Express Scripts Q3 2010 Earnings Call Transcript

Express Scripts Q3 2010 Earnings Call Transcript
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Express Scripts (ESRX)

Q3 2010 Earnings Call

October 28, 2010 9:00 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

Lisa Gill - JP Morgan Chase & Co

Ross Muken - Deutsche Bank AG

Ricky Goldwasser - Morgan Stanley

Steven Valiquette - UBS Investment Bank

Garen Sarafian - Citigroup Inc

Robert Willoughby

Lawrence Marsh - Barclays Capital

Thomas Gallucci - Lazard Capital Markets LLC

Presentation

Operator

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Ladies and gentlemen, thank you for standing by. Welcome to the Express Scripts Third Quarter 2010 Earnings Call. [Operator Instructions] Now with that being said, I'll turn the conference now to the Vice President of Investor Relations, Mr. David Myers.

David Myers

Thank you, and good morning, everyone. With me today are George Paz, our Chairman and CEO; and Jeff Hall, our CFO. Before we begin, I need to read the following Safe Harbor 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 filings with the SEC.

For clarity purposes, all numbers we talk about today will be on an adjusted basis. Please refer to the tables in 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. The earnings release is posted on our website.

At this point, I'll turn the call over to Jeff, who will talk about our third quarter results.

Jeffrey Hall

Thank you, David. Today, we are pleased to report another record quarter and provide guidance for 2011. Our strong results and outlook for the future are the result of our differentiated strategy. Our business model of alignment, enabled by our behavior-centric approach, supported by market-leading technology and service levels. Our execution of this strategy helps our clients and patients drive out wasteful spending, which in turn helps us continue to deliver superior returns to our stockholders.

Third quarter earnings per share reached a record of $0.65, up 55% over last year. The majority of these growth came from EBITDA, which grew at 45% over last year and 5% sequentially. During the quarter, we made significant progress executing our integration plans. We have now transitioned 90% of the WellPoint Live to our IT platform, and expect to complete the final migration of Live at year end. This will position us to finish the integration, retire the NextRx system and rationalize our operational footprint in the first quarter.

Metrics for the quarter were strong and reflect our integration progress. Adjusted claims grew at 48% to $186.9 million. Total operating expenses were in line with our expectations, although the mix of expenses is weighted more towards cost of goods sold and forecasted through the excess capacity that remains in the system today. Despite this excess capacity, gross profit improved to 7.2%, up 30 basis points sequentially. We expect gross profit margin will continue to improve as the underlying fundamentals of our business continue to improve, the completion of the integration and the optimization of capacity.

EBITDA for adjusted Rx reached $3.30, up sequentially from $3.10 last quarter, and year-to-date cash flow from operations increased 99% to $1.8 billion. During the quarter, we repurchased 16.4 million shares and repaid the remaining balance of our term loan. Based on these results and our positive outlook for the remainder of the year, we have narrowed our 2010 EPS guidance range to $2.48 to $2.50. This represents growth of 26% to 27% over 2009 on an adjusted basis.

Moving on to 2011 guidance, we expect that 2011 EPS will be in the range of $3.15 to $3.25, representing growth of 27% to 31% over 2010. We are confident we will complete the integration and achieve our synergy targets in the year. And as a result, our 2011 guidance include $1 billion of incremental EBITDA.

Since the acquisition will be fully integrated next year and our guidance includes the achievement of synergy targets, and keeping with our long-standing practice of not commenting on specific clients, we will no longer discuss WellPoint-specific results.

Cash flow from operations is expected to be between $2.2 billion and $2.4 billion. We see a lot of exciting opportunities, and our EPS guidance include significant investments in 2011. In addition to these significant investments flowing through our P&L, we also expect to spend $140 million to $170 million in capital investments in the year.

We are pleased with how our team has executed in 2010 and look forward to continuing to deliver strong performance in 2011 and beyond.

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

George Paz

Thank you, Jeff, and good morning, everyone. Since our inception, we have been focused on alignment and our ability to innovate and execute. These qualities are as strong as ever, and we are now deploying new capabilities enabled by our groundbreaking work in Consumerology. This week, we had our National Accounts Advisory Board meeting. Annually, we hold this meeting to bring in our diverse set of our National Account clients to get input on market conditions, medical trends and our pipeline of new products. At this meeting, I gathered feedback from many of our clients. They are overwhelmingly pleased with our ability to drive out wasteful spending while improving health outcomes, with high levels of member satisfaction.

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