CVS Health Corp (CVS) 2002 Q4 法說會逐字稿

Good day, everyone, and welcome to the Caremark Rx fourth quarter 2002 earnings conference call. This call is being recorded. There will be a presentation followed by a question-and-answer session. If you have a question, please press the star or answer key followed by the digit one on the touch-tone phone.

For opening remarks, I would like to turn the call over to the Chairman and Chief Executive Officer, Mr. Mac Crawford.

Good morning, everyone, I'm going to go through the forward-looking statement quickly since people are still dialing in, then we'll jump into it.

This conference call contains statements that student forward-looking statements from the meanings of the Securities Act of 1933 and the Securities Exchange Act of 1934 as amended by the Private Securities Litigation Reform Act of 1995. Forward-looking statements contained in this conference call include the intent, belief, or current expectations of the company and members of the senior management team with respect of the anticipated growth prospects for the companies business, including revenue and earning projection 2003, net new business for 2003, as well as the assumptions upon which statements are based. Respective investors are cautioned that any such forward-looking statements are not guarantees of future performance involve risks and uncertainties and actual results may differ materially from those contemplated by such forward-looking statements and for the factors currently known to management that could cause actual results to differ materially from those contemplated by the forward-looking statements in this conference call include and are not limited to adverse development are respect to the companies operating plan objectives, as well as adverse developments in the health care and in the pharmaceutical industry generally. Additional factors that could cause actual results to differ materially from those contemplated in this conference call can be found in the company's annual report on form 10-K for the year ending December 31, 2001, and in the company's susiquent forms 10-Q filled with Securities and Exchange Commission. Again, thanks for calling in.

What more can I say in the numbers speak for themselves. We had another very strong quarter to wrap up 2002, which was an outstanding year for the company. Also, we provided guidance for 2003, too, which indicate we expect to have another successful year in front of us. I want to cover a few of the items in the release before I turn the all over to A.D. Frazier, the President, Chief Operating Officer, as well as to Howard McLure, the CFO. When we get through with the presentations then we'll open it up for Q-And-A.

First, we recognize the deferred tax asset on our balance sheet at December 31, which means that as a result of our outstanding performance, we now have enough certainty about the realization of this asset that it should go on the balance sheet. This also means that we are going to start taxing our earnings at a rate of approximately 40%. We talked about this every quarter recently, so I'm sure it's no surprise to anyone. Also, another consequence of recording this asset of the company now has book equity after taking all the charges that we took to exit the PBM business where we actually had gone into a negative equity position. That as well is a positive outcome from this.

Let me point out that this impacts the reported earnings per share numbers but doesn't impact the amount of cash taxes we will pay as we utilize NOL, therefore cash taxes the remain at 7 1/2% or less until the net operating loss is fully utilized. We also recorded the discontinued operating charge in the quarter. Last quarter we stated we probably would take a charge at year end for the cleanup, of exiting the previous businesses. This charge represents that cleanup and covers such things as leases and resolutions of litigation. The softness in the commercial real estate market, particularly in California, contributed to what we believe is the end of the cleanup.

Let me give you a few numbers and focus on the comparisons of earnings per share at the 7 1/2% tax rate we have been use versus the 40% tax rate so that we make sure everyone is comparing on an apples to apples basis and we get all the comps right on the go-forward bases. For the quarter, reported diluted earnings of $2.19 a share, remember this includes the $520 million benefit from recognition of the deferred tax asset as well as the discontinued operations charge. Focusing on earnings from continuing operation, which is what all the [INAUDIBLE] earnings estimates are based on, we earned 35 cents per share, using a 7 1/2% tax rate, versus first call estimates of 33 cents per share. At a 40% rate earnings would have been 23 cents per share for the quarter.

For the year, we earned $1.17 per common share from continuing operations, again, two cents above the most recent guidance that we've given you, with earnings tax at 7 1/2% at a 40% rate earnings for the year would have been 76 cents per share. Going through all of this to be certain that appropriate comparisons are made on a go-forward basis. Again, the change in the tax rate doesn't impact the economics of the company just the reported earnings, and keep in mind, that 76 cents, as we talk in a few minutes about the guidance for 2003.

Let me spend a minute on a couple of other highlights and I'll turn it over to A.D. Once again, we saw strong cash flows from the business for the quarter. Cash flows for continuing operations totalled $100 million, and the year, $408 million, a 43% increase over the procedure year. We entered the year with over $300 million cash on hand, and our debt-debt was down to $39 million. Remember that just several years ago, that number was $1.8 billion.

Revenue growth for the year was in line with expectations while EBITDA margin was 6%, compared to 5.3% in 2001, obviously another strong quarter and another strong year, and the cash results also speak to the quality of the earnings that we're reporting here today.

Regarding the 2003 guidance, let me spend a second on that. We expect revenues to grow in the range of 35 to 40% for the year. Net new business for 2003 now stands at $1.3 billion, versus the $1.2 billion we gave on the last call. Diluted earnings per share from continuing operations for the year will be in the range of $1.02 to $1.04, this compares to the 76 cents per share number in 2002 based on the 40 cent tax rate that I gave you a few minutes ago. Achievement of these averages in 2003 would represent an increase in earnings per share over 2002 of 34% to 37%.

For those of you who wish to compare based on the 7 1/2% tax rate, since the current street estimates are built on models using this rate, the pro forma earnings guidance for 2003 would be in the range of $1.57 to $1.60, again, a 7 1/2% rate. The current street estimates were in the mid $1.40s compared to the $1.70 to $1.60.

Let me also give you two numbers for 2003 that are pretty well fixed and should give you the models in zero and yen on the numbers up above them. First, depreciation and amortization for 2003 will be approximately 44.5 million up from the 29.9 million in 2002. This increase reflects in part the new pharmacy capacity that has come on line in the last year in the company. And the, what will come on line the first part of the year as well.

The second number's interest expense. Interest expense for 2003 will be approximately $44 million, compared to approximately $47 million in 2002. Again, keep in mind that we have got the senior notes that are noncallable until '06, and we have two term loan pieces totaling $250 million, which are very cheap money and at this point, we have chosen not to pay down.

I also encourage everyone to get your estimates for 2003, as well as your comparisons to prior years converted to the 40% tax rates so we don't have confusion on a go-forward basis as far as the numbers that we're reporting, versus those that we achieved last year. And, again, the 40% rate does not effect the economics of company. We'll still be paying taxes at a low rate until the net operating lost loss is exhausted.

Before I turn it over, let me take a couple of moments and brag on our people. Our personnel have done another outstanding job and will do a great job in 2003. These results that you see come from providing our customers outstanding customer service and value for the money that they have spent. I really, we all do appreciate our people as well as our customers. A big thanks to both of them. We have had a great run here, and will continue to have a strong 2003. The new book of business started off well. A.D. will talk a little bit about that, too but the numbers that you see here today are the estimates for the guidance for '03.

At this point in time, I'm turning the call over to A.D. and we'll come back and take Q-And-A after he and Howard get through. A.D.?

Thanks, Mac and good morning, everyone.

As you can see, Caremark Rx continues to show outstanding results both financially and operationally. The company as these results while preparing to start $1,300,000,000 in new business on January 1st, 2003, including several premier accounts such as calPERS and International Truck.

On all fronts, it was a record year. While achieving the results, we made significant investment to sustain new growth and profitability. We will highlight these investments as well as summarize the year's operating results in the balance of my presentation.

Now for the details of the fourth quarter and the year, revenue growth was strong for both the quarter and the year. Revenues for the quarter were up 25% and the year up 21%. Mail order revenues, including our specialty business increased by 26% for the quarter and 23% for the year. Retail revenues were up 24% for the quarter and 20% for the year.

Mail service prescription volume, including our specialty distribution was 5.3 million for the quarter and 20.2 million for the year representing a 14% increase for the quarter and an 11% increase for the year. Retail prescription volume was 18.8 million for the quarter and 71.3 million for the year, representing increases of 13% and 12% respectively.

Our specialty business, whose revenues are included in the overall mail revenue category performed extremely well for the quarter and the year. The performance was led by our Hemophilia, Hepatitis C, Multiple Sclerosis, Rheumatoid Arthritis therapy lines.

A word about generics. As we have seen throughout the year, generics continue to be a key driver of savings for our clients and their participants. In our mail service facilities, we ended with a generic dispenser rate of 33.3%, a 2.4 percentage point improvement over the prior year. At retail, our generic expense rate ended 2002 at 43.2%. A 1.9 percentage point increase over 2001. The variance in the two rates is due to the difference and type of products dispensed in these two outlets, and our mail service pharmacies, we dispensed primarily maintenance medications and 90 day supplies, which currently don't have as many generic equivalence available. At retail, we encourage our plan sponsor participants to fill their acute medications for 30 day or less supplies for which more generic equipments are available.

We continue to develop programs that help our planned sponsors encourage participants to use generics as a first line of therapy and expect this positive trend to continue for the foreseeable future.

About operating efficiency, I'm extremely proud to report our operating income margins continue to improve, demonstrating the leverage we have been able to generate over our operational platform as we brought on more business. For the third quarter, our operating income margin grew to 6% as compared to 5.3% in the prior year and for the year, our operating margin was 5.6%. Favorably compared to the 2000 level of 4.8%.

We also continue to show the highest EBITDA per adjusted plain results in the industry. For the quarter, our EBITDA for adjusted script was $3.45, compared to $2.82 in the prior year, representing an increase of 22.3%. Our EBITDA per adjusted script for the year ended in 2002 with $3.14, as compared to $2.53 in 2001, an increase of 24.1%.

We continue to make investments in the fourth quarter in many areas. Our Phoenix facility continues to process front-end prescriptions that are being filled by our our new auto fill line, a refill-only line in San Antonio. Our Kansas City call center was brought up to capacity during the quarter. We also finalized plans for the expansion of the Fort Lauderdale facility, once completed, this will be Caremark's fourth tristar facility and will provide additional capacity and cost savings for business.

Caremark also made other significant investments in the quarter to ensure a smooth transition of the record 1.3 billion new businesses starting January 1st. I'm pleased to report that the implementations went well. I believe our experience from bringing on this business will pay dividends well into the future as it solidifies Caremark as the premier provider of pharmacy benefit management services.

I would like to add my words to those of Mac Crawford to take the opportunity to thank our clients who rely on Caremark to provide the pharmacy benefit management and specialty distribution services and disease-management services for giving up under the circumstance the opportunity to serve them. I would also like to add my thanks to the over 4500 Caremark employees who work day in, day out, to generate the results reported here to you today. They should be very proud of these results, and I hope you will join me in applauding them for a job well done.

Now, I would like to turn the call over to Howard McLure, who would give you the details of the financial results. Howard.

Thank you, A.D. Good morning, everyone.

As Mac discussed, during the fourth quarter we recognized a significant portion of the deferred tax asset relating to our net operating loss carried forward. Excluding this adjustment, our earnings from continuing operations for the fourth quarter 2002, were 35 cents per diluted share, an increase of 52% over 2001, for the year, were $1.17 per diluted share, an increase of 60% over last year. Revenues were 1.9 billion for the quarter, an increase of 25% over the prior year's quarter. Revenues were 6.8 billion for the year, up 21% compared to last year.

EBITDA was 118.7 million for the quarter, an improvement of 39% over last year, and EBITDA was 410.5 million for the year, an increase of 38%. Operating income was 110.6 million for the fourth quarter of 2002, and 380.6 million for the year, an increase of 41% for the quarter and the year. EBITDA for adjusted claim was $3.45 in the quarter, a 22% improvement over the fourth quarter 2001, and was $3.14 per adjusted square for the year. EBITDA margin improved to 6.4% during the fourth quarter of 2002, compared to 5.8% during the same period of 2001. Margin improvement primarily resulted from a higher generic dispensing rate at both mail and retail during the period and the higher than anticipated mail mix, which was 45% of retail adjustments during the quarter.

Cash flow again was strong in the fourth quarter. Cash flow from continuing operation was 100.5 million during the quarter, reflecting an improvement of 40% over 2001. For the year, cash flow from operations was 408.4 million, which is a 43% increase from 2001. This cash flow performance continues to provide [INAUDIBLE] support for the quality of earnings for the company.

Capital expenditures was 17.4 million for the quarter, 48.4 million for the year. Cap Ex spending in the quarter includes amounts related to mail service, capacity expansion and additional capital for expansion of costs and operations. We expect Cap Ex spending to be approximately $65 million for 2003, which will include the completion of the Phoenix pharmacy and capacity expansion in other facilities. We recorded the charge of 37.5 million after-tax related to the wind down of the PBM business.

As we discussed on last quarter's call, certain remaining legal issues move much closer to resolution during the quarter and we evaluate the remaining retained real estate leases and a lot of the softness in certain markets where we have property available for sublease. Discontinued operations for cash outflows were 16.3 million in the quarter and 50.4 million for the year. We anticipate that discontinued operations cash outflows will be approximately $95 million for 2003.

Our day to sales outstanding were 25.2 days at December 31, 2002, compared to 20.1 day in December 2001. The increase reflects the payoff of the $99.2 million outstanding our accounts receivable sales facility at the end of last year. Because of the way the DSO calculations work, this repayment had the effect of the increasing or DSO by six days. So in other words, our DSO, were down about one day compared to December 2001.

Our inventory days on hand were 10.9 days at December 31, 2002, compared to 9.9 days on December 31, 2001. And our accounts payable days were 30.8 compared to 29.2 on December 31, 2001. Inventory days on hand increased do you to inventory purchases made in December as we prepare to make service to the record business starting in 2003. The inventory purchases had the additional effect in increasing accounts payable days to certain purchases that remained unpaid in year end.

Turning to the balance sheet, our cash balance was 306.8 million, and our debt 698.1 million, representing net debt of 391.3 million. This gives us a net debt EBITDA ratio of .95 times using EBITDA in 2002.

As Mac discussed, we reduced our valuation allowance for deferred tax assets significantly in the fourth quarter. $520 million of the adjustment is recorded in the tax provision on the income statement and 52.8 million related to tax deductible stock options is credited directly to stockholders equity on the balance sheet.

The reduction and valuation allowance results from the strong operating performance for the company. And under accounting rules, we believe we're required to put the asset on the balance sheet. After taking into account taxable income generated in 2001 and 2002, net operating loss for tax purposes is 7.5 billion as of December 31, 2002. [INAUDIBLE] consists primarily of losses generated by operation and divestiture and the discontinued PBM operation. We believe the NOL was calculated with the tax law and regulations and we'll utilize the entire amount on future returns. However, due to the uncertainty of projecting future taxable income and the complexity of the PBM divesture, combined with the fact that NOLs can be audited well beyond the three year statutory audit period, we feel it's prudent to maintain a [INAUDIBLE] against the deferred tax asset. Our effective tax rate for accounting purposes will be 40%. Our cash taxes will be significantly less until we fully utilize the entire NOL in future years.

As we have previously announced, we called our convertible deferred shares on October 11th, 2002, all shares were converted to common stock. We issued $26.9 million to fully retire lease preferred shares and eliminated the approximately $14 million in annual dividends we paid on the preferred shears. Preferred shares were significantly in the money and have been included in our diluted shares outstanding since 2001. The conversion won't have an impact on diluted earnings per share. A version of the preferred shares, recognition of the deferred tax asset and our current earnings resulted in converting our stockholders deficit that existing at the end of last year, to approximately 258 million stockholders equity as of December 31, 2002.

Thanks, I will turn it back over to Mac.

Okay, thank you, Howard. As you can see from these numbers, folks, it's just an outstanding quarter and outstanding year and particularly looking ahead of us, we're excited about what we see for 2003. The majority of the new book of business, the $1.3 billion, the vast majority, has been implemented and started. This is unlike 2002, where we had some of the business or a good piece of the business starting in the middle of the year it's already started, we're already seeing the volumes come through our facilities and we'll tell you that our facilities are holding up very well under the increased volume. As a matter of fact, we have, the same record volumes in our mail service facilities over the last several weeks.

I'm very pleased about what we're seeing coming out starting in 2003. Very excited about the results we see here and particularly about what we see for 2003. Just a word on the sales pipeline, we expect to be other busy year sitting today with a pipeline between $2 and $3 billion that we're work to still expect more RFTs, obviously, to be issued as the year moves on since it's still early, but very, very pleased about the group of people we have, where we position this company, and the opportunities that we see in front of us. At this point in time, operator, let's turn it over for Q-And-A.

Thank you gentlemen. The question-and-answer session will be conducted electronically. If you would like to as a question you may do so by pressing the star key followed by the digit one on your touch-tone phone. We will come to you in the order that you signal. We'll pause one moment to assemble our roster.

While we're pausing, I would like to give you the telephone number for the replay, which will begin approximately two hours after today's conference has ended. To access the replay today you may dial 719-457-0820. You have to punch in the confirmation number 577242. Again, that is 719-457-0820. With the confirmation number of 577242. And once again, to ask a question, press the star key followed by the digit one.

We'll go first to Dave McDonald with Leerink Swann.

Good morning, guys, congratulations. Couple questions, first of all, could you give more visibility on the pipeline of the 200 to 300 billion of new business, is that all of 2004 start dates in January, is a piece of that still on the table for 2003, et cetera?

Those are the 2004 start dates. We still got some opportunities that are sitting for mid-year starts out there that my recollection, you may want to correct me is in the $500-million range, I think, stuff that we see for mid-year start.

Okay. Mac, can you can talk a little about, you guys talked about the implementation of new business. You can talk specifically of how the implementation went at calPERS, I know there is an opportunity for new business there. Any update there in terms of what your sense is on how you're thinking on that front?

Yeah, I think so. For the information at calPERS went well. I met with them in January to make sure things were going okay. I think it's unclear as to you're talking about the new business being what they decide to do as far as their PBM business with certain health plans as I understand it.

Yes.

And I think that that was laid out in some of the discussions that they had during the RFP process earlier. I expect, that -- I will be surprised if they do that in '04, Dave.

Okay.

I think it's probably more likely in '05 or '06 opportunity. I think just from the size of doing it, because it's substantially larger and I don't think they made a decision yet as to what they're going to do exactly. Clearly, we're going to work very hard to make sure we service the account well so we have every opportunity to do it, if they decide to do it.

Okay. Mac, one last question, when you look at the 1.3 billion brought on, or will be brought on in '03, can you give us any sense of what the mail-order penetration rate is at that book and any reason why over time that shouldn't be consistent with where your existing book is?

It should be over time exist with our existing book is. calPERS was already a large mail-order account. I don't have at the top of the head the exact penetration rate of what came in. That's always an estimate when it comes in, but it will be lower than the 45% we're experiencing currently. I expect when we talk at the end of the first quarter, we're going to be down below 45 and then we'll work the rest of the year to pull it back up to it.

Okay. Thank you.

We'll take our next question from Lisa Gill with J.P. Morgan.

Great, thank you. Let me add my congratulations, a great quarter, guys.

Was wondering if you could talk a little bit about what your plans are from a cash flow perspective. Last quarter, you talked about acquisitions and new strategic areas, and Mac, I was wondering if you could give us any indication into what direction you're looking? Thanks.

Yeah, I mean obviously we're going to generate a lot of cash. And we talked about this before. It's either acquisition that is pay down debt or buy stock back.

The acquisition front, though, we're focusing on all three parts of our business, if you will. That's the disease managements area, the PBM area, and the specialty area. So we're not closing out any opportunities there, as long as it's strategic having the financial flexibility that we have today, we're going to be aggressive if we can find the right kind of, and I don't mean aggressive from a standpoint of overpaying for anything. I mean it from the stand point of turning over every rock we can turn over for the appropriate opportunities in the marketplace. Because we do think there is an opportunity to utilize the strength of the company as the balance sheet today, the growth, our supplement the growth we have seen through accession.

What kind of opportunities are you seeing now? Are there many opportunities? Limited opportunities?

No, we're seeing a fair amount of activity right now.

In all three areas, Mac?

Yes.

Okay, great. Thanks.

We'll take our next question from Tom Gallucci with Merrill Lynch.

Good morning, everyone.

Morning, Tom.

Just a follow up on the cash flow question, the cash expected to be used next year for discontinued operations seemed higher, I wondered if you could just add some color there?

And maybe I have one another question, I think in the prepared remarks, you talked about working with the clients to increase generic dispensing rates and things. Can you talk about as you started 2003 maybe the benefit design changes in the customer base and how it might help push, you know, different aspects of either the formulary or increasing the lines there, generic dispensing rating, et cetera.

As far as the discontinued ops cash outflow, if you recall the number we actually spent this year was less than we had projected.

Right.

Some of that is just a spillover into the '03 year. As well as the resolution, of an arbitration that was decided in one piece of litigation where we had already had a reserve that will be paid out you know, in '03. So, that's really the two major deferences that we're dealing, part of it we didn't spend as much as we thought we would spend this last year. It's a catch up.

As far as what is going on in plan design, we continue to see utilization of two and three tier copays in the book of business, we continue to see our customers going to more mandatory mail-order refill prescription programs. Looking forward, what we're going to see, though, from a mail service side which will help this drive this is the significantly more generics that are coming out and the customers being willing to really utilize the mail service to be able to dispense these generics in a cheaper fashion, so a little combination of everything that we're seeing playing into the strength of what we do today, and I think the strength of our system is just being able to convert as quickly as we do to generics, once the generics come out. We're sitting within the first two or three weeks after a generic is introduced at 90 plus percent generic substitution rates on the mail side, and that's clearly contributing to our ability to drive our numbers and save our customers money.

Maybe another one. On the inventories, I noticed they were up substantially and you mentioned in preparation for new business. There any opportunities there to purchase from forward buying at all or is it related to the new business?

We did a forward buy on the specialty side but most of that was really just from the standpoint and [INAUDIBLE] has never been a material factor to us from an earning standpoint, even when we were doing so, but most of it really, we sat there and looked and said, you know, almost all of this $1.3 billion is starting January 1. We want to make sure we have plenty of products in the mail service facility so we don't have customer service issues. It was a conscious decision to add more inventory into the facilities.

Thanks, Mac.

And we'll take our next question from Patrick Wailo.

Go morning, guys.

Morning.

Question on the specialty side of things, one of your competitors spoke recently about the synergist market, having some fairly steep price competition, you can comment on what you're seeing there?

With -- we talked about this to some, at some of the conferences. We're seeing price competition in the specialty marketplace. Incentages, I should say. I made a broad statement there when I was sitting here reading something else. I should be careful what we're reading. We are seeing it in the synergies marketplace.

What we're seeing there is a couple of players that have come in and deeply discounted some of the pricing that has been a therapy that that we have been watching, been look at it's not the numbers that you see here taking into account any price pressure that we see there I will tell you that the way we're managing our specialty business and will continue to do so is that we will manage all of the specialty lines as a portfolio of products and if we don't think we can make an adequate margin to service that line, then we will exit it. Synergist is one we're carefully evaluating it at the current time, so we had an increase in our revenue in the fourth quarter of 2002, over 2001 just, I think, is the other competitor you mentioned indicated they were being selective about the referrals they would take, we're in the same kind of situation ourselves. Still saw an increase, but that's the therapy we're watching.

Obviously for you folks, not big enough to put a needle on one way or another, though. That particular drug anyway.

That's correct.

The specialty this year, I know in '02, at least a couple of times during the year, as good as I have seen it, it was growing faster, I know, than your PBM business this past year. Should we expect -- should we expect it to grow at least in line, if not more rapidly in the PBM business again in '03?

I think it will grow in line with the PBM business in '03. We did have a strong specialty here this past year I treated that to some of the tension that our management people paid to that business, as well as we had [INAUDIBLE] come out, which was a help to us. But you know, we're off to a good start in specialty for the first part of '03 right now. I think it's going to grow pretty much in line with it absent on acquisition, but, no, it's on as I said, we'll manage as a portfolio of products, you will see us move in the products where we think that have an timeout, you will see us move out of those that we don't think have the kind of margin characteristics we look for. But right now, it's growing well.

Great. One last question. The Fort Lauderdale facility, what is the timing on that opening?

I expect it will be finished with the construction we do in the latter half of '03, and start occupying it early '04.

Great. Thank a lot.

Next to Larry Marsh with Lehman Brothers.

Yes, a couple of quick things. First of all, Mac, the portfolio approached your specialty business are you anticipating with that price competition, it says you're going to grow in line with your specialty business this year and, are you anticipating that the current margin profile in your hemo product line, you know, will be the same this year as last better or any worse? Any thoughts there?

On the synergist line, it's grown slower than our overall product portfolio. And again, part of that is conscious from our standpoint. The, you know, on the flip side, January sales in synergist were pretty strong.

Okay.

It will be an interesting thing to watch. That's just one that I will say is on our watch list of watching the therapy.

On the hemophilia products side, that's going to be an interesting market to watch this year as well, simply because you have Baxter coming out with a new product midyear and how well that product is accepted by the physician community and the patient community and the payer community, I think, is going to be an interesting phenomena to watch. As far as margins in that business, those have held up, you know, pretty well for us, Larry.

All right. So like you anticipate those to be comparable this year to what you saw last year?

Yeah, fairly comparable.

All right.

Absent some reimbursement change somewhere, you know, it's not a fast-growing therapy for us, but been one that has been good to us.

Great. Along the same lines, I am sure you have been asked this question as well, you anticipate participating at all in the psoriasis market in a few years in CTS?

Certainly going to be some opportunities from a product standpoint. We think we'll participate in that market.

Great. Okay.

One follow up on the Cap Ex, is it fair to say your Cap Ex this year came in a little below what you budgeted, you said as much as 70 million, and your guidance is 65 million. Is that -- is that right, even Cap Ex has been less than your original expectations? And then, are you anticipating that '03 will be the last big reserve year for discontinued operations of that 95 million or could you see something in '04 as well?

You mean as far as cap payouts? Let me go to the Cap Ex number first, I think from the Cap Ex standpoint, probably slightly below what we said we were going to do in budget in the length of time and expenditures more than anything else.

Okay.

So I don't think the projects that weren't done weren't done, it was more of when the money got spent. The 65 million is our best guess right now. Could be more, could be less. Depends upon the timing of of payment of the projects or the expenditure of the projects.

Okay.

What was the last, the other one?

Yeah, I think if we spend the 95 and that's in another area, we have always spent less and followed again because of timing. Then that should be the last major expenditure coming out of that. There's not a lot more that we have got to deal with.

Okay. Got you, and all right, and did you give any guidance specifically on cash flow from ops this year, or you generally just think that's going to grow in the line of net income on an adjusted basis?

Should grow in line with the EBITDA. Yeah.

Okay. That's great. Thanks.

Thank you.

We'll take our next question from Andy Speller with A.G. Edwards.

Hi, guys, question on the deferred tax asset. Is there going to be a point in time in that where you may increase that number down the road or is this the one time event or are you going to be drawing down the total NOL over time?

Well,now we're getting in deferred tax accounting and god bless all of us if we can understand it. Except Howard, I know he does.

What we recorded here is the, again, what we think is conservative amount to put on the balance sheet, the way you should look assets on the balance sheet. You never know from an audit standpoint what will happen. Howard, please correct me here if I make a mistake.

At some point in time when we exhaust this asset, if you will, by virtue of the utilization of the NOL, then rather, I think, than another asset being recorded, you will actually record the deferred liability, won't you? And then if that comes, does not -- if through audit and everything else that it ends up being resolved in our favor and we end up with utilizing every bit of NOL from a tax standpoint or, which we will, but holds up, that liability gets take own income. True?

True. -- way into the future.

Anyone wanting to talk about accounting for deferred tax, call Howard after this call. I have exhausted my knowledge of it right now.

Okay, as far as I understand then, there won't be any big benefited terms of income flowing back through the balance sheet, through the income statement again.

Not, well -- there could be, but it will not be until all years have been audited and closed by the IRS.

Okay. Thanks a lot.

If we utilize -- so obviously in the book, the entire 1.75 billion on the tax affect on the balance sheet.

Okay and --

And, so, when we continue to use NOL, you will have actually deferred liability that will be set up. That will come back into on the income side.

Okay, that's fair. On the share repurchase, can you remind me how much you guys have outstanding there and given, I know last year there was, when you first announced there was a certain covenants with your debt position in terms of how much you can do, you can expand that given your current cash flow from ops position and balance sheet today and positive move to equity. Can you expand that faster given what shape the business is now?

Under the covenants, we would have $125 million left under the existing facilities. Given how we performed, I don't think our lenders would have a problem if we went back and said we wanted have more room to do what we needed to do. Yes, I think we could do, as long as we keep performing like this, do what we wanted to.

Okay. Thanks a lot.

Sure.

Our next question comes from Kent Delover with SG Cowen Securities.

Thanks and good morning. First on generics, any estimate as to what the impact of generic substitutions was on your revenue growth rate in the fourth quarter and the year if you have it handy and also any thoughts regarding what kind of impact it might have in your '03 revenue guidance.

As far as growth rates first quarter, it would have been 26.1% versus the 24.6 that we reported. For the year, it would have been 23 1/2% versus 21.2.

As far as '03 I don't have it on the top of my head. Maybe one of them can give it to me here quickly. He's flipping the page to me here. I do have it.

We expect that the tell what you we expect the rates to be okay. We expect it to go up around 36% for '03 versus the 33.3 in 2002. That's on the mail side, the retail side, we expect to go to 45% from the 43.2 we saw last year.

So, I don't -- I'd have to do the calculation, Kent to try to figure that out. I am sure you can calculate that and figure out what it did to the overall revenue line.

Okay, that's fine. And then, the second question is what impact is, did your relationship with First Health have on the new business wins? I believe mail handlers, for instance something that was probably sizable that when it came in via that relationship, was there anything else of notes that you picked up in '03?

I think it was First Health. That was the most notable one that we had.

That's super. Thanks very much.

Let me also let me just point out because I know some people, have talked about mail-only accounts and the impact that has on us versus other people and so forth. If you pulled out all of our mail-only accounts that we got, which is what, the First Health relationship is, it wouldn't change our penetration rates.

That's helpful. Thank you.

Our next question comes from Kevin Berg with First Albany.

Can you talk about the competition a little, on the specialty pharmacy market heating up a bit, like the large wholesalers are getting into the marketplace, and where are you guys focused? Is it on your current PBM customer base or across the board?

No, we're across the board. If you look at competition, yeah, we're saying some of the wholesalers get into the marketplace today. You see some smaller players that mom-and-pop type operations that are still in the market but the far as large players, I would say, that probably certainly, I'm guessing we have seen more activity out of it.

Is that troubling since they're your wholesaler?

Yes, it is.

Then, what about business mix in terms of customer mix. Did you guys break that out for the year what that ended up at?

We got that, Howard.

On the PBM side, 86%.

86% employer government plans, government employee, state and federal employee health benefit plans by 14% managed care.

One last question about your comment about mail penetration without mail only. You mean your mail penetration would still be 45%?

Yes, if I took out those accounts, I would do mail-service only, not a combined mail-retail product.

The mail raised the minimus is what you're saying.

Yeah.

Okay. Thank you very much.

Next to Robert Willoughby from Credit Suisse First Boston.

Hi, actually, it's Frank Pinkerton here. Mac, can you tell me if you have expectations built in for a Medicare drug benefit this year, what are Caremark's expectations there, will you participate and what kind of upside do you think that provides going forward?

We don't have anything built in for the expectation of the Medicare drug benefit. What it's -- whether we'll participate, what it will look like doesn't make sense for the PBMs. It all depends on what the legislation, assuming legislation gets passed, finally looks like. My best guess right now is that we will have seen some legislation probably passed, it will have a multiyear phase in to it, and I think that prior to that phase-in, there might be something where the PBMs are asked to help provide services for a population that is primarily the poverty level or maybe 150% above poverty level. Whether or not we decide to participate in that will be driven by whether or not we think that we can make an adequate return on the investments for shareholders. But nothing is in our numbers this year.

Thank you.

Operator? Hello?

We'll take our next question. Just one moment, please. From Tim Laighe with Goldman Sachs.

Thank you. It's Tim Laighe in for Christopher McFadden.

Two questions, should we assume going into '03 that margin trends should be similar to historical basis as lowest in Q1 and then a ramp up through Q4 as mail-order penetration increases? And then secondarily I guess is there any anticipation that the move on the deferred tax asset side should have any impact as to how the credit rating agencies view the company. Obviously it's from a pure accounting standpoint and major capital structure look a little be better, but you have publicly stated before, your relative displeasure your credit rating and it was -- I wanted to get your thought there is. Thanks.

First, as far as margin trends, yeah, I would expect our margin trends to follow the same kind of historical trend they followed in the past. That is, starts out lower at the first of the year and then builds as the year goes along. And in that regard, let me mention something, as far as guidance for the first quarter we typically, you know, always come out with the first quarter of the year, earnings being pretty much the same as the fourth quarter on earnings per share basis, which is about 23 cents a share, on a 40% tax rate. Hopefully that will help you all build your models, give you a base to start from as you go forward there.

What was the rest of the question?

The rating agencies.

I don't think the deferred attacks accounting will have an impact on the rating agencies. Hopefully it will be continued strong performance. If you look at being less than one times debt to EBITDA now will have that impact, I think clearly -- we think we deserve a higher rating than we got. But that's up to the rating agency to make that determination. But I don't see that deferred tax as making any difference. I think they understand it pretty well.

Great. Thank you.

Operator, did we miss Eric Veil from Alex Brown?

He took himself out of the queue, sir.

Okay, thank you.

We'll go to Kelly Crowe with Morgan Keegan.

Mac, when you look at your new business that you brought on line for this year and looking at the pipeline from next year, how would you characterize that business? Is it largely take away business from other PBMs, is it business coming out of other HMOs? How would you characterize the majority of it?

The majority has been this year. Unlike last year, this year the majority of it was coming from business wins that we took from other competitors in the industry. Approximately a fourth of it, though, however, or a third of it almost did come from new entrance into the marketplace and primarily from people carved in to health plans who decided to carve out, and that was about 32% of the business, I think, that we want.

And do you see similar trends for the pipeline for '04?

Well, I've not looked at it in that regard Kelly, so I don't -- I'm not sure. And where -- in looking just at the pipeline, isn't necessarily going translate into what we win, and I don't know that the 32% translated into what the pipeline was last year. So, I think until we get further along I'm just not sure, as far as what business we end up with.

Okay. That's great. And secondly can you talk a little about how your cross-selling initiatives are going among -- obviously mail is your biggest but, you know, how important is cross selling specialty to your overall specialty growth and the similar on management?

It's not the biggest part of our growth in specialty by we have had a lot of success in the specialty marketplace cross-selling into our PBM client. Disease management is 100% cross sale in our PBM book business.

Okay. And then looking at your -- you said you're make capacity editions to your other facilities. Are you -- do you think that these near-term investments will sort of get you through the end of may be what you see-through '04?

Yes, on this.

Okay, thank you very much.

Sure thing.

We'll take our next question from Glen Santangelo with Salomon Smith Barney.

Hi, actually it's Charles Resting in for Glen. Mac, you know, you made a comment awhile ago about seeing more activity out of some of the major wholesalers, in particular mentions [INAUDIBLE]. Are you seeing they're entering in the direct patient sort of care providing, you know, the specialty drugs directly to the patient's homes, or is it into using, distributing specialty drugs into the alternative site setting? May be you can give us color on what activity you're seeing among them.

Well, from what I mentioned specifically, was through an acquisition that they did, which is, you know, basically the same business that we're in, and that's well, we distributed ours both to the the patience's home as well as to the doctor's office, particularly on the percentage of products. Basically the same business mall that we have.

Okay. Okay, thank you.

Our next question comes from Matt Beutin with Argus Partners.

Hi, I would also like to wish a congratulation on a great quarter.

Mac, maybe can you talk about customer retention? What does it look like in '02, and maybe talk about, some you know, a major contract up for renewal in '03.

On the specialty distribution side, and overall margins gross margins 9%, operating margin 6% in the quarter. Can you comment on the magnitude of the higher margins on the specialty distribution side and where you see these going in '03?

As far as the specialty margins, we don't break out the margins between the two. We have the margins probably on an overall average basis have the same kind of trends as in '02.

As far as retention rates, we were over 97% retention rate on our book of business last year, as far as '03 contract experations we actually had some of our largest accounts that renewed in '02, were renewed, didn't go out a bit. So we don't have as many of our real big accounts even coming up for renewal this year. We do have several of them that are significant that we're working on, we hope they're renewed like our book of business typically does without them ever going out to bid. But not as much in '03 as we actually say in '02.

Can I ask one additional question?

Sure.

On the distribution side, there were a couple of one-time factors that helped the growth, maybe grow faster than the corporate average. Which category is it particular that you see, you know, moderating so that the growth is now more in line with the company average?

Well, you saw, what I mentioned was a drug that proved very well, we look to have a good year with it this year. Obviously it's not a brand new add-on from zero as we say last year.

MS, Rheumatoid Arthritis are probably two of the areas we see as being the more moderating from -- as compared to last year, anyway.

And you think Hemophilia is about the same?

Hemophilia is not a big high growth area any year. So, it will keep ticking along as it has been ticking along.

Thank you.

Operator.

We'll take our next question from Howard Capek with UBS Warburg.

Thanks, one point of clarification. Mac, you said 45 million or so on the depreciation side and 65 million Cap Ex. Are they the two numbers roughly?

Yeah, that's right.

If you could just follow up on sort of the competing with -- with your supplier, starting to compete with you, and appreciating the nuances or the differences in settings, patient versus doctor's office, how does that tie into your acquisition activity or strategy in that segment? Are there any disease states or areas of biologics that you want to get into, need to get into via acquisition?

You know, I can't say that we necessarily just need to get into just from a strategic standpoint, an accession that gives me an opportunity in either a new payer class or a new therapy class while strategically will be more attractive to me than say buying a hemophilia company simply because we have a good presence in the hemophilia, we've grown the market well, we did one last year. It's going to be strategically driven and it's a new therapy or new payer.

Okay. Thank you.

We'll take our next question from Ester Chow with Wavemark Partners.

Thank you, my question has been answered.

Okay.

Gentleman, at this time there appears to be no further questions. I'll turn the call back to you for any additional or closing remarks.

Thank you very much, again, thank you for calling if you have any follow-up questions, we'll be around all day today, Pete, Ryan, Howard, myself but again, thank you very much, folks, and we look forward to talking to you. Good day.

This does conclude today's conference call, you may disconnect at this time.