CVS Caremark Corporation's (CVS) CEO Larry Merlo on Q1 2014 Earnings - Call Transcript

This transcript originally appeared on Seeking Alpha.

Title: CVS Caremark's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Symbol: CVS

Call Start: 08:30

Call End: 09:57

CVS Caremark Corporation (CVS)

Q1 2014 Results Earnings Conference Call

May 02, 2014 08:30 AM ET


Nancy Christal - Senior Vice President, Investor Relations

Jon Roberts - President, PBM

Helena Foulkes - President, Retail Business

Larry Merlo - President and CEO

Dave Denton - Chief Financial Officer


Charles Rhyee - Cowen and Company

Robert Jones - Goldman Sachs

Ross Muken - ISI Group

John Heinbockel - Guggenheim Securities

Scott Mushkin - Wolfe Research

Lisa Gill - JPMorgan

Dane Leone - Macquarie Research

Peter Costa - Wells Fargo Securities

Edward Kelly - Credit Suisse

Steven Valiquette - UBS

Mark Wiltamuth - Jefferies

Ricky Goldwasser - Morgan Stanley

David Larsen - Leerink Partners

John Ransom - Raymond James

Meredith Adler - Barclays Capital

George Hill - Deutsche Bank

Robert Willoughby - Bank of America Merrill Lynch



Ladies and gentlemen, thank you for standing by. Welcome to the CVS Caremark Q1 2014 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded Friday, May 02, 2014.

I would now like to turn the conference over to Nancy Christal, Senior Vice President of Investor Relations. Please go ahead Ma'am

Nancy Christal

Thanks Matt. Good morning, everyone, and thanks for joining us today. I am here this morning with Larry Merlo, President and CEO, who will provide a business update and Dave Denton, Executive Vice President and CFO, who will review our first quarter results as well as guidance for the second quarter and year.

Jon Roberts, President of PBM and Helena Foulkes, President of the Retail Business, are also with us today and will participate in the question-and-answer session following our prepared remarks. During the Q&A, please limit yourself to no more than one question with a quick follow-up, so we can provide more callers with the chance to ask a question.

Please note that just before this call, we posted a slide presentation on our website that summarizes the information you will hear today as well as some additional facts and figures regarding our operating performance and guidance. Additionally, please note that our quarterly report on Form 10-Q will be filed by the close of business today and it will be available on our website at that time.

During today's presentation, we will make forward-looking statements within the meaning of the federal securities laws. By their nature, all forward-looking statements involve risks and uncertainties, actual results may differ materially from those contemplated by the forward-looking statements for a number of reasons as described in our SEC filings including the risk factors section and cautionary statement disclosure in our most recently filed annual report on Form 10-K.

During this call, we'll also use some non-GAAP financial measures when talking about our company's performance including free cash flow and adjusted EPS. In accordance with SEC regulations, you can find the definitions of these non-GAAP items as well as reconciliations to comparable GAAP measures on the Investor Relations portion of our website.

And as always, today's call is being simulcast on our website and it will be archived there following the call for one year.

And now, I will turn this over to Larry Merlo.

Larry Merlo

Well thanks, Nancy. Good morning everyone, and thanks for joining us today. We posted solid results in the first quarter with adjusted earnings per share growing 22.5% to a $1.02 per share. Both our PBM and retail segments delivered solid operating profit growth despite the impact of a fair amount of unforeseen weather related issues.

And when combining the weather issues with the higher than anticipated tax rate, the estimated impact to our adjusted earnings per share versus our expectations was at least, $0.03 per share. Now, let me just say that it's unusual to hear us talk about the impact of weather on our business, historically it's been our practice to not blame the weather when we explain our results. But this quarter, the amount of severe weather was so abnormal that quite frankly it's hard not to talk about it.

I want to emphasize that our underlying trends were very strong and given the weather issues noted, retail operating profit increased a very healthy 14.2% just below the low end of our expectations.

PBM operating profit growth was slightly above the high-end of our expectations increasing a very strong 28.5%, also of note is the $1.8 billion of free cash generated in the quarter, which puts us well on our way to achieving this year's free cash flow goal.

So while disappointed that the severe weather put a damper on an otherwise excellent quarter we remain very confident in our outlook for the full year and Dave will discuss our financial results and guidance in greater detail during his financial review.

So with that let me turn to a brief business update and I'll start with Health Reform. As I am sure everyone is aware the latest available data suggests that 8 million individuals have enrolled in the public exchanges. Now it's still too early to estimate the impact this might have on utilization trends, acknowledging that the mix of those lives is unclear, so obviously more to come on this issue.

With regard to Medicaid expansion available data indicates that 3 million individuals have gained coverage and it's forecasted that this number will continue to increase in the coming months. And as expected we have seen a slight positive impact on our results from this growth in the Medicaid segment and we continue to believe that CVS Caremark is well-positioned to serve these new customers across our enterprise assets.

I also want to touch briefly on our 10 year agreement with Cardinal Health that agreement forms the largest generic sourcing entity here in the U.S. Both CVS Caremark and Cardinal continue to work closely together on all aspects of the launch, deepening our long standing working relationship and building on our combined sourcing expertise.

Initial reactions from suppliers have been positive and we remain on track for go live data as soon as July 1st of this year. The company will be staffed with individuals from both Cardinal and CVS Caremark. The entity will be located in Foxborough, Massachusetts and operate under the name Red Oak Sourcing. So progress continues and we're looking forward to this exciting new venture.

Moving to our PBM business and I'll start with an update on the 2014 selling season. And since our last earnings call, we did add some second half wins and we warn that the transition of some business loss through acquisition primarily the Amerigroup business would be delayed from 2014 until 2015.

And as a result of these changes, our client net new business for '14 increased to $3 billion and that's up from $2.4 billion at our last update. I should also note that Amerigroup would have been require to pay in early termination fee has the business transition this year. So improvement in the 14 net new businesses expected to be immaterial for this year's financial results.

I also want to remind everyone that the 2014 net new business excludes the impact from attrition in our Med-D PDP business. As we discussed during our Analyst Day, we lost approximately $1.3 billion in 14 revenues related to last year's CMS sanction. And with the sanction listed we are now able to enroll newly eligible Medicare lives as they age into the program throughout the year. However, we miss the opportunity to gain lives through open enrollment last fall.

In our SilverScript plan as just mentioned we began to enroll new choosers for February as they aged into Medicare and we expect to begin receiving low-income subsidy auto assignees this month. And we currently have roughly 3 million lives in our individual PDP and we continue to see significant opportunity to grow the business over the long term.

I am pleased to report that we have had a very successful 2014 welcome season. We have affectively handled 100s of implementations with very high levels of service and this success is been driven by investments that we have made in our people, our processes and our technology.

As for the 15th selling season, it's still too early to provide a substantive update but I would just say that the marketplace is active, and we are seeing a significantly higher level of RFPs relative to the 14th selling season and would also say that our RFP activity is generally consistent with the levels experienced two years ago.

In mid April PBMI released its annual pharmacy benefit manager customer satisfaction report, its broad survey it includes the opinions of nearly 400 plans sponsors who represent almost 65 million members. And we are pleased that CVS Caremark ranked first among large publically traded PBMs on overall satisfaction. And we think these results underscore our commitment to excellent service and we believe that we are very well positioned in the marketplace to both retain business and gain share with our strong service record along with our unique sweet of capabilities.

We recently announced the renewal of a three year contract to provide integrated pharmacy benefit services for the federal employee health benefit program or FEP as it is commonly called, and we continue to provide mail, retail and specialty PBM services along with highly customized clinical programs to FEP's more than 5 million federal employees, retirees, and dependents. And we are certainly very pleased that FEP continues to recognize the value and service that we provide to their plan and to their members.

Moving on to specialty, our business remains strong in the first quarter, revenues were up approximately 34% year-over-year. Today about 60% of specialty revenues in our PBM book of business are dispensed through CVS Caremark specialty pharmacies.

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