Express Scripts' CEO Discusses Q4 2011 Results - Earnings Call Transcript

Express Scripts (ESRX)

Q4 2011 Earnings Call

February 23, 2012 9:00 am ET

Executives

David Myers - Vice President of Investor Relations

Jeffrey L. Hall - Chief Financial Officer and Executive Vice President

George Paz - Chairman, Chief Executive Officer and President

Analysts

Lisa C. Gill - JP Morgan Chase & Co, Research Division

Lawrence C. Marsh - Barclays Capital, Research Division

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Michael Cherny - Deutsche Bank AG, Research Division

Ricky Goldwasser - Morgan Stanley, Research Division

Steven Valiquette - UBS Investment Bank, Research Division

John Kreger - William Blair & Company L.L.C., Research Division

Charles Rhyee - Cowen and Company, LLC, Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Express Scripts Fourth Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. And I would now like to turn the conference over to our host, Vice President of Investor Relations, Mr. David Myers. Please go ahead.

David Myers

Thank you, and good morning, everyone. Thank you for joining us this morning. With me today is George Paz, Chairman and CEO; and Jeff Hall, CFO.

Before we begin, I need to read the following Safe Harbor statement. Statements or comments made on this call today may be forward-looking 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'll talk about today will be on an adjusted basis. Please refer to the tables in our press release for a reconciliation of GAAP to the adjusted numbers we'll be discussing. The reconciliation of EBITDA to net income can also be found in our earnings release, which is posted on our website.

At this point, I'll turn the call over to Jeff, who'll discuss our fourth quarter results.

Jeffrey L. Hall

Thanks, David. Last night, we reported fourth quarter EPS of $0.82, up 15% from the prior year. EPS for the year was $2.97, up 19%. Cash flow from operations was $532 million for the quarter and $2.2 billion for the year.

Since our last call, we continue to make progress towards completing the Medco acquisition, including securing the remainder of the financing, obtaining shareholder approval and certifying our substantial compliance with the FTC's second request. As a result of this progress, we maintained high levels of project spending to free up capacity for integration activities in 2012, and delayed cost savings opportunity, keeping staffing at higher levels to support integration planning.

SG&A cost were up $17 million year-over-year, reflecting the increased spending and an accrual for tax items, partially offset by lower management compensation. Despite this increased spending, gross profit margin was 7.4%, in line with last year's fourth quarter. EBITDA was up 8% over last year. EBITDA per adjusted Rx rose to $3.66, up 6%, and EPS grew 19% for the year.

Although EPS was strong, it was below our target due to lower claims volume, driven by utilization and increased attrition as a result of poor economic environment, increased spending on projects and higher staffing levels to prepare for integration, and investing to support clients and members as they changed retail pharmacies. Because EPS was below target, management bonuses were 0 in 2011. During the quarter, we settled $725 million of the remaining $750 million accelerated share repurchase, resulting in the receipt of 2.1 million additional shares. These shares are excluded from our outstanding shares this quarter.

The ASRs have resulted in the retirement 33.4 million shares of this year.

As we've been saying for the past several months, we plan to provide combined 2012 guidance after the closing of the transaction when we have had a chance to review and consolidate our forecast for the year. Our view of the transaction remains unchanged. We believe the acquisition will be slightly accretive to adjusted EPS in the first full year after closing and moderately accretive once fully integrated. We expect to realize $1 billion in net synergies once fully integrated.

And at this point, I'll turn the call over to George.

George Paz

Good morning, everyone, and thank you, Jeff.

The actions we took in 2011 demonstrated our ability to advance healthcare through innovation, execute on our unwavering alignment with clients and position ourselves to address the national mandate for more affordable healthcare, higher quality healthcare through our merger with Medco. We succeeded by helping our clients solve for issues in an industry that's ever-changing and ever-challenging, which positions us well for 2012 and beyond. Our research in new solutions lab continues to deliver innovative products and solutions that addresses our clients' pain points, such as poor adherence, which leads to $300 billion in healthcare waste each year. We launched Screen Rx, a new product offering, where predictive modeling is employed to determine which members are likely to be non-adherent in the future and tailor an intervention to best suit each individual. We are setting a new standard in healthcare by fighting non-adherence before it begins.

Another tool that continues to gain traction in the marketplace to specially benefit services, and an innovative offering that addresses the skyrocketing cost of specialty drugs across the pharmacy/medical spectrum. We can forecast, guarantee and deliver measurable savings by applying proven tools for specialty drugs, regardless of where patients receive the medication.

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