Cvs Health Corporation · NYSE:CVS
Cvs Health — Q3 2016 Earnings Presentation
44 slides from Cvs Health's earnings presentation, Nov 8, 2016
Slide 1: Third Quarter 2016 Earnings Conference Call
Third Quarter 2016 Earnings Conference Call Larry Merlo President & Chief Executive Officer Dave Denton Executive Vice President & Chief Financial Officer November 8, 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. Actual results may differ materially from those contemplated by the forward
Slide 3: Third Quarter Business Update
Third Quarter Business Update © 2016 CVS Health
Slide 4: Solid Results in Third Quarter
Solid Results in Third Quarter Change vs. Q3 2016 Q3 2015 Consolidated net revenues $44.6 billion 15.5% Consolidated operating profit (1) $2.9 billion 17.3% Adjusted EBITDA (2) $3.5 billion 16.6% Adjusted EPS (3) $1.64 28.0% Free Cash Flow (4) $3.7 billion 186.9% Refer to pages 42 - 44 for end notes
Slide 5: PBM Business: Another Strong Selling Season
PBM Business: Another Strong Selling Season 2017: Significant Gross and Net New Business; Strong Retention • Gross wins of ~ $7.6 billion – Does not include individual Med D PDP impact • Net new business of ~ 4.4 billion - Sequentially $0.2 billion lower due to health plan clients exiting the public
Slide 6: Retail/LTC Business: Q3 Pharmacy Revenue and Script Growth
Retail/LTC Business: Q3 Pharmacy Revenue and Script Growth • Total same-store sales increased 2.3% • Pharmacy same-store sales increased 3.4% – Negative impact of ~ 340 bps due to recent generic introductions • Pharmacy same store prescription volumes increased 3.0% on a 30- day equivalent basis (6)
Slide 7: Target Pharmacies & Clinics and Omnicare
Retail/LTC Business: Target Pharmacies & Clinics and Omnicare CVS at Target: • Despite script shortfall, overall performance in line with expectations • Expect to increase awareness and utilization of CVS at Target – Strong Maintenance Choice performance with the enhanced access for existing Mainten
Slide 8: Q3 Front Store Revenue and Gross Margin
Retail/LTC Business: Q3 Front Store Revenue and Gross Margin • Front store comps decreased 1.0% • Softer traffic largely offset by an increase in basket size – Pulled back on promotional spend for lower-value, promotionally-oriented customers • Front store margins improved significantly in Q3 • Fron
Slide 9: 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 10: Retail Pharmacy Real Estate Update
Retail/LTC Business: Retail Pharmacy Real Estate Update Stores at end of Q2 9,686 Opened 48 Acquired - Closed (6) Stores at end of Q3 9,728 Net new retail drugstores 42 Relocations 11 Retail pharmacies 9,638 (7) Refer to pages 42 - 44 for end notes. 10 © 2016 CVS Health
Slide 11: CVS MinuteClinic
Retail/LTC Business: CVS MinuteClinic • Operate 1,136 clinics across 33 states and Washington, D.C. • Revenues up ~ 23% vs. same quarter a year ago, including Target • Use of on-line wait times or “Hold My Place in Line” on-line queuing tool continues to grow – Recent survey indicated 33% of patient
Slide 12: Enterprise Digital: Creating a Connected Health Experience
Retail/LTC Business: Enterprise Digital: Creating a Connected Health Experience • Mobile Prescription Pickup allows patients to pick up their prescriptions in a fast and private way – Nearly 2 million scripts have been filled using MPP since launch • Enhanced version of SilverScript.com launched in
Slide 13: Third Quarter 2016 Financial Review
Third Quarter 2016 Financial Review © 2016 CVS Health
Slide 14: Capital Allocation
Financial Update: Capital Allocation • Paid ~ $455 million in dividends in Q3 – Dividend payout ratio of 34.7% (27) • Artificially high due to loss on debt extinguishment incurred in second and third quarters as well as ongoing integration costs associated with recent acquisitions – On track to reac
Slide 15: Free Cash Flow
Financial Update: Free Cash Flow • In Q3, generated $3.7 billion of free cash (4) • Year-to-date, produced $6.6 billion of free cash (4) • Increasing free cash flow guidance to range of $6.8 to $7.0 billion (4)(8) from previous range of $6.3 billion to $6.6 billion in 2016 – The increase in free cas
Slide 16: Earnings per Share
Q3 2016 Income Statement: Earnings per Share • Q3 Adjusted EPS of $1.64 (3), up 28%, 6¢ above high end of guidance range – 5¢ relates to lower tax rate, primarily due to resolution of certain tax matters previously anticipated to occur in Q4 – 1¢ relates to below the line items • GAAP diluted EPS of
Slide 17: Revenues: Consolidated, PBM
Q3 2016 Income Statement: Revenues: Consolidated, PBM • Consolidated revenues of $44.6 billion, up 15.5% vs. LY • PBM revenues of $30.4 billion, up 19.2% vs. LY – Growth driven by increased volume in pharmacy network claims from last year’s successful selling season and growth in specialty pharmacy
Slide 18: Revenues: Retail/LTC
Q3 2016 Income Statement: Revenues: Retail/LTC • Retail/LTC revenues of $20.1 billion, up 12.5% vs. LY – Growth driven primarily by addition of Omnicare and the pharmacies within Target, as well as pharmacy same store sales • Retail/LTC GDR of 85.8%, up 100 bps vs. Q3 2015 18 © 2016 CVS Health
Slide 19: Gross Profit Margin: Consolidated, PBM
Q3 2016 Income Statement: Gross Profit Margin: Consolidated, PBM • Consolidated gross margin of 16.8%, down ~ 45 bps vs. LY – Gross profit dollars up 12.6% (9) • PBM gross margin of 5.9%, up ~ 15 bps vs. LY – Increase primarily due to favorable generic dispensing • PBM gross profit dollars up 22.4%
Slide 20: Gross Profit Margin: Retail/LTC
Q3 2016 Income Statement: Gross Profit Margin: Retail/LTC • Retail/LTC gross margin of 29.3%, down ~ 70 bps vs. LY – ~ 30% of decline was mix-driven, due to the acquisitions – Continued reimbursement pressure – Declines partially offset by increasing GDR as well as increased front store margins as w
Slide 21: Operating Expenses and Margin
Q3 2016 Income Statement: Operating Expenses and Margin • Consolidated: expenses were 10.3% of revenues (10) • PBM: expenses were 1.1% of revenues … ~ 10 bps YOY improvement – Driven by additional sales leverage from volume increases • Retail/LTC: expenses were 20.2% of revenues (10) … ~ 55 bps YOY
Slide 22: Operating Profit and Margin
Q3 2016 Income Statement: Operating Profit and Margin • Consolidated – Operating profit increased 17.3% (1) – Operating margin of 6.5% (1), up ~ 10 bps vs. LY – EBITDA of $3.5 billion, up 16.6% vs. LY • PBM – Operating profit increased 25.3% – Operating margin of 4.8%, up ~ 25 bps vs. LY • Retail/LT
Slide 23: Below-the-line
Q3 2016 Income Statement: Below-the-line • Net interest expense of $253 million, up ~ $8 million (13) vs. LY – Driven by debt issues in the third quarter of 2015 to fund the acquisitions – Year-to-date 2016, retired $4.2 billion of debt and recorded $643 million loss on the early extinguishment of d
Slide 24: Marketplace Changes
Marketplace Changes © 2016 CVS Health
Slide 25: Recent Marketplace Actions
Recent Marketplace Actions • Very recently, there have been a number of unexpected marketplace actions that will have a negative impact on our Q4 2016 results and a more meaningful impact on our outlook for 2017 - In total, we believe these network actions will result in more than 40 million retail
Slide 26: 2016 Guidance Review
2016 Guidance Review © 2016 CVS Health
Slide 27: 2016 Guidance Update
2016 Guidance Update • FY 2016 lowered midpoint by 5 cents per share − Takes into account recent competitor actions restricting us from pharmacy networks as well as current trends in the retail business • Trends in retail include the slowing script growth in the overall market and a soft seasonal bu
Slide 28: Lowering Midpoint of Adjusted EPS By 5 Cents
Guidance: 2016 Full-year (15) Lowering Midpoint of Adjusted EPS By 5 Cents Full-year 2016 Net Revenue Growth 16.0% to 16.5% Adjusted EPS (21) $5.77 to $5.83 Year-over-year Growth (22) 11.75% to 13.0% GAAP Diluted EPS $4.84 to $4.90 Operating Profit Growth (19)(23) 7.5% to 8.5% Refer to pages 42 - 44
Slide 29: Increasing Free Cash Flow
Guidance: 2016 Full-year (19) Increasing Free Cash Flow (billions) Full-year 2016 Operating Cash Flow (4) $9.1 to $9.3 Gross Capital Expenditures ~ ($2.6) to ($2.5) Sale-leaseback proceeds (20) $0.3 to $0.2 Net Capital Expenditures ~ ($2.3) Free Cash Flow (4) $6.8 to $7.0 Year-over-year Growth Refer
Slide 30: Guidance Reflects Recent Marketplace Changes And Current Retail Trends
Guidance: 2016 Q4 (15) Guidance Reflects Recent Marketplace Changes And Current Retail Trends Q4 2016 Net Revenue Growth 12.25% to 14.0% Adjusted EPS $1.64 to $1.70 Year-over-year Growth (17) 7.0% to 10.75% GAAP Diluted EPS $1.52 to $1.58 Operating Profit Growth (15) 2.0% to 5.5% Refer to pages 42 -
Slide 31: PBM Outlook Remains Strong
Guidance: 2016 Q4 (15) PBM Outlook Remains Strong Q4 2016 Net Revenue Growth 18.75% to 20.5% Gross Profit Margin Moderate decline Operating Expense Modest improvement (% of revenue) Operating Profit Growth 9.5% to 11.5% Operating Profit Margin Down 30 bps to 35 bps Refer to pages 42 - 44 for end not
Slide 32: Retail/LTC Outlook Has Softened
Guidance: 2016 Q4 (15) Retail/LTC Outlook Has Softened Q4 2016 Net Revenue Growth 4.0 to 5.75% Same-store Sales Flat to down (1.75%) Same-store Adjusted Scripts (6) 1.0% to 2.0% Gross Profit Margin Moderate decline Operating Expense Flat to down (% of revenue) Operating Profit Growth (18) (1.25%) to
Slide 33: Consolidated Income Statement
Guidance: 2016 Q4 (15) Consolidated Income Statement Q4 2016 Corporate Segment Expense $225 million to $220 million Gross Profit Margin Significant decline Operating Expense Notable improvement (% of revenue) Operating Profit Margin (18) Down 50 bps to 65 bps Refer to pages 42 - 44 for end notes. 33
Slide 34: Consolidated Income Statement
Guidance: 2016 Q4 (15) Consolidated Income Statement Q4 2016 Net Interest Expense ~ $245 million Effective Tax Rate ~ 39.2% Weighted Average Shares ~ 1.07 billion Consolidated Amortization ~ $205 million Consolidated D&A ~ $600 million Refer to pages 42 - 44 for end notes. 34 © 2016 CVS Health
Slide 35: 2017 Preliminary Outlook
2017 Preliminary Outlook © 2016 CVS Health
Slide 36: Enterprise Outlook for 2017
Preliminary Outlook: 2017 Full-year (15) Enterprise Outlook for 2017 Full-year 2017 Adjusted EPS (25) $5.77 to $5.93 Year-over-year Growth (21) (0.5%) to 2.5% GAAP Diluted EPS (24) $5.16 to $5.33 PBM EBIT Growth ~ 8% Retail/LTC EBIT Growth ~ (8%) Refer to pages 42 - 44 for end notes. 36 © 2016 CVS H
Slide 37: Factors Affecting Growth
Preliminary 2017 Outlook Factors Affecting Growth • PBM segment: – Strong selling season – Specialty expected to deliver strong growth – SilverScript business expected to continue to perform very well • Retail/LTC segment: – Significant headwind of more than 40 million scripts from network changes –
Slide 38: Continue to Drive Shareholder Value
Preliminary 2017 Outlook Continue to Drive Shareholder Value • Significant cash generation capabilities are a real asset • Continue to increase dividend annually • Continue share repurchases after considering strategic acquisition opportunities • Board approved $15 billion share repurchase authoriza
Slide 39: Long-term Outlook
Long-term Outlook © 2016 CVS Health
Slide 40: Targeting 10% Adjusted EPS Growth
Long-term Outlook Targeting 10% Adjusted EPS Growth • Adjusted EPS growth target of approximately 10%, on average − Some years may be higher, while some years may be lower − Recognizes the fact that maintaining 10% to 14% growth off of a much larger base is becoming more challenging • Expect to gene
Slide 41: Plan for Healthy Operating Profit Growth
Long-term Outlook Plan for Healthy Operating Profit Growth 1. Leverage enterprise capabilities and CVS Pharmacy’s compelling value proposition to partner more broadly with other PBMs and health plans 2. Focus on driving growth through new PBM product introductions that capitalize on benefits inheren
Slide 42: Endnotes
Endnotes 1. Consolidated operating profit excludes $65 million and $127 million of acquisition-related transaction and integration costs during the three months ended September 30, 2016 and 2015, respectively. The costs relate to the acquisitions of Omnicare and the pharmacies and clinics of Target.
Slide 43: Endnotes
Endnotes 10. Consolidated operating expenses and Retail/LTC operating expenses for the three months ended September 30, 2016, have been adjusted to exclude $60 million and $47 million, respectively, of acquisition-related integration costs. Consolidated operating expenses and Retail/LTC operating ex
Slide 44: Endnotes
Endnotes 21. Adjusted EPS for the year ending December 31, 2016, excludes $207 million of acquisition-related costs, a $643 million loss on early extinguishment of debt, $798 million of amortization of intangible assets and a $3 million charge related to a disputed 1999 legal settlement. Estimated a