacco elimination Improvement reflects our highly personalized promotional strategy along with the continued growth in store brand sales 2015 CVS Health 10

11 Retail Business: Front Store Updates In 2015, first phase of healthy foods rollout will begin in select stores Beauty elevation program will launch in several thousand stores Continue to test multitude of changes to further enhance our front store clustering (e.g., knowledge from Navarro) We have developed new internal tools to ensure promotional investments are driving the right economics and personalization efforts Approximately 80% of our sales go through our loyalty program Customers using our mobile app with ExtraCare are spending 4x more than the average customer 2015 CVS Health 11

12 Retail Business: Store Brands Store Brands saw continued progress in Q1 as its share of our front store sales increased ~ 330 bps to 20.9% About two thirds of the improvement reflected removal of tobacco from the product mix Remaining one third reflects underlying progress of store brand penetration 2015 CVS Health 12

13 Retail Business: Real Estate Update In Q1, opened 38 new retail drugstores, relocated 12, and closed 10, resulting in 28 net new retail drugstores In 2015, plan to add ~ 150 net new stores with an increase in retail square footage of ~ 2% 2015 CVS Health 13

14 Retail Business: CVS/minuteclinic Revenues up approximately 21% vs. same quarter last year Operate 986 clinics in 31 states and Washington, D.C. 15 net new clinics added in Q1 84% of MinuteClinic visits were paid for by third parties in the quarter Rollout of EPIC electronic medical records system expected to be completed by mid-year TeleHealth pilot in CA and TX has now seen 13,000 patients with very high levels of customer satisfaction 2015 CVS Health 14

15 Business Update: Cardinal Health Venture: Red Oak Sourcing Red Oak Sourcing has transitioned nearly all suppliers in a relatively short timeframe Expertise along with simplicity of business structure has enabled significant ifi strides Extremely pleased with rapid progress to date, and we look forward to its future contributions 2015 CVS Health 15

16 First Quarter 2015 Earnings Conference Call Financial Review Dave Denton Executive Vice President & Chief Financial Officer May 1, CVS Health

17 Financial Update: Capital Allocation Returned more than $2 billion to shareholders in Q1 Dividends of $399 million in Q1 Dividend payout ratio of 28.7% Still on track to reach 35% targeted payout ratio by 2018 In January, entered into $2 billion accelerated share repurchase program that wrapped up in April Average price of $ per share Received 16.8 million shares in Q1 at $94.49 per share Receiving ~ 3 million shares in Q2 In 2015, still expect to repurchase $6 billion of shares during the year, and return $7 billion overall to shareholders an increase of more than 30% year-over-year 2015 CVS Health 17

18 Financial Update: Cash Flows Generated approximately $1.6 billion of free cash in Q1 Still expect between $5.9 and $6.2 billion of free cash for CVS Health 18

19 Income Statement: Earnings per Share Adjusted EPS of $1.14 in Q1 (1) 5 above guidance range Up 12.2% over last year GAAP diluted EPS of $1.07 Refer to page 34 for end notes CVS Health 19

20 Income Statement: Revenues Consolidated revenues of $36.3 billion, up 11.1% vs LY PBM revenues of $23.9 billion, up 18.2% vs. LY Growth driven by specialty pharmacy and increased volume in pharmacy network claims Partially offset by an increase in generic dispensing rate Generic dispensing rate of 83.5%, up ~ 150 bps vs. Q Top line strength due to higher than expected volumes, drug price inflation and mix, including the Hepatitis C drugs Retail revenues of $17.0 billion, up 2.9% vs. LY Strong performance driven by strong pharmacy same store sales growth despite transition of Specialty Connect volume to PBM segment 2015 CVS Health 20

21 Income Statement: Gross Profit Margin Consolidated gross margin of 17.0%, down ~ 120 bps vs. LY, in line with expectations Decline due in part to mix shift, as lower margin PBM is growing faster than retail PBM gross margin of 4.3%, down ~ 35 bps vs. LY Driven by price compression Partially offset by improvement in GDR, and favorable purchasing and rebate economics PBM gross profit dollars up 9.8% Retail gross margin of 31.2%, down ~ 20 bps vs. LY Driven by pressure on reimbursement rates and continuing mix shift towards pharmacy Partially offset by 150 bps increase in retail GDR to 84.4%, benefits to front store margin from tobacco exit, and increased store brand penetration Retail gross profit dollars up 2.1% 2015 CVS Health 21

22 Income Statement: Operating Expenses Consolidated: expenses were 11.1% of revenues notable YOY improvement PBM: expenses were 1.2% of revenues ~ 25 bps YOY improvement Retail: expenses were 21.0% of revenues ~ 20 bps YOY deterioration ti Driven by reduction in retail sales related to tobacco exit as well as shift of Specialty Connect revenues from retail to PBM On a comparable basis, improvement of ~ 50 bps Corporate expenses were flat vs. LY, at $189 million, and lower than expected 2015 CVS Health 22

23 Income Statement: Operating Profit Margin Consolidated operating margin of 5.9%, a decline of ~ 35 bps vs. LY PBM operating margin of 3.1%, a decline of ~ 10 bps vs. LY PBM operating profit increased 14.6%, greatly exceeding expectations Retail operating margin of 10.2%, a decline of ~ 45 bps vs. LY Retail operating profit decreased by 1.3%, within expectations On a comparable basis excluding tobacco, retail operating profit increased ~ 1.7% 2015 CVS Health 23

24 Income Statement: Below-the-line Net interest expense of $134 million, down ~ $24 million vs LY Primarily driven by lower average interest rates Weighted-average share count of 1.11 billion shares Effective tax rate of 38.9%, slightly lower than expected 2015 CVS Health 24

25 Financial Update: Guidance Narrowing 2015 full-year EPS ranges by raising the bottom of the ranges by 3 given outperformance in Q1 Pleased with where we are year to date, but still early in the year Several timing factors affect the cadence of profit delivery throughout the year (e.g., timing of break-open generics, tobacco exit, welcome season investments) While we delivered a strong first quarter, above our own expectations, the cadence of profit growth is still expected to be back-half weighted 2015 CVS Health 25

26 Guidance: 2015 Full-Year Healthy Enterprise Growth Full-year 2015 Net Revenue Growth 7.0% to 8.25% Adjusted EPS (1) (4) $5.08 to $5.19 Year-over-year Growth (2) 13.0% to 15.50% GAAP Diluted EPS $4.80 to $4.91 Refer to page 34 for end notes CVS Health 26

27 Guidance: 2015 Full-Year Strong PBM Outlook Full-year 2015 Net Revenue Growth 11.25% to 12.25% 25% Total Adjusted Claims (3) billion to billion Gross Profit Margin Modest decline Operating Expense (% of revenue) Operating Profit Growth Operating Profit Margin Modest improvement 7.75% to 10.75% Down 5 bps to 15 bps Refer to page 34 for end notes CVS Health 27

28 Guidance: 2015 Full-Year Solid Outlook in Retail Full-year 2015 Net Revenue Growth 1.25% to 2.50% Same-store Sales (5) (0.5)% to 0.75% Same-store Adjusted Scripts (3) 4.0% to 5.0% Gross Profit Margin Flat to up Operating Expense (% of revenue) Operating Profit Growth Operating Profit Margin Modest improvement 4.75% to 6.50% Up 35 bps to 40 bps Refer to page 34 for end notes CVS Health 28

29 Guidance: 2015 Full-Year Consolidated Income Statement Full-year 2015 Corporate Segment Expense $785 million to $800 million Intercompany Eliminations (% of combined segment revenues) ~ 10.8% Gross Profit Margin Notably down Operating Expense (% of revenue) Notable improvement Operating Profit Margin Flat to up 10 bps 2015 CVS Health 29

30 Guidance: 2015 Full-Year Consolidated Income Statement Full-year 2015 Net Interest t Expense $540 million to $550 million Effective Tax Rate ~ 39.3% 3% Weighted Average Shares (4) ~ 1.12 billion Consolidated Amortization ~ $520 million Consolidated D&A ~ $2.0 billion Refer to page 34 for end notes CVS Health 30

31 Guidance: 2015 Q2 Enterprise Revenue and Earnings Per Share Q Net Revenue Growth 6.25% to 7.75% Adjusted EPS (1) (4) Year-over-year Growth $1.17 to $ % to 6.0% GAAP Diluted EPS $1.10 to $1.13 Refer to page 34 for end notes CVS Health 31

32 Guidance: 2015 Q2 Segment Performance Q Net Revenue Growth 0.5% to 2.0% Retai l Pharma acy Same store sales (6) (1.25)% to 0.25% Same store adjusted scripts 4.25% to 5.25% Operating Profit Growth (4.0)% to (2.0)% Pharm acy Servic ces Net Revenue Growth 11.25% to 12.5% Operating Profit Growth 5.0% to 9.0% Refer to page 34 for end notes CVS Health 32

33 Guidance: 2015 Full-Year Substantial Free Cash Flow (billions) Full-year 2015 Operating Cash Flow $7.6 to $7.9 Gross Capital Expenditures ~ ($2.3) to ($2.2) Sale-leaseback proceeds (7) $0.6 to $0.5 Net Capital Expenditures ~ ($1.7) Free Cash Flow Year-over-year Growth $5.9 to $6.2 Flat to 7% Refer to page 34 for end notes CVS Health 33

34 Endnotes 1. Adjusted EPS equals income before income tax provision plus amortization, less adjusted income tax provision and other (comprised of earnings allocated to participating securities), less net income attributable to noncontrolling interest, divided by the weighted average diluted common shares outstanding. The adjusted income tax provision is computed using the effective income tax rate computed from the consolidated statement of income. 2. Excludes $521 million loss on early extinguishment of debt (~$0.27 per diluted share) recognized in Includes the adjustment to convert 90-day, non-specialty prescriptions to the equivalent of three 30-day prescriptions. This adjustment reflects the fact that these prescriptions include approximately three times the amount of product days supplied compared to a normal 30-day prescription 4. Estimates for weighted-average share count and EPS assume completion of approximately $6.0 billion in share repurchases in 2015 as part of a $6.0 billion share repurchase program authorized by CVS Health s board of directors in December 2013, and a $10.0 billion share repurchase program authorized by CVS Health s board of directors in December We expect the tobacco exit to have a negative impact on total same-store sales of approximately 175 basis points for the full year We also expect it to have a negative impact of approximately 575 basis points on front store same-store sales for the full year We expect the tobacco exit to have a negative impact on front store same-store store sales of approximately 800 basis points for the second quarter of CVS Health finances a portion of its store development program through sale-leaseback transactions. Use of sale-leaseback financing is subject to change, as we evaluate a variety of financing vehicles for future development; this may also result in changes to our definition of free cash flow CVS Health 34

Earnings. Larry Merlo. President & Chief Executive Officer. Executive Vice President & Chief Financial Officer. November 4, 2014

Earnings. Larry Merlo. President & Chief Executive Officer. Executive Vice President & Chief Financial Officer. November 4, 2014 Third dquate Quarter Earnings Conference Call Larry Merlo President & Chief Executive Officer Dave Denton Executive Vice President & Chief Financial Officer November 4, 2014 Forward-looking Statements