Cvs Health Corporation · NYSE:CVS
Cvs Health — Q4 2017 Earnings Presentation
35 slides from Cvs Health's earnings presentation, Feb 8, 2018
Slide 1: Fourth Quarter 2017 Earnings Conference Call
Fourth Quarter 2017 Earnings Conference Call Larry Merlo President & Chief Executive Officer Dave Denton Executive Vice President & Chief Financial Officer February 8, 2018
Slide 2: Important Information
Important Information No Offer or Solicitation This communication is for informational purposes only and not intended to and does not constitute an offer to subscribe for, buy or sell, the solicitation of an offer to subscribe for, buy or sell or an invitation to subscribe for, buy or sell any secur
Slide 3: Important Information
Important Information Participants in the Solicitation CVS Health, Aetna, their respective directors and certain of their respective executive officers may be considered participants in the solicitation of proxies in connection with the proposed transaction. Information about the directors and execu
Slide 4: Important Information
Important Information Statements in this communication regarding CVS Health and Aetna that are forward-looking, including CVS Health’s and Aetna’s projections as to the closing date for the pending acquisition of Aetna (the “transaction”), the extent of, and the time necessary to obtain, the regulat
Slide 5: Important Information
Important Information In addition, this communication may contain forward-looking statements regarding CVS Health’s or Aetna’s respective businesses, financial condition and results of operations. These forward-looking statements also involve risks, uncertainties and assumptions, some of which may n
Slide 6: Forward-looking Statements
Forward-looking Statements This presentation contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements reflect our current views related to our future financial performance, future events and industry and market conditions. Forward-lookin
Slide 7: Fourth Quarter Business Update
Fourth Quarter Business Update 7 © 2018 CVS Health
Slide 8: Fourth Quarter: Solid Results
Fourth Quarter: Solid Results Q4 2017 Change vs. Q4 2016 Consolidated net revenues $48.4 billion 5.3% Adjusted operating profit $3.2 billion 5.7% Adjusted EBITDA $3.8 billion 4.8% Adjusted EPS $1.92 12.0% Free Cash Flow ($642) million (143%) 8 © 2018 CVS Health
Slide 9: 2017 Provides Foundation for Growth in 2018
2017 Provides Foundation for Growth in 2018 2017 Change vs. 2016 Consolidated net revenues $184.8 billion 4.1% Adjusted operating profit $10.0 billion (5.8%) Adjusted EBITDA $12.4 billion (4.4%) Adjusted EPS $5.90 1.0% Free Cash Flow $6.4 billion (22%) 9 © 2018 CVS Health
Slide 10: 2018 Selling Season Seeing Good Progress
PBM Business: 2018 Selling Season Seeing Good Progress • Gross wins of ~ $6.2 billion • Net new business of ~ $2.4 billion - Does not include any impact from our individual Med D PDP - Strong retention rate of ~ 96.5% (1) • Welcome season saw service levels reaching record performance • 2019 Selling
Slide 11: Top of Mind for Clients
PBM Business: Top of Mind for Clients • Plan designs that effectively lower unit costs and overall health care costs – Most common are plans with formularies focused on the highest value drugs – Clinical programs such as Transform Diabetes Care and Pharmacy Advisor increasingly central to clients’ b
Slide 12: Specialty Pharmacy
PBM Business: Specialty Pharmacy • In Q4, specialty revenues increased 9.2%; scripts increased 14.5% – Benefited from new product introductions and increased access to limited distribution drugs • Revenue moderated by: – Lower levels of inflation on specialty drugs – Increase in generic dispensing w
Slide 13: SilverScript Still Clear Leader in Med D Space
PBM Business: SilverScript Still Clear Leader in Med D Space • Another successful enrollment period – Including non-captive Med D lives CVS Caremark manages for our health plan clients, we have 13.3 million lives under management Medicare Part D Lives Served by CVS Caremark (1)(2) (millions) January
Slide 14: Q4 Pharmacy Revenue and Script Growth
Retail/LTC Business: Q4 Pharmacy Revenue and Script Growth (1) • Total same-store sales increased 0.1%, more than 100 bps better than expectations • Pharmacy same-store sales increased 0.4% ̶ Negative impact of ~ 340 bps due to recent generic introductions • Pharmacy same-store prescription volumes
Slide 15: Collaborating With All Payors
Retail/LTC Business: Collaborating With All Payors • We will return to healthy script growth, driven in part by our new collaborations with Optum, Cigna, and Express Scripts ̶ Collaborations will help patients receive the most from their health benefits while improving their health • Believe that be
Slide 16: Q4 Front Store Revenue and Gross Margin
Retail/LTC Business: Q4 Front Store Revenue and Gross Margin • Front store comps decreased 0.7% – Cold and flu season added 80 bps • When cold and flu impact adjusted out, comp improved sequentially – Reflects a number of factors, including decision to optimize promotional strategies • Reduction in
Slide 17: Real Estate Update
Retail/LTC Business: Real Estate Update Locations at end of Q3 9,751 Opened 65 Closed (13) Retail locations at end of Q4 2017 9,803 Net new locations 52 Relocations 5 Retail locations with pharmacies 9,755 (1) 1. Including 8,060 CVS Pharmacy stores that operated a pharmacy and 1,695 pharmacies locat
Slide 18: Fourth Quarter 2017 Financial Review
Fourth Quarter 2017 Financial Review 18 © 2018 CVS Health
Slide 19: Capital Allocation
Financial Update: Capital Allocation • For full-year 2017, generated $6.4 billion in free cash • Paid ~ $510 million in dividends in Q4; $2.0 billion in full-year 2017 – 12-month trailing dividend payout ratio of 30.9% (1) – Down slightly due to non-cash tax reform benefit captured in net income dur
Slide 20: Free Cash Flow and Capex
Financial Update: Free Cash Flow and Capex • In Q4, outflow of ($642) million in free cash as we settled the CMS payable associated with the 2016 plan year • In 2017, gross capital expenditures of ~ $1.9 billion, about $306 million lower than LY - Primarily due to higher spend in 2016 on integration
Slide 21: Earnings per Share
Q4 2017 Income Statement: Earnings per Share • Q4 Adjusted EPS of $1.92, at the high end of guidance range – Several items open at year-end resolved in our favor, causing our effective tax rate to be lower than forecasted • None are individually significant and, where appropriate, are factored into
Slide 22: Revenues: Consolidated, PBM
Q4 2017 Income Statement: Revenues: Consolidated, PBM • Consolidated revenues of ~ $48.4 billion, up 5.3% vs. LY • PBM revenues of $34.2 billion, up 9.3% vs. LY – Growth was 150 bps above the high-end of guidance – Year-over-year growth driven by increase in pharmacy network and specialty volume, br
Slide 23: Revenues: Retail/LTC
Q4 2017 Income Statement: Revenues: Retail/LTC • Retail/LTC revenues of $20.9 billion, up 0.3% vs. LY – Better than expectations due to stronger-than-expected pharmacy same store sales and script growth and better-than-expected volume in front store • Stronger cold and flu season contributed ~ 80 bp
Slide 24: Gross Profit Margin: Consolidated, PBM
Q4 2017 Income Statement: Gross Profit Margin: Consolidated, PBM • Consolidated adjusted gross margin of 16.3%, down ~ 30 bps vs. LY, primarily driven by mix shift, as lower-margin PBM is growing faster than Retail/LTC • Consolidated adjusted gross profit dollars increased 3.5% • PBM gross margin of
Slide 25: Gross Profit Margin: Retail/LTC
Q4 2017 Income Statement: Gross Profit Margin: Retail/LTC • Retail/LTC adjusted gross margin of 30.0%, up ~ 25 bps vs. LY – Increase primarily driven by favorability in front store margin and increased generic dispensing, partially offset by continued reimbursement pressure • Favorability in front s
Slide 26: Operating Expenses and Margin
Q4 2017 Income Statement: Operating Expenses and Margin • Consolidated: adjusted operating expenses were 9.7% of revenues …~ 30 bps improvement vs. LY • PBM: adjusted operating expenses as percent of sales flat to LY • Retail/LTC: adjusted operating expenses as percent of sales increased slightly du
Slide 27: Operating Profit and Margin
Q4 2017 Income Statement: Operating Profit and Margin • Consolidated – Adjusted operating profit increased 5.7%, in line with expectations – Adjusted operating margin of 6.6%, flat vs. LY • PBM – Operating profit increased 13.5%, in line with expectations – Operating margin of 4.3%, up ~ 15 bps vs.
Slide 28: Below-the-line
Q4 2017 Income Statement: Below-the-line • Net interest expense of $241 million, ~ $1.5 million lower than LY • Adjusted effective tax rate of 38.3%; 38.1% for the year (1) – Better than expectations • Weighted-average share count of ~ 1.0 billion shares 1. The income tax provision for the three mon
Slide 29: 2018 Guidance
2018 Guidance 29 © 2018 CVS Health
Slide 30: Investment from Tax Reform
Guidance: 2018 Full-year Investment from Tax Reform • Updating guidance only to reflect plans for investment of tax reform benefit • Reduction in tax expense to yield ~ $1.2 billion in cash benefits, allowing us to make incremental investments in our business • Anticipate spending at least half of t
Slide 31: Enterprise Outlook
Guidance: 2018 Full-year Enterprise Outlook Full-year 2018 Net Revenue Growth 0.75% to 2.50% Enterprise Adjusted Operating (1.5%) to 1.5% Profit Growth Tax Rate ~ 27% Assumptions: 1. Revised from January guidance to reflect $275 million investment of the benefit from tax reform in operating expenses
Slide 32: Retail/LTC Pharmacy
Guidance: 2018 Full-year Segment Outlook Full-year 2018 Net Revenue Growth 2.5% to 4.0% Retail/LTC Same-Store Sales (1) 2.0% to 3.5% Same-Store Adjusted Scripts (1) (2) 6.0% to 7.0% Operating Profit Change (3) Down low-single digits Net Revenue Change 1.5% to 3.5% Pharmacy Services Total Adjusted Cl
Slide 33: Below-the-Line
Guidance: 2018 Full-year Below-the-Line • Share repurchases suspended for 2018 due to Aetna transaction – Expect to use cash to pay down existing debt, continue to pay $2 per share annual dividend and fund purchase of Aetna • Expect net interest in range of $2.0 billion to $2.3 billion – Net interes
Slide 34: Enterprise Outlook
Guidance: 2018 Q1 Enterprise Outlook Q1 2018 Net Revenue Growth 1.5% to 3.25% Enterprise Adjusted Operating 0.5% to 4.5% Profit Growth Assumptions: 1. Assume for guidance purposes only, Aetna transaction closes after year-end 2018, given the uncertainty of the timing of the close of the transaction.
Slide 35: Retail/LTC Pharmacy
Guidance: 2018 Q1 Segment Performance Q1 2018 Net Revenue Growth 4.0% to 5.5% Retail/LTC Same-Store Sales (1) 4.0% to 5.5% Same-Store Adjusted Scripts (1) (2) 7.0% to 8.5% Low- to mid-single Adjusted Operating Profit Growth digits Pharmacy Net Revenue Growth 2.0% to 3.75% Services Operating Profit G