CVS Health Corporation · NYSE:CVS
CVS Health — Q3 2014 Earnings Presentation
37 slides from CVS Health's earnings presentation, Nov 4, 2014
Slide 1: Third Quarter Earnings Conference Call
Third d Quarter Qua te Earnings Conference Call Larry y Merlo President & Chief Executive Officer Dave Denton Executive Vice President & Chief Financial Officer November 4, 2014
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
Third Quarter 2014 Earnings Conference Call Business Review Larry Merlo President & Chief Executive Officer November 4, 2014 © 2014 CVS Health 3
Slide 4: Third Quarter: Continued Strength in 2014
Third Quarter: Continued Strength in 2014 Q3 2014 Change vs. Q3 2013 Adjusted EPS(1) (2) (3) $1.15 9.0% Retail Operating Profit (4) $1,527 million 8.8% PBM O Operating ti P fit (5) Profit $1 086 million $1,086 illi 8 5% 8.5% Free Cash Flow (YTD) $3,606 million 17.4% Refer to page 37 for end notes. ©
Slide 5: 2015 Selling Season Update
PBM Business: 2015 Selling Season Update • Gross wins of $6.4 billion, up $1 billion from last update • Net-new business of $3.1 billion, up $500 million from last update – Business lost to-date: • ~50% due to acquisition • ~25% due to clients that shifted a subset of their members (namely retiree p
Slide 6: Specialty Pharmacy
PBM Business: Specialty Pharmacy • Strong results, with revenues up ~53% year-over-year in Q3 – Key drivers: new business; Sovaldi, the new hepatitis C drug; and the addition of Coram infusion business • Through Q3, numerous clients have signed up for our site-of-service management product enabled b
Slide 7: SilverScript
PBM Business: SilverScript • Currently ~3 million lives enrolled in our individual PDP • Expect to end year with approximately the same amount, with monthly add-ins expected to offset normal monthly attrition • Significant opportunity to grow individual PDP business over the long term © 2014 CVS Hea
Slide 8: Revenue and Script Growth
Retail Business: Revenue and Script Growth • Total same-store sales increased 2.0% • Pharmacy same-store sales increased 4.8%; market share up ~40 basis points – N Negative i iimpact off ~190bps 190b ffrom new generic i ddrug iintroductions d i – Negative impact of ~190bps due to transfer of special
Slide 9: Medicare Part D
Retail Business: Medicare Part D • In 2014, CVS is preferred in 5 of the top 10 Med D plans (based on lives) • For 2015, we have contracted with 20 regional and national Med D p plans • We will continue to use our economic model to make sound decisions with respect to participation © 2014 CVS Health
Slide 10: Front Store Trends
Retail Business: Front Store Trends • Front store comps decreased 4.5% – Comps would have been ~480bps higher if tobacco and estimated associated basket sales were excluded – Adjusting for the tobacco impact in Q3 and the Easter shift in Q2 Q2, pro forma front store comps would reflect modest sequen
Slide 11: Store Brands & Personalization
Retail Business: Store Brands & Personalization • Store Brands saw notable gains in Q3 – Share of our front store sales increased ~210bps to 20.1% in Q3 – Roughly half of improvement in store brand penetration relates to tobacco exit – Gains in health, beauty, general merchandise and edibles • Signi
Slide 12: Real Estate Update
Retail Business: Real Estate Update • Navarro Discount Pharmacy acquisition completed on September 4th includes 33 retail drugstores • In addition to Navarro, opened 45 new retail drugstores, relocated 13, and closed 4, resulting g in 74 net-new retail drugstores g overall in Q3 • On track to achiev
Slide 13: Continued Strong Growth at CVS/minuteclinic
Retail Business: Continued Strong Growth at CVS/minuteclinic • Revenues and customer visits up more than 25% and 30%, respectively vs respectively, vs. same quarter last year • Operate 936 clinics in 30 states and Washington D.C. – 76 net new clinics added in Q3 – Plan to open more than 30 new clini
Slide 14: Cardinal Health Venture: Red Oak Sourcing
Business Update: Cardinal Health Venture: Red Oak Sourcing • Largest generic sourcing entity in the U.S. • To date, Red Oak Sourcing has met with approximately 40 suppliers covering more than 90% of the cumulative generic spend • Manufacturers continue to be transitioned from legacy purchasing progr
Slide 15: Financial Review
Third Quarter 2014 Earnings Conference Call Financial Review Dave Denton Executive Vice President & Chief Financial Officer November 4, 2014 © 2014 CVS Health 15
Slide 16: Capital Allocation
Financial Update: Capital Allocation • Returned more than $1.1 billion to shareholders in Q3; more than $3 7 billion YTD $3.7 – Dividends of $324 million • Already surpassed targeted payout ratio of 25% in 2014 • Still on track to reach 35% targeted payout ratio by 2018 – Repurchased more than 10 mi
Slide 17: Cash Flows
Financial Update: Cash Flows • Generated more than $1.4 billion of free cash in Q3; ~$3.6 billion YTD – Driven by healthy growth in earnings and improvements in retail cash cycle • Expect between $5.7 and $6.0 billion in free cash for 2014, up from previous guidance of $5.5 to $5.8 billion – Driven
Slide 18: Earnings per Share
Income Statement: Earnings per Share • Adjusted EPS grew 9.0%, to $1.15 in Q3 (1) (2) (3) – 1¢ per share above high end of guidance range – Includes expected 3¢ negative impact from tobacco exit – Reflects strong growth across our operating segments • GAAP diluted EPS of $0.81 per share Refer to pag
Slide 19: Debt Transactions
Income Statement/Balance Sheet: Debt Transactions • Retired $2.0 billion of long-term debt at average rate of 6.0% • Issued $1.5 billion at average rate of 2.74% – $850 million, 2.25% note due 2019 – $650 million, 3.375% note due 2024 • Before tax cost of $521 million in Q3 – Approximately 27¢ per s
Slide 20: Revenues
Income Statement: Revenues • Consolidated revenues of $35 billion, up 9.7% vs LY • PBM revenues of $22.5 billion, up 15.7% vs. LY – Strong performance driven by specialty, branded drug inflation, net-new business and product mix – Offset to some degree by lower mail choice claims and an increase in
Slide 21: Segment Mix Shift and Tobacco Effects
Income Statement: Segment Mix Shift and Tobacco Effects • Implementation of Specialty Connect (SC) continues to transfer revenues from retail into PBM – As expected, shift enhanced year-over-year top-line growth in the PBM by ~115bps with a negative impact on retail pharmacy comps of 190bps • Exit f
Slide 22: Gross Profit Margin
Income Statement: Gross Profit Margin • Consolidated gross margin of 18.5%, down ~40bps vs. LY driven by mix shift and modest decline in PBM gross margin • PBM gross margin of 6.2%, down ~40bps vs. LY – PBM gross profit dollars up ~8.4% – Decrease primarily driven by typical client compression and d
Slide 23: Operating Expenses
Income Statement: Operating Expenses • Consolidated operating expenses were 12.1% of consolidated revenues an improvement of ~30bps revenues, vs LY ((2)) 30bps vs. • PBM expenses were 7.9% of PBM revenues, an improvement of ~10bps to LY (5) • Retail expenses were 22.1% of retail revenues, an increas
Slide 24: Operating Profit Margin
Income Statement: Operating Profit Margin • Consolidated operating margin of 6.4%, a decline of ~10bps vs. LY (2) • PBM operating margin of 4.8%, a decline of ~30bps vs. LY (5) – Strong operating profit growth of 8.5% vs. LY, higher than expected • Retail operating margin of 9.1%, 9 1% an improvemen
Slide 25: Below-the-line
Income Statement: Below-the-line • Net interest expense of $153 million, up ~$32 million vs LY – Primarily driven by debt issued in Q4 2013, though saw some benefit from debt extinguishment at the end of Q3 2014 • Weighted-average share count of 1.16 billion shares • Effective tax rate of 39.7% © 20
Slide 26: Solid Enterprise Growth
Guidance: 2014 Full-Year Solid Enterprise Growth Full-year 2014 Net Revenue Growth ~9.0-9.5% Adjusted EPS (1)(8) $4.47 to $4.50 Year-over-year Growth (2) (3) ~12.75% to 13.5% GAAP Diluted EPS $3.93-$3.96 Refer to page 37 for end notes. © 2014 CVS Health 26
Slide 27: Enterprise Revenue and Earnings Per Share
Guidance: 2014 Fourth Quarter Enterprise Revenue and Earnings Per Share Q4 2014 Net Revenue Growth ~9.0%-10.5% Adjusted EPS (1)(8) $1.18 to $1.21 Year-over-year Growth (2) 6% to 8.75% GAAP Diluted EPS $1.12-$1.15 Refer to page 37 for end notes. © 2014 CVS Health 27
Slide 28: Retail Pharmacy
Guidance: 2014 Fourth Quarter Retail Pharmacy Q4 2014 N tR Net Revenue Growth G th 0 25% tto 1 0.25% 1.75% 75% Same-store Sales (1.0%) to 0.5% Same-store Adjusted Scripts (7) 3.5% to 4.5% Gross Profit Margin g Significant g improvement Operating Expense Moderate decline (% of revenue) Operating Prof
Slide 29: PBM
Guidance: 2014 Fourth Quarter PBM Q4 2014 N tR Net Revenue Growth G th 16 75% to 16.75% t 18.25% 18 25% Total Adjusted Claims (7) 270 million to 275 million Gross Profit Margin Notable decline Operating Expense Modest improvement (% of revenue) Operating Profit Growth Flat to 2% Operating Profit Mar
Slide 30: Consolidated Income Statement
Guidance: 2014 Fourth Quarter Consolidated Income Statement Q4 2014 C Corporate t SSegmentt E Expense $200 million illi tot $205 million illi Intercompany Eliminations 10.8% ~10 8% (% of combined segment revenues) Gross Profit Margin Significantly down Operating Expense Notable improvement (% of rev
Slide 31: Consolidated Income Statement
Guidance: 2014 Fourth Quarter Consolidated Income Statement Q4 2014 N t IInterest Net t t Expense E $125 million illi tot $135 million illi Effective Tax Rate ~40 40.0% 0% Weighted Average Shares (8) ~1.15 billion Consolidated Amortization ~$130 million Refer to page 37 for end notes. © 2014 CVS Hea
Slide 32: Substantial Free Cash Flow
Guidance: 2014 Full-Year Substantial Free Cash Flow (billions) Full-year 2014 O Operating ti Cash C h Flow Fl $7 4 tto $7.7 $7.4 $7 7 Gross Capital Expenditures ~($2.3) to ($2.2) Sale-leaseback proceeds (9) $0.6 to $0.5 Net Capital Expenditures ~(1.7) ( ) Free Cash Flow ~$5.7 to $6.0 Refer to page 3
Slide 33: Healthy Outlook in Retail
Guidance: 2014 Full-Year Healthy Outlook in Retail Full-year 2014 N tR Net Revenue Growth G th ~2.5% 2 5% tto 3% Same-store Sales ~1.5% to 2% Same-store Adjusted Scripts (7) ~3.5% to 4.0% Gross Profit Margin g Notable improvement Operating Expense (4) Moderate decline (% of revenue) Operating Profit
Slide 34: Healthy Outlook in PBM
Guidance: 2014 Full-Year Healthy Outlook in PBM Full-year 2014 N tR Net Revenue Growth G th ~14.75% 14 75% to t 15.25% 15 25% Total Adjusted Claims (7) 1 070 billion to 1 1.070 1.075 075 billion Gross Profit Margin Modest decline Operating Expense (5) Modest improvement (% of revenue) Operating Prof
Slide 35: Consolidated Income Statement
Guidance: 2014 Full-Year Consolidated Income Statement Full-year 2014 C Corporate t SSegmentt E Expense $795 million illi tot $800 million illi Intercompany Eliminations 10.8% ~10 8% (% of combined segment revenues) Gross Profit Margin Moderately down Operating Expense (2) Modest improvement (% of r
Slide 36: Consolidated Income Statement
Guidance: 2014 Full-Year Consolidated Income Statement Full-year 2014 N t IInterest Net t t Expense E $595 million illi tot $605 million illi Effective Tax Rate ~39 39.6% 6% Weighted Average Shares (8) ~1.17 billion Consolidated Amortization ~$520 million Consolidated D&A ~$1.9 billion Refer to page
Slide 37: Endnotes
Endnotes 1. Adjusted EPS equals income before income tax provision plus amortization, less adjusted income tax provision, and other, which is comprised of earnings allocated to participating securities, divided by the weighted average diluted common shares g The adjusted outstanding. j income tax pp