CVS Health Corporation · NYSE:CVS
CVS Health — Q2 2016 Earnings Presentation
38 slides from CVS Health's earnings presentation, Aug 2, 2016
Slide 1: Second Quarter 2016 Earnings Conference Call
Seco d Qua Second Quarter te 2016 0 6 Earnings Conference Call Larry y Merlo President & Chief Executive Officer Dave Denton Executive Vice President & Chief Financial Officer August 2, 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
Second Quarter 2016 Earnings Conference Call Business Review Larry Merlo President & Chief Executive Officer August 2, 2016 © 2016 CVS Health
Slide 4: Second Quarter: Continued Strength in 2016
Second Quarter: Continued Strength in 2016 Change vs. Q2 2016 Q2 2015 Consolidated net revenues $43.7 billion 17.6% Consolidated operating profit (1) $2.4 billion 6.5% Adj Adjusted d EBITDA $3 billion billi 9 8% 9.8% Adjusted EPS ((2)) $1 32 $1.32 8 3% 8.3% Free Cash Flow (3) $1.1 billion 111.7% Ref
Slide 5: PBM Business: Another Terrific Selling Season
PBM Business: Another Terrific Selling Season 2017: Significant Gross and Net New Business; Strong Retention • Gross wins of ~ $7.4 billion – Does not include individual Med D PDP impact • Net new business of ~ 4.6 billion • ~ 7% of g gross wins relate to the p previously-discussed y transition of t
Slide 6: PBM Business: Competitive Dynamics of Selling Season
PBM Business: Competitive Dynamics of Selling Season • Facts and realities can easily be lost or overlooked amidst attention paid to a few client shifts • Our key points of differentiation driving success remain: – Access: We have multiple patient touch-points through our unique suite of assets – re
Slide 7: PBM Business: Formulary Update
PBM Business: Formulary Update • Our 2017 formulary management strategy continues to address emerging cost drivers with new, market-leading enhancements – Will be creating opportunities for additional client and member savings through an indication- based formulary – On quarterly basis, products wit
Slide 8: PBM Business: SilverScript Update
PBM Business: SilverScript Update • Captive lives: ~ 4.1 million • Captive EGWP lives: ~ 1.2 million • Health p plan lives: ~ 6.4 million • Total Med D lives currently served: ~ 11.8 million • SilverScript qualified in 32 of the 34 regions for 2017 in preliminary CMS benchmark results – Strong St be
Slide 9: Q2 Pharmacy Revenue and Script Growth
Retail/LTC Business: Q2 Pharmacy Revenue and Script Growth • Total same-store sales increased 2.1% • Pharmacy same-store sales increased 3.9% – Negative impact of ~ 355 bps due to recent generic introductions • Pharmacy same store prescription volumes increased 3.5% on a 30- day equivalent basis(5),
Slide 10: Target Pharmacy & Clinic Integration
Retail/LTC Business: Target Pharmacy & Clinic Integration • Integration completed ahead of schedule • All 1,667 pharmacies and 79 clinics have been converted to CVS systems, programs and interior branding • One of our smoothest integrations g ever – Appreciate strong communication and collaboration
Slide 11: Omnicare Continues to Perform Well
Retail/LTC Business: Omnicare Continues to Perform Well • Performance in line with expectations • Integration efforts progressing as planned – Expect to complete majority of Omnicare integration activities by year-end • Working with our LTC clients to address currently unmet needs of their residents
Slide 12: Q2 Front Store Revenue and Gross Margin
Retail/LTC Business: Q2 Front Store Revenue and Gross Margin • Front store comps decreased 2.5% – Down 1.7% 1 7% after adjusting for negative impact of Easter holiday • Softer traffic partially offset by notable increase in basket size – Pulled back on promotional spend for lower-value, promotionall
Slide 13: Front Store Strategies
Retail/LTC Business: Front Store Strategies • Focused on mix shift towards higher-margin health, beauty, and store brand categories – Continuing with store resets to improve Health and Beauty leadership • Will continue to scale healthy food selection, optimize key categories in the Health quadrant,
Slide 14: Retail Pharmacy Real Estate Update
Retail/LTC Business: Retail Pharmacy Real Estate Update Stores at end of Q1 9,674 Opened 22 Acquired - Closed (10) Stores at end of Q2 9,686 Net new retail drugstores 12 Relocations 9 Square footage growth 0 2% 0.2% Retail pharmacies 9,598 (6) Refer to pages 37 - 38 for end notes. 14 © 2016 CVS Heal
Slide 15: CVS MinuteClinic
Retail/LTC Business: CVS MinuteClinic • Target integration completed in 79 clinics; providers adjusting well to MinuteClinic scope of services and Epic electronic health record system • Operate p 1,136 , clinics across 33 states and Washington, g , D.C. • Revenues up 15.2% vs. same quarter a year ag
Slide 16: Financial Review
Second Quarter 2016 Earnings Conference Call Financial Review Dave Denton Executive Vice President & Chief Financial Officer August 2, 2016 © 2016 CVS Health
Slide 17: Capital Allocation
Financial Update: Capital Allocation • Paid ~ $459 million in dividends in Q2 – Dividend payout ratio of 35.5% 35 5% • Artificially high due to loss on debt extinguishment incurred in second quarter as well as ongoing integration costs associated with recent acquisitions – On comparable basis basis,
Slide 18: Free Cash Flow
Financial Update: Free Cash Flow • In Q2, generated ~ $1.1 billion of free cash (3) • Year-to-date, produced more than $2.9 billion of free cash • Increasing g free cash flow gguidance to range g of $ $6.3 billion to $$6.6 billion (3)(7) from previous range of $5.3 billion to $5.6 billion in 2016 –
Slide 19: Debt Refinancing
Financial Update: Debt Refinancing • In Q2, issued $3.5 billion in debt used to refinance ~ $3.1 billion of outstanding debt through tender transaction – Loss on early extinguishment of debt of $542 million during the quarter • Also, retired additional $1.1 billion by y calling g certain debt, and a
Slide 20: Earnings per Share
Q2 2016 Income Statement: Earnings per Share • Q2 Adjusted EPS of $1.32 (2), 1¢ above high end of guidance range – Up 8.3% (2) over LY • GAAP diluted EPS of $0.86 • Retail/LTC segment delivered solid earnings within expectations • PBM segment posted profit growth above high end of guidance • Outperf
Slide 21: Revenues: Consolidated, PBM
Q2 2016 Income Statement: Revenues: Consolidated, PBM • Consolidated revenues of $43.7 billion, up 17.6% vs. LY, above guidance range • PBM revenues of $29.5 billion, up 20.7% vs. LY – Growth Gro th driven dri en by b increased volume ol me in pharmac pharmacy net network ork claims from last year’s
Slide 22: Revenues: Retail/LTC
Q2 2016 Income Statement: Revenues: Retail/LTC • Retail/LTC revenues of $20 billion, up 16.0% vs. LY – Growth driven primarily by addition of Omnicare and the pharmacies within Target, as well as solid pharmacy same store sales • Retail/LTC GDR of 86.1%, up ~ 110 bps vs. Q2 2015 22 © 2016 CVS Health
Slide 23: Gross Profit Margin: Consolidated, PBM
Q2 2016 Income Statement: Gross Profit Margin: Consolidated, PBM • Consolidated gross margin of 16.1%, down ~ 115 bps vs. LY – Gross profit dollars up 9.7% (8) • PBM g gross margin g of 4.6%, down ~ 45 bps p vs. LY – Decrease primarily due to mix of business and continued price compression, partiall
Slide 24: Gross Profit Margin: Retail/LTC
Q2 2016 Income Statement: Gross Profit Margin: Retail/LTC • Retail/LTC gross margin of 29.2%, down ~ 165 bps vs. LY – ~ 40% of decline was mix-driven, due to the acquisitions – Continued reimbursement pressure – Positively offset by increasing GDR as well as increased front store margins as we conti
Slide 25: Operating Expenses and Margin
Q2 2016 Income Statement: Operating Expenses and Margin • Consolidated: expenses were 10.5% of revenues (9) • PBM: expenses were 1.1% of revenues … ~ 10 bps YOY improvement – Driven by additional sales leverage from volume increases • Retail/LTC: expenses were 20.3% of revenues (9) … ~ 85 bps YOY im
Slide 26: Operating Profit and Margin
Q2 2016 Income Statement: Operating Profit and Margin • Consolidated – Operating profit increase of 6.5% (1) – Operating margin of 5.6% (1), down ~ 60 bps vs. LY – EBITDA of $3 billion, billion up 9.8% 9 8% vs. vs LY • PBM – Operating profit increased 10.5% 10 5% – Operating margin of 3.5%, down ~ 3
Slide 27: Below the line
Q2 2016 Income Statement: Below the line Below-the-line • Net interest expense of $280 million, up ~ $150 million (12) vs. LY – Driven by debt issues in the third quarter of 2015 to fund the acquisitions • Effective tax rate (13) of 39.3% in Q2 • Weighted-average share count of 1.1 billion shares Re
Slide 28: Healthy Enterprise Growth: Raising and Narrowing Adjusted EPS
Guidance: 2016 Full-year (14) Healthy Enterprise Growth: Raising and Narrowing Adjusted EPS Full-year 2016 Net Revenue Growth 17.0% to 17.75% Adjusted EPS (15) $5.81 to $5.89 Year-over-year Growth (16) 12.5% to 14.25% GAAP Diluted EPS (17) $4.92 to $5.00 Refer to pages 37 - 38 for end notes. 28 © 20
Slide 29: Strong PBM Outlook
Guidance: 2016 Full-year (14) Strong PBM Outlook Full-year 2016 N tR Net Revenue Growth G th 21 0% to 21.0% t 22.0% 22 0% Total Adjusted Claims (5) 1 35 billion to 1 1.35 1.40 40 billion Gross Profit Margin Moderate decline Operating Expense Modest improvement (% of revenue) Operating Profit Growth
Slide 30: Solid Outlook in Retail/LTC
Guidance: 2016 Full-year (14) Solid Outlook in Retail/LTC Full-year 2016 N tR Net Revenue Growth G th 13 0% tto 13 13.0% 13.75% 75% Same-store Sales 1.75% to 2.5% Same-store Adjusted Scripts (5) 3.5% to 4.5% Gross Profit Margin (18) Significant decline Operating Expense (19) Moderate improvement (%
Slide 31: Consolidated Income Statement
Guidance: 2016 Full-year (14) Consolidated Income Statement Full-year 2016 C Corporate t S Expense (21) Segmentt E $870 million illi tot $875 million illi Intercompany Eliminations ~ 11.6% 11 6% (% of combined segment revenues) Gross Profit Margin (18) Significant decline Operating Expense (22) Nota
Slide 32: Consolidated Income Statement
Guidance: 2016 Full-year (14) Consolidated Income Statement Full-year 2016 N t IInterest Net t t Expense E $1 07 billion $1.07 billi tot $1.08 $1 08 billi billion Effective Tax Rate ~ 39.0% 39 0% Weighted Average Shares ~ 1.08 billion Consolidated Amortization ~ $795 million Consolidated D&A ~ $2.5
Slide 33: Increasing Free Cash Flow
Guidance: 2016 Full-year (23) Increasing Free Cash Flow (billions) Full-year 2016 Operating Cash Flow (3) $8.8 to $9.1 G Gross Capital C it l Expenditures E dit ~ ($2.8) ($2 8) tto ($2 ($2.7) 7) Sale-leaseback proceeds (24) $0.3 to $0.2 Net Capital Expenditures ~ ($2.5) Free Cash Flow (3) $6 3 to $6
Slide 34: Enterprise Revenue and Earnings Per Share
Guidance: 2016 Q3 (14) Enterprise Revenue and Earnings Per Share Q3 2016 Net Revenue Growth 16.50% to 17.75% Adjusted EPS (25) $1.55 to $1.58 Year-over-year Growth (26) 21.0% to 23.75% GAAP Diluted EPS (17) $1.38 to $1.41 Operating Profit Growth (25)(27) 14.75% to 17.50% Refer to pages 37 - 38 for e
Slide 35: Expect Strong Back Half of Year
Guidance: Timing Factors Affecting Profits in 2016 Q3 and Q4 Expect Strong Back Half of Year • As we said at Analyst Day, the cadence of profit delivery throughout the year is back half-weighted and is affected by: – Introduction and timing of break-open generics – Timing of profitability in our Med
Slide 36: Segment Performance
Guidance: 2016 Q3 (14) Segment Performance Q3 2016 Net Revenue Growth 11.5% to 13.0% acy Retail Pharma Same store S t sales l 1 0% to 1.0% t 2.25% 2 25% Same store adjusted scripts 3.0% to 4.0% Operating Profit Growth (28) 10.0% to 12.0% Pharmacy Net Revenue Growth 21.25% to 22.50% ces Servic Operat
Slide 37: Endnotes
Endnotes 1 1. Consolidated operating profit excludes $81 million and $21 million of acquisition acquisition-related related transaction and integration costs during the three months June 30, 2016 and June 30, 2015, respectively. The costs relate to the acquisitions of Omnicare and the pharmacies and
Slide 38: Endnotes
Endnotes 15 15. Adjusted EPS for the year ending December 31 31, 2016 2016, excludes $81 million of acquisition acquisition-related related integration costs costs, and a $644 million from loss on extinguishment of debt, as well as approximately $795 million of amortization of intangible assets. Est