Express Scripts Q1 2010 Earnings Call Transcript

Express Scripts Q1 2010 Earnings Call Transcript
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Express Scripts (ESRX)

Q1 2010 Earnings Call

April 29, 2010 10:00 am ET

Executives

David Myers - Vice President of Investor Relations

Jeffrey Hall - Chief Financial Officer and Executive Vice President

George Paz - Chairman, Chief Executive Officer and President

Analysts

Ricky Goldwasser - Morgan Stanley

Thomas Gallucci - Lazard Capital Markets LLC

Robert Willoughby

Lisa Gill - JP Morgan Chase & Co

Ross Muken - Deutsche Bank AG

Lawrence Marsh - Barclays Capital

John Kreger - William Blair & Company L.L.C.

Presentation

Operator

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Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2010 Earnings Conference Call. [Operator Instructions] I now like to turn the call over to the Vice President of Investor Relations, David Myers.

David Myers

Thank you, and good morning, everyone. Welcome to our First Quarter Conference Call. With me today are George Paz, our Chairman and CEO; and Jeff Hall, our CFO.

Before we begin, I need to read the following statement. Statements or comments made on this conference call may be forward-looking statements and may include, but are not necessarily limited to, financial projections or other statements of the company's plans, objectives, expectations or intentions.

These matters involve certain risks and uncertainties. The company's actual results may differ significantly from those projected or suggested in any forward-looking statement due to a variety of factors, which are discussed in detail in our SEC reports.

For clarity purposes, all numbers we talk about today will be on an adjusted basis. Please refer to the tables on our press release for reconciliation of GAAP to the adjusted numbers we will be discussing. The reconciliation of EBITDA to net income can also be found in our earnings release. Earnings release is posted on our website.

Now at this point, I'll turn the call over to Jeff, who'll discuss our first quarter financial results.

Jeffrey Hall

Thank you, David. Yesterday, we reported solid first quarter EPS of $1.10, which represents an increase of 25% over last year. Other highlights in the quarter were EBITDA per Rx at $2.92, the high end of our guidance range for the quarter. Cash flows from operations was strong at $761 million, up 166% from the prior year. We made significant progress with the implementation of NextRx live and now have more than 15% integrated onto our system. And we raised the low end and midpoint of our EPS guidance range for the year.

Last year, we indicated that our focus for uses of cash in the first half of the year would be the $1.3 billion of 2010 debt maturity. This is still our primary focus. However, as a result of strong cash flow, which includes $25.7 million from our 338(h)(10) election for NextRx, we were able to repurchase 2.2 million shares and repay $180 million of debt in the quarter. We still expect cash from operations for the year to be more than $2 billion.

Our Q1 results reflected a full quarter of both NextRx, which closed on December 1, and the new DoD contract, which was implemented on November 4. As you know, we began recording DoD revenues on a gross basis which increased revenues and cost of revenues by $2 billion in the quarter.

Gross profit dollars increased 35% from last year. However, as a result of the change in DoD revenue and the addition of the NextRx business, gross profit margin declined to 6.4% from 9.8%. As we continue to make progress executing our integration plan, we expect gross profit margin to increase sequentially.

During the quarter, our focus is on the successful start up of our new clients, including NextRx, which resulted in a higher level of spending charged to cost of goods sold. As a result of this focus, we also spent less on SG&A projects than we were in subsequent quarters. We continue to expect that SG&A, excluding charges and amortization, will be $865 million to $881 million for the year.

As a result of our performance so far this year, we're now expecting earnings per share, excluding transaction-related charges and amortization, to be in the range of $4.85 to $5. This range represents a growth of 23% to 27% over 2009, excluding three closed financing costs last year.

After our call last quarter, we realized that while EPS and EBITDA estimates were in line with our guidance, many of the details were not. As a result, mid-quarter, we provided specific guidance for several line items, including revenue and SG&A. We provide the details on our IR website. Please consider our detailed guidance as updated[ph], as you adjust your model for the remainder of the year.

As the year progresses, you will see us rationalize our footprint, eliminate redundancies, implement more eyes [ph] onto our system and realize synergies as we made progress towards delivering to more than $1 billion in incremental EBITDA we expect to achieve in the NextRx transaction.

And with that, I'll turn it over to George.

George Paz

Thank you, Jeff. Good morning, everyone. In addition to solid financial performance, we've been successful on a number of fronts this year. Earlier this month, we successfully integrated the first major group of NextRx slides onto our platforms. This migration represented over 15% of total membership.

Our focus on integration is continuing. This will allow us to provide Express Scripts high level of services and tools to NextRx patients and clients. In turn, this will help WellPoint maintain and grow its business.

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