CVS Health Corporation · NYSE:CVS
CVS Health — Q4 2014 Earnings Presentation
37 slides from CVS Health's earnings presentation, Feb 10, 2015
Slide 1: Fourth Quarter Earnings Conference Call
Fourth Quarter Earnings Conference Call Larry Merlo President & Chief Executive Officer Dave Denton Executive Vice President & Chief Financial Officer February 10, 2015
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: Business Review
Fourth Quarter 2014 Earnings Conference Call Business Review Larry Merlo President & Chief Executive Officer February 10, 2015 © 2015 CVS Health 3
Slide 4: 2014 Was a Great Year
2014 Was a Great Year Full-year 2014 Change vs. 2013 Adjusted EPS (1) (2) (3) $4.49 13.5% Retail Operating Profit (4) $6,762 million 7.9% PBM Operating Profit (5) $3,514 million 13.8% Free Cash Flow $6,516 million 48.1% Refer to page 37 for end notes. © 2015 CVS Health 4
Slide 5: Fourth Quarter: Solid Close to 2014
Fourth Quarter: Solid Close to 2014 Q4 2014 Change vs. Q4 2013 Adjusted EPS (1) $1.21 8.4% Retail Operating Profit $1,780 million 6.5% PBM Operating Profit $909 million 0.9% Refer to page 37 for end notes. © 2015 CVS Health 5
Slide 6: 2015 Selling Season Update
PBM Business: 2015 Selling Season Update • Gross wins of $7 billion • Net-new business of $3.6 billion, up ~ $400 million from Analyst Day update – Excludes any impact from our individual SilverScript Medicare Part D PDP business • Success again reflects high levels of service and execution, competi
Slide 7: Specialty Pharmacy
PBM Business: Specialty Pharmacy • Strong results, with revenues up 56% year-over-year in Q4 – Key drivers: new business; hepatitis C drugs; and the addition of Coram infusion business • Continue to see client interest in and adoption of our medical pharmacy management offering through NovoLogix® •
Slide 8: Hepatitis C Therapies
PBM Business: Hepatitis C Therapies • In January, Harvoni and Solvaldi became exclusive on CVS/caremark Standard Commercial, Exchange, Medicare Part D and Medicaid formularies • Harvoni is the preferred agent for genotype 1 • Solvaldi is the preferred agent for other genotypes • We believe this crea
Slide 9: SilverScript
PBM Business: SilverScript • Ended 2014 with ~ 2.9 million individual PDP lives • Successful enrollment period with ~ 3.4 million lives enrolled in our individual PDP, consistent with expectations • Significant opportunity to grow individual PDP business over the long term © 2015 CVS Health 9
Slide 10: Tobacco Impact
Retail Business: Tobacco Impact • Our stores have been tobacco-free since September of 2014 • Magnitude of tobacco effect on most impacted categories has been a bit less than expected – Beyond categories expected to feel impact, other front store categories have not been negatively impacted • Former
Slide 11: Revenue and Script Growth
Retail Business: Revenue and Script Growth • Script comps increased 5.3% on a 30-day equivalent basis (6) • Retail pharmacy market share was 21.1% in Q4, up ~ 55 bps versus Q4 2013 • Pharmacy same-store sales increased 5.5% – Incidence of flu picked up a bit, adding ~ 40 bps to pharmacy comps – Nega
Slide 12: Medicare Part D
Retail Business: Medicare Part D • For 2015, we have contracted with 20 regional and national Med D plans, where CVS/pharmacy is preferred provider • We will continue to use our economic model to make sound decisions with respect to participation © 2015 CVS Health 12
Slide 13: Front Store Trends
Retail Business: Front Store Trends • Front store comps decreased 7.2% – Adjusting for the tobacco impact, comps would have increased 0.7% – Impact of tobacco exit was ~ 800 bps, which is ~ 100 bps less than anticipated • Front store margins improved modestly year-over-year on a comparable basis, in
Slide 14: Store Brands
Retail Business: Store Brands • Store Brands saw notable gains in Q4 as its share of our front store sales increased ~ 310 bps to ~ 22% – ~ 190 bps of the improvement reflected removal of tobacco from the product mix – Remaining ~ 120 bps reflects underlying progress of store brand penetration – Gai
Slide 15: Real Estate Update
Retail Business: Real Estate Update • In Q4, opened 50 new retail drugstores, relocated 30, and closed 7, resulting in 43 net-new retail drugstores • In 2014, opened 151 new retail drugstores, acquired 33, relocated 60, and closed 22, resulting in 162 net-new retail stores – New markets included Lit
Slide 16: CVS/minuteclinic
Retail Business: CVS/minuteclinic • Revenues and customer visits up more than 36% and 33%, respectively, vs. same quarter last year • Operate 971 clinics in 31 states and Washington, D.C. – 35 net new clinics added in Q4 – 171 net new clinics added in 2014 – Plan to open more than 100 new clinics in
Slide 17: Cardinal Health Venture: Red Oak Sourcing
Business Update: Cardinal Health Venture: Red Oak Sourcing • To date, Red Oak Sourcing has transitioned suppliers representing more than 95% of the combined generic spend • Received the first fixed payment of $25.6 million from Cardinal in Q4, as expected • Extremely pleased with rapid progress to d
Slide 18: FDA Approval of Teva's Generic Nexium
Business Update: FDA Approval of Teva’s Generic Nexium • Still many questions regarding the launch of generic Nexium, including potential legal maneuvers, the timing of launches, and the number of other manufacturers who could potentially launch • We need clarity and answers to those questions befor
Slide 19: Financial Review
Fourth Quarter 2014 Earnings Conference Call Financial Review Dave Denton Executive Vice President & Chief Financial Officer February 10, 2015 © 2015 CVS Health 19
Slide 20: Capital Allocation
Financial Update: Capital Allocation • Returned more than $1.5 billion to shareholders in Q4; approximately $5.3 billion in 2014 – Dividends of $317 million in Q4; ~ $1.3 billion in 2014 • Finished 2014 with payout ratio of 27.7% • Still on track to reach 35% targeted payout ratio by 2018 – Repurcha
Slide 21: Cash Flows
Financial Update: Cash Flows • Generated more than $2.9 billion of free cash in Q4 – Driven by improvements in collections and payables management • Generated more than $6.5 billion of free cash in 2014, $500 million above the high end of our goal – Driven by early receipt of some late-year payments
Slide 22: Q4 Earnings per Share
Income Statement: Q4 Earnings per Share • Adjusted EPS of $1.21 in Q4 (1) – At high end of guidance range – Reflects strong growth across our operating segments, particularly in retail • GAAP diluted EPS of $1.14 Refer to page 37 for end notes. © 2015 CVS Health 22
Slide 23: Q4 Revenues
Income Statement: Q4 Revenues • Consolidated revenues of $37.1 billion, up 12.9% vs LY • PBM revenues of $23.9 billion, up 21.7% vs. LY – Growth driven by specialty pharmacy and increased volume in pharmacy network claims – Partially offset by an increase in generic dispensing rate – Generic dispens
Slide 24: Q4 Gross Profit Margin
Income Statement: Q4 Gross Profit Margin • Consolidated gross margin of 17.9%, down ~ 140 bps vs. LY, in line with expectations • PBM gross margin of 5.2%, down ~ 100 bps vs. LY – PBM gross profit dollars up 2.2% • Increase due to increase in volumes, improvement in GDR, and favorable rebate economi
Slide 25: Q4 Operating Expenses
Income Statement: Q4 Operating Expenses • Consolidated: expenses were 11.6% of revenues … notable YOY improvement • PBM: expenses were 1.4% of revenues … ~ 20 bps YOY improvement – Spent more than expected on 1/1 readiness for welcome season, but were able to deliver modest improvement with over-del
Slide 26: Q4 Operating Profit Margin
Income Statement: Q4 Operating Profit Margin • Consolidated operating margin of 6.3%, a decline of ~ 50 bps vs. LY • PBM operating margin of 3.8%, a decline of ~80 bps vs. LY – Strong operating profit growth of 0.9% vs. LY • Retail operating margin of 10.1%, an improvement of ~ 35 bps vs. LY – Retai
Slide 27: Q4 Below-the-line
Income Statement: Q4 Below-the-line • Net interest expense of $131 million, down ~ $4 million vs LY – Primarily driven by lower average interest rates • Weighted-average share count of 1.2 billion shares • Effective tax rate of 39.6% © 2015 CVS Health 27
Slide 28: Guidance
Financial Update: Guidance • Full-year guidance remains essentially unchanged from Analyst Day • First quarter guidance also remains unchanged • As we highlighted at our December Analyst Day, several timing factors affect the cadence of profit delivery throughout the year • While 2015 is expected to
Slide 29: Healthy Enterprise Growth
Guidance: 2015 Full-Year Healthy Enterprise Growth Full-year 2015 Net Revenue Growth 7.0% to 8.25% Adjusted EPS (1) (7) $5.05 to $5.19 Year-over-year Growth (8) 12.25% to 15.50% GAAP Diluted EPS $4.77 to $4.91 Refer to page 37 for end notes. © 2015 CVS Health 29
Slide 30: Solid Outlook in Retail
Guidance: 2015 Full-Year Solid Outlook in Retail Full-year 2015 Net Revenue Growth 1.25% to 2.50% Same-store Sales (9) (0.5)% to 0.75% Same-store Adjusted Scripts (6) 4.0% to 5.0% Gross Profit Margin Flat to up Operating Expense Modest improvement (% of revenue) Operating Profit Growth 4.75% to 6.50
Slide 31: Strong PBM Outlook
Guidance: 2015 Full-Year Strong PBM Outlook Full-year 2015 Net Revenue Growth 11.0% to 12.25% Total Adjusted Claims (6) 1.13 billion to 1.15 billion Gross Profit Margin Modest decline Operating Expense Modest improvement (% of revenue) Operating Profit Growth 6.75% to 10.75% Operating Profit Margin
Slide 32: Consolidated Income Statement
Guidance: 2015 Full-Year Consolidated Income Statement Full-year 2015 Corporate Segment Expense $785 million to $800 million Intercompany Eliminations ~ 10.6% (% of combined segment revenues) Gross Profit Margin Notably down Operating Expense Notable improvement (% of revenue) Operating Profit Margi
Slide 33: Consolidated Income Statement
Guidance: 2015 Full-Year Consolidated Income Statement Full-year 2015 Net Interest Expense $540 million to $550 million Effective Tax Rate ~ 39.3% Weighted Average Shares (7) ~ 1.12 billion Consolidated Amortization ~ $520 million Consolidated D&A ~ $2.0 billion Refer to page 37 for end notes. © 201
Slide 34: Enterprise Revenue and Earnings Per Share
Guidance: 2015 Q1 Enterprise Revenue and Earnings Per Share Q1 2015 Net Revenue Growth 8.5% to 10.0% Adjusted EPS (1) (7) $1.06 to $1.09 Year-over-year Growth 4% to 7.25% GAAP Diluted EPS $0.99 to $1.02 Refer to page 37 for end notes. © 2015 CVS Health 34
Slide 35: Segment Performance
Guidance: 2015 Q1 Segment Performance Q1 2015 Net Revenue Growth 1.5% to 3.0% Pharmacy Retail Same store sales (10) (0.5)% to 1.0% Same store adjusted scripts 4.0% to 5.0% Operating Profit Growth (1.5)% to 0.5% Pharmacy Net Revenue Growth 14.5% to 15.75% Services Operating Profit Growth (5.0)% to Fl
Slide 36: Substantial Free Cash Flow
Guidance: 2015 Full-Year Substantial Free Cash Flow (billions) Full-year 2015 Operating Cash Flow $7.6 to $7.9 Gross Capital Expenditures ~ ($2.3) to ($2.2) Sale-leaseback proceeds (11) $0.6 to $0.5 Net Capital Expenditures ~ ($1.7) Free Cash Flow $5.9 to $6.2 Year-over-year Growth Flat to 7% Refer
Slide 37: Endnotes
Endnotes 1. Adjusted EPS equals income before income tax provision plus amortization, less adjusted income tax provision and other (comprised of earnings allocated to participating securities), less net income attributable to noncontrolling interest, divided by the weighted average diluted common sh