Cvs Health Corporation · NYSE:CVS
Cvs Health — Q1 2017 Earnings Presentation
47 slides from Cvs Health's earnings presentation, May 2, 2017
Slide 1: First Quarter 2017 Earnings Conference Call
First Quarter 2017 Earnings Conference Call Larry Merlo President & Chief Executive Officer Dave Denton Executive Vice President & Chief Financial Officer May 2, 2017
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. Actual results may differ materially from those contemplated by the forward
Slide 3: First Quarter Business Update
First Quarter Business Update © 2017 CVS Health
Slide 4: First Quarter: Continued Solid Results
First Quarter: Continued Solid Results Q1 2017 Change vs. Q1 2016 Consolidated net revenues $44.5 billion 3.0% Consolidated operating profit (1) $2.0 billion (10.8%) Adjusted EBITDA (2) $2.6 billion (8.3%) Adjusted EPS (3) $1.17 (1.4%) Free Cash Flow (4) $3.1 billion 67.0% Refer to pages 43 - 47 for
Slide 5: CVS Health Is Making Health Care More Affordable, Accessible, and Effective
CVS Health Is Making Health Care More Affordable, Accessible, and Effective • Continuously innovate to offer solutions that lower costs for clients and members … driving meaningful results – Commercial client trend of only 3.2% versus an unmanaged trend of more than 11% – Members saw out-of-pocket c
Slide 6: CVS Health Is Making Health Care More Affordable, Accessible, and Effective
CVS Health Is Making Health Care More Affordable, Accessible, and Effective • Create plan designs that lower member out-of-pocket costs while managing health outcomes – Offer option to clients to adopt point-of-sale (POS) rebates, enabling their members to directly benefit from lower negotiated cost
Slide 7: PBM Business: Another Strong Selling Season in 2017
PBM Business: Another Strong Selling Season in 2017 Gross and net wins have grown • Gross wins of ~ $8.5 billion • Net new business of ~ $5.4 billion - Up ~ $1 billion from last update - Majority of increase relates to our clients’ Medicare add-on lives, which were still being reconciled at the time
Slide 8: PBM Business: 2018 Selling Season Off to Solid Start
PBM Business: 2018 Selling Season Off to Solid Start • Our integrated products and services are resonating strongly, and we remain differentiated in marketplace • We have already had some contract wins for ’18 • We were selected as one of two pharmacy care partners by the Health Transformation Allia
Slide 9: PBM Business: 2018 Selling Season Off to Solid Start
PBM Business: 2018 Selling Season Off to Solid Start • ~ $23 billion up for renewal in 2018, comparable with previous year as a percent of business • Completed ~ 43% of client renewals, ahead of where we were last year at this time • Still early in season, but magnitude of the bidding opportunities
Slide 10: PBM Business: Recently Hosted Annual Client Forum
PBM Business: Recently Hosted Annual Client Forum • Record attendance of nearly 1,000 attendees • Provides an opportunity to update clients on our latest innovations in products and services while gaining feedback on their evolving priorities – Transform Diabetes Care program, a value-based clinical
Slide 11: Q1 Pharmacy Revenue and Script Growth
Retail/LTC Business: Q1 Pharmacy Revenue and Script Growth (6) • Total same-store sales decreased 4.7%, in line with expectations • Pharmacy same-store sales decreased 4.7%, in line with expectations – Negative impact of ~ 480 bps due to recent generic introductions • Pharmacy same-store prescriptio
Slide 12: Working With All Payors to Drive Volumes and Capture Share
Retail/LTC Business: Working With All Payors to Drive Volumes and Capture Share • Partnership with OptumRx to provide a 90-day retail solution to their ASO clients and members is progressing nicely - Teams are currently working on the implementation of the clinical wrap for the offering, which inclu
Slide 13: Target Pharmacies Moving in Right Direction
Retail/LTC Business: Target Pharmacies Moving in Right Direction • Continuing to see improving script performance versus prior quarters, putting aside the network changes • Performance driven by strength of patient care programs and Maintenance Choice 13 © 2017 CVS Health
Slide 14: Q1 Front Store Revenue and Gross Margin
Retail/LTC Business: Q1 Front Store Revenue and Gross Margin • Front store comps decreased 4.9% – Reflects softer customer traffic related to a number of factors – Negative impact of 175 basis points from the absence of leap day versus 2016, as well as the shift of Easter into the second quarter – A
Slide 15: Front Store Growth Strategies: Store Design
Retail/LTC Business: Front Store Growth Strategies: Store Design Remain focused on growing our Beauty, Health Care and Personal Care businesses through a number of actions: Store Design, Digital, and Store Brands • New store design and enhanced customer experience • New store formats offer expanded
Slide 16: Front Store Growth Strategies: Digital
Retail/LTC Business: Front Store Growth Strategies: Digital • Recognizing the growing presence of the digital market, focused on enhancing our online and mobile capabilities to create an integrated health and pharmacy experience only CVS can provide • Focused on defining next generation of convenien
Slide 17: Front Store Growth Strategies: Store Brands
Retail/LTC Business: Front Store Growth Strategies: Store Brands • Remains an area of strength and opportunity • Represented 22.8% of front store sales in the quarter - Up ~ 85 basis points from a year ago • Significant opportunities to expand the share of Store Brand products by building on core eq
Slide 18: Real Estate Update
Retail/LTC Business: Real Estate Update Stores at 2016 year-end 9,747 Reclass of onsite pharmacies (8) (38) Opened 27 Closed (60) Retail stores at end of Q1 2017 9,676 Net new stores (33) Relocations 10 Retail stores with pharmacies 9,626 (9) Refer to pages 43 - 47 for end notes. 18 © 2017 CVS Healt
Slide 19: CVS MinuteClinic
Retail/LTC Business: CVS MinuteClinic • Operate 1,125 clinics across 33 states and Washington, D.C. • Q1 revenues up ~ 15% vs. same quarter a year ago, including clinics within Target stores • We continue to introduce digital tools that deliver added convenience and access to care for our patients •
Slide 20: First Quarter 2017 Financial Review
First Quarter 2017 Financial Review © 2017 CVS Health
Slide 21: Capital Allocation
Financial Update: Capital Allocation • Paid ~ $516 million in dividends in Q1; increased quarterly cash dividend by 18% for year – 12-month trailing dividend payout ratio of 36.8% (10) • Ratio is artificially high due to some expenses that are more temporary in nature, such as the loss on the early
Slide 22: Free Cash Flow
Financial Update: Free Cash Flow • In Q1, generated $3.1 billion of free cash – Unusually high due in large part to the timing of a Med D payment, as expected • Continue to expect to produce free cash of between $6.0 billion and $6.4 billion for the full year 22 © 2017 CVS Health
Slide 23: Earnings per Share
Q1 2017 Income Statement: Earnings per Share • Q1 Adjusted EPS of $1.17 (3), down 1.4%, 4¢ above high end of guidance range – Below-the-line items contributed roughly 2¢ to the over-performance – Retail business over-delivered by about 3¢ due to timing factors; PBM within expectations • Retail pharm
Slide 24: Revenues: Consolidated, PBM
Q1 2017 Income Statement: Revenues: Consolidated, PBM • Consolidated revenues of ~ $44.5 billion, up 3.0% vs. LY • PBM revenues of $31.2 billion, up 8.5% vs. LY – Growth driven by increased volume in pharmacy network claims as well as brand inflation and growth in specialty pharmacy – Partially offs
Slide 25: Revenues: PBM Claims Processed
Q1 2017 Income Statement: Revenues: PBM Claims Processed Pharmacy Claims Processed (millions) 2016 2017 Q1 Q2 Q3 Q4 FY Q1 Mail Choice 21.7 22.2 22.4 23.2 89.5 22.8 Network 283.1 280.5 282.6 294.3 1,140.5 307.4 Old Method (11) Total 304.8 302.7 305.0 317.5 1,230.0 330.1 Total Adjusted 343.7 342.5 345
Slide 26: Revenues: Retail/LTC
Q1 2017 Income Statement: Revenues: Retail/LTC • Retail/LTC revenues of $19.3 billion, down 3.8% vs. LY, in line with expectations – Decline driven primarily by decline in script volumes due to the previously- discussed marketplace changes restricting CVS Pharmacy from participating in certain netwo
Slide 27: Gross Profit Margin: Consolidated, PBM
Q1 2017 Income Statement: Gross Profit Margin: Consolidated, PBM • Consolidated gross margin of 14.8%, down ~ 85 bps vs. LY (13), and consistent with expectations, primarily driven by mix shift, as lower- margin PBM is growing faster than Retail/LTC • Consolidated gross profit dollars decreased 2.5%
Slide 28: Gross Profit Margin: Retail/LTC
Q1 2017 Income Statement: Gross Profit Margin: Retail/LTC • Retail/LTC gross margin of 29.4%, up ~ 35 bps vs. LY (13) – Increase primarily driven by increase in GDR and improvement in front store margin rate and dollars related to the continued rationalization of our promotional strategies and impro
Slide 29: Operating Expenses and Margin
Q1 2017 Income Statement: Operating Expenses and Margin • Consolidated: expenses were 10.3% of revenues (14)…~ 15 bps YOY improvement • PBM: expenses were 1.0% of revenues (15) … ~ 10 bps YOY improvement – Driven by efficiency improvements • Retail/LTC: expenses were 20.9% of revenues (16) … ~ 110 b
Slide 30: Operating Profit and Margin
Q1 2017 Income Statement: Operating Profit and Margin • Consolidated – Operating profit decreased 10.8% (1) – Operating margin of 4.5% (1), down ~ 70 bps vs. LY • PBM – Operating profit flat (15) – Operating margin of 2.5% (15), down ~ 20 bps vs. LY • Retail/LTC – Operating profit decreased 11.9% (1
Slide 31: Below-the-line
Q1 2017 Income Statement: Below-the-line • Net interest expense of $252 million, down ~ $31 million vs. LY – Driven by paying down debt in prior year and a lower average interest rate on the debt that remains outstanding • Effective tax rate (19) of 37.7% – Better than expected for the quarter due t
Slide 32: Share-Based Compensation Accounting Change
Share-Based Compensation Accounting Change SHARE-BASED COMPENSATION ACCOUNTING CHANGE EFFECTIVE JANUARY 1, 2017 • All excess tax benefits and deficiencies are now recognized in the income statement; previously they were recorded to equity • Impacts the income, income tax provision and earnings per s
Slide 33: Defined Benefit Pension Plan Settlement to Affect Only GAAP Results
Defined Benefit Pension Plan Settlement to Affect Only GAAP Results ESTIMATED SETTLEMENT CHARGE OF $200 MILLION • In September 2015, four of our defined benefit pension plans merged into one plan • In December 2015, the merged plan was terminated • The settlement of the terminated plan is expected t
Slide 34: 2017 Guidance Review
2017 Guidance Review © 2017 CVS Health
Slide 35: Enterprise Outlook
Guidance: 2017 Full-year Enterprise Outlook Full-year 2017 Net Revenue Growth 2.5% to 4.25% Operating Profit Change (20) (5.25%) to (3.0%) Operating Profit Margin (20) Moderate decline Adjusted EPS (21) $5.77 to $5.93 Year-Over-Year Change (21) (1.25)% to 1.5% GAAP Diluted EPS (22) $5.02 to $5.18 Re
Slide 36: Healthy Growth in PBM
Guidance: 2017 Full-year Healthy Growth in PBM Full-year 2017 Net Revenue Growth 7.5% to 9.5% Total Adjusted Claims (12) 1.76 billion to 1.78 billion Gross Profit Margin Modest decline Operating Expense (23) Modest improvement (% of revenue) Operating Profit Growth (23) 5.75% to 8.75% Operating Prof
Slide 37: Retail/LTC Outlook
Guidance: 2017 Full-year Retail/LTC Outlook Full-year 2017 Net Revenue Change (3.25%) to (1.75%) Same-store Sales (6) (4.25%) to (2.75%) Same-store Adjusted Scripts (6) (7) (0.25%) to 0.75% Gross Profit Margin Modest improvement Operating Expense (24) Notable deterioration (% of revenue) Operating P
Slide 38: Consolidated Income Statement
Guidance: 2017 Full-year Consolidated Income Statement Full-year 2017 Corporate Segment Expense (26) $890 million to $900 million Intercompany Eliminations ~ 12% (% of combined segment revenues) Gross Profit Margin Notable decline Operating Expense (27) Modest improvement (% of revenue) Refer to pag
Slide 39: Consolidated Income Statement
Guidance: 2017 Full-year Consolidated Income Statement Full-year 2017 Net Interest Expense ~$1.01 billion to $1.02 billion Effective Tax Rate ~ 39% Weighted Average Shares ~ 1.03 billion Consolidated Amortization ~ $820 million Consolidated D&A ~ $2.5 billion 39 © 2017 CVS Health
Slide 40: Enterprise Revenue and Earnings per Share
Guidance: 2017 Q2 Enterprise Revenue and Earnings per Share Q2 2017 Net Revenue Growth 3.25% to 5.0% Adjusted EPS (28) $1.29 to $1.33 Year-over-year Growth (28) (2.5%) to 1.0% GAAP Diluted EPS (29) $1.15 to $1.19 Refer to pages 43 - 47 for end notes. 40 © 2017 CVS Health
Slide 41: Retail/LTC Pharmacy
Guidance: 2017 Q2 Segment Performance Q2 2017 Net Revenue Change (4.25%) to (2.5%) Retail/LTC Same-store sales (6) (4.75%) to (3.0%) Same-store adjusted scripts (6) (7) (1.5%) to (0.5%) Operating Profit Change (31) (13.25%) to (10.25%) Pharmacy Net Revenue Change Services 9.0% to 10.75% Operating Pr
Slide 42: Free Cash Flow
Guidance: 2017 Full-year Free Cash Flow (billions) Full-year 2017 Operating Cash Flow $7.7 to $8.6 Gross Capital Expenditures ($2.0) to ($2.4) Sale-leaseback proceeds (32) $0.3 to $0.2 Net Capital Expenditures ($1.7) to ($2.2) Free Cash Flow $6.0 to $6.4 Year-over-year Change (33) (26%) to (21%) Ref
Slide 43: Endnotes
Endnotes 1. Consolidated operating profit excludes $61 million of acquisition-related integration costs and a $3 million charge related to a disputed 1999 legal settlement during the three months ended March 31, 2016. Excludes $15 million of acquisition-related integration costs during the three mon
Slide 44: Endnotes
Endnotes 6. Same store sales and prescriptions exclude revenues from MinuteClinic, and revenue and prescriptions from stores in Brazil, long-term care operations and from commercialization services. 7. Includes the adjustment to convert 90-day, non-specialty prescriptions to the equivalent of three
Slide 45: Endnotes
Endnotes 16. Retail/LTC operating expenses have been adjusted to exclude $57 million of acquisition-related integration costs during the three months ended March 31, 2016. Excludes $15 million of acquisition-related integration costs during the three months ended March 31, 2017. In 2016, the costs r
Slide 46: Endnotes
Endnotes 21. Adjusted EPS for the year ended December 31, 2016, excludes $795 million of amortization of intangible assets, a $643 million loss on early extinguishment of debt, $291 million of acquisition-related integration costs related to the acquisitions of Omnicare and the pharmacies and clinic
Slide 47: Endnotes
Endnotes 27. Consolidated operating expenses for the year ended December 31, 2016, excludes $245 million of acquisition-related integration costs related to the acquisitions of Omnicare and the pharmacies and clinics of Target, a $3 million charge related to a disputed 1999 legal settlement, a $34 m