First
st Qua
Quarter
te 2015
0 5
Earnings Conference Call
Larry
y Merlo
President & Chief Executive Officer
Dave Denton
Executive Vice President &
Chief Financial Officer
May 1, 2015
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
forward-looking
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
g 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.
© 2015 CVS Health
2
First Quarter 2015
Earnings Conference Call
Business Review
Larry Merlo
President &
Chief Executive Officer
May 1, 2015
© 2015 CVS Health
First Quarter: Strong Start to 2015
Q1 2015
Change vs. Q1 2014
$1.14
12.2%
Retail Operating Profit
$1,727 million
(1.3)%
PBM O
Operating
ti P
Profit
fit
$734 million
illi
14 6%
14.6%
Free Cash Flow
$1.6 billion
(11.2)%
Adjusted EPS (1)
Refer to page 34 for end notes.
© 2015 CVS Health
4
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 p
primarily
y by
yg
growth in membership
p 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
well-positioned
positioned to provide differentiated products and services
that generate savings for clients; resonating strongly in the market
© 2015 CVS Health
5
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
PBM Business:
Specialty Pharmacy
•
Strong results, with revenues up 46% year-over-year in Q1
–
•
Healthy growth in Specialty Infusion (Coram)
–
•
Key drivers: volume, new products, inflation, impact of Specialty
Connect
Number of infusion patients serviced grew 15.7% from Q1 2014
Using our leading formulary strategies to control Hepatitis C costs,
and anticipate using similar tools to manage PCSK9 inhibitors
© 2015 CVS Health
7
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
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
Q1 2014
•
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.
© 2015 CVS Health
9
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
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
g 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
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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
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
q
footage
g of ~ 2%
© 2015 CVS Health
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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
l t db
by mid-year
id
•
TeleHealth pilot in CA and TX has now seen 13,000 patients with
very high levels of customer satisfaction
© 2015 CVS Health
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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
i ifi
t strides
t id
•
Extremely pleased with rapid progress to date, and we look forward
to its future contributions
© 2015 CVS Health
15
First Quarter 2015
Earnings Conference Call
Financial Review
Dave Denton
Executive Vice President &
Chief Financial Officer
May 1, 2015
© 2015 CVS Health
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
•
A
Average
price
i off $100
$100.64
64 per share
h
•
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
year over year
© 2015 CVS Health
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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 2015
© 2015 CVS Health
18
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.
© 2015 CVS Health
19
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
83.5%,
5% up ~ 150 bps vs
vs. Q1 2014
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
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
exit, and increased store brand penetration
–
Retail gross profit dollars up 2.1%
© 2015 CVS Health
21
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
•
R t il expenses were 21.0%
Retail:
21 0% off revenues … ~ 20 b
bps YOY d
deterioration
t i 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
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%,
14 6% greatly
greatl exceeding
e ceeding e
expectations
pectations
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
tobacco, retail operating profit increased
~ 1.7%
© 2015 CVS Health
23
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 1.1
Weighted-average
1 1 billion shares
•
Effective tax rate of 38.9%, slightly lower than expected
© 2015 CVS Health
24
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
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)
GAAP Diluted EPS
13.0% to 15.50%
$4.80 to $4.91
Refer to page 34 for end notes.
© 2015 CVS Health
26
Guidance: 2015 Full-Year
Strong PBM Outlook
Full-year 2015
N tR
Net
Revenue Growth
G
th
Total Adjusted Claims (3)
11 25% to
11.25%
t 12.25%
12 25%
1 13 billion to 1
1.13
1.15
15 billion
Gross Profit Margin
Modest decline
Operating Expense
Modest improvement
(% of revenue)
Operating Profit Growth
Operating Profit Margin
7.75% to 10.75%
Down 5 bps to 15 bps
Refer to page 34 for end notes.
© 2015 CVS Health
27
Guidance: 2015 Full-Year
Solid Outlook in Retail
Full-year 2015
N tR
Net
Revenue Growth
G
th
1 25% tto 2
1.25%
2.50%
50%
Same-store Sales (5)
Same-store Adjusted Scripts (3)
(0.5)% to 0.75%
4.0% to 5.0%
Gross Profit Margin
g
Flat to up
Operating Expense
Modest improvement
(% of revenue)
Operating Profit Growth
Operating Profit Margin
4.75% to 6.50%
Up 35 bps to 40 bps
Refer to page 34 for end notes.
© 2015 CVS Health
28
Guidance: 2015 Full-Year
Consolidated Income Statement
Full-year 2015
C
Corporate
t S
Segmentt E
Expense
Intercompany Eliminations
(% of combined segment revenues)
$785 million
illi to
t $800 million
illi
10 8%
~ 10.8%
Gross Profit Margin
Notably down
Operating Expense
Notable improvement
(% of revenue)
Operating Profit Margin
© 2015 CVS Health
Flat to up 10 bps
29
Guidance: 2015 Full-Year
Consolidated Income Statement
Full-year 2015
N t IInterest
Net
t
t Expense
E
Effective Tax Rate
$540 million
illi to
t $550 million
illi
~ 39.3%
39 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.
© 2015 CVS Health
30
Guidance: 2015 Q2
Enterprise Revenue and Earnings Per Share
Q2 2015
Net Revenue Growth
6.25% to 7.75%
Adjusted EPS (1) (4)
$1.17 to $1.20
Year-over-year Growth
GAAP Diluted EPS
3.25% to 6.0%
$1.10 to $1.13
Refer to page 34 for end notes.
© 2015 CVS Health
31
Guidance: 2015 Q2
Segment Performance
Q2 2015
Pharmacy
Servic
ces
Retail
Pharma
acy
Net Revenue Growth
Same store
S
t
sales
l (6)
Same store adjusted scripts
0.5% to 2.0%
(1 25)% to
(1.25)%
t 0.25%
0 25%
4.25% to 5.25%
Operating Profit Growth
(4.0)% to (2.0)%
Net Revenue Growth
11.25% to 12.5%
Operating Profit Growth
5.0% to 9.0%
Refer to page 34 for end notes.
© 2015 CVS Health
32
Guidance: 2015 Full-Year
Substantial Free Cash Flow
(billions)
Full-year 2015
O
Operating
ti Cash
C h Flow
Fl
$7 6 tto $7.9
$7.6
$7 9
Gross Capital Expenditures
Sale-leaseback proceeds (7)
Net Capital Expenditures
Free Cash Flow
Year-over-year Growth
~ ($2.3) to ($2.2)
$0.6 to $0.5
~ ($1.7)
(
)
$5.9 to $6.2
Flat to 7%
%
Refer to page 34 for end notes.
© 2015 CVS Health
33
Endnotes
1.
2.
3.
4.
5.
6
6.
7.
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
g
average
g diluted common shares outstanding.
g The adjusted
j
income tax p
provision is computed
p
using
g the effective
the weighted
income tax rate computed from the consolidated statement of income.
Excludes $521 million loss on early extinguishment of debt (~$0.27 per diluted share) recognized in 2014.
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
Estimates for weighted
weighted-average
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 2014.
We expect the tobacco exit to have a negative impact on total same-store sales of approximately 175 basis points for the full
year 2015. We also expect it to have a negative impact of approximately 575 basis points on front store same-store sales for
the full year 2015.
We expect the tobacco exit to have a negative impact on front store same-store
same store sales of approximately 800 basis points for
the second quarter of 2015.
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.
© 2015 CVS Health
34