CVS Health Corporation · NYSE:CVS
CVS Health — Q1 2015 Earnings Presentation
34 slides from CVS Health's earnings presentation, May 1, 2015
Slide 1: First Quarter 2015 Earnings Conference Call
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
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
First Quarter 2015 Earnings Conference Call Business Review Larry Merlo President & Chief Executive Officer May 1, 2015 © 2015 CVS Health
Slide 4: First Quarter: Strong Start to 2015
First Quarter: Strong Start to 2015 Q1 2015 Change vs. Q1 2014 Adjusted EPS (1) $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)% Refer to page 34 for end notes. © 2015 CVS Health 4
Slide 5: PBM Business: Selling Season Updates
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 pprimarily y by yggrowth in membership p within some health plan clients as well as some additional wins 2016 • Completed about a th
Slide 6: PBM Business: Managing Trend
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
Slide 7: PBM Business: Specialty Pharmacy
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 Q1 2014 • Using our leading f
Slide 8: PBM Business: Biosimilars
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 strat
Slide 9: Retail Business: Revenue and Script Growth
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 ~ 2
Slide 10: Retail Business: Front Store Trends
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/co
Slide 11: Retail Business: Front Store Updates
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) •
Slide 12: Retail Business: Store Brands
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 penet
Slide 13: Retail Business: Real Estate Update
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 13
Slide 14: Retail Business: CVS/minuteclinic
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 record
Slide 15: Cardinal Health Venture: Red Oak Sourcing
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, an
Slide 16: Financial Review
First Quarter 2015 Earnings Conference Call Financial Review Dave Denton Executive Vice President & Chief Financial Officer May 1, 2015 © 2015 CVS Health
Slide 17: Financial Update: Capital Allocation
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 wr
Slide 18: Financial Update: Cash Flows
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
Slide 19: Income Statement: Earnings per Share
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
Slide 20: Income Statement: Revenues
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
Slide 21: Income Statement: Gross Profit Margin
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 – Partiall
Slide 22: Income Statement: Operating Expenses
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 ret
Slide 23: Income Statement: Operating Profit Margin
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 m
Slide 24: Income Statement: Below-the-line
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
Slide 25: Financial Update: Guidance
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
Slide 26: Guidance 2015 Full-Year: Healthy Enterprise Growth
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. © 2015 CVS Health 26
Slide 27: Guidance 2015 Full-Year: Strong PBM Outlook
Guidance: 2015 Full-Year Strong PBM Outlook Full-year 2015 N tR Net Revenue Growth G th 11 25% to 11.25% t 12.25% 12 25% Total Adjusted Claims (3) 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 7.7
Slide 28: Guidance 2015 Full-Year: Solid Outlook in Retail
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) (0.5)% to 0.75% Same-store Adjusted Scripts (3) 4.0% to 5.0% Gross Profit Margin g Flat to up Operating Expense Modest improvement (% of revenue) Operating Pr
Slide 29: Guidance 2015 Full-Year: Consolidated Income Statement
Guidance: 2015 Full-Year Consolidated Income Statement Full-year 2015 C Corporate t SSegmentt E Expense $785 million illi tot $800 million illi Intercompany Eliminations ~ 10.8% 10 8% (% of combined segment revenues) Gross Profit Margin Notably down Operating Expense Notable improvement (% of revenu
Slide 30: Guidance 2015 Full-Year: Consolidated Income Statement
Guidance: 2015 Full-Year Consolidated Income Statement Full-year 2015 N t IInterest Net t t Expense E $540 million illi tot $550 million illi Effective Tax Rate ~ 39.3% 39 3% Weighted Average Shares (4) ~ 1.12 billion Consolidated Amortization ~ $520 million Consolidated D&A ~ $2.0 billion Refer to
Slide 31: Guidance 2015 Q2: Enterprise Revenue and Earnings Per Share
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 3.25% to 6.0% GAAP Diluted EPS $1.10 to $1.13 Refer to page 34 for end notes. © 2015 CVS Health 31
Slide 32: Guidance 2015 Q2: Segment Performance
Guidance: 2015 Q2 Segment Performance Q2 2015 Net Revenue Growth 0.5% to 2.0% acy Retail Pharma Same store S t l (6) sales (1 25)% to (1.25)% t 0.25% 0 25% Same store adjusted scripts 4.25% to 5.25% Operating Profit Growth (4.0)% to (2.0)% Pharmacy Net Revenue Growth 11.25% to 12.5% ces Servic Opera
Slide 33: Guidance 2015 Full-Year: Substantial Free Cash Flow
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 ~ ($2.3) to ($2.2) Sale-leaseback proceeds (7) $0.6 to $0.5 Net Capital Expenditures ~ ($1.7) ( ) Free Cash Flow $5.9 to $6.2 Year-over-yea
Slide 34: Endnotes
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 g the weighted average g diluted commo