Cvs Health Corporation · NYSE:CVS
Cvs Health — Q2 2017 Earnings Presentation
44 slides from Cvs Health's earnings presentation, Aug 8, 2017
Slide 1: Second Quarter 2017 Earnings Conference Call
Second Quarter 2017 Earnings Conference Call Larry Merlo President & Chief Executive Officer Dave Denton Executive Vice President & Chief Financial Officer August 8, 2017
Slide 2: 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 3: Second Quarter Business Update
Second Quarter Business Update © 2017 CVS Health
Slide 4: Second Quarter: Continued Solid Results
Second Quarter: Continued Solid Results Q2 2017 Change vs. Q2 2016 Consolidated net revenues $45.7 billion 4.5% Consolidated operating profit (1) $2.3 billion (7.0%) Adjusted EBITDA (2) $2.9 billion (5.2%) Adjusted EPS (3) $1.33 0.8% Free Cash Flow (4) $1.6 billion 37.2% Refer to pages 39 - 44 for e
Slide 5: Four-Point Plan to Return to Healthy Growth
Four-Point Plan to Return to Healthy Growth • In November, we laid out our four-point plan to return to healthy growth: – Leveraging our enterprise capabilities and CVS Pharmacy’s compelling value proposition to partner more broadly with other PBMs and health plans – Focusing on driving growth throu
Slide 6: PBM Business: 2018 Selling Season Off to Solid Start
PBM Business: 2018 Selling Season Off to Solid Start • Gross wins of ~ $5.4 billion • Net new business of ~ $1.8 billion - Does include the previously-announced loss of the FEP specialty contract - Does not include any impact from our individual Med D PDP - To date, completed ~ 70% of our client ren
Slide 7: PBM Business: 2018 Formulary Strategy
PBM Business: 2018 Formulary Strategy • Last week announced 2018 formulary strategy – Effective January 1st we plan to remove 17 products from Standard Control Formulary in 10 drug classes, while adding back 17 products that had been removed in previous years – For 2018, estimate 99.76% of members w
Slide 8: PBM Business: SilverScript
PBM Business: SilverScript • In total, Caremark currently serves ~ 12.4 million Med D beneficiaries – 4.5 million captive lives in our individual PDP – 1 million captive EGWP lives – 6.9 million lives through our health plan clients • SilverScript qualified in 32 of the 34 regions in the preliminary
Slide 9: PBM Business: Specialty Pharmacy
PBM Business: Specialty Pharmacy • CVS Specialty’s growth continues to outpace the market • Seeing strong growth in the open market while securing significant wins in the standalone specialty market • In Q2, specialty revenues increased 11.5% 9 © 2017 CVS Health
Slide 10: Retail/LTC: Q2 Pharmacy Revenue and Script Growth
Retail/LTC Business: Q2 Pharmacy Revenue and Script Growth (6) • Total same-store sales decreased 2.6%, slightly better than expectations • Pharmacy same-store sales decreased 2.8% - Negative impact of ~ 410 bps due to recent generic introductions • Pharmacy same-store prescription volumes flat on a
Slide 11: 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 launched last month - Seen some uptake from clients, and pipeline of additional opportunity in coming years is promising • I
Slide 12: Retail/LTC: Long-Term Care Pharmacy Business
Retail/LTC Business: Long-Term Care Pharmacy Business • Omnicare remains the leader in the market and the potential acquisition of PharMerica does nothing to change that • We have invested the time and capital over the past two years to get the right technology and processes in place in order to dif
Slide 13: Retail/LTC: Q2 Front Store Revenue and Gross Margin
Retail/LTC Business: Q2 Front Store Revenue and Gross Margin • Front store comps decreased 2.1% – Positive impact of 75 basis points from the shift of Easter into the second quarter – Reflects decision to rationalize promotional strategies – Adjusting for the Easter shift and leap day impact in Q1,
Slide 14: Front Store Growth Strategies
Retail/LTC Business: Front Store Growth Strategies • Remain focused on growing our Beauty, Health Care and Personal Care businesses • Integrated digital manufacturer coupons into our app • Implemented new technology that is making our digital communications even more relevant by automating the selec
Slide 15: Front Store Growth Strategies: Store Brands
Retail/LTC Business: Front Store Growth Strategies: Store Brands • Remains an area of strength and opportunity • Represented 22.6% of front store sales in the quarter - Up ~ 80 basis points vs. LY • Focusing on providing high-quality, value alternatives and through innovation that improves the consu
Slide 16: Retail/LTC: CVS MinuteClinic
Retail/LTC Business: CVS MinuteClinic • Operate 1,126 clinics across 33 states and Washington, D.C. • Q2 revenues up 8% vs. LY • MinuteClinic providers have now conducted 37 million patient visits • Recently joined the Alere eScreen Occupational Health Network • Through this new collaboration, emplo
Slide 17: Retail/LTC: Real Estate Update
Retail/LTC Business: Real Estate Update Locations at end of Q1 9,676 Opened 27 Closed (3) Retail locations at end of Q2 2017 9,700 Net new locations 24 Relocations 10 Retail locations with pharmacies 9,650 (8) Refer to pages 39 - 44 for end notes. 17 © 2017 CVS Health
Slide 18: Second Quarter 2017 Financial Review
Second Quarter 2017 Financial Review © 2017 CVS Health
Slide 19: Capital Allocation
Financial Update: Capital Allocation • Paid ~ $512 million in dividends in Q2 – 12-month trailing dividend payout ratio of 36.6% (9) – Ratio is artificially high due to some expenses that are more temporary in nature, as described in our non-GAAP reconciliations on our website – On track to reach 35
Slide 20: Free Cash Flow
Financial Update: Free Cash Flow • In Q2, generated $1.6 billion of free cash and $4.6 billion year- to-date - Free cash flow in Q2 benefitted from timing of PBM cash receipts and payables, due in part to the early receipt of a Med D payment that shifted into Q2 due to the timing of month end • Cont
Slide 21: Earnings per Share
Q2 2017 Income Statement: Earnings per Share • Q2 Adjusted EPS of $1.33 (3), up 0.8%, at the high end of guidance range – Retail/LTC segment delivered results within our expectations – PBM posted profit growth above high end of our expectations, primarily driven by timing factors related to purchasi
Slide 22: Revenues: Consolidated, PBM
Q2 2017 Income Statement: Revenues: Consolidated, PBM • Consolidated revenues of ~ $45.7 billion, up 4.5% vs. LY • PBM revenues of $32.3 billion, up 9.5% vs. LY – Growth driven by increased volume in pharmacy network claims as well as brand inflation and solid specialty pharmacy growth – Partially o
Slide 23: Revenues: Retail/LTC
Q2 2017 Income Statement: Revenues: Retail/LTC • Retail/LTC revenues of $19.6 billion, down 2.2% vs. LY, slightly better than expectations – Decline driven by continued reimbursement pressure, magnified by flat script comps caused by the previously-discussed network changes restricting CVS Pharmacy
Slide 24: Gross Profit Margin: Consolidated, PBM
Q2 2017 Income Statement: Gross Profit Margin: Consolidated (11), PBM • Consolidated gross margin of 15.2%, down ~ 85 bps vs. LY, primarily driven by mix shift, as lower-margin PBM is growing faster than Retail/LTC • Consolidated gross profit dollars decreased 1.2% – Decrease primarily due to the lo
Slide 25: Gross Profit Margin: Retail/LTC
Q2 2017 Income Statement: Gross Profit Margin: Retail/LTC (11) • Retail/LTC gross margin of 29.0%, down ~ 20 bps vs. LY – Decrease primarily driven by lower reimbursement rates – Partially offset by increasing generic dispensing rate and increased front store margin • Retail/LTC gross profit dollars
Slide 26: Operating Expenses and Margin
Q2 2017 Income Statement: Operating Expenses and Margin • Consolidated: expenses were 10.2% of revenues (12)…~ 25 bps vs. LY improvement • PBM: expenses were 1.0% of revenues (13) … ~ 10 bps vs. LY improvement – Driven by additional sales leverage related to the volume increases • Retail/LTC: expens
Slide 27: Operating Profit and Margin
Q2 2017 Income Statement: Operating Profit and Margin • Consolidated – Operating profit decreased 7.0% (1), in line with expectations – Operating margin of 5.0% (1), down ~ 60 bps vs. LY • PBM – Operating profit increased 9.1% (13) – Operating margin of 3.5% (13), flat vs. LY • Retail/LTC – Operatin
Slide 28: Below-the-line
Q2 2017 Income Statement: Below-the-line • Net interest expense of $247 million, ~ $33 million lower than LY – Driven by paying down debt in prior year and a lower average interest rate on the debt that remains outstanding • Effective tax rate (16) of 38.4% – Higher compared to expectations, driven
Slide 29: 2017 Guidance
2017 Guidance © 2017 CVS Health
Slide 30: Enterprise Outlook
Guidance: 2017 Full-year Enterprise Outlook Full-year 2017 Net Revenue Growth 3.0% to 4.0% Operating Profit Change (17) (5.75%) to (4.25%) Operating Profit Margin (17) Moderate decline Adjusted EPS (18) $5.83 to $5.93 Year-Over-Year Change (18) (0.25%) to 1.5% GAAP Diluted EPS (19) $4.92 to $5.02 Re
Slide 31: Healthy Growth in PBM
Guidance: 2017 Full-year Healthy Growth in PBM Full-year 2017 Net Revenue Growth 8.0% to 9.0% Total Adjusted Claims (10) 1.78 billion to 1.80 billion Gross Profit Margin Modest decline Operating Expense (20) Modest improvement (% of revenue) Operating Profit Growth (20) 5.75% to 7.25% Operating Prof
Slide 32: Retail/LTC Outlook
Guidance: 2017 Full-year Retail/LTC Outlook Full-year 2017 Net Revenue Change (3.50%) to (2.75%) Same-store Sales (6) (4.25%) to (3.50%) Same-store Adjusted Scripts (6) (7) (0.75%) to 0.25% Gross Profit Margin Moderate improvement Operating Expense (21) Significant deterioration (% of revenue) Opera
Slide 33: Consolidated Income Statement
Guidance: 2017 Full-year Consolidated Income Statement Full-year 2017 Corporate Segment Expense (23) $925 million to $945 million Intercompany Eliminations ~ 12% (% of combined segment revenues) Gross Profit Margin Notable decline Operating Expense (24) Modest improvement (% of revenue) Refer to pag
Slide 34: Consolidated Income Statement
Guidance: 2017 Full-year Consolidated Income Statement Full-year 2017 Net Interest Expense ~$1.00 billion to $1.01 billion Effective Tax Rate ~ 39% Weighted Average Shares ~ 1.02 billion Consolidated Amortization ~ $820 million Consolidated D&A ~ $2.5 billion 34 © 2017 CVS Health
Slide 35: Enterprise Revenue and Earnings per Share
Guidance: 2017 Q3 Enterprise Revenue and Earnings per Share Q3 2017 Net Revenue Growth 2.75% to 4.25% Adjusted EPS (25) $1.47 to $1.50 Year-Over-Year Growth (25) (10.5%) to (8.0%) GAAP Diluted EPS (26) $1.20 to $1.23 Refer to pages 39 - 44 for end notes. 35 © 2017 CVS Health
Slide 36: Pharmacy Retail/LTC
Guidance: 2017 Q3 Segment Performance Q3 2017 Net Revenue Change (5.0%) to (3.25%) Retail/LTC Same-Store Sales (6) (5.75%) to (4.0%) Same-Store Adjusted Scripts (6) (7) (0.75%) to 0.25 Operating Profit Change (28) (13.5%) to (11.0%) Pharmacy Net Revenue Change 8.5% to 9.75% Services Operating Profit
Slide 37: 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 (29) $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 (30) (26%) to (21%) Ref
Slide 38: Responses to Drug-Pricing Rhetoric
Responses to Drug-Pricing Rhetoric • We continue to be a very active voice in Washington regarding health care issues • Our proactive proposals to lower drug costs focus on increasing competition in the drug market, strengthening the ability to use our drug management tools, and easing out-of- pocke
Slide 39: Endnotes
Endnotes 1. Consolidated operating profit excludes $81 million of acquisition-related integration costs during the three months ended June 30, 2016 and $10 million of acquisition-related integration costs during the three months ended June 30, 2017. In 2016, the integration costs relate to the acqui
Slide 40: Endnotes
Endnotes 5. Client retention rate is defined as: 1 less (estimated lost revenues from any known terminations plus annualization of any mid-year terminations, divided by estimated PBM revenues for that selling season year) expressed as a percentage. Both terminations and PBM revenues exclude Medicare
Slide 41: Endnotes
Endnotes 14. Retail/LTC operating expenses have been adjusted to exclude $75 million of acquisition-related integration costs during the three months ended June 30, 2016. Excludes $5 million of acquisition-related integration costs during the three months ended June 30, 2017. In 2016, the costs rela
Slide 42: Endnotes
Endnotes 17. Consolidated operating profit for the year ended December 31, 2016, excludes $291 million of acquisition-related integration costs related to the acquisitions of Omnicare and the pharmacies and clinics of Target, a $34 million asset impairment charge in connection with 2017 planned stor
Slide 43: Endnotes
Endnotes 21. Retail/LTC operating expenses for the year ended December 31, 2016, excludes $235 million of acquisition-related integration costs related to the acquisitions of Omnicare and the pharmacies and clinics of Target, and a $34 million asset impairment charge in connection with 2017 planned
Slide 44: Endnotes
Endnotes 25. Adjusted EPS for the quarter ended September 30, 2016, excludes $197 million of amortization of intangible assets, a $101 million from loss on early extinguishment of debt and $65 million of acquisition-related integration costs. Adjusted EPS for the quarter ending September 30, 2017, e