CVS Health Corporation · NYSE:CVS
CVS Health — Q4 2015 Earnings Presentation
39 slides from CVS Health's earnings presentation, Feb 9, 2016
Slide 1: Fourth Quarter 2015 Earnings Conference Call
Fourth ou t Qua Quarter te 2015 0 5 Earnings Conference Call Larry y Merlo President & Chief Executive Officer Dave Denton Executive Vice President & Chief Financial Officer February 9, 2016
Slide 2: Forward-looking Statements
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 tho
Slide 3: Business Review
Fourth Quarter 2015 Earnings Conference Call Business Review Larry Merlo President & Chief Executive Officer February 9, 2016 © 2016 CVS Health
Slide 4: 2015 Was a Terrific Year
2015 Was a Terrific Year Full-Year 2015 Change vs. 2014 Consolidated net revenues $153.3 billion 10.0% Consolidated operating profit (1) $9.8 billion 11.0% Adj t d EPS (2) Adjusted $5 16 $5.16 14 8% 14.8% Free Cash Flow (3) $6.5 billion (0.9)% Completed two key acquisitions that support our strategy
Slide 5: Fourth Quarter: Continued Strong Results
Fourth Quarter: Continued Strong Results Change vs. Q4 Q4 2015 2014 Consolidated net revenues $41.1 billion 11.0% Consolidated operating profit (4) $2.9 billion 24.6% Adjusted EPS (5) $1.53 26.5% Free Cash Flow (6) $3.1 billion (5.5)% Refer to pages 38-39 for end notes. 5 © 2016 CVS Health
Slide 6: 2016 Selling Season
PBM Business: 2016 Selling Season • Gross client wins of $14.8 billion and net wins of $12.7 billion – Increase in net new business of $1.2 billion from last update largely reflects incremental growth from new health plan clients as they closed out enrollment year – Excludes impact from our individu
Slide 7: Specialty Pharmacy Top of Mind for Clients
PBM Business: Specialty Pharmacy Top of Mind for Clients • CVS Specialty offers comprehensive set of programs to effectively manage specialty trend • Healthy revenue growth of 32% year-over-year in Q4 • CVS Specialty continues to outpace market and gain share 7 © 2016 CVS Health
Slide 8: SilverScript is Clear Leader in Med D Space
PBM Business: SilverScript is Clear Leader in Med D Space • Successful 2016 annual enrollment period, consistent with expectations – Added ~ 500,000 net lives and began 2016 plan year with more than 3.9 million individual PDP lives – Including I l di ~ 1.1 1 1 million illi EGWP lilives, more th than
Slide 9: Omnicare Integration
Retail/LTC Business: Omnicare Integration • Business performing well and in line with expectations; multiple opportunities exist to drive enterprise value • Expect to complete majority of Omnicare integration activities by year end – First half of 2016: expect to achieve benefits of purchasing syner
Slide 10: Target Pharmacy & Clinic Integration
Retail/LTC Business: Target Pharmacy & Clinic Integration • Integration activities well underway • Store conversions expected to be completed by end of the summer – Pilot stores already successfully converted – Conversions will ramp throughout Q1 and Q2 • Maintenance Choice was available to all CVS
Slide 11: Q4 Pharmacy Revenue and Script Growth
Retail/LTC Business: Q4 Pharmacy Revenue and Script Growth • Pharmacy same-store sales increased 5.0% – Negative impact of ~ 470 bps from new generic drug introductions • Script comps increased 5.0% on a 30-day equivalent basis (8), outperforming overall market growth • Retail pharmacy market share
Slide 12: Medicare Part D
Retail/LTC Business: Medicare Part D • CVS Pharmacy’s Med D share increased 35 bps during full-year 2015 • Continue to gain share while maintaining disciplined approach to evaluating gpparticipation p in p preferred Med D networks • Expect to maintain market share position in 2016 12 © 2016 CVS Heal
Slide 13: Enterprise Digital
Retail/LTC Business: Enterprise Digital • Creating a “Connected Health” experience that makes it easier to save time and money money, and to stay healthy by connecting patients to our unique assets when, where and how they want • To date: – 12.7 million downloads of the CVS Pharmacy app – 18 million
Slide 14: Q4 Front Store Revenue and Gross Margin
Retail/LTC Business: Q4 Front Store Revenue and Gross Margin • Front store comps declined 0.5% • Softer customer traffic partially offset by increase in basket size • Front store g gross margins g increased notably, y, benefiting g from: – Efforts to rationalize promotional strategies – Growth in hi
Slide 15: Store Brands and Health & Beauty
Retail/LTC Business: Store Brands and Health & Beauty • Store Brands share of our front store sales was 22% in Q4, down slightly from prior year Q4; up 75 bps in 2015, to 21.3% • In 2015, gained ~ 140 bps of share in store brand overall sales within Drug channel and gained 60 bps of share in store b
Slide 16: Retail Pharmacy Real Estate Update
Retail/LTC Business: Retail Pharmacy Real Estate Update Stores at 2014 year-end 7,839 Stores at Q3 end 7,944 Opened 161 Opened 53 Acquired 1,686 Acquired from Target 1,672 Closed ((31)) Closed ((14)) Stores at 2015 year-end 9,655 Stores at Q4 end 9,655 Net new retail drugstores 130 Net new retail dr
Slide 17: CVS/minuteclinic
Retail/LTC Business: CVS/minuteclinic • Largest walk-in retail clinic operator in the country • Operate 1,135 clinics across 33 states and Washington, D.C. – 36 new clinics added in Q4 in addition to 79 clinics acquired from Target • Revenues up 4.4% 4 4% vs. vs same quarter a year ago ago, excludin
Slide 18: Financial Review
Fourth Quarter 2015 Earnings Conference Call Financial Review Dave Denton Executive Vice President & Chief Financial Officer February 9, 2016 © 2016 CVS Health
Slide 19: Capital Allocation
Financial Update: Capital Allocation • Dividends of $391 million in Q4; $1.6 billion in 2015 – Dividend payout ratio of 30.1%, 30 1% more than double 2010 2010’s s level and 240 bps higher than 2014 – Still on track to reach 35% targeted payout ratio by 2018 • Over past three years, repurchased ~ 16
Slide 20: Free Cash Flow
Financial Update: Free Cash Flow • In Q4, generated ~ $3.1 billion of free cash (6) • In 2015, generated ~ $6.5 billion of free cash (3), exceeding high end of guidance by ~ $200 million – Outperformance driven by client collections – Improved cash cycle by ~ 2 days due to improvements in payables m
Slide 21: Earnings per Share
Q4 2015 Income Statement: Earnings per Share • Q4 Adjusted EPS of $1.53 (5), at midpoint of guidance – Up 26.5% over LY (5) – Excludes: • Amortization of intangible assets • Impact of transaction and integration costs related to the Omnicare and Target acquisitions • Charge related to a disputed 199
Slide 22: Revenues
Q4 2015 Income Statement: Revenues • Consolidated revenues of $41.1 billion, up 11% vs. LY • PBM revenues of $26.5 billion, up 11.1% vs. LY – Growth driven by specialty pharmacy and increased volume in pharmacy network claims • PBM adjusted claims grew 6.4% (8) – Partially offset by increase in GDR
Slide 23: Revenues
Q4 2015 Income Statement: Revenues • Retail/LTC revenues of $19.9 billion, up 12.5% vs. LY – Growth driven by strong pharmacy same store sales and addition of Omnicare – Exceeded revenue guidance primarily due to addition of Target assets earlier than planned and lower GDR than expected – Retail/LTC
Slide 24: Gross Profit Margin
Q4 2015 Income Statement: Gross Profit Margin • Consolidated gross margin of 17.7%, down ~ 15 bps vs. LY – Consistent with expectations • PBM gross margin of 5.6%, up ~ 45 bps vs. LY – PBM gross profit dollars up 20.5% – Increase due to increase in volumes, improvement in GDR and favorable rebate an
Slide 25: Gross Profit Margin
Q4 2015 Income Statement: Gross Profit Margin • Retail/LTC gross margin of 30.2%, down 125 bps vs. LY – Decline due primarily to continued pressure on pharmacy reimbursement rates; lesser factor was addition of Omnicare, which carries lower margins than retail – Partially offset by increase in GDR a
Slide 26: Operating Expenses
Q4 2015 Income Statement: Operating Expenses • Consolidated: expenses were 10.7% of revenues (10) • PBM: expenses were 1.3% of revenues … ~ 10 bps YOY improvement • Retail/LTC: expenses were 19.4% of revenues (11) … ~ 190 bps YOY improvement – Driven by lower advertising costs in 2015 due to tobacco
Slide 27: Operating Profit Margin
Q4 2015 Income Statement: Operating Profit Margin • Consolidated operating margin of 7% (4), up ~ 75 bps vs. LY • PBM operating margin of 4.3%, up ~ 55 bps vs. LY • Retail/LTC operating p g of 10.7% (13), up g margin p ~ 65 bps p vs. LY Refer to pages 38-39 for end notes. 27 © 2016 CVS Health
Slide 28: Operating Profit
Q4 2015 Income Statement: Operating Profit • PBM – PBM operating profit increased 26.8% • Retail/LTC – Retail/LTC operating profit increased by 19.8% (13) Refer to pages 38-39 for end notes. 28 © 2016 CVS Health
Slide 29: Below the line
Q4 2015 Income Statement: Below the line Below-the-line • Net interest expense of $276 million, up ~ $145 million vs. LY – Driven by debt associated with the acquisitions • Effective tax rate (14) of 38.9% in Q4; 39.1% in 2015 • Weighted-average share count of 1.1 billion shares Refer to pages 38-39
Slide 30: Healthy Enterprise Growth
Guidance: 2016 Full-year (19) Healthy Enterprise Growth Full-year 2016 Net Revenue Growth 17.0% to 18.5% Adjusted EPS (15) $5.73 to $5.88 Year-over-year Growth (2) 11.0% to 14.0% GAAP Diluted EPS $5.28 to $5.43 Refer to pages 38-39 for end notes. 30 © 2015 CVS Health
Slide 31: Strong PBM Outlook
Guidance: 2016 Full-year (19) Strong PBM Outlook Full-year 2016 N tR Net Revenue Growth G th 20 25% to 20.25% t 21.75% 21 75% Total Adjusted Claims (8) 1 33 billion to 1 1.33 1.35 35 billion Gross Profit Margin Moderate decline Operating Expense Modest improvement (% of revenue) Operating Profit Gro
Slide 32: Solid Outlook in Retail/LTC
Guidance: 2016 Full-year (19) Solid Outlook in Retail/LTC Full-year 2016 N tR Net Revenue Growth G th 14 25% tto 15 14.25% 15.50% 50% Same-store Sales (17) 2.75% to 4.0% Same-store Adjusted Scripts (8) 3.5% to 4.5% Gross Profit Margin Significant decline Operating Expense Moderate improvement (% of
Slide 33: Consolidated Income Statement
Guidance: 2016 Full-year (19) Consolidated Income Statement Full-year 2016 C Corporate t SSegmentt Expense E $860 million illi tot $870 million illi Intercompany Eliminations ~ 11.6% 11 6% (% of combined segment revenues) Gross Profit Margin Significant decline Operating Expense Moderate improvement
Slide 34: Consolidated Income Statement
Guidance: 2016 Full-year (19) Consolidated Income Statement Full-year 2016 N t IInterest Net t t Expense E $1 13 billion $1.13 billi tot $1.14 $1 14 billi billion Effective Tax Rate ~ 39.0% 39 0% Weighted Average Shares (15) ~ 1.08 billion Consolidated Amortization ~ $800 million Consolidated D&A ~
Slide 35: Enterprise Revenue and Earnings Per Share
Guidance: 2016 Q1 (19) Enterprise Revenue and Earnings Per Share Q1 2016 Net Revenue Growth 17.0% to 18.5% Adjusted EPS (19) $1.14 to $1.17 Year-over-year Growth Flat to up 3.0% GAAP Diluted EPS $1.03 to $1.06 Refer to pages 38-39 for end notes. 35 © 2015 CVS Health
Slide 36: Segment Performance Q1 2016
Guidance: 2016 Q1 Segment Performance Q1 2016 Net Revenue Growth 19.0% to 20.5% acy Retail Pharma Same store S t l (17) sales 4 5% to 4.5% t 6.0% 6 0% Same store adjusted scripts 4.75% to 5.75% Operating Profit Growth (19) 5.0% to 7.0% Pharmacy Net Revenue Growth 18.0% to 19.25% ces Servic Operating
Slide 37: Substantial Free Cash Flow
Guidance: 2016 Full-year (20) Substantial Free Cash Flow (billions) Full-year 2016 Operating Cash Flow $7.6 to $7.9 G Gross Capital C it l Expenditures E dit ~ ($2.6) ($2 6) tto ($2 ($2.5) 5) Sale-leaseback proceeds (18) $0.3 to $0.2 Net Capital Expenditures ~ ($2.3) Free Cash Flow $5 3 to $5 $5.3 $
Slide 38: Endnotes
Endnotes 1 1. Consolidated operating profit for the year ended December 31 31, 2015 2015, has been adjusted to exclude $52 million of acquisition acquisition- related bridge financing costs, $220 million of acquisition-related transaction and integration costs, and a $90 million charge related to a
Slide 39: Endnotes
Endnotes 14 14. Tax rate for the year ended December 31 31, 2015 2015, has been adjusted to exclude $52 million of acquisition-related acquisition related bridge financing costs, $220 million of acquisition-related transaction and integration costs, and a $90 million charge related to a disputed 199