Cvs Health Corporation · NYSE:CVS
Cvs Health — Q2 2015 Earnings Presentation
38 slides from Cvs Health's earnings presentation, Aug 4, 2015
Slide 1: Second Quarter 2015 Earnings Conference Call
Seco d Qua Second Quarter te 2015 0 5 Earnings Conference Call Larry y Merlo President & Chief Executive Officer Dave Denton Executive Vice President & Chief Financial Officer August 4, 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
Second Quarter 2015 Earnings Conference Call Business Review Larry Merlo President & Chief Executive Officer August 4, 2015 © 2015 CVS Health
Slide 4: Second Quarter: Continued Strong Results
Second Quarter: Continued Strong Results Q2 2015 Change vs. Q2 2014 Adjusted EPS (1) (2) $1.22 7.7% Retail Operating Profit $1,680.8 million (1.4)% PBM O Operating ti P Profit fit $940 4 million $940.4 illi 7 1% 7.1% Free Cash Flow $523 million 32.7% Refer to page 38 for end notes. © 2015 CVS Health
Slide 5: Pending Acquisitions
Pending Acquisitions • Omnicare is the leading provider of pharmacy services to long-term care facilities • New pharmacy dispensing channel for CVS; enhances ability to provide continuity of care for patients Definitive agreement to acquire • Complementary specialty business will augment our Omnicar
Slide 6: PBM Business: 2016 Selling Season
PBM Business: 2016 Selling Season • Gross wins of ~ $12 billion and net wins of ~ $11 billion – Includes estimated revenues of Coventry Medicare Part D business based on current enrollment – Excludes impact from our individual Med D PDP – Spans across client segments; significant portion in health p
Slide 7: PBM Business: Specialty Pharmacy
PBM Business: Specialty Pharmacy • Healthy revenue growth of 28.4% year-over-year in Q2 – M More th than d double bl the th market k t growth t (3) th rate – Have cycled addition of Coram and seen a flattening in the utilization trend for Hep C drugs • M di l claims Medical l i managementt (N (Novol
Slide 8: PBM Business: Formulary Strategy
PBM Business: Formulary Strategy • 26 additional products removed from the 2016 standard formulary • Guiding principles for CVS/caremark formulary management – Maintain clinical integrity – Reduce pharmacy cost for plan sponsors – Effectively transition members onto the formulary © 2015 CVS Health 8
Slide 9: PBM Business: SilverScript
PBM Business: SilverScript • Overall, we currently serve ~ 7.9 million lives – ~ 3.4 million captive lives in our individual PDP, up from ~ 2.9 million at year-end 2014 – ~ 1.1 million captive lives in EGWPs – ~ 3.4 million lives through our health plan clients • Based on preliminary benchmark resul
Slide 10: Retail Business: Pharmacy Revenue and Script Growth
Retail Business: Pharmacy Revenue and Script Growth • Script comps increased 4.8% on a 30-day equivalent basis (4) • Retail pharmacy market share was 21.6% in Q2, up ~ 60 bps versus Q2 2014 • Pharmacy same-store sales increased 4.1% – Negative impact of ~ 370 bps from new generic drug introductions
Slide 11: Retail Business: Front Store Revenue and Gross Margin
Retail Business: Front Store Revenue and Gross Margin • Front store comps declined 7.8% – On a comparable basis, adjusting for the impact of tobacco exit, comps would have been essentially flat • Decrease in front store traffic partially offset by increase in average customer basket • Gained share i
Slide 12: Retail Business: Front Store Updates
Retail Business: Front Store Updates • Focus on being a leading health and beauty destination – To date, expanded healthy snack food options in ~ 275 stores; plan to complete ~ 450 by year-end – Upgrading beauty department in several thousand stores this year; early results very positive iti – Plan
Slide 13: Retail Business: Store Brands
Retail Business: Store Brands • Store Brands saw continued progress in Q2 as its share of our front store sales increased ~ 265 bps to 20.9% – ~ 120 bps of this growth is a result of tobacco exclusion from denominator – Broad-based opportunities for further store brand penetration; we continue to ma
Slide 14: Retail Business: Real Estate Update
Retail Business: Real Estate Update • In Q2, opened 25 new retail drugstores, relocated 16, and closed 5, resulting in 20 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 14
Slide 15: Retail Business: CVS/minuteclinic
Retail Business: CVS/minuteclinic • Revenues up approximately 21% vs. same quarter last year • Operate 997 clinics in 31 states and Washington, D.C. – 11 net new clinics added in Q2 • Successfully completed rollout of EPIC EHR (electronic health record) implementation – Enables MinuteClinics to inte
Slide 16: Business Update: Red Oak Sourcing
Business Update: Red Oak Sourcing • This venture with Cardinal Health celebrated its one-year anniversary in July • Since launch, Red Oak has established best-in-class sourcing • Has enhanced supply pp y chain efficiencies and spurred p innovative purchasing strategies with generic manufacturing thr
Slide 17: Financial Review
Second Quarter 2015 Earnings Conference Call Financial Review Dave Denton Executive Vice President & Chief Financial Officer August 4, 2015 © 2015 CVS Health
Slide 18: Financial Update: Capital Allocation
Financial Update: Capital Allocation • Dividends of $395 million in Q2; $794 million year-to-date – Dividend payout ratio of 28.1%, after excluding impact of non-recurring items – Still on track to reach 35% targeted payout ratio by 2018 • The $2 billion accelerated share repurchase program that beg
Slide 19: Financial Update: Senior Notes
Financial Update: Senior Notes • Issued series of senior notes on July 13th totaling $15 billion • Tranches well-laddered – Terms of 3 yrs, 5 yrs, 7 yrs, 10 yrs, 20 yrs and 30 yrs – No one year in which maturities are significantly large • Favorable blended rate of ~ 3.75% • Net proceeds will be use
Slide 20: Financial Update: Cash Flows
Financial Update: Cash Flows • Year-to-date, generated approximately $2.1 billion of free cash • Continue to expect to produce between $5.9 and $6.2 billion of free cash for 2015, excluding the impact of acquisition-related costs © 2015 CVS Health 20
Slide 21: Income Statement: Earnings per Share
Income Statement: Earnings per Share • Adjusted EPS, excluding acquisition-related costs, of $1.22 in Q2 (1) (2) – 2¢ above guidance range of $1 $1.17 17 to $1 $1.20 20 – Growth of 7.7% from $1.13 last year – Incurred ~ 3¢ of deal related transaction and financing costs in the quarter • GAAP diluted
Slide 22: Income Statement: Revenues
Income Statement: Revenues • Consolidated revenues of $37.2 billion, up 7.4% vs. LY • PBM revenues of $24.4 billion, up 11.9% vs. LY – Growth driven by specialty pharmacy and increased volume in pharmacy network claims l i – Partially offset by an increase in generic dispensing rate to 83.9%, up ~ 1
Slide 23: Income Statement: Gross Profit Margin
Income Statement: Gross Profit Margin • Consolidated gross margin of 17.2%, down ~ 105 bps vs. LY, in line with expectations – Decline due in part to mix shift, as lower margin PBM is growing faster than retail – Year-over-year decline intensified by finalization of CA’s Medicaid reimbursement rates
Slide 24: Income Statement: Operating Expenses
Income Statement: Operating Expenses • Consolidated: expenses were 11.1% of revenues, ~ 75 bps YOY improvement • PBM: expenses were 1.2% of revenues … ~ 20 bps YOY improvement • Retail: R t il expenses were 21.1% 21 1% off revenues … ~ 20 b bps YOY improvement – On a comparable basis, improvement of
Slide 25: Income Statement: Operating Profit Margin
Income Statement: Operating Profit Margin • Consolidated operating margin of 6.1%, down ~ 30 bps vs. LY • PBM operating margin of 3.8%, down ~ 15 bps vs. LY – PBM operating profit increased 7.1%, in line with expectations – Excluding the finalization of CA’s Medicaid reimbursement rates from last ye
Slide 26: Income Statement: Below-the-line
Income Statement: Below-the-line • Net interest expense of $166 million, up ~ $8 million vs. LY – Primarily driven by acquisition-related financing costs • Paid $52 million in fees for bridge loan facility for the Omnicare deal – Capitalized and amortized as interest expense over period facility was
Slide 27: Financial Update: Guidance
Financial Update: Guidance • Narrowing 2015 full-year Adjusted EPS range by raising the bottom of the range by 3¢ and bringing the top end down by 1¢ • Assume Omnicare acquisition closes near the end of 2015; close of Target g deal is more uncertain and could fall into 2015 or 2016 • Guidance includ
Slide 28: Guidance 2015 Full-Year: Healthy Enterprise Growth
Guidance: 2015 Full-Year Healthy Enterprise Growth Full-year 2015 Net Revenue Growth 7.5% to 8.5% Adjusted EPS (1) (5) (6) $5.11 to $5.18 Year-over-year Growth (7) 13.75% to 15.25% GAAP Diluted EPS $4.64 to $4.71 Refer to page 38 for end notes. © 2015 CVS Health 28
Slide 29: Guidance 2015 Full-Year: Adjusted EPS Walk
Guidance: 2015 Full-Year Adjusted EPS Walk per share Low High Adjusted EPS (excluding acquisition-related transaction and financing costs) $5.11 $5.18 Subtract: acquisition-related transaction costs recorded through 6/30/15 (0.01) (0.01) Subtract: Omnicare transaction costs estimated through 12/31/1
Slide 30: 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 5% to 11.5% t 12.5% 12 5% Total Adjusted Claims (4) 1 15 billion to 1 1.15 1.16 16 billion Gross Profit Margin Modest decline Operating Expense Modest improvement (% of revenue) Operating Profit Growth 10.0% t
Slide 31: 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 2 50% tto 3 2.50% 3.25% 25% Same-store Sales (8) 0.75% to 1.50% Same-store Adjusted Scripts (3) 4.0% to 5.0% Gross Profit Margin Moderate decline Operating Expense Moderate improvement (% of revenue) Operati
Slide 32: Guidance 2015 Full-Year: Consolidated Income Statement
Guidance: 2015 Full-Year Consolidated Income Statement Full-year 2015 C Corporate t SSegmentt E Expense $790 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 33: 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 ~ 39.2% 39 2% Weighted Average Shares (5) ~ 1.13 billion Consolidated Amortization ~ $520 million Consolidated D&A ~ $2.0 billion Refer to
Slide 34: Guidance 2015 Q3: Enterprise Revenue and Earnings Per Share
Guidance: 2015 Q3 Enterprise Revenue and Earnings Per Share Q3 2015 Net Revenue Growth 6.5% to 7.75% Adjusted EPS (1) (5) (6) $1.27 to $1.30 Year-over-year Growth 10.5% to 13.5% GAAP Diluted EPS $1.13 to $1.16 Refer to page 38 for end notes. © 2015 CVS Health 34
Slide 35: Guidance 2015 Q3: Adjusted EPS Walk
Guidance: 2015 Q3 Adjusted EPS Walk per share Low High Adjusted j EPS $1 27 $1.27 $1 30 $1.30 (excluding acquisition-related transaction and financing costs) Subtract: Omnicare transaction costs estimated - - 7/1/15 through h h 9/30/15 Subtract: acquisition-related financing costs (0.07) (0.07) esti
Slide 36: Guidance 2015 Q3: Segment Performance
Guidance: 2015 Q3 Segment Performance Q3 2015 Net Revenue Growth 2.75% to 4.25% macy ail Same store sales (9) 1.0% to 2.5% Reta Pharm Same store adjusted scripts (4) 4.75% to 5.75% Operating Profit Growth 4 0% to 6 4.0% 6.0% 0% macy Net Revenue Growth 9.0% to 10.25% vices Pharm Serv Operating Profit
Slide 37: 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 (10) $0.6 to $0.5 Net Capital Expenditures ~ ($1.7) Free Cash Flow (6) $5.9 to $6.2 Year-over-ye
Slide 38: 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 non-controlling interest, divided by g the weighted average g diluted comm