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Original Source: FD (FAIR DISCLOSURE) WIRE
. Nancy Christal, CVS Caremark Corp., SVP, IR . Dave Rickard, CVS Caremark Corp., EVP, CFO . Scott Mushkin, Jefferies & Company, Analyst
. Lisa Gill, JPMorgan, Analyst . Howard McLure, Caremark Pharmacy Services, President . Eric Bosshard, Cleveland Research, Analyst
. Tom Gallucci, Merrill Lynch, Analyst . John Heinbockel, Goldman Sachs, Analyst . Matt Perry, Wachovia, Analyst . Larry Merlo, CVS/pharmacy - Retail, President . David Magee, SunTrust Robinson Humphrey, Analyst
. David Veal, Morgan Stanley, Analyst . Deborah Weinswig, Citigroup, Analyst . John Ransom, Raymond James, Analyst . Meredith Adler, Lehman Brothers, Analyst . Robert Willoughby, Bank of America, Analyst
CVS reported 2Q08 total revenues on a consolidated basis of $21.1b, GAAP diluted EPS from continuing operations of $0.56, and adjusted EPS from continuing operations of $0.60. Expects full-year 2008 adjusted EPS from continuing operations to be $2.44-2.50. Expects 3Q08 GAAP diluted EPS from continuing operations to be $0.53-0.56 and adjusted diluted EPS from continuing operations to be $0.58-0.61.
A. Key Data From Call 1. 2Q08 total revenues on a consolidated basis = $21.1b. 2. 2Q08 GAAP diluted EPS from continuing operations = $0.56.
3. 2Q08 adjusted EPS from continuing operations = $0.60. 4. 2Q08 gross profit margin = 20.7%. 5. 2Q08 net CapEx = $491m. 6. 2Q08 share repurchases = 550,000 shares. 7. Full-year 2008 adjusted EPS for continuing operations guidance = $2.44-2.50. 8. 3Q08 GAAP diluted EPS from continuing operations guidance = $0.53-0.56.
9. 3Q08 adjusted diluted EPS from continuing operations guidance = $0.58-0.61.
S1. 2Q08 Business Review (D.R.) 1. Highlights: 1. Posted record:
1. Sales. 2. Operating profit. 3. Profit margins.
4. Net earnings. 5. EPS. 2. PBM: 1. Already renewed more than half of businesses that's up for renewal in 2009, included accounts such as: 1. AT&T. 2. Bank of America.
3. 3M. 4. State of Connecticut. 2. Scheduled renewals for 2009 are already over 70% complete. 3. Lost the Med D contract with Coventry, due in large part to price. 1. Represents approx. $2.5b in revenues and was largely retail-oriented. 2. It is not significant to bottom line. 3. It was announced back in 2006 prior to merger, CVS' contract with Empire would expire at 2008-end. 4. This expiration is part of Empire's plan strategy to take this business in-house as part of its merger with WellPoint.
5. Contract represents approx. $1b in revenues. 6. Similar to Coventry Med D, this account is largely retail. 4. Experiencing one of best selling seasons ever. 1. Client retention in employer segment is in excess of 99%. 5. Won the right to serve about 40 clients, which in total, should have first 12-month revenues of about $3b. 1. Includes the previously announced contracts to service the Employee Retirement System of Texas, BellSouth portion of AT&T and GE. 2. Since Co. has won $1.3b in additional new business. 1. New contracts in total, season to-date, are expected to have first 12-month revenues of $4.3b represented by over
50 accounts. 2. Some of these start as early as Sept. 2008. 3. $4.3b is not the increment for 2009. 3. There is still some business, which is not yet been awarded. 1. Will be more specific about the net expected impact in 2009 and '3Q' call. 2. Selling season will be largely wrapped up. 3. Will provide a specific number for total net new business. 6. Two health plan contracts will expire at the end of this year, had single digit mail penetration, while the new business Co. won is well over 30% mail. 1. Many of them are in excess of 40% mail, as these clients had mandatory mail or significant mail drivers with the previous PBM. 2. This is an obvious profitability driver for business and signals the traction Co. is getting with maintenance choice offering. 3. Although Co. is losing two large retail health plan projects, recently awarded the mail service business for a significant health plan customer. 1. Expanded mail offering and specialty services for a large Blues plan. 7. Many investors have asked Co. about the pricing environment.
1. While it's safe to say that it remains competitive, as it
always has been, price will always be an important factor in every contract decision. 2. As evidenced by solid business wins, believes award winning service and new model are key differentiators for CVS.
3. New Proactive Pharmacy Care model is increasingly resonating
in marketplace. 1. Clients mentioned to Co. that it's been an important
factor in their PBM process. 4. Beginning to see maintenance choice create market differential. 1. This offering lets patient choose where they receive their 90-day maintenance medication, while maintaining the same economics to payer and patient. 2. Concept of preserving the economics of mail service while expanding consumer choice and access has resonated in marketplace and led to several key wins in 2009 selling season. 8. Proactive Pharmacy Care at retail is well underway. 1. Retail pharmacists are speaking with CVS members who have gaps in care. 1. Already beginning to deliver incremental scripts, as Co. aims to improve adherence rates to prescribed drug regimens. 2. This will both keep people healthier and lower overall healthcare costs. 9. ExtraCare Health card provides a discount on CVS brand flexible spending account OTC products to its members who would like to participate, especially given current economic climate. 1. Still on target for reaching about 10m members by early next year. 2. Offering is resonating with clients, as a unique way to provide savings to members. 1. Continues to rollout new cards each month. 10. First specialty pickup at retail client is scheduled to go live on Sept. 2. 1. All systems and processes are in place for a broader rollout next year. 2. Overall new offerings are make steady headwinds in marketplace. 1. Being recognized as a differentiator for CVS. 3. Retail: 1. Pharmacy same-store sales growing 3.7%.
1. Sales of new generics negatively impacted by 280 BP. 2. On adjusting for impact of new generics, pharmacy comps would
have been 6.5%. 3. Generic dispensing rate in retail segment, 67%. 1. Up about 460 BP from last year. 2. Up about 40 BP sequentially. 3. Although there are some headwinds impacting pharmacy growth across the industry, such as Rx to OTC switches and weak brand drug pipeline, CVS continues to grow and gain market share. 4. Strip growth in 2Q08 and YTD is nicely ahead of all other chain stores. 1. Continues to gain on independence as well.
5. On adjusting for calendar differences, pharmacy same-store
sales have led the industry every month for the past six months.
4. Did an analysis of retail and mail. 1. Looked at the number of days between refills of maintenance medications. 1. If people were doing more pill splitting, number of days between pills would go up. 2. Study found absolutely no increase in days. 5. Front-end comps increased 1.8%. 1. Adjusting for negative impact of Easter shift, front-end comps increased 2.9%. 2. Seeing a pickup in price increases from suppliers, which Co. has been able to pass through, but it has had a minimal impact on comps through June, as many are effective in 2H08. 6. Avg. front store ticket continues to increase.
1. Up notably vs. 2Q07. 2. Believes that's a testament to strength of ExtraCare loyalty card program, which encourages customers to aggregate their purchases at CVS. 1. More than 65% of front-end sales across the store base used ExtraCare card. 7. Front store margins continued to improve significantly. 1. One important driver is the use of Extracare loyalty program to drive more profitable sales. 2. With some competitors, has not had to become …