CVS Health Corp (CVS) 2004 Q1 法說會逐字稿

Good morning, my name is Miles, and I will be your conference facilitator today.

At this time, I would lake to welcome everyone to the Caremark RX first-quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker' remarks, there will be a question-and-answer period.

If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad.

If you would like to withdraw your question, press star and the number two on your telephone keypad.

Thank you.

I would now like to turn the call over to Mr. Mac Crawford, Chairman, President, and CEO of Caremark.

Mr. Crawford, you may begin your conference.

Okay.

Good morning, everybody, and thank you for dialing in.

Before we get into the formal remarks, let me go ahead and go through the forward-looking statement.

We will then give a brief presentation, and then take Q&A.

This conference call contains statements that constitute forward-looking statements within the meeting 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 press release include the intent, belief, or current expectations of the Company and members of the senior management team, with respect to the anticipated growth prospects for the company's business, including revenue growth and earnings per share projections, and the anticipated amount and timing of synergies and accretion from the AdvancePCS transaction and the amount of certain expenses to be incurred in connection with the transaction, as well as the assumptions upon which such statements are based.

Respective investors are cautioned that any such forward-looking statements are not guarantees of future performance, and involve risk and uncertainties that actual results may differ materially from those contemplated by such forward-looking statements.

Important 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, but are not limited to, adverse developments with respect to the company's operating plan objectives, as well as adverse developments in the healthcare pharmaceutical industry generally.

Additional factors that could cause actual results to differ from those contemplated in this conference call can be found in the company's annual report on Form 10-K for the year ended December 31, 2003.

This conference call includes certain non-GAAP financial measures, as defined under SEC rules.

As required by SEC rules, we have provided in the press release issued this morning, footnotes to the tables, a reconciliation of those measures to those most comparable to GAAP measures.

And again, thank you very much for calling in.

With me this morning is Howard McLure, and Howard will be doing part of the presentation, as well.

First quarter was obviously a milestone quarter for Caremark, as we completed the acquisition of AdvancePCS.

That took place on March 24, 2004.

You know, we're extremely pleased at this point with the work done prior to and following the close of the acquisition on integrating the two companies together.

And we're pleased to report to you, then, that progress as well as the results of the first quarter.

Due to the increased visibility that we now have, and you recall that we had talked to you before and said there's only a certain amount of things that we can do prior to the close, we've now obviously been able to get in and look at a lot of different things from synergy and the other standpoint.

We're able to update the synergy targets for the year as a result of that.

We're now comfortable that we will be able to generate, as we've previously discussed, $125 million by the end of this year, which is one quarter earlier than we had previously given to you and previously expected.

Based on that and the strength of current results, we are raising four-year 2004 guidance for diluted earnings per share, excluding integration of other related expenses, to a range of $1.37 to $1.39.

Let me point out to you that this is GAAP guidance, excluding integration, amortization expense, and that cash earnings per share is obviously higher than these numbers.

That's as a result of having both stock option expense, related to stock options for the former AdvancePCS employees, as well as increased amortization expense.

But, as you can see, the manner in which we have to report these transactions under GAAP, and because of the fact that the transaction closed right at the end of the quarter and the number of moving pieces in these numbers, therefore, we want to go through with you the financials in detail.

We've given you a lot more information in the press release so that you can look at it and in the footnotes there, too, and the tables there, too.

But let me kind of talk about what it means from my perspective, as I see the numbers that we have here.

First, just to kind of go over with you what we are presenting.

The financial statements presented are for Legacy Caremark for the full quarter and AdvancePCS for the period of March 24 through March 31.

Those are the consolidated financial statements that you see in the release.

In this length of financial and statistical information we give you the consolidating income statement and other statistical information, so you can see how the numbers come together with that March 24th short period and Caremark for the full year.

And we also give you pro forma income statement and stats that present the information that the companies had come together on January 1, 2004.

We'll tell you to look at this, talk to Pete, talk to Howard, and we can take you through the numbers on a detailed basis.

But I think we've tried to lay out all of the pieces that you can look at and see where we are.

In the financial statements, you will also find further pro forma information that gives you the separate numbers for Legacy Caremark and Legacy AdvancePCS for the full quarter.

I will tell you, Howard and I are going to repeat each other somewhat on this call, but we want to be certain that you got our view on the business and all of the pieces that go along with it.

Looking at Legacy Caremark for the full quarter, Caremark had another very strong quarter, with EBITDA increasing 31%, excluding integration and other related expenses.

We produced an EBITDA margin of 6.4% compared 5.8% in the same period last year.

And diluted earnings per share were $0.32, excluding the integration and the other related costs thereto.

If you look at AdvancePCS for the full quarter, you'll see that AdvancePCS EBITDA was $96.4 million, excluding $2.6 million in integration expenses.

This is a decrease of $2.1 million compared to the quarter of 2003.

Now, you need to understand that there were adjustments of $19 million that were recorded in the quarter.

The $96 million is not indicative of the run rate of Advance's book of business, in our opinion, as we do not expect these adjustments to be of recurring nature.

Also let me point out we had anticipated these adjustments as we went through our due diligence process.

I've already told you, we are increasing guidance for the full year 2004, and as you look at the models, you're seeing that we are assuming a higher run rate for the Legacy AdvancePCS book of business for the rest of the year.

On a consolidated basis, which again is the Legacy CareMark for the full quarter and Advance for the short period, we reported diluted earnings per share of $0.29 for the quarter.

This number includes integration and other related costs of $10.4 million related to the acquisition of AdvancePCS, and if you exclude those items, the diluted earnings per share for the quarter were $0.32, a 33% increase over the first quarter of 2003.

We also reported net revenues of $3 billion, a 40% increase over the same period a year ago.

This number does include $465 million of revenues contributed by AdvancePCS after the close of the acquisition.

The revenue number above includes $1.4 billion of mail revenue and $1.6 billion in retail revenues, representing increases of 28% and 51%, respectively.

I said before, Howard will cover the financial results for the quarter for you in much more detail than I have, and we'll come back and then take questions.

Balance sheet is very strong.

We ended the quarter with $357 million in cash, decreased from the year end because of the cash used in the acquisition.

We did restructure the credit facility as well during the quarter in order to do the transaction and have ourselves in a good footing on a go-forward basis.

We finished the quarter with $604 million of total debt, a decrease of $91 million since the end of the year, and net debt of $247 million.

So, obviously, very, very strong balance sheet that we have coming right out of finishing this transaction, despite taking on additional debt as a result of the transaction.

Things progressing extremely well with respect to the integration efforts.

We've named a new senior leadership team, and we continue to make strides in the synergy identification and capture, as well as combining the two organizations from an operational perspective.

As I mentioned before, due to the increased visibility gained after the close of the acquisition, we're now comfortable to be able to achieve the previously named $125 million in pre-tax synergies by the end of 2004.

Again, this is one full quarter faster than we had previously announced.

Also, we are increasing our previously announced views on synergies and believe that they will now total approximately $250 million a year once they're fully realized.

From a business perspective and a selling season perspective, I informed you on the last call about the wins with the City of Chicago and the Texas Teachers Retirement System.

And, during the quarter, we obviously are very pleased to announce that we've been selected by the Federal Employee Program administered by Blue Cross and Blue Shield to provide mail service benefits to that program.

Obviously one of the largest and most prestigious wins in the company's history, and really provides a solid foundation for the 2005 selling season.

The FEP win will require us to make certain capital and ramp up certain expenditures that we would not normally incur if we had not won this business.

However, this has been taken into account in the guidance that we provided to you in the press release and at the beginning of my comments this morning.

This will reduce earnings by approximately $0.02 per share this year.

We have also executed the contract for Independence Blue Cross, far yet another marquis win for the Company.

This business will start later in the year.

And I really believe that these wins that we've had speaks volumes of the strength of the two companies coming together and the excitement of the marketplace that the programs felt comfortable enough to select us to be their PBM provider, even as we were closing and integrating this acquisition.

At this time, the sales pipeline for the 2005 selling season stands in excess of $4 billion, as we look at it today.

Again, extremely pleased with the results for the first quarter, very pleased with the integration efforts to date.

We started off the selling season with some large wins.

The pipeline remains very attractive for the 2005 season.

Also want to thank our employees who, frankly, have taken this transaction in stride and stayed focused on their job and are delivering value to the customers.

So very, very pleased that the little over first month into transaction, the attitude that we've seen and the reception that we've gotten from the customer base as we've gone around and met with a number of them and actually had some conferences with them.

At this point, I'm going to turn it over to Howard McLure.

He'll give you much more detail on the financial results, and then we'll come back to question-and-answer.

Howard?

Thank you, Mac, and good morning, everyone.

We are pleased to report that the first quarter of 2004 was yet another record for Caremark.

I plan to go through a fair amount of data with you this morning, including our GAAP performance for first quarter, as well as the performance of Legacy CareMark and Legacy AdvancePCS for the first quarter, and provide some color on our current expectations for performance in the future.

As you saw in the press release today, we provided significant detail in our financial tables and notes for the quarter, and we included operating results on a GAAP basis and for each of the Legacy organizations separately.

As you have seen from the press release, CareMark once again had a record quarter.

We also have raised our previously issued guidance for 2004 and look forward to the opportunity to realize significantly more synergies than we have communicated with you in the past.

As you all know, our acquisition of AdvancePCS closed on March 24, 2004.

As a result, CareMark's GAAP results for the first quarter includes eight days of the AdvancePCS operation.

I'll discuss the GAAP results first.

Caremark announced diluted earnings per share for the first quarter of 2004 of $0.29 per share, which includes integration and other related expenses of approximately $10.4 million.

Since the first call consensus estimates do not include the integration and other related expenses, our diluted earnings per share, excluding these items, were $0.32, in line with first call consensus estimates for the quarter.

This represents a 33% increase in diluted earnings per share from the first quarter of 2003.

The integration and other related costs include $2.2 million in deferred loan cost writeoffs, related to the Caremark debt retired as a result of the acquisition for the balance primarily relating to the cost for the consulting firms who assisted with our integration-planning efforts.

Revenues were $3 billion for the quarter, an increase of 40% over the same period in the prior year.

Our strong revenue growth was a result of the inclusion of the AdvancePCS revenue in the quarter, and significant increases in mail and retail prescription volumes.

The Company generated a 20% growth rate in mail prescriptions filled and a 54% increase in retail funds processed during the quarter.

Our mail penetration rate was 37.9% in the first quarter of 2004.

Since Legacy AdvancePCS has a much lower mail order penetration rate and a much higher retail claims volume than does Legacy CareMark, first-quarter consolidated volumes were impacted by the inclusion of the eight days of Legacy AdvancePCS, reducing our lower mail penetration rate but higher retail claims growth.

Mail revenues grew approximately 28% for the quarter to $1.4 billion, while retail revenues grew 51% and totaled approximately $1.6 billion.

EBITDA was $174.4 million for the quarter, excluding $10.4 million in integration and other related expenses, an improvement of 38% over the first quarter of last year.

EBITDA per adjusted claim, also excluding the integration and other related expenses, was $3.16 for the quarter, essentially flat with last year's $3.17.

This number was flat due to the inclusion of eight days of AdvancePCS results and their higher mix of retail claims.

EBITDA margin, excluding the integration and other related expenses, was flat with the first quarter of last year at 5.8%.

The margin is flat due to the inclusion of AdvancePCS for the last eight days of the quarter and will actually be lower in the second quarter as we consolidate AdvancePCS' lower-margin business with CareMark's business for the full quarter.

For the eight-day period that AdvancePCS results were included in the quarter ended March 31, 2004, AdvancePCS' reported revenue was approximately $465 million, and EBITDA of $9.3 million.

These amounts have been included in Caremark's consolidated income statement for the first quarter.

Adjusted claims for the eight-day period related to AdvancePCS were $11.5 million.

I also want to discuss the performance of Legacy Caremark and Legacy AdvancePCS separately for the first quarter of 2004.

As you can see in the tables attached to our press release this morning, Legacy Caremark's financial results for the first quarter of 2004, excluding the results for AdvancePCS for the eight-day period, reflected revenues of $2.6 billion, an increase of 18% over the first quarter of 2003.

EBITDA for Legacy Caremark was $165 million, excluding integration and other related expenses, $10.4 million, an increase of 31% over last year.

CareMark's stand-alone EBITDA margin was 6.4%, up from 5.8% during the same period in the prior year.

Mail order penetration rate for Legacy Caremark was 45% in the first quarter, compared to 43.9% last year.

EBITDA for adjusted claim for the quarter was $3.78, up from $3.17 for adjusted claim in the first quarter of 2003, an increase of 19.2%.

Diluted earnings per share were $0.32 cents for Legacy Caremark operations, again excluding the Legacy AdvancePCS results and the integration and other related expenses mentioned previously.

Turning to Legacy AdvancePCS, as shown in the table in the release, AdvancePCS reported full first-quarter revenues of $5.1 billion, an increase of 10% over the first quarter of 2003.

EBITDA for the quarter was $96.4 million, excluding the impact of $2.6 million of expenses related to the acquisition, compared to EBITDA of $98.5 million in last year's quarter.

We don't, however, believe that this is indicative of the ongoing EBITDA run rate for Legacy AdvancePCS.

The Legacy AdvancePCS EBITDA for the first quarter of 2004 was adversely impacted by adjustments for revisions to estimated net realizable values to receivable, settlements of amounts due to and due from customers, and payroll taxes on stock options exercised shortly before the close of the acquisition.

EBITDA for the first quarter of 2004 was positively impacted by adjustments in certain liability accounts, and inventory investment buyouts that were higher than normal.

These items in total reduced Legacy AdvancePCS EBITDA by approximately $19 million for the first quarter.

We do not expect similar adjustments of this magnitude to recur in future statements of operations.

Turning to the cash-flow statement, CareMark's cash flow continued, strong cash flow continued through the first quarter.

Cash flow from continuing operations was $203 million during the period, an increase of 47% over the 137.7 million reported for the first quarter of 200.

Strong growth in net income and effective balance sheet management continue to be the primary reasons for the strong cash flow.

Capital expenditures were $12.9 million for the quarter while discontinued operations cash outflows were approximately $1.8 million.

The balance sheet was very strong at the end of the quarter, despite the cash used to complete the acquisition of AdvancePCS, and retirement of the AdvancePCS outstanding senior notes.

At March 31, 2004, debt totaled $604 million.

This included the previously outstanding Caremark $450 million senior notes due 2006, $4 million in senior notes due 2008 issued by the Legacy AdvancePCS, but callable next spring, and a $150 million new, secured bank term loan.

Unsecured, excuse me.

With $357 million in cash on hand at March 31, 2004, our net debt was only $247 million.

We also have approximately $880 million of availability through our bank revolver and our accounts receivable facility, should we need capital for short or long-term needs.

As footnote number one to the press release illustrates, we have included pro forma income statements for the quarters ended March 31, 2004, and 2003.

You will notice that the adjusted claims account for AdvancePCS for the first quarter of 2004 and 2003 is $127.5 million, $124.4 million, respectively.

The claims numbers for the first quarter of 2003 have been adjusted downward by 11 million claims to conform to the way Caremark is historically counting claims.

Legacy AdvancePCS included in their claim accounts certain retail claims which did not result in the dispensing of a prescription, which Legacy CareMark does not include.

For the year ended 12-31-03, the restated claims number for AdvancePCS include the following: Mail claims, $16,966.

Retail claims, $445,985,000.

Total claims, $462,941,000.

Total adjusted claims, $496,852,000.

I went through the numbers fast, if you want to -- if you weren't able to get them down, call Peter or myself, and we will be glad to help you.

We are very excited about the future and how the acquisition of AdvancePCS positions the company, both strategically and financially.

A lot of analysis has occurred since the transaction was closed in late March to verify our initial assumptions made last summer.

Based on this analysis, we now believe that we can obtain approximately $125 million in synergies within calendar year 2004, a full quarter earlier than we initially expected.

We also believe that the synergies we can ultimately realize from the transaction will total approximately $250 million per year, which will be achieved over the next several years.

Obviously, it takes time to realize the full value of potential synergy, but the majority of the 2004 synergies of $125 million will be recognized in the back half of the year.

We now expect that our earnings per share, excluding integration and other related expenses, for the full year 2004 will be in the range of $1.37 to $1.39, on revenues of $25 billion to $26 billion.

The Company is expected to generate earnings per share of $0.29 to $0.30 in the second quarter, 34 cents to 35 cents in the third quarter, and 41 cents to 42 cents in the last quarter of 2004.

As Mac pointed out, this guidance includes the additional amortization expense and additional stock option expense.

As reported in the release, the Company will incur certain expenses as a result of the AdvancePCS acquisition in 2004 and beyond as we integrate the two businesses.

First, stock option expense will total approximately $23 million for 2004, and will result in expenses of approximately $9 million in Q2, $7 million in Q3, and $6 million in Q4.

Second, amortization expense related to certain identifiable and tangible assets will be recognized.

Currently, we have estimated this expense to be approximately $12.5 million per remaining quarter in 2004 and beyond.

The ultimate identifiable and tangible assets will be determined in the second quarter when the valuational analysis conducted by outside appraisers is expected to be complete.

As a result, our current estimate of amortization expenses associated with these assets, which we don't expect to change materially, will be updated in the future.

Additionally, depreciation expense is expected to total approximately $25 million to $26 million per remaining quarter.

The Company expects net interest expense for 2004 to be in the range of $35 million to $40 million.

The company's effective accounting tax rate will decrease slightly to 39.8%.

However, cash taxes will not increase until the net operating loss of carry-forward is fully utilized.

As I've already mentioned, the Company is targeting $125 million in synergies over the remaining nine months of the year.

Our guidance includes incremental expenses associated with the implementation of the Federal Employees mail service account win, which is scheduled to begin in January of 2005.

These incremental costs are expected to negatively impact 2004 earnings by approximately two cents per diluted share.

They're expected to be incurred during the third and fourth quarters.

Let me also provide some guidance on the outstanding share accounts for purposes of calculating diluted earnings per share.

As we discussed when we announced the transaction, weighted average shares outstanding, assuming full dilution, will be approximately 471 million shares in Q2, and should increase by 2.5 million shares per quarter for the remainder of the year.

The annual share count will be the average of the four quarters, and would be approximately 427 million shares.

This number will vary based on the market value of the stock and future option activity.

Finally, let me point out that our guidance for 2004 does not include integration and other related costs associated with the acquisition of AdvancePCS.

GAAP requires, to many costs associated with the integration and rationalization of Legacy Caremark operations, the expense when occurred, while similar costs associated with the Legacy AdvancePCS operations are capitalized.

While we indicated to you in the past that we expect to spend approximately $12 million to $15 million on integration planning expenses in 2004, there will be additional expense associated with the actual integration of the Legacy AdvancePCS that we are not forecasting at this time.

However, as we have indicated with our guidance in the past, our expected diluted EPS of $1.37 to $1.39 per share for 2004 excludes any incremental expenses associated with the actual integration and also excludes integration and planning expenses.

On the cash-flow front, we are currently projecting the capital expenditures for the rest of the year to be approximately $75 million to $85 million.

And our discontinued operations cash outflows will be approximately $25 million for the rest of the year.

Thanks again, and now I'll turn it back over to Mac for questions.

Okay.

As I said, got a lot of numbers here and a lot of detail that we're trying to give you so that people can get a full view of how the Company's doing.

Bottom line, though, is that, you know, I think once again we had a very outstanding quarter, and best of all, the integration is coming together well.

I think that, as I said, people have put their heads down and gone to work, and we are going to see more synergy out this transaction than we had originally anticipated.

Also, it's in line what we had told you in the past, and it would be accretive in the near term.

We've backed that near term up by one full quarter from, because we said in the first year, was what the near term was defined as.

So, as we see it, we're off to a very good start.

The business remains good.

We're working hard, we've got a lot to do.

We'll continue to focus on the business the rest of the year, and as we've always done, and on the selling season that we have in front of us.

But clearly, off to a good start for the year.

Legacy Caremark continues to perform well.

The Advance book of business, very thrilled to have it into the Company as well as the employee base, a very good bunch of people that we've identified and that we're working with here.

Well, let me turn it over now for Q&A.

Operator?

Thank you, sir. (Caller instructions) We'll now go to the line of Kevin Berg with CSFB.

Hi, it's actually Noah Yosha (phonetic) sitting in for Kevin.

Good morning.

Any details on the $250 million synergy number in terms of where it's coming from, recontracting with pharma or on the SG&A line or a combination of both?

Well, it's a combination of a lot of different things.

And we're not going to try -- we've given you in the past kind of where the $125 million broke out from a competitive standpoint, though.

We think it's wise for us to not give those kind of details.

But it will come from better contracting, it will come from efficiencies that we've achieved.

It will come from the elimination of duplicate corporate overheads, it will come from a number of different areas.

Great.

And then one last question.

Any update on the integration as it specifically relates to client retention?

Do you expect to retain over, you know, 95-plus-% of your business, next, you know, going into '05?

That's clearly what we've always done is -- no doubt, that when you have a transaction like this -- I know I'll get this question, so let me go ahead an address it -- you will have some customers that will try to renegotiate and some will go out to bid.

We have that going on right now.

I don't know of a single account that had to change-control provisions, which most of you are familiar with.

I don't think we got a single notice of people actually using that provision or calling that provision.

But, at the same time, about a third of our book of business comes up for renewal every year.

That's typical what we're seeing this year.

But I will tell you that, so far, we've met very good reception by the clients on both sides as we've gone forward.

But it's going to be a typical selling season.

Okay.

Great.

Thanks, Mac.

Thank you.

Your next question comes from the line of Eric Veiel from Wachovia.

Thank you.

My first question relates to the acceleration of the synergies.

Actually, and first, let me just say thank you for all the disclosure in the press release.

It's very helpful.

Just as I think through the $125 million going over three quarters instead of four, that seems that it adds about $6 million after tax to the net.

Which would be, you know, a little under four cents for the full year.

But the guidance only gets raised by two cents.

So I'm wondering what is the offset there, if there's something that I'm not calculating properly.

Well, first, you got FEP, which is two cents.

Okay?

Yeah.

Which -- and then I'm not sure how you calculated the six -- the four cents or whatever it was you said --

Yeah, basically we just took the $125 million, if you divided it by four, you get something like $31 million and change per quarter from synergies.

If you divide it by three, you get a bigger number, that gets you about $10 million extra in pretax, tax that you get the six, and --

Well, that's making an assumption that they were spread evenly over the quarters, and that hadn't been our assumption in the past.

So --

Okay.

So, it sounds like the timing of it in the FEP probably makes the difference.

I think the FEP is probably the single biggest, it towers anything else that comes to mind, I think.

No, the FEP will be the biggest.

Okay.

Keep in mind that, you know, two cents a share, when you start looking at the number of shares we've got, that's probably $16 million or so.

Right.

Is that going to be a dedicated mail order facility for them?

No.

No, they'll go into our Phoenix facility.

Okay.

And then the second question was just following up on the selling season for 2005.

The $4 billion, Mac, is that net of sort of what your typical exposure will be, or is that -- in other words, is that net of your 1/3, or is that just what you see --

We don't count our business in those numbers.

I don't know how other people do it.

But this is the -- this is the business that is new business to us, if you will.

New business potential.

Great.

And then just the final on that, on the '05 selling season.

Can you update us on your discussions with CalPERS as it relates to getting more of their book, if they could-- if they'd potentially carve it out from their HMO customers?

They're going through an evaluation process right now that will have to go before their board, and we're just waiting to see what that outcome of that is.

And that's in the May meeting you'll go before their board?

We don't -- I'm not sure exactly when they're going to go, you know, because their agenda changes from time to time.

But that is -- they've got outside consultants doing that for them.

Okay.

Great.

Thanks very much.

You're next question comes from the line of Glen Santangelo with Schwab.

Yeah.

Thanks.

Hey, Mac, just two questions.

First, I just want to get a better understanding of what your intentions are with all this cash flow that you're piling up.

I mean, essentially, the Company is sitting in an enviable position with only $250 million in net debt.

Now, I think if I remember correctly, and maybe Howard, this might be a better question for you.

But I think under the legacy debt structure from your old restructuring days, you have some notes out there that are not callable until '06, and they might be restricting the uses of what you can do for your cash.

I mean, once we get past that hurdle, could we be looking at maybe share repurchase or potentially a dividend?

I mean, just sort of any color on what you intend to do with the cash would be helpful.

Sure, and we have $450 million worth of debt that's non-callable until '06, which is some legacy debt that we had.

You know, it's the same as -- same answer that we've given before.

One, we are going to look to deploy it strategically within the business.

We are going to have a lot of cash flow.

We certainly have to evaluate the differences between what we would have deployed it at versus what does it do from the share buy-back, and then what the price of the shares are coming into play with that.

And if we don't have -- I mean, dividends is certainly something that we'll always consider, because this is the shareholder's cash and don't think the shareholders, they don't need us to managed cash for them.

Is it fair to say, though, you're restricted on what you can do with that cash at this point right now?

No.

And I just have one -- one more follow-up question, if I could.

Clearly, the Company's been a net winner of new business now consistently for the past few years.

What is sort of the competitive advantage that customers are identifying with your company that's choosing them to -- or leading them to choose Caremark in these negotiations?

Are these guys most concerned about price and you guys have some competitive advantage that's enabled you to price differently?

Or, is it some of the ancillary services?

Because I'd imagine on the core PBM business, a lot of services that you provide are consistent throughout all your competitors.

So what's been the difference here, in your mind?

Well, I mean, it's customer service is clearly a differentiator.

I don't think the PBM services are necessarily consistent across all of the companies.

In fact, I don't think they are at all.

And we saw that with some of the big wins we've had this year when they came in and actually saw, for example, in our mail facilities, some of the things that we do, some of the capabilities we can give our customers, some of the things we do ourselves, and it was a differentiator.

Pricing is competitive.

So, I don't think that pricing is how you win business.

If it is, then it's not a game that we play.

You know, the bottom line is that people look at us, they look at our people, they look at what we can do, and the broad service offerings that we have.

The fact we've been in the specialty business 25 years makes a difference.

The fact that we now, particularly with the Advance transaction, have such a broad base of products that we can cross-sell into it.

You know, we've stuck to our business, we've done what we've had to do, and the customers have recognized and realized.

And I think the retention rates go along with that.

Thanks for the comments.

Your next question, sir, comes from the line of Robert Willoughby of Bank of America Securities.

Thank you.

Mac, any greater clarity on AdvancePCS businesses you might walk away from.

And, secondarily, it looks like you all valued RX Hub at about zero, not far where I valued it, actually.

Will you not be incurring or sharing in the losses of that unit going forward?

Well, RX Hub is something that we're still evaluating and looking at.

You know, and, you know, we're continuing to be a part of it, participate, and don't have any intention to do other than that right now.

But we want to be sure that their direction meshes with where we think strategically we have to go, and more importantly, where the marketplace is going.

As far as other businesses, you know, we probably have some businesses that will fold in and get integrated closer than they have been in the past.

But as far as the functionality of most of those businesses, you know, we don't see any material change in some of the operations that were there.

But we do think that there's an opportunity to really get them more closely tied and integrate them into the business.

Now, and some of that, though, couldn't be integrated because they had earnouts that were there in the past.

So those have now expired.

And so we're able to do some things that couldn't have been done before.

But, from a basic operational perspective, I don't see a material change.

In fact, it should be a material enhancement, hopefully, as we go forward.

Great.

Thank you.

Your next question comes from the line of Tom Gallucci of Merrill Lynch.

Thank you.

Good morning.

A couple of follow-ups.

One on the synergies, just wondering, on the acceleration of the $125 million, I think you had said previously the bulk of the $125 million was purchasing synergies.

Is that still the case, and what's fostering maybe the acceleration that you see there?

Well, as we had said, that I think about 70% of the $125 million we expected to come there, and that will -- is still comparable to where we are.

We're just seeing some things happen quicker than we had anticipated and get something opportunities quicker than we thought we would.

On the $250 million, you mentioned some of the cost areas.

Are there any revenue expectations for synergies in there, or is that purely cost in the $250 million?

No, there's some revenue in there.

Okay.

And then, finally, if you could offer any color on the specialty business and the trends in the quarter, and maybe just a little bit more about the integration of the businesses in -- relative to yours in Advance, going forward?

Specialty businesses, I recall, grew at 26%, 27%, something like that for the quarter, so we continued to have very strong growth in the specialty business.

So, you know, we're continuing to see good trends there.

And that's one area that -- now that we've put the two together, talking about integration and opportunities.

I think we've got a lot of upsides sitting in the specialty side of our business, which is good from the standpoint, it's a higher margin business.

And our teams are working, I think, very, very well on the specialty side right now trying to put that together.

You know, other than that, we're sticking what we had said in the past.

We're not going to do anything to disrupt our customers.

That means that we're not going to go out and change platforms overnight.

We're not going to change account teams.

And we've stuck true to that.

And so that's continuing to be what we're doing.

I will have to say that on the IT front, though, even though we're not changing platforms, you know, we're seeing a lot of opportunities to do things and to share data and to consolidate some activities that we probably didn't have a chance to -- well, we didn't have a chance to get down to that level of detail simply from the anti-trust standpoint before then.

Still going through the process of what seat everybody sits in to an extent, and that is, you know, do we move some people from various locations to other locations, do we move certain functions back and forth, and that's still part of the evaluation process.

But I will tell you I could not be more pleased right now with, number one, the quality of people that we have within the Company and I'm taking both the Legacy Caremark and the Legacy Advance people.

And how receptive they've been to just, you know, continuing to deliver the value to the customer while all this stuff has been going on.

It really has been a fairly smooth process.

And I also put a lot of that to the fact that we did an extensive amount of planning on the front end of this transaction.

And it involved a lot of people, and so now, at the point when we closed, we frankly had the plans laid out of what have we wanted to do.

And I think that has contributed as well to being able to accelerate some of these synergies.

It was-- you know, people knew what had to be done day one.

In fact, we had some plans that were laid out down to the hour in the first week of when we wanted things done, and it's happened so far.

So, that's been part of the pleasant thing sitting in my seat that I've been able to see.

Great, thank you.

Your next question comes from the line of Kemp Dolliver from S.G. Cowen.

Thanks, and good morning.

A couple of things.

With regard to the synergy realization, Mac, it looks like the -- your comment regarding the timing and the second half of this year would suggest that there's really immaterial synergy realization in the second quarter.

Is that a pretty fair guess?

I don't recall off the top of my head exactly what it is.

But clearly, it takes some time to -- for things such as recontracting and other things to begin to kick in.

And there's then some-- also some -- some costs that you don't get out that are sitting there for a period of time.

So, yeah, it's not a -- not a huge number in the second quarter.

But, again, you all need to go back and think, we never gave you quarterly numbers before on when these things would kick in.

We said it would be in the near term, and then we defined near term as was within the first year.

We've now backed it up and said within the first nine months.

So, we're actually accelerating the synergy piece.

And, you know, when you add this many shares in the share count, to me it's pretty logical that you'd have one quarter that was slightly diluted, and then the accretion coming in in the rest of the year.

But it's exactly what we had planned starting out.

That's great.

Secondly, with regard to the clients that have change of control provisions.

How long they have, post closing, to exercise those provisions?

I don't know off the top of my head.

I think it varies by client, frankly, Kemp, but I don't -- off the top of my head, I just don't have that information.

Okay.

Would -- if you came -- if we came to say that the end of the second quarter and you hadn't exercised any by then, is that a reasonably good time frame to think about or --

Well, generally, it is limited.

I don't know, again, I don't know exactly -- just off the top of my head, I don't know if it's 30 days, 60 days, 90 days, or 180.

I don't remember.

I don't think any stretch out probably that far, but I don't remember exactly what it is.

But, you know, we're going to work hard to keep everybody.

And, you know, so far, so good.

That's great.

Just last question.

With regard to the Medicare drug card, could you just talk about the -- any initial rollout of that, and also, do you know if CMS got your prices right on the website?

Well, I hope they've got them right.

We've been working with them to get them right.

And again, in fairness to CMS, you've got a big, new program, so things are going to happen.

But, I'll also tell you, they've been very cooperative and very much trying to get everybody's information correct.

I think we've got somewhere in the high 20's of cards that -- where either we've got our own card, but then we're supporting a number of other clients with their cards In various forms, whether it's the back-office piece, whether it's a COBRA ending.

So we've got a lot of activity going on right now.

It's early, obviously, the first week.

So it is just now ramping up and getting started.

And I think that so far, put it this way, the noise level hasn't knocked my door down yet so, from the standpoint of everybody's having problems or anything like that.

It appears to be the pricing issue that probably all of you have heard about, getting people's prices right.

And it wasn't-- it was everybody.

So, I mean, it was just kind of happening again.

That's kind of-- is to be expected in a program this large.

That's great.

Thank you.

Your next question comes from the line of Michael Baker with Raymond James.

Yes.

Just a couple of questions.

First off, with respect to rebates, do you anticipate any changes there in the way Advance did relative to you, both in terms of how it's accounted for as well as how it's presented to the customer in terms of who owns them, whether it's percentage share or a stated amount?

Well, we've got two different business models.

We've looked at that.

And both of those business models are work under the safe harbors.

So, that's going to be something that we continue to work under, two business models for a long period of time.

It's really based on what the customer is looking for.

So, you know, we've always been trying to respond to the customer.

How we do things two years from now, who knows?

Maybe different than where we are today.

But for right now, no change, and pretty much business as usual as we go through the transition process.

Then, from a more of a cultural standpoint, any challenges there from bringing the two companies together?

No, Michael, not really.

I mean, it's -- you know, we've got to now form our own culture.

And part of what we did, as well, in the -- and I say our own culture, I mean a new culture with the two companies coming together.

We actually spent money in the front end of this thing bringing people in, consultants, to help us to define that culture and help get the message out.

And if you had seen the day-one packages that went to all the employees, that's really what he it was driven off of, and that is defining the culture.

But no, I have not seen -- probably far less than I frankly expected culture differences, and as I said, people have just been super about working together and getting along and trying to make it, make the transaction work for our customers.

I was wondering if there's a possibility to kind of talk a little bit about the Advance retail script number.

It was a bit weaker than I anticipated.

Didn't know if you had any color around that.

I don't.

Okay.

It was restated, too.

I mean, so it's on a different basis, but I don't have color on it, no.

Okay.

Thank you.

Your next question comes from the line of Steve Halpern with Thomas Wiesel Partners.

Hi. could you just expand on some of the adjustments that you made on AdvancePCS EBITDA?

You know, walk me through the process, why you had to make them, and I'm assuming they were made before the merger was closed as opposed to the stub period that was included in your results?

They were made before the merger was closed, so -- they're included, you know, prior to that.

Okay.

And they are really kind of what have we said they were.

You know, adjustments to net realizable value of receivables and so forth.

I think the press release pretty well lays out what they were.

Were these things mandated by your auditors going in?

No, they weren't.

Okay.

Thank you.

Your next question comes from the line of Anne Barlow with Southwest Securities.

Good morning.

Quick couple of questions.

First, is the option-related expenses an '04 event only?

And going forward, I know, obviously, there is a difference in the mail penetration.

Is there a goal or a number we should look for by the end of '04, and again is there a goal you guys are looking for into '05?

Anne, as far the option related expenses, they will stay outstanding as long as we have options that are still outstanding from the former AdvancePCS organization, because those are the ones it relates to.

So those will trail down over time.

However, you know, FASB is going to come out with something so we're going to have new option expenses next year, probably related to different stock options.

But that will trail down over time, and it will end from the time the options, I guess, are outstanding.

There's a period there, a vesting period, and they'll trail.

Yeah, and it has to advance, then I guess they go away, right?

Right.

So -- what was the other part?

Just mail penetration --

Mail penetration rates.

I'm sorry.

We don't have a goal for the end of '04.

And here's the reason.

We don't expect much of that to change in '04 because most of that is plan-design driven.

And not necessarily -- not mandatory planned or mail rather, but just how co-pays work and other things work.

And those probably we will not be able to work with the customers to get a lot of those changes made that we think are inducive or conducive to doing that, until the '05 year.

So, you know, we're still working on that analysis and what we do and how we do it.

But we really don't have anything of any significance built into '04 for that to happen.

Okay.

So, we'll just look for those changes in '05.

Right.

All right.

Great.

Thanks.

Your next question comes from the line of Andy Speller with A.G. Edwards.

Thanks.

Just to follow up on the options expense, can you give us what the -- how much-- should we expect 1/3 to come off every year, is it like that, or -- or any help there?

Andy, I don't have those numbers for 2005 or those components with me.

If you give us a call later, we'd be happy to get it for you.

That doesn't sound unreasonable, but let us get it and be sure.

Okay.

That's fine.

And then, as far as business that's currently outstanding for this year, either whether it's current Advance clients who've informed you to go out and rebid or just business that's in the back half of starts, Mac, can you give comment with regard to how you see that prospect?

For the back half of the year?

Yeah .

There's probably, I think, $700 million or $800 million worth of business that is still out to bid that could potentially come on in the back half of the year.

Not yours --

That's not our business.

That's other business that we're bidding on.

And that's an annual number, the $700 million or $800 million.

So, not just this year's impact.

As far as our business that could go by the end this year, I don't know that-- anything that's out to bid is probably an 2005 start.

My recollection.

If we were to lose it, which again we're fighting -- we don't plan to, but you always could.

But I think most of the stuff that we've got would be '05 starts.

Okay.

Thank you.

And so, annual meaning impact to you an annual basis, not --?

That's correct.

All right.

Thank you.

Your next question comes from the line of Grant Jackson with First Analysis.

Good morning, gentlemen.

With the adjustment to claims numbers, do you give some guidance as to what we should expect for whether it's a year-over-year increase or just about claims levels over the rest of the year?

I don't have that in front of me.

Do you have it, Howard?

No, I don't.

Perhaps you can call us?

We can give you a little bit of help with that.

Great.

Your next question comes from the line of Michael Maguire of Leerink Swann.

Thanks.

Good morning, gentlemen.

Mac, could I get you to comment on the composition of the $4 billion that's still out on the table for 2005?

Is that primarily a competitive situation?

Yeah.

Mmm-hmm.

Okay.

Thanks.

And on the specialty side, I believe you've already answered this in another way.

But, given some of your larger competitors increased focus, I guess, on that market, is there anything you're seeing thus far with regards to either market share or pricing that -- you know, is sort of recognized or you've recognized that they are making a more concerted effort, and you're starting to witness it out there?

No.

I haven't seen any big changes.

Okay, thanks.

Sure.

Your next question comes from the line of Glen Garmont of First Albany Capital.

Thanks.

Good morning.

Mac, at some point in the future, are we going to see Caremark out there?

You've got some pretty robust disease-management capabilities.

Are we going to see the Company pursuing more disease-management contracts with employers that may not necessarily be, you know, PBM or specialty distribution clients of the Company?

And then, secondarily, just a numbers question.

I want to make sure I have this right.

The cap ex for the year, I think you said 75 to 85.

That was for the balance of the year in addition to what was incurred in the first quarter, is that correct?

Thanks.

That's correct.

Yeah.

As far as the disease management business, yeah, we've got fairly robust offerings.

You know, we don't see the stand-alone disease management business as a major focus of the Company.

We do, from time to time, have the opportunity to bid on those kind of accounts.

And we may be more aggressive with that in the future.

We still see the disease-management business, though, primarily as one of those legs to the stool, to help the clients that we have manage their overall healthcare costs.

A major component of that being, though, the pharmaceutical spend and how that spend impacts other parts of the total healthcare spend.

Disease-management marketplace is not a large marketplace, from a revenue standpoint.

The margins are good on the business, if you do it well.

So, if we think that we can enhance our margins and enhance an opportunity, we certainly will always look at bidding on the stand-alone basis.

We have not to date, though, had a separate sales force out, though, just calling on customers that weren't necessarily a part of who we are.

Now, you think about, though, given the book of business that we have today and the large managed care books of business that we have as well as the large employers that we now have, then we've got an awful lot to keep us busy just in house.

But, yeah, that might be a logical extension in a year or two.

But probably the first thing we'll do this year and what we'll concentrate on for the next 12 to 18 months is making sure that we get programs consolidated, put together, and we're giving the best business or the best service we can to the people that we currently serve.

But someone comes along, wants us to bid on the stand-alone basis, which is what we have always done in the past, then we certainly will do that.

That's very helpful.

Thanks, Mac.

Your next question comes from the line of Christopher McFadden of Goldman Sachs.

Thanks you.

Good morning.

Two questions, if I might.

First, could you give a little bit of clarity on Legacy AdvancePCS' reporting of some of the prescription volumes, and do you have the corrected number or the adjusted number for the prior fiscal year?

And then, secondarily, your year-over-year mail order prescription volume growth was slightly below the trend that we saw in 2003.

Could you talk a little bit about factors influencing it and give any expectations on what you think mail-order-volume growth will be for the combined company looking out for 2004?

Thanks.

Well, again, on the mail order for the combined company for 2004, as I said, there's not a lot that you're going to be able to influence on the Advance book of business, and that will clearly give and bring in the other big retail side that will dilute what our overall percentages have been.

And, certainly, then, have an impact on how the volume growth does.

I think just the differences in last year and this year is more of a customer concentration than anything else.

As you know, we continue to bring in new accounts all the time.

Most of those accounts that we bring in are not as penetrated as our current book of business.

Therefore, you have to start with them and the growth takes longer as you change benefit plans and those other things.

So, I think, Chris, that really accounts for any differences that you see there.

You know, from the overall standpoint of continuing to build facilities and other things, that we haven't slowed down a bit from that standpoint.

So, it's pretty consistent from what we see in our volume bases going forward.

I think it's just a percentage change more than anything else, not an actual what we're doing.

Your other question was?

Regards to the adjusted number that Howard provided in his comments on the Legacy Advance mail-order claims volume.

Slightly different than I guess how they had previously reported those numbers.

The Advance mail order claims volume?

The retail claims volume.

The retail claims is not mail order.

And then, Howard, do you have that number restated for the prior fiscal year?

For 2002 calendar year or 2003 calendar year?

For the 2002 year.

Okay.

For the 2002 calendar year, the retail claims were $443,000 -- excuse me, $443,623,000.

And so, debt-- the reconciliation there is how you would have recognized those under your treatment versus theirs, which, if I understood your presentation, Howard, they were reporting the claims even though they hadn't been filled?

They were taking some actions on some of these claims, but the actions didn't result in the fulfillment of a prescription.

We don't count those type of things.

We have some of the similar activity, they just don't result in the filling of a script, so we don't count them.

They just basically conform to the way we count scripts to the way they count.

We only count scripts actually filled, and they would have activities they would do on a particular transaction or script that got counted as a script, that's just not consistent with how we did it.

So, it's just conforming the two.

Finally, to the extent that there were sort of executive level as opposed to operating level, Legacy AdvancePCS employees that were not part of the combined organization, have all those people now been let go?

Yeah.

I think all that has taken place.

Thank you.

And Mr. Crawford, your final question comes from the line of Larry Marsh with Lehman Brothers.

Good morning, Larry.

Hey, Mac, how are you?

Thanks for the detail.

Mac, did you -- have you qualified what you estimate you'll be spending to support your drug discount card program this year, and do you think you're going to be able to generate any profit off of the discount card in '04?

You know, it's in the numbers that we've given you, and I don't know exactly what it is, Larry.

Okay.

So I have just tried to pull it out.

It's not big numbers.

Do I think I'll make any money off of it?

Not really.

It will be just, you know, if we break even, great.

You know, and this is when we had finished -- you al l have heard me say before, I never think of this as much of a money winner.

It's really, number one, we said that we would support the program to help the Administration.

And number two, we've got a lot of clients that we're supporting and doing this with, and that should hopefully put us in a very good position with them as this thing comes into a funded plan in '06.

So you're not talking specifically about '05, but it sounds like you're not anticipating much of a contribution on a discount card even in '05?

Well, I don't know.

I mean, if the numbers come in and we've got a huge enrollment and everything, then you look at it and say, gosh, this is great.

But, no, I'm not counting on a lot, because I mean, I think it's just -- it's -- such a temporary program that I think that it's hard to, you know, given the way this business works, you typically make more money over time as you have an account longer and longer.

So I just look at this, this business as-- my planning standpoint is pretty much a break-even business.

And hopefully make money in the latter years out of it.

But we could be surprised.

I don't have -- I'm not anticipating anything right now.

Okay.

And then, the guidance you're giving on your quarterly depreciation expense, if you look at the period and balance sheet, it looks like you're assuming a depreciation of PP&E over three years, which seems to be pretty conservative.

Is that the right way to look at that?

Is that PP&E, just giving you the depreciation expense, a reasonable run rate even for '05 and '06, do you think?

Well, Larry, you've got to keep in mind that there's a cap ex number of $75 million to $85 million for the back half of the year.

A lot of that will come on line and be depreciated as well.

When you look at the PP&E number, it's a net number.

So it doesn't reflect the actual beginning point for those assets that, you know, is what drives the depreciation expense as opposed to the net number.

Or the number you gave in--

$25 million to $26 million per quarter.

Okay.

I see.

So it's a little bit longer than what you're suggesting.

But not depreciativelly amortized?

Yeah --

Then, I guess, then, you are saying that your amortization expenses could be slightly different next year, once you get the final recognition of the allocation of assets, is that right?

Or is that about the right number to think about even for next year?

Yeah, we -- it's about the right number to think about for next year.

We don't anticipate it to change materially.

You know, the appraisals will be completed during the second quarter.

Okay.

All right.

And I guess what you said, Mac, is you expect some option expense ongoing for '05, but it doesn't feel like it will be as -- certainly as significant as what you're estimating in the second quarter.

Second and third quarters.

It should trail down and, you know, if you all recall, Howard, I'm not sure, we've got detailed sheets around here and we can figure out exactly where it will run down.

I just didn't bring it in here with me.

But he can give you the estimates.

But, yes, it should trail down.

Again, I'll point out, though, we're going to end up expensing stock options, folks.

I mean, that's just what FASB is going to make us do.

So, this will be a whole new era in '05.

So, this stock option expense is related solely to the acquisition and to the Legacy AdvancePCS options.

And so, we'll have a whole new roud of -- done a different way, once FASB comes out with whatever they're doing.

But, again, I know that's a topic for a different time.

I'm sorry, so you're saying that this is really associated with FASB guidance along option expenses?

No, this is just associated specifically with the AdvancePCS options which, under current GAAP, we have to expense.

And this is just options that relate to the Legacy AdvancePCS option plans.

And is done under the intrinsic value method, under APB-25, if I'm not mistaken.

That is correct.

Put my old accountant hat on.

But again, we'll have a new way to value options next year.

But it won't affect these.

It will be on the new options as we go forward.

Right.

But as with every company --

Those are other companies.

This is something that's unique to us because of the transaction.

Got it.

Okay.

Thank you.

Hope I didn't confuse people by going down that road.

I didn't mean to.

Okay.

Any other questions, operator?

Actually, sir, at this time, there are no further questions.

Your closing remarks?

Okay.

Folks, certainly appreciate everyone calling in.

We are around today if you have further questions and need, you know, any clarity on anything that we've gone over.

Again, very good quarter for the Company.

And look forward to talking with you.

Thank you very much.

Ladies and gentlemen, this does conclude today's Caremark RX first-quarter earnings conference call.

You may now disconnect.