CVS Health Corp (CVS) 2004 Q4 法說會逐字稿

Good morning.

My name is Marvin, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Caremark Rx Fourth Quarter 2004 Earnings Conference Call.

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

After the speakers' 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" then the number "two."

Thank you.

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

Please go ahead, sir.

Thank you, operator, and good morning everyone.

Before I get started, let me go ahead and do the forward-looking statements.

This conference call contains statements that constitute forward-looking statements within the meaning 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 discussed on this conference call include the intent, belief or current expectations of the Company and members of its 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 statements are based.

Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance, involve risks and uncertainties and 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 on this conference call include, but are not limited to adverse developments with respect to the Company's operating plan and objectives, as well as adverse developments in the healthcare, pharmaceutical industry generally.

Additional factors that could cause actual results to differ materially from those contemplated on this conference call can be found in the Company's annual report on Form 10-K for the year ended December 31, 2003, the Company's quarterly reports on Form 10-Q for the quarters ended March 31, 2004, June 30, 2004, and September 30, 2004 and the Company's other periodic filings from time to time with the SEC.

This conference call will include certain non-GAAP financial measures as defined under SEC rules.

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

And again, good morning and thank you for calling into the fourth quarter earnings call for Caremark.

With me today are Howard McLure and Pete Clemens.

As you know, 2004 has been a very busy year for Caremark, we closed the AdvancePCS acquisition in March of 2004; we've been dealing with the integration activities surrounding the transaction, and during that process saw a record new book of business for the year.

All in all, 2004 as you see from the results we presented here today, have been a very solid year and a very solid fourth quarter.

Today, we are pleased to report record earnings for the fourth quarter and for the full year of 2004.

Excluding integration and other related expenses, diluted earnings per share were $0.45 for the quarter and $1.46 for the year, both of which are $0.02 per share above First Call consensus estimates.

On a pro forma basis, earnings per share were $0.45 for the quarter and $1.40 for the year.

These results represent an increase of 50% and 36% for the quarter and year respectively, when compared to pro forma result, which include AdvancePCS result in all periods presented.

Revenues for the quarter were $8 billion, which includes $2.3 billion of mail pharmacy revenues and $5.6 billion of retail revenues.

Mail claims totaled 12.5 million claims during the quarter, while retail claims totaled 140.6 million claims.

EBITDA for the fourth quarter, excluding integration and other related costs was $387 million, which represents 41% increase over pro forma EBITDA for the fourth quarter of 2003.

Cash flow from operations for the quarter was $487 million, another very strong performance, and $1.6 billion for the year.

For the year on a GAAP basis, revenues totaled $25.8 billion, an increase of 16.7 billion over 2003.

On a pro forma basis, revenues totaled 30.4 billion, an increase of 2.3 billion or 8% over 2003.

Also on a pro forma basis, mail pharmacy revenues increased 22% and mail claims increased 12% when compared to the same numbers in 2003.

Pro forma revenue from the retail sector increased 4%, while claims increased 2%.

Pro forma EBITDA, excluding integration and other related expenses totaled $1.26 billion, a 29% increase over pro forma 2003.

There are number of reasons for the performance that you're seeing here today.

Obviously, people have worked very hard and have done their job, but we've also had some other things that contributed to it, let me give you just a few of the highlights.

And again, these are on a pro forma basis the AdvancePCS transaction was included for all periods.

We had increased generic dispensing rights at both mail and retail.

For 2004, the generic dispensing rate was 37.9% at mail compared to 35.3% in 2003.

And at retail, the generic dispensing rate was 49% versus 45.3% in '03.

We also had increased mail penetration rates.

Penetration rate stood at 20.2% at the end of '04 versus 18.7% in 2003.

Another contributing factor was our significant growth in the specialty business.

This business continues to perform very well and we experienced top line growth in our specialty area in excess of 30% for 2004.

With the transaction, with what we have done, we have also been able to leverage our cost.

Our cost of revenues grew at a slower level building our sales and we were able to pickup standard gross profit as a result.

Also, SG&A has been leveraged across the book of business.

As a result of this, EBITDA per adjusted claim was $2.18 in the fourth quarter, which represents a 35% increase over 2003.

You know, let me also point out that we achieved these results while also serving our clients very well.

We just received our trend results in our book of business for 2004, and it is in the single digits for the entire book of business, which is well below the national average.

Report on Medicare.

At the end of this week, we will file a notice of intent to apply in all 34 regions as a nationwide PDT, as we support our health plan clients as well as the other corporate and other players that we have in our marketplaces.

Let me discuss the Q1 2005 guidance that we gave today, because we heard some noise about that this morning, and address so you have this in the right perspective.

If you look at the pro forma 2003 Q4, compared to pro forma 2004 Q1 results, that is taking AdvancePCS and looking at it in 2003 in the fourth quarter as if the results were included there.

Compare on a pro forma basis also Q4 - I'm sorry, Q1 of 2004, then you will see the same trend.

This trend has also been the same in some years that we've had at Caremark.

Remember that in the fourth quarter people typically fill scripts prior to the expiration of the plan year, so we always see volume go up somewhat in the fourth quarter.

Also, remember how we record discounts at the company.

We do not smooth them over the year.

We only record discounts as they are earned that typically ramp up towards the end of the year, so we always see higher levels of earnings in the back half of the year than we do in the front part of the year.

They aren't smoothed over as I said, this is the way we record them.

We also incurred some cost and will incur some cost in the first part of this year bringing on a very new book of business, including the FDC, (ph) so that factors into it as well.

But when you cut through all of this, if you look at the guidance that we have given you in the press release and compare it to the same period of last year on a pro forma basis, you got a 55% increase in earnings per share.

Our fourth quarter increase in earnings per share over last year was 50%, so people shouldn't be reading a whole lot into first quarter guidance.

Consistent with what we have seen before from a trend in the book of business and that's the way the business works from a seasonality standpoint, and again, from the way we record discounts.

So I don't know what all the uproar is about or the questions about it, because I don't get it.

If you look at our balance sheet, it remains very strong.

Howard will tell you more about it.

If we look to next year, we expect revenue growth on a GAAP basis to be in the 25 to 28% range and we expect earnings per share before integration and other related expenses to be in the range of $1.88 to $1.92 per share.

All in all, we had really a great quarter and a very good year.

Before I turn it over to Howard, I want to thank all of our people that are listening in on this call today and those that aren't who have worked extraordinarily hard through the year, when we had a very major acquisition, and again, a lot of new business coming on.

And they have done a marvelous job, and we look forward to what we will see happening in '05.

And as you can see from the numbers and the estimates that we have given, we're expecting are very healthier for next year.

Now, I'll turn it over to Howard.

We'll come back and take Q&A.

Howard.

Thank you, Mac and good morning, everyone.

As we have for the past three quarters of 2004, I will go through our GAAP performance for the fourth quarter, as well as our performance on a pro forma basis, assuming AdvancePCS was included for all of 2004 and 2003.

Finally, I'll provide some detail on the outlook for 2005 that we included in our press release this morning.

As you know, Caremark closed the acquisition of AdvancePCS on March 24, 2004.

As a result, Caremark's GAAP results include the AdvancePCS operations for the full fourth quarter in 2004, but not for 2003.

In the fourth quarter of 2004, Caremark reported diluted earnings per share of $0.45, which includes integration and other related expenses of $3.9 million or $2.4 million after taxes.

For 2004, Caremark reported diluted earnings per share of $1.43 including integration and other related expenses of 25.2 million or 15.2 million after taxes.

Excluding integration and other related expenses, earnings per share for the fourth quarter were $0.45, $0.02 above First Call consensus estimates.

And for 2004 were $1.46, $0.02 above First Call consensus estimates.

These estimates do not include the integration and other related expenses.

This represents diluted earnings per share growth over the comparable prior period of 41% for the fourth quarter and 32% for the year.

Revenues were 8 billion for the fourth quarter and 26 billion for 2004, an increase of approximately 6 billion and 17 billion over the same period in the prior year.

EBITDA, excluding integration and other related expenses in the fourth quarter was $387 million, an increase of $223 million over the fourth quarter of 2003.

And for the year, EBITDA was 1.2 billion, an increase of $602 million over the prior year.

On a pro forma basis, assuming the AdvancePCS acquisition was included in the fourth quarter of 2003, as it was in the fourth quarter of 2004, mail claims were 12.5 million, an increase of 13%.

Our mail penetration rate was 21% in the fourth quarter compared to a pro forma 2003 mail penetration rate of 19%.

Retail claims were 140.6 million for the fourth quarter of 2005, compared to pro forma retail claims of 137.8 million in the fourth quarter of 2003, an increase of 2%.

Retail claims were negatively impacted in the fourth quarter as we continue to cycle through a few legacy AdvancePCS clients, and announced their termination prior to the close of the transaction.

Retail claims for legacy Caremark customers grew by 8%.

Net revenues for the fourth quarter 2004 increased 9% from pro forma fourth quarter 2003.

Caremark's success in driving generics increased our generic expensing rates at mail and retail, which, due to the lower prices of generic reduced our total revenue growth by approximately 6% per quarter.

Generics produced top line revenues but generate savings for our clients and higher risk profit for us.

Our mail generics expensing rate for Q4 '04 was 39.3% compared to 35.6% of pro forma Q4 '03.

Our retail generic expensing rate for Q4 '04 was 50.4% compared to 46.8% of pro forma Q4 '03.

On a pro forma basis, EBITDA, excluding integration and other related expenses, grew 41% over the pro forma fourth quarter in 2003.

EBITDA per claim in the fourth quarter of 2004 was $2.18, an increase of 35% over pro forma fourth quarter 2003.

Diluted earnings per share, excluding integration and other related expenses, of $0.45 for the fourth quarter 2003, increased 50% compared to pro forma diluted earnings per share of $0.30 from the fourth quarter of 2003.

On a pro forma basis, assuming AdvancePCS acquisitions was included for all of 2004 and 2003, mail claims were 47 million, an increase of 12%.

Our mail penetration rate was 20% for the year compared to a pro forma 2003 mail penetration rate of 19%.

Retail claims were 544.9 million for 2004, compared to pro forma retail claims of 535.9 million in 2003, an increase of 2%.

Our mail generic dispensing rate for 2004 was 37.9%, compared to 35.3% for pro forma 2003.

Our retail generic dispensing rate for 2004 was 49% compared to 45.3% of pro forma 2003.

On a pro forma basis, assuming AdvancePCS was included in the entire 2004 and 2003 results, net revenues would have been 30.4 billion, an increase of 8% year-over-year.

The higher generic dispensing rate for 2004 had the effect of reducing the revenue growth rate.

Excluding this impact, the revenue growth rate would have been approximately 14% for the year.

For the 2004 year, pro forma EBITDA grew 29% to 1.3 billion over pro forma 2003.

EBITDA per claim on a pro forma basis for full-year 2004 grew 24%, $1.84 over pro forma 2003.

Pro forma diluted earnings per share, excluding integration and other related expenses, was $1.40 for 2004, an increase of 36% over pro forma 2003.

Once again, Caremark's balance sheet was very strong at the end of 2004 as we continue to manage our working capital effectively.

December 31, 2004, cash and short-term investments were 1.3 billion.

Total debt outstanding was approximately 600 million.

Debt outstanding included Caremark's 450 million senior secured notes for 2006 and a 147 million term loan.

Cash flow from operations during the fourth quarter was $487 million, up 343 million over the same quarter last year.

Cash flow from operations for the full-year 2004 was 1.6 billion, an increase of $1 billion from the same period 2003.

Capital expenditures totaled 25 million for the fourth quarter of 2004, and were $81 million for the year.

During the fourth quarter, we purchased 4.9 million shares of our common stock for a total expenditure of approximately $144 million.

These share purchases, which were included in our guidance we provided last quarter, had the effect of increasing EPS less than one-half of a penny in the fourth quarter of 2004.

For the year, we purchased 16.3 million shares of common stock for a total expenditure of approximately $482 million.

As of today, we have not had any share repurchases since the fourth quarter.

As noted in our press release, we have reiterated our diluted earnings per share guidance for 2005 in the range of $1.88 to $1.92.

We expect our 2005 revenues will grow in the range of 25% to 28% over 2004 GAAP measure revenue.

The guidance is based on a number of assumptions, including the following items, stock option expense is expected to total $19 million in 2005.

Since we last provided guidance, the FASB have issued FAS 123 (R), which will require us to expense previously granted options, in addition to those being expensed due to the Advance acquisition beginning in July of 2005.

FAS 123 (R) will result in approximately 6 million in additional expense.

This amount does not include any additional stock option expense related to any future stock option grant.

Amortization expense related to certain identifiable intangible assets is estimated to be approximately $47 million.

Depreciation expense is expected to total approximately $105 million in 2005.

Net interest expense for 2005 is expected to be in the range of 3 million to 7 million.

The company's effective accounting tax rate is expected to decrease slightly beginning in the first quarter of 2005 to 39.5% from our 2004 level of 39.8%.

This reduction in the rate is primarily attributable to the increase in absolute income, which minimizes the effect of certain nondeductible expenses on the effective rate of calculation.

We continue to expect that our federal net operating loss carry forward's will be substantially utilized in the second half of 2005.

Our 2005 earnings guidance does not into include integration and other related expenses associated with the acquisition of AdvancePCS.

GAAP requires that any cost associated with the integration and rationalization of legacy Caremark operations be expensed while any costs associated with the legacy AdvancePCS operations be capitalized.

While we incurred most of the expense associated with the integration of AdvancePCS during 2004, we continue to expect certain expenses in 2005.

In terms of share count, we currently expect weighted average shares outstanding; assuming full dilution, will be approximately 461 million shares in Q1 and should be 464 million shares for the year of 2005.

These numbers take into account only share repurchase activity to-date, and will vary based on the market value of the stock and future option activity.

As you'll recall, in our previous guidance, we had estimated shares outstanding to be approximately 460 million shares for 2005.

We expect capital expenditures for 2005 to total approximately 135 million to 150 million.

From a cash flow perspective, we estimate that three items will impact 2005 cash flow from operations.

First, the company will fully utilize the operating loss carry forward the tax purposes in the second half of 2005, and we'll begin paying taxes at a higher rate.

Second, we have collected a significant amount of manufacturer accounts receivable for legacy AdvancePCS relating to the time period prior to the acquisition.

Accordingly, we will be paying our clients their share of these rebate collections during the first quarter of 2005.

Third, certain of the clients who did not renew us in 2005 were mainly retail volume clients.

Since our collection cycle for retail revenues was shorter than our payment cycle for retail claims, we will be paying for retail claims in 2005 to these clients with funds collected in 2004.

However, we do expect our cash flow for the full-year 2005 will be comparable to 2004 after adjusting for the increase tax payments and reduction in claims payable for the terminated clients.

Finally, as we announced in our press release today, we expect first quarter diluted earnings per share, excluding integration and other related expenses in the range of $0.42 to $0.43.

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

Okay.

Thank you Howard.

And again, as you can see, we tried to give you a lot of information so you can work on your models, and it's also in the press release.

But, a very good year for 2004 and certainly another very strong quarter, and we look forward to a good 2005.

At this time, operator let's turn it over to question-and-answer.

Ladies and gentlemen, if you would like to ask a question at this time, please press "star" then "one" on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Lisa Gill with JP Morgan.

Please go ahead with your question.

Good morning, and thank you.

Mac, I was wondering if you could just perhaps talk a little bit about Medicare?

This -- and you're becoming a national PDP provider, can you talk about what your managed care plans are talking about doing, as well as what your employee groups are planning on doing, and why it is that you've decided to become a national PDP provider, and will you be taking on any risk as a national provider?

If you could just, maybe, talk a little bit more about this it would be great.

Sure.

Our stance really hasn't changed on the Medicare benefit from where we have been.

And that is our first primary obligation and goal is to support our customers that we currently have, which will need the health plan accounts as well as those corporate accounts that decided that they may want to be a PDP as well.

So, you know, we have built -- we are building an infrastructure that supports that effort and those plans.

I think '06 in what we're seeing still in these is a lot of confusion, a lot of clients that have not made up their mind as to what they exactly want to do.

I really see '06 as being a transition year giving the short period of time that you will have from approval to actually get things up and running.

As far as taking a risk, again our posture has not changed there.

We're not a risk-taking entity unless it is something that we look at and say it makes sense from a reasonable amount standpoint that we will look at.

So we're like everyone else right now, we're understanding the regs, we're reading the regs, we've got a lot of people working on this process.

Our clients are doing the same thing.

We're having constant conversations with them, but our first and primary goal is to support them in what they want to do.

But I really think we will see some more activity in '07 than we've done in '06.

Thanks.

And then just a follow-up question with Howard, on FAS 123, it looks like you said $6 million will be the incremental costs for the back half of the year.

Should we anticipate that it will be roughly $12 million a year going forward?

Lisa, that is for those options that were previously granted and it depends on the number of options that are granted and the number of factors market price and so forth.

Okay.

It is hard to peg that out for number of years.

Okay.

Great.

Thank you very much.

Your next question comes from Christopher McFadden with Goldman Sachs.

Please go ahead with your question.

Thank you and good morning everyone.

Good morning, Chris.

Just following up I guess on a broader Medicare theme, as you have thought about 2005 guidance that you provided here, what types of expenses have you anticipated whether those be marketing expenses, preparatory expenses, systems preparation expenses or otherwise?

It will be part of an investment cycle to get ready for the program.

We have -- we are incurring expense in that regard.

I don't have it broken out right now, we have not really tried to segregate and say this is what it is.

Marketing, I don't see a lot of marketing expenses associated with it right now because of the fact that we are going to be supporting those customers, primarily health plans, that will be rolling this out and be part of an integrated offering with them.

But clearly, we are incurring a good bit of cost and have been, getting ready for this but I don't have it at the tip of my hand really as to what we have even budgeted in there.

It's just part of our overall budget process just like there is any book of business that is potentially out there.

Understand.

And there has been an estimate provided by CMS that as many as 10 million retirees currently provided drug benefits under a corporate plan will be provided there an employee based PDP.

Can you sort of just reflect on that, as either it would affect your profit relationship with the customer in that scenario or how you are trying to particularly tailor capabilities in case you have employer customers who are thinking about being part of that transition set?

Well, we don't see a large number of customers right now contemplating being a part of that transition set, I don't know if we are seeing this, comes up with the 10 million lives, just as I don't know exactly where they estimate what the total program is going to cost.

So from our standpoint, we will work with our customers and clients and however they do that and what will they will be.

But I think it's early to try to be estimating anything, right now.

There is lot of estimates that also were given out before the drug discount card went -- into effect and while I think we've got one of the larger discount card programs out in the country, it's still not very big.

Fair point.

Last question.

Obviously, you're in the digestion of some important new customers but as you look out over the first couple of quarters in 2005, are there some meaningful kind of opportunities you see of people who might be off cycle in terms of contracting opportunities?

There are still a few opportunities out there for '05, and which we are working on, but clearly most of our activity today is turning toward 2006.

Understand.

Thank you very much.

Your next question comes from Steve Halper with Thomas Weisel Partners.

Please go ahead with your question.

Yes.

This is George Hill sitting in for Steve Halper.

Looking forward, can you talk about the company's priorities for usage of cash and where you expect to re-deploy the capital especially the amount of cash balance on the balance sheet?

Sure.

I mean we are actively pursuing acquisition opportunities in areas that we think will provide increase services to our customers that we currently have today.

As you see, we have been active in share repurchasing.

And then the third priority would be that if we don't have better uses of it then a payment of dividend.

Okay.

And my second question is can you talk about what is driving in particular growth in the specialty business?

And what are you seeing there, in terms of carve outs amongst customers and what new business is coming to you for specialty pharmaceutical management?

We are seeing a number of opportunities out of some of the health plan customers.

We've got some bids that are in house right now, some opportunities in front of us, and some rather significant plans.

We're seeing opportunities out of the Medicare demonstration project, as well that, we announced last year that we are a part of and that clearly continues to grow.

FDP, we also think will be a significant opportunity for us on the specialty side of the business.

As far as Pacific Therapies, I know that MS had a very strong year this last year.

I think Hepatitis C grew fairly well, rheumatoid arthritis group.

Our specialty business, and we thought we would see the opportunity of being able to penetrate more on the Advance side, we're clearly seeing that opportunity take place as well, and we've just seen very strong growth in that sector of our business and continue to see it.

Okay.

And if I can sneak one more, and what portion of the Company's book of business will be up for bid in '05?

Like it always does, about a third.

Okay.

Thank you.

And it is typical three-year kind of contracts, that's really the kind of rotation cycle we see almost regardless what the length of the contract is.

Right.

Thank you.

Your next question comes from Eric Veiel with Wachovia.

Please go ahead with your question.

Yes.

First question just on the cash flow metrics that you gave, Howard.

Can you get to a quantified '05 on bottom-line cash flow from ops number?

In my sort of back in envelope calculations, it looks like the tax payments would be about 290 million to 300 million in the back half of the year, is that about accurate?

Well, Eric, we tried not to get in the business of forecasting cash flows...

That's a little heavy on the taxes

Little heavy on the tax.

Okay.

Second question on Medicare, as a National PDP, I know, you guys aren't going to be active, but at least it sounds like you guys not going actively out there trying to bringing individual members, but as I understand the reg to be a national PDP, you have to accept members if they select your plan.

Is that how you guys have read the reg as well?

If so, doesn't that require that you do get licensed as a risk bearing entity across the country?

That is correct.

Eric Veiel Okay.

And then final question, if you could, just as we think about the first quarter numbers, it does look like the order of magnitude is a little bit bigger than some of the past years on the sequential decrease.

Do we chop that up to just the extra expense to bring on FEP or is there anything else in the first quarter that we should think about there?

I don't think the order of magnitude that is really in the different and again you look at the growth rate putting the two companies together first.

Okay.

Eric Veiel Right.

So, I mean, I just...

Let me finish, if you do it on a pro forma of looking at the companies put together the first quarter of '03 -- the fourth quarter of '03 and then the first quarter of last year and do the same comparison this year.

And we're sitting there with a 55% growth in earnings per share, which is frankly, little bit greater than what we saw in Q4 over Q4 then, I think, the order of magnitude pretty much in line.

Eric Veiel I'll chat with you again about that, offline.

Okay.

Eric Veiel Thanks.

Your next question comes from Robert Willoughby with Banc of America Securities.

Please go ahead with your question.

Good morning.

Mac or Howard, just you mentioned there was some spending being incurred for the Medicare opportunity, are there other areas you could speak to where maybe you are funding some projects kind of one-off kinds of things, any other activities that you're up to that might be -- your might be spending on your near term as well?

Rob, we are always spending on activities.

I mean, we just don't just try to break them out and segregate them.

That's why this, I mean, as the usual part of the business.

So, yes, we've got a lot of projects that we are working on as far as -- where we don't see the growth in business come from that might not pay offer two or three years.

But that's just part of investment spendin and we don't try to capture a picture we've always got that going.

So this year wouldn't be a higher year verses any other year?

Simply the magnitude of the dollars are going to be higher because the size of the company is bigger, but I don't know on a percentage basis it would be a lot different.

Okay.

Thank you.

Your next question comes from Tom Gallucci with Merrill Lynch.

Please go ahead with your question.

Thank you.

Good morning.

Howard I appreciate not projecting cash flows exactly, but is it possible for you give some relative order of magnitude of the retail issue that you described in your prepared comments?

It's probably somewhere in the $75 million range.

Okay.

And then Mac, I was hoping that you'd give an update on both how the FEP implementation has gone so far?

You know, what's been better, what's been worse and also maybe the same idea on the synergies and the AdvancePCS integration?

You know, FEP is a big account that's come on.

We've worked awfully hard for the last six or eight weeks bringing that book of business on and we're seeing it smooth out now and being to run on a more normal kind of basis.

As you would expect with any account that size, you're always going get hit with a lot of volume.

And I would say that just in general we probably saw more mail volume in the first couple weeks of January then we have been used to seeing.

So had a lot of volume that's come in.

So from that standpoint, that's kind of where that one's going.

I think the pharmacy that's handling the FEP business is probably one of the most efficiently run pharmacies that we have right now.

We're glad to see that.

What was the second part of the question?

Just the Advance update on the synergies integration?

Advance and synergies are -- everything is on track.

We've achieved, what we thought we would achieved and we're kind of out of the synergy accounting mode now then it's pretty much business as usual, , to make the numbers and make them hit and get going.

Did the combined PDL going to effect on January 1st as you've anticipated?

It did and there's still some rationalization to be made there -- for the most part it did.

Okay.

Thank you.

Your next question comes from Andy Speller with AG Edwards.

Please go ahead with your question.

Hi.

Good morning.

Howard, could you comment on the rise in inventory?

I assuming some of that do with FEP contract, is there any inventory profits that you expected to factor in there?

You're right.

It was due to FEP and now we don't factor in any -- there is not any significant inventory profits in there, as you know, we don't go forward while to capture a lot of that in our contract with our wholesalers on a run rate basis.

That's going to be a new inventory level going forward?

Or is it going put down little bit?

We stocked up at the end of the year probably little higher than we normally would have just because we knew we had a big book of business coming in so...

Okay.

That probably got a lot more on hand at the end of the year then we typically would see.

Okay.

And then Mac, on the specialty side, can you give us any comments with regard to how any of your customers are reacting to the new ASP Medicare rules.

Is it changing any of their habits and potentially impacting volume possibly for you or not?

The ASP rules affect such a small amount of our business, so I don't think we've seen any real change that's come out of that.

Okay.

Thanks.

Your next question comes from Kemp Dolliver with SG Cowen.

Please go ahead with your question.

All right.

Thanks and good morning.

First question, relates to contract structure or pricing during 2004.

Based on the renewals you had in any new business you took on for '05, has there been much shift in terms of contract structure from value model to transparency as described in your book of business?

No.

It's been very small.

Great.

Second question, relates to Medicare, and -- there's -- I think there is some still lingering controversy about the interpretation of the any willing provider role, as it pertains to mail pharmacies.

Any read -- what's your read on that situation?

I would agree there's controversy.

So if...

Yes.

Well I get this way.

Who is smoking dope on this?

Well, I don't know, if anybody's smoking dope on it, I mean that's why you have controversies, as some people do think one way some people do think the other way.

And the whole any willing provider on the mail side, time will tell on that one.

Great.

Thank you.

Next question comes from Michael Baker with Raymond James.

Please go ahead with your question.

Yes.

First of all, just a follow-up to the previous question, I was wondering, if you could comment in general in terms of what you're seeing in terms of pricing on 90 day retail versus mail, because certainly, there is some debate around, how that's actually is playing out?

What I have seen is that people that are pricing 90 days at retail are not willing to price at the same level, that I will price my 90 mail for.

Okay.

And then secondly, I was wondering, if you could provide a little bit of color in terms of the -- it looked like the revenue guidance came down just a little bit, in another words, last quarter you kind of talked around 30%, now it's 25 to 28.

Is that just the fine-tuning or is there anything from a competitive standpoint behind that?

No, a couple of things.

We did have the -- we do a little better than what we thought we were going to do revenue wise, when we had given those projections so we ended up at '04 a little bit better, so you're starting off little different base there.

We did lose the State of Illinois account and that's factored and there, but that's not a big number.

And also if you look at the growth that we've seen in generics, there was some early generic launches that has impacted in fact.

If you look at the numbers and you all heard the numbers that we gave, as far as the impact on our revenue growth this year it would have been 14 or 15% if we were the same generic dispensing rates in '04 that we were in '03.

So, it's just the continued impact of all those things.

But generics are playing a bigger piece, which is why I think, if you're looking at revenue growth in this business may not always be the smart thing to do on a go forward basis because it's good for our customers for more and more generics to come to marketplace, '05 will not be nearly, as big a year as 06 will be, but clearly that's going to dampen everyone's revenue growth, as we go forward in this industry.

But it's good for our customers and it's good for our earnings.

Thanks a lot.

Your next question comes from Anne Barlow with Southwest Securities.

Please go ahead.

Good morning.

Couple of questions; first, may you talked a little bit about acquisitions, can you speak to what type you're looking at, more strategic in nature or more market share?

What types of acquisitions are you actually got your eyes on?

Yes, without obviously giving away competitive information, I would put that we were looking at both areas, in strategic from the standpoint or being able to take us into some new areas that perhaps we don't do business in today.

Some maybe more tactical, and gives us a greater capability in some of the existing areas.

And then, certainly we will look at selective market share opportunities in those parts of business where we think that there is an opportunity to get, to garner more market share from transactions.

So, we're not trying to cut in the out, but we've got a very strong balance sheet.

We've got the capability to do and that's were we're going to try head for.

Right.

I would -- and you guys are comfortable with where you are with AdvancePCS' integration that looking at acquisitions now and it's not going to be a big distraction all?

We don't.

Just one last question.

Any color on what your goal is for mail penetration by the end of fiscal '05?

No.

We are still getting a better feel about the Advance book of business with what we can do.

We had in the fourth quarter of this year a big success in going from retail to mail with a number of scripts something between 6 and 700,000, I think as to the number that I saw that we had just in fourth quarter of this year, from some of the programs in place in that book of business.

We're still figuring it out and hopefully, later in the year we'll have some better numbers for you.

But clearly, our penetration rates continue go up.

All right.

Thanks.

Your next question comes from Larry Marsh with Lehman Brothers.

Please go ahead with your question.

Yes.

Thanks.

Just a couple of clarifications, I guess, Mac and Howard on the CapEx, 135 to 150, is there any specific designation of use of projects or as you said, Mac, just a general spreading around of other specific items because of the size of the Company?

No, we'll have -- we'll continue to invest in call centers and probably will start looking at another mail service facility towards the latter half of the year given the growth that we're seeing.

Other than that, it's just continuing to add on to the capabilities that we have and continue to upgrade technologies that we have, giving our people great places to work and places they will be happy to come to work every morning.

That's spread out across a wide range.

Howard, I don't know if you have any other color on that, but I guess pretty much where it is.

I think that's the color on it, as well as, in spending some money on facilities that quite frankly have been starved for capital.

Previous owners...

Yes.

I think Scottsdale is a good example, where if you look at the facilities out there for the legacy PCS need to spend some money out there on those facilities.

We've already started to do that so we saw somewhere encouraged last year.

Got it.

... possible.

Okay.

Thanks.

Your 464 assumption in shares, that's not assuming any incremental share repurchase or is it?

It does not.

Okay.

Top line as you have mentioned to the previous question, you got are dinged, as you said six points because of generic in the fourth quarter.

Is it fair to say in our own modeling that we should assume at least six points of impact in '05?

No, because we won't have as big a generic year in '05 as we had in '04.

Okay.

Just a clarification on FAS 123, the 6 million, is that a six month number or an annualized number?

That's for the - that's what we'll incur, six month number.

So, should we think that is 12 million for '06 or is -- roughly?

No.

You've got to take into account changes in stock price, if there arefuture option brands, and that's a base to start if everything else is constant.

Yes.

But just in terms of -- obviously, you're showing all your option expense in your EPS and it seems like a lot of other people would take that out of a number.

So it seems like it is conservative?

I'll do whatever you want to with it.

But it is in the number that we have given.

Sure.

And just one you had said last quarter, net new business of 1.2 for '05 is that's still the right ballpark?

That's still the right ballpark.

We don't try to do it every quarter, but that's still the right one.

Right.

And then just integration expenses, I know you exclude that from your EPS guidance, about 25 million in '05, is there -- I know that's just legacy Caremark, is there any sense of the range of what you expected in '05?

We've drawn up forecasts of that and there are a couple of things there for example there is a -- one of the things that does go through there is a retention payment that was part of the deal for legacy Advance employees, but that they'll be the main thing that runs through it probably this year.

Okay.

And I guess in '06 you would -- you wouldn't differentiate between legacy Caremark and Advance?

We wouldn't probably have anything in '06.

Yes, it should be over with by '06.

It should be all over with.

Yes.

Okay.

All right, I think that's it.

Thanks.

You're welcome.

Your next question comes from Glenn Garmont with First Albany Capital.

Please go ahead, do it with your question.

Hello?

Glenn (ph) I am so sorry.

I am sorry.

I apologize.

My question has been answered.

Thank you.

Yes.

Your next question comes from Janet Groin (ph) with Chieftain Capital Market.

Please go ahead with your question.

Hi.

It's actually Tom Stern (ph).

Couple of questions; on the capital expenditure, should we anticipate the 135 to 150, will be an ongoing rate of capital spending?

For a business our size that's not an -- wouldn't be an unrealistic amount to spend every year but if you have seen in the past, it has bounced around from 60 million to 80 million.

I guess maybe we'd get 100 before and now we never have 100 but it will moves year-to-year. depends on the projects that are going on.

Okay.

How would I wonder if you could provide a little more clarity on working capital?

Should it be a contributor to operating cash flow in 2005?

Let me validate my thought processes --

Can you just give a sense for size or should we be surprised to see you announced deals north of $500 million of size?

I wouldn't be surprised if I did a deal more than 500 million.

More progressively working capital probably in neutral not a provider or not really big user or provider.

Should we assume Howard that would be a consistent trend?

I mean obviously the business is a negative working capital business, but as an exchange is over time, would you anticipate working capital to be in a source or neutral or used?

Tom.

That's just hard to predict.

It depends on the book of business in '05.

Is it predominantly retail or is it predominantly mail.

It's hard to predict until you are seeing the business that you are actually founding in.

Yes.

About one year about, as far as you can look at that and tell so, see what your book of business looks like.

Okay.

Great.

Thanks very much.

Your next question comes from David Veal with Morgan Stanley.

Please go ahead with your question.

Sure.

Thank you.

Early this week we saw a high-profile move by large employer to push back on a retail response for their efforts to constrainments or email.

I wonder if you could characterize the views of your customers.

Have they may have changed overtime, and are they prepared to make similar kinds of moves to retain the full menu options, and I wonder if they're starting, if could you give a sense if they're starting to view retail as part of the problem, instead of part of the solution?

David, you have cited in and out, I could not hear part of that.

I think what you ask is, are we seeing similar kinds of moves out of our customer base, are they willing to as GM made, was that the...

Right.

That's the just -- are they prepared to make the same kind of moves and are they starting to view retail as part of the problem instead of part of the solution?

Well, the retail is a very important part of networks because people need to be able to use the retail stores.

The views of the customers and their views about actions that may be taken to block customers out or to not do things, I think that - and as I've always said, the actions about the retailers here really aren't taking me on, they're really taking on the people that pay the bills and the people that have to go get scripts.

And I think you saw General Motors react to that from, and take the actions that they did.

Time will tell us as to whether other employers will take similar kinds of moves or measures.

And our job is to provide the best quality of service when provided to these customers that we can, using all the networks that are available to us to do so.

But it really is up to the customer's decision as to whether or not they will narrow that retail network or whether they'll leave it broad based, and you certainly have seen one major employer decide to narrow it as a result of other actions.

But I don't have any clients today telling me they're going to do this tomorrow or whatever, but time will tell.

Great.

Thank you.

Your next question comes from Larry Marsh with Lehman Brothers.

Please go ahead, sir.

I'm sorry.

Just a quick follow-up.

I just want to make sure, you said the 75 million is the combination of those two factors for retail that you highlighted in cash flow in the fourth quarter?

Yes.

Okay.

And then talking, but if you like the -- is it fair to say the tax -- the NOL impact would be more like 230 to 250?

You are in the ballpark.

Okay.

All right, thanks.

Thank you.

There are no further questions at this time.

All right.

Again, thank you very much for dialing in.

We'll be around if you need to follow-up on anything today.

And we appreciate you being on the call.

Have a good day.

This concludes today's conference call.

You may disconnect at this time.