Express Scripts Holding Management Discusses Q2 2012 Results - Earnings Call Transcript

Express Scripts Holding (ESRX)

Q2 2012 Earnings Call

August 08, 2012 10:00 am ET


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


Thomas Gallucci - Lazard Capital Markets LLC, Research Division

Lawrence C. Marsh - Barclays Capital, Research Division

Glen J. Santangelo - Crédit Suisse AG, Research Division

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

Robert M. Willoughby - BofA Merrill Lynch, Research Division

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

Ricky Goldwasser - Morgan Stanley, Research Division

Charles Rhyee - Cowen and Company, LLC, Research Division

Steven Valiquette - UBS Investment Bank, Research Division



Ladies and gentlemen, thank you for standing by, and welcome to Express Scripts Second Quarter 2012 Earnings call. [Operator Instructions] And as a reminder, today's conference is being recorded.

I'd now like to turn the conference over to Vice President of Investor Relations, David Myers. Please go ahead, sir.

David Myers

Thank you, and good morning, everyone. Welcome to our second 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 Safe Harbor statement. Statements or comments made on this conference call may be forward-looking statements, may include 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 filing 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 a 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, which is posted on our website.

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

Jeffrey L. Hall

Thanks, David. Well, obviously, we've had a few busy months here, including closing the Medco acquisition, executing our integration plan, migrating the first year of WAG, focusing on the selling season and signing a new contract with Walgreens. In addition, we're also reporting strong second quarter earnings and increasing guidance for the year. Adjusted claims for the quarter were 404.3 million, up 118% from last year. Our generic fill rate was 77.8%, up from 74% a year ago. In keeping with our model of alignment, as our clinical programs delivered savings to our clients, we also improved our gross profit. SG&A was up $80 million versus Q1 pro forma for the acquisition, as a result of an increase in management incentive compensation to reflect the increase in our expectations for the year and the reclassification of several Medco expenses from cost of goods sold to SG&A to conform with Express Scripts accounting methodology.

EBITDA for the quarter was $1.5 billion, and EBITDA per RX was up 14% versus prior year, again pro forma for the acquisition. Interest expense in the quarter was $169.5 million, as a result of the repayment of $1.5 billion of bonds at an average rate of 5.9% and continued low floating rates. Interest expense for 2012 is expected to be approximately $530 million. This quarter's effective tax rate, excluding non-recurring items related to purchase accounting, was 42.1%. The higher rate for the quarter was the result of several factors related to the closing of the transaction and a necessary year-to-date true-up.

We still expect our effective tax rate to be 39%, which means the tax rate for the second half is expected to be approximately 38%. EPS for the second quarter was $0.88, a 24% increase over last year. Cash from operations was $726 million, a 58% increase from last year. Including Medco's first quarter performance, year-to-date cash from operations is approximately $2 billion.

As a result of strong performance in the first half of the year and the accelerated realization of synergies, we are increasing our guidance range for 2012. We now expect EPS for the year, excluding transaction, integration and amortization expenses, to be in the range of $3.60 to $3.75, representing growth of 24% over 2011 at the midpoint. As we have said before, this range assumes that shares outstanding for the year will be 750 million and the tax rate will be 39%. If the share count or tax rate changes from these assumptions, our EPS forecast could change.

We are in the process of reviewing the strategic alternatives for several of our adjacent businesses, which are not core to our PBM offering. We do not expect the ultimate disposition of these businesses to have a material impact on our financial results. In summary, integration is proceeding well, and we continue to expect to complete the integration and achieve $1 billion of net synergies in 2014.

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

George Paz

Thank you, Jeff, and good morning, everyone. Four months post closing, we are more confident that the combination with Medco provides significant opportunities to innovate, drive out waste and improve how health care is delivered. As part of our integration, we are combining Medco's clinical approach through its therapeutic research centers and the use of specialized pharmacists with Consumerology, the application of behavioral sciences to health care. By blending the combined clinical skills with the behavioral sciences, we will be able to accelerate clinical offerings from our greater efficiencies in the health care system and better protect American families from the rising cost of prescription medications. Our shared vision is to increase therapy adherence where appropriate, lower costs and drive a better health outcome. Our previous acquisitions have succeeded through a disciplined approach to integration, including clinical programs, rationalization of our footprint and system migration. We believe operating on one platform is imperative in offering best-in-class service and meeting the market challenges and opportunities presented by Health Care Reform, Medicare and Medicaid expansion.

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