CVS Health Corp (CVS) 2005 Q1 法說會逐字稿

Good day, everyone. Welcome to the CVS corporation first quarter 2005 earnings conference call. Today's conference is being recorded.

At this time, for opening remarks, I would like to turn the call over to the Vice President of Investor Relations, Ms. Nancy Christal. Please go ahead.

Thank you. Good morning, everyone. Thanks for joining us today for our first quarter 2005 conference call. I'm here with David Rickard, Executive Vice President and CFO. Dave will be providing highlights of our business in the first quarter followed by a financial review and earnings guidance.

But before I turn this over to Dave, as always, I have a few reminders for you. First, our 2005 Analyst and Investor meeting will be held on Thursday, June 2 at the Mandarin Oriental Hotel in New York City. We're once again planning a half-day event with several speakers from our senior management team. If you haven't already responded to the invitation we e-mailed on the morning of March 24th, please do so at your earliest convenience. If you need any information, please contact my assistant, Linda Pierre at 914-722-4094. And because our annual Analyst and Investor meeting is only four weeks away, we're going to provide a somewhat condensed business update today, along with our usual financial review. For a more detailed update, please join us either in person or via audio webcast at our upcoming meeting on June 2nd.

Next, I want to remind you that today's call will be simulcast on our website at investor.CVS.com. It will also be archived on our website for one month period following the call, to make it easy for all investors to access the call. Note that this call may not be rebroadcast without prior written consent from CVS. I also want to remind you that in light of regulation FD, we'll only accept analyst models for review within the one-week period following each quarterly earnings call. This review and comment will be limited to suggesting changes based on information disseminated to the public on the call. During this period, we'll simply check analyst models for appropriate interpretations of what we have said.

In addition, please note during this call we will discuss one non-GAAP financial measure in talking about our Company's performance, namely free cash flow. We find a good way to understand operational cash flow being generated by the business. Free cash flow is defined as earnings after taxes plus non-cash charges, plus changes in working capital, less net capital expenditures. So free cash flow excludes acquisitions and dividends. In accordance with SEC regulations, you can find the reconciliation of free cash flow to comparable GAAP measures on the Investor Relations portion of our website at investor.CVS.com.

As we typically do on these calls, our attorneys have asked me to read the Safe Harbor Statement. During this presentation, we will make certain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. For these statements, we claim the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. We strongly recommend that you become familiar with the specific risks and uncertainties that we've outlined for you under the caption cautionary statements concerning forward-looking statements in our annual report on form 10-K for the 2004 fiscal year ending January 1, 2005.

And this morning's earnings press release is also available on our website, which should be reviewed along with the information on this call. As always, following the call, please feel free to call me with any follow-up questions.

Now I'll turn this over to our CFO, Dave Rickard.

Thanks, Nancy. Good morning, everyone. And Happy Cinco de Mayo.

While we clearly had a terrific start to 2005, with great first quarter results, we had healthy sales growth in both the pharmacy and the front end, which was way ahead of our original expectations, primarily due to a very strong flu season. We delivered diluted earnings per share of $0.69, up 17% from last year, coming in at the high end of the revised guidance we provided in early March. Comparable store sales increased a robust 8.2% with pharmacy comps up 8.8% and front end comps up 6.9%.

Remember that the former Eckerd stores are not yet included in our comps. They will be in the comp numbers beginning in August. In addition to the strong flu season, our front end and total comps reflect the benefit of an earlier Easter, which shifted more holiday sales into the first quarter. We estimate that the earlier Easter added approximately 140 basis points to our front end comps, and 45 basis points to our total comps in the first quarter. Strength during the quarter was broad-based. We continued to gain share in both front and pharmacy in the first quarter. We saw strength across core front end categories, including health and beauty, consumables, seasonal, general merchandise, greeting cards, and digital photo.

In the pharmacy, capturing share remains an important part of our long-term success. Nationally our retail pharmacy market share increased to 13.7% through February, the latest available data. In those markets where we operate, we fill one out of every five scripts. We expect to continue to gain share by delivering superior service in our existing stores, through our new stores in existing and new markets, as well as from the turnaround of the acquired stores.

There's just one second quarter item I want to update you on, related to the pharmacy side of the business. You may recall that on January 18th we announced that we would exit the pharmacy network established to service Ohio state employees in 90 days, if we didn't reach an agreement with them. The Ohio plan is a mandatory mail plan, as you'll recall. After exhaustive negotiations, which included an extension of our original April 18th deadline to May 2nd, we had no choice but to terminate our participation in the plan on Monday of this week.

The state of Ohio has refused to accept a 90-day retail prescription option, which would have been at no additional cost to the state, as compared to the current mandatory mail program administered by the state's PBM. We'll continue to work with the state to attempt to demonstrate the advantages of patient choice and face-to-face counseling, but at least for now, we're no longer a part of their network. It's too bad. We hate to disappoint any customers, but it was a relatively small plan, and will have no meaningful impact on our financial projections.

We also reported today that our strong sales continued into April. Our total sales increased 31.2% in April. Same-store sales rose 5.2% with pharmacy comps up 7.9%, and front store comps down 70 basis points. Front store comps were negatively impacted by the earlier Easter that shifted holiday sales into March. For March and April combined, total comps increased 6.5%. Pharmacy comps increased 7.5%, and front end comps increased 4.3%. So we're off to a good start in the second quarter.

Now, I know that you're all anxious to hear about how we're doing with the Eckerd integration, so let me address that. As you know, we closed 160 Eckerd stores last year. We also closed 7 additional former Eckerd stores in the first quarter, and will close another 7 later this year, as planned, resulting in a total of 174 Eckerd store closings. So of the 1268 stores we acquired, we are left now with 1101 stores. All of them have been rebranded, remerchandised and repriced. And all but the 7 we're closing later this year, will be remodeled to look and feel like CVS stores.

We've completed about 650 store remodels to date. I'm happy to say that we're tracking ahead of our original schedule. Florida is nearly complete and we expect to complete all of Texas by July 31st. Once remodeled, the stores we acquired will look like brand new CVS stores, that reflect our latest prototype in most cases.

So in effect, we'll have 1100 new CVS stores, but they will already have a starting customer base from which we can build. This is different from the kind of acquisition where you just buy a company and run it for what it is. And this transformation will be completed in just 12 months from the date we closed the deal.

Our business in Florida where we first started the remodels has continued to improve. Sales growth trends are where we want them. In Texas, the first remodels were completed in late March, so it's too early to provide specific post versus pre-model results. I will say that Texas sales trends are still not positive overall, but they are definitely looking better and are more consistent. But the Texas trend is more than offset by the strength in Florida.

So the great news is that the aggregate sales results of the 1100 former Eckerd stores are trending positive to last year. Said another way, the Eckerd stores we purchased were in steep decline when we bought them. Today, they are growing. In these acquired stores, we're experiencing strong sales momentum in our core health and beauty categories, cosmetics, skin care and over the counter remedies, where Eckerds had clearly unindexed. They are showing impressive growth.

As we noted on our last call, we launched extra care in the former Eckerd stores in early January, and we're tracking ahead of our scan rate projections. The acquired stores are now seeing over 50% of front store sales using extra care. Our core business is at a scan rate just over 60%, so this obviously shows very strong acceptance of the loyalty card among our new customers, as well as the opportunity that still remains.

As we complete the store remodeling in each market, we will hold special events to reintroduce the stores to customers. Once that's complete, we should be well on track to begin experiencing the benefits of a multi-year turnaround. The financial benefits of the acquisition in the first year to year and a half are driven by the quick start synergies, like purchasing and overhead cuts. Longer term, it will be driven by some of the later synergies like shrink improvement, but more importantly by sales growth and share gains.

Remember, we've just turned the overall sales positive. We're still not gaining share. Share gains will come, but they take some time. So overall, the Eckerd integration continues to go very well, and we're very encouraged by our progress to date. We'll get into more detail at our June meeting, but suffice it to say, right now we're right on track.

I should also add that in addition to our good business results reflected in our numbers, the qualitative measures of our performance are also running strong. At the acquired Eckerd stores, our customer service metrics tell us that the pharmacy and front store service improvements have been noticed. Complaints are way down. We're very encouraged by those trends, since we find that these scores tend to be a leading indicator of our future sales results. As I said, more to come on Eckerd at our June meeting.

Now I'll turn to our real estate program. During the first quarter, we opened 96 stores, more than one a day. That includes 51 new and 45 relocations. We closed 17 others, resulting in net unit growth of 34 stores. Of the new stores, we added 12 in Texas and 8 in Florida, further expanding our presence in those important growth markets.

Just a quick note on our organic growth. We continue to be pleased with our results in the emerging markets, including Chicago, Las Vegas, Phoenix, Tucson, Los Angeles, Orange County and Minneapolis. In aggregate, our front store sales, pharmacy sales and script volumes are tracking ahead of our budget in these newer market areas. Also over the past 12 months, we've expanded our organic square footage by 3.6%, even while purchasing and integrating the Eckerd assets.

As we said in the past, our plan for 2005 is to open 275 to 300 stores, about 175 of which will be new, the rest will be relos. With about 50 normal closings, that would translate to net unit growth of approximately 125 stores, an organic square footage growth of approximately 3.5% for the year.

Now let me touch on PharmaCare, our PBM, mail order and specialty pharmacy business. The integration of EHS with PharmaCare is done. We're operating as one company and officially changed EHS's name to PharmaCare in early April. We are achieving planned synergies in purchasing, operations and marketing. In the first quarter, PharmaCare sales increased 105%, while operating profit grew 106%. Combined operating profit margin was a healthy 7.5%. We're staying focused on retaining and servicing existing customers, while we track new customers to PharmaCare. The combination of PharmaCare and EHS created a full-service PBM mail order specialty pharmacy company, serving approximately 30 million lives.

It has placed us at the negotiating table with a far more robust mix of clients, large and small employers, TPAs, and managed care companies. And our pipeline of activity has significantly increased. In addition, several clients representing over 400,000 lives have agreed to add PharmaCare's specialty pharmacy services into their pharmacy benefits. We would expect to see that reflected in 2006 sales growth. PharmaCare specialty business also continues to make in-roads with the pharmaceutical manufacturers for limited distribution of specialty drugs.

Most recently, we were selected by Genzyme to be a national distributor of it's drug, Thyrogen, a diagnostic tool in the management of patients with well-differentiated thyroid cancer. PharmaCare can efficiently deliver specialty drugs to patients and provide the support and information they need to use them successfully. PharmaCare was also recently selected to become one of a limited number of distributors for Millennium Pharmaceuticals' new treatment for bone marrow cancer, Velcade.

As I mentioned, PharmaCare has a very strong mail-order operation. We continue to receive a lot of questions about how CVS will respond to the growth in mail-order pharmacy. Well, the first SANs that we will participate in it, given that we have over $1 billion in mail-order business, we are obviously not against dispensing prescriptions via the mail. But as the largest retail pharmacy chain with 5400 stores and a full-service PBM, we are in a unique position to offer significant savings to payors through flexible solutions that meet their specific needs, and the needs of their members, without mandating the use of mail-order for certain drugs.

We do believe 90-day scripts at retail are part of the solution. We can offer 30 and 90-day prescriptions at retail, 90-day prescriptions through the mail, specialty pharmacy, and other PBM services. Payors are looking for other levers beyond mandatory mail to lower costs. These can include higher generic utilization, percentage copays, better control of their specialty pharmacy spend, and three-tier formulas. We are prepared through PharmaCare and our 5400 retail stories to help them accomplish that. Making progress with payors will take some time, because contracts have long lead times of up to three years, but we believe we have a compelling offer and we look forward to reporting more about this in the future.

Now I'll provide a more detailed review of our first quarter financial results. After that, I'll provide initial guidance for the second quarter and update guidance for the remainder of this year. So let's turn to the first quarter income statement. Sales increased 35% to 9.2 billion in the quarter. This year's figure, of course, includes sales from the former Eckerd stores in addition to the stronger flu season year-over-year, and the earlier Easter that I mentioned before.

Pharmacy sales represented about 71% of total sales in the first quarter. That's up about 80 basis points from last year. Third party sales accounted for about 94% of pharmacy sales, up 20 basis points from last year's first quarter. Our overall gross margin declined by only 5 basis points in the quarter to 25.9%. The gross margin rate, once again, benefited from the increase in the amount of generic drugs dispensed. The strong flu season and the overindexing of generics within the flu category, helped our overall pharmacy margin to increase significantly in the quarter.

Purchasing synergies across the company from the Eckerd acquisition, as well as an improvement in shrink were also positive factors. These positive influences on our gross margin, however, were offset by the continuing mix shift toward higher pharmacy sales as a percent of total sales, and the increase in third-party pharmacy sales.

Now, let me turn to SG&A. Our total SG&A expense as a percentage of sales including depreciation and amortization increased year-over-year in the first quarter by 46 basis points to 20.5%. The major drivers were these. First, the reduced sales leverage on our occupancy costs, due to the addition of the Eckerd stores and their lower sales per retail square foot.

Second, the cost of integrating and running the Eckerd acquisition, which we begin-- we began to incur in the third quarter of last year. This will be a year-to-year pressure until we cycle them in the back half of the year. Some of these costs are nonrecurring. Others are normal business expenses, like expanded store hours and labor hours. Finally, the reduced sales leverage on our expenses due to the significant increase in generic dispensing. Offsetting these, we again saw synergies coming from Eckerd due to leveraging of CVS' corporate overhead, a more efficient field management structure, new market leverage, and supplies purchasing savings.

I also want to note that we recently settled a lawsuit related to our 2001 earnings miss. While we believe that the class action lawsuit was without merit, we reached an agreement in principle to settle the suit, in order to avoid the risk and diversion of resources associated with a trial. Our insurers largely covered the settlement. The minimal negative impact that we had was offset by favorable settlements on other litigation. These related to a manufacturer lawsuit and a credit card company lawsuit, so there was no material impact on our financial results in the first quarter or the year from these legal matters. The pluses and minuses virtually offset each other to the dollar.

After all this, then, operating margin was 5.4% in the first quarter, down 51 basis points versus last year's first quarter, but does represent an improvement over the fourth quarter of 2004, even after adjusting for the one-time impact of the change in lease accounting. Net interest expense was $28 million in the quarter, an increase of over 20 million year-over-year. Of course this was driven by the increase in debt used to fund the Eckerd acquisition in the third quarter of last year.

As expected, our tax rate was 38.6% in the quarter. Our diluted share count was 419 million shares. As I said earlier, diluted earnings per share were $0.69, an increase of 17% versus last year's first quarter.

Now let's turn to the balance sheet and cash flow. In the first quarter inventories increased by 41% versus last year, of course due to the Eckerd acquisition. Inventories grew faster than sales, primarily due to the ongoing infusion of inventory into the former Eckerd stores, as we move through the resets and fix the out of stocks. Despite this, our inventory turns increased a bit to 4.99 times, so we believe our customers are benefiting by being able to find the products they want, when they want them. We still believe that once we fully convert the former Eckerd stores into CVS pharmacies, our inventories can be normalized, but first things first.

Quarter 1 net capital expenditures were $311 million. Gross capital expenditures of 313 million were offset by only 2 million of sale leaseback activity during the quarter. We experienced an outflow of $268 million in free cash flow during the quarter. This was not unexpected and reflects the increase in inventory, primarily related to the Eckerd stores. We also saw a seasonal decrease in accrued expenses associated with 2004 bonus payments during the first quarter.

Now I want to provide some guidance for the second quarter and full year 2005. For the second quarter, we expect comp store sales growth between 4% and 6%. As in the first quarter, comp store sales will not include the former Eckerd stores while total sales will include Eckerd. Remember that April front end sales were negatively impacted by the Easter shift, which is one factor to consider as you model second quarter comps. We expect second quarter EPS to be in the range of $0.59 to $0.61per diluted share up from last year's $0.56 per share, as we continue to invest in the Eckerd acquisition.

For the full year, total sales are expected to increase by about 18 to 21%. The second quarter is the final full quarter that we'll experience much higher sales growth due to the Eckerd acquisition. There will be one month's worth of impact on third quarter sales growth, as we completed the deal at the end of last July. We expect that total comp store sales of 5 to 7% for the year. Keep in mind that the former Eckerd stores enter the comp base in August of this year. Assuming that the sales improvement trends we're seeing continue, same-store sales growth should benefit, due to the in inclusion of 1100 stores undergoing a sales revitalization.

Thanks to the greater than anticipated utilization of generic drugs that we now foresee for this year, we now expect our overall gross margin rate to improve versus last year. The expansion in pharmacy margins from the generic drugs should outweigh the continuing shift of sales to a higher mix of pharmacy versus front store sales. Keep in mind that we're still expecting to see important shrink improvements in the former Eckerd stores beginning later in 2005, and continuing into 2006 and beyond.

Within SG&A, we continue to expect to see ongoing benefits from our systems and work flow enhancements. We'll also capture meaningful synergy savings again this year. Recall that when we increased our full year earnings guidance in March, we stated we would take the opportunity to turn some of the short-term windfall from the strong flu season in the first quarter into a longer-term benefit. And we have plans in place to do just that. We're making additional investments in advertising, store hours, and payroll to further enhance our competitive position. So full-year 2005 SG&A as a percentage of sales should reflect all of this and thereby modestly increase versus last year.

Full year 2005 operating margin, therefore should improve upon 2004 operating margin, reflecting the improvement in overall gross margin. Remember, margins in the first half of the year should be down year-over-year due to Eckerd. Third quarter should be mixed. But by the fourth quarter, margins should be up, as we cycle the acquisition and integration expenses, and the former Eckerd stores begin their revitalization. Some of the analyst estimates we have seen don't adequately reflect this.

Net interest is expected to be approximately $100 million, that's higher than last year, primarily due to the addition of about $2 billion in debt to fund the Eckerd acquisition last year, which we will have for 12 months this year compared to just over five months in 2004. Our tax rate is expected to be 38.6% and our diluted share count is expected to be about 424 million shares for 2005. We still project capital expenditures, net of sale lease back transactions of close to $1 billion in 2005, and free cash flow in excess of half a billion dollars.

Now, before I provide you with our EPS guidance, let me update on the status of our adoption of FAS 123-R, which deals with expensing stock options. As you know, the SEC decided to delay mandatory adoption until fiscal years beginning after June 15, 2005. For CVS, that means adoption in 2006, so that's when we will adopt. That's a change for us, in line with the new regulations.

Now let's get back to full year earnings. We still expect 2005 earnings per share in the range of $2.66 to $2.72. As I mentioned before, we'll continue to cycle the Eckerd integration through July of this year, so the growth in EPS we expect to see will be weighted more heavily to the back half of the year.

So in summary, quarter 1 was a terrific quarter. We delivered strong sales, both front and pharmacy. Share gains in all key categories, including pharmacy. New market results above budget, significant continued progress in the Eckerd acquisition, as we move into the home stretch of this activity, and earnings at the high end of our expectations.

Thanks for your attention. We hope to see you at our meeting on June 2nd, and now I'd be happy to take your questions.

Thank you. [OPERATOR INSTRUCTIONS] And we'll pause for just a moment to give everyone an opportunity to signal. Welling go first to John Heinbockel with Goldman Sachs.

Two things, Dave. Can you give any color on Eckerd's performance accretion/dilution during the first quarter, and how you expect that to progress, and if the 15 to 20 number you guys talked about when you made the acquisition originally is still very much in your thinking? And then have I one other.

Okay. Good morning, John. Yeah, the accretion/dilution, I'm not going to break that out each quarter, but I will say that it's on track. We are clearly going achieve the $0.15 to $0.20, and with a little luck, maybe just a little bit more than that.

Okay, and then secondly, what are you seeing with sequentially with generic margins, the penetration rate and the margins you're actually getting? Is that accelerating? Is the benefit accelerating noticeably, or not accelerating, or only modestly?

Well, we're seeing greater penetration than we would have expected to. Now, bear in mind that the first quarter had two sort of artificial benefits, if you will. One was the growth in the flu business, and flu is disproportionately generic.

Secondly, the COX-2 phenomenon, which has driven many people from branded to generic products in that category. So I think the quarter 1 performance was not, sort of, on the trend of massively better performance, but it was massively better than we expected.

Okay. Just one final thing. Some people may be surprised by the second quarter guidance. I'm just curious if you can talk to how much, how much profit actually shifted from the second quarter to the first, primarily because of Easter, but maybe even a little because of the flu.

Well, I think we did have a shift into the first quarter because of Easter. We had a pop in the first quarter due to the flu, but flu is still running ahead of year ago, even through April. So I don't think it's shifting out of the second quarter in that regard. I think it's more just a matter of the pace of, or the quarterly breakdown of how we do our advertising, when we have our depreciation kicking in on new stores, and things like that, that people may or may not have estimated the way we're estimating it.

Okay. Thanks.

We'll go next to Eric Bosshard with Midwest Research.

Good morning. Can you hear me?

I can hear you, Eric.

Can you talk a little bit about sales, comp sales momentum, especially in regards to the front end, and also what you're seeing in the promotional environment at this time?

Well, in terms of momentum, I think we feel very good about it. We're a little better than 4.5, if you combine March and April, which is the best way to look at current trends, due to the Easter timing thing. And so we're feeling pretty good about that.

We're seeing good pickups in the Eckerd territory. Obviously that's one of the-- that's the place that is the front of the store that picks up the positive trends fastest, the pharmacy customers a little harder to get. So the trends are good and I think they are going to remain good.

Your second question, I'm sorry?

Second question was in regards to what you're seeing with the promotional environment, if it's comparable to what we've seen in the last six or nine months, or if it's increasing?

Yeah, I think for a lot of our geography, it's about the same as it has been. We have seen some pickup in the northeast and mid-south by one competitor especially.

Is that something that's at a concerning level? Is it rational? How do you think it plays out?

Well, any time promotional levels increase, it's of some concern. We're obviously watching it like a hawk and we will respond to it appropriately. It's not at a level that concerns us relative to our expectations to the second quarter of the year.

Thank you, Dave.

Okay.

We'll go next to Neil Currie with UBS.

Hi, just a couple of questions. One is in the last quarter you gave us a run rate for the converted Eckerd stores being 10 to 20 points better in comps than the, than they were doing before conversion. Is that run rate still applicable to the larger number of stores that you've converted to date in Florida?

Yeah, I don't actually have a quarter 1 figure for that, but as I look at these reports, week-by- week I'm seeing those kinds of numbers for Florida. It's a little early to tell on Texas yet, but I would expect it will certainly be positive in Texas and wouldn't be surprised if it were similar in magnitude. Perhaps a little bit less.

Thanks, and the second question is you rightly look to the, you know, what the-- what the acquisition really, is which is acquiring, basically opening 1100 new CVS stores in the space of a year, but effectively a market which is existing because you've gotten infrastructure, and of course you have existing files in the stores.

Could you remind us, because you often do it at the conferences for that type of store opening, where you do have a file acquisition and you're in an existing market, what the timescale is to breakeven, and then maturity?

Well, on, on new stores in existing markets, our experience has been 1.5 years to 2 years to breakeven, and in new markets, just exactly twice that, 3 to 4 years. But as you say, we had some stores in place in especially Florida, and so these are I suppose in character, somewhere between existing and new markets.

But also when you add a file to the stores -- ?

Yeah, the files obviously ramp it up much quicker, and where we've closed stores for the most part, we've taken those files and transferred them into other CVS locations.

So normally when you add a file, how-- is there any -- ?

You know, the files, the size of the files can be quite different. It's hard to generalize that, but it certainly helps.

Okay. Thanks.

Okay.

We'll go next to Meredith Adler with Lehman Brothers.

Hey. I would like to talk a little bit about the PBM and maybe you could-- there have been some announcements recently being a PDA for Universal American-- the PBM to help them do their Medicare drug benefit. You made an announcement about working with CMS. Do you believe that the acquisition of EHS is helping you with those kinds of things, or would that have happened anyway, and then I don't know if you could talk a little bit about, either how you see marketing the combined business, or what your sort of, the response you're getting from people, because you're bigger, because you're dealing with large employers?

Yeah, I think there's no question that having the EHS business now a part of PharmaCare has helped with our scale, the range of capabilities that we can bring to the party, and with our credibility. We're just a bigger player. So no doubt that was helpful in those instances. We would have done, or we would have pursued the same goals with or without EHS, but I think it is undeniable that it was easier with the EHS than without.

In terms of the marketing and things like that, what I would like to suggest is, that we look to the June conference as the time to explore that in greater depth. I think that is a good topic and we will address it.

But we're also, I should also note that we are getting more RFPs as a function of the EHS thing, and we're able to respond with a full range of capabilities to that, better than EHS could have on its own.

Good, and then I'd like to just see if you could comment at all about some of what's coming out of Washington about cuts to Medicaid. I think they are now talking about $10 billion over five years, and most of that is supposed to come from pharma, switch from the AWP to ASP. Any thoughts about how you're going to deal with that, or is that going to be real?

Well, first of all, it's not targeted at pharmacy, per se. It's more global. Secondly it's a political process and as you know, that's like making sausage, it will come out as it comes out, and what goes in is barely recognizable in the final product many times.

On the topic of switching from AWP to ASP that, clearly is an unworkable thing to do. ASP is not a good price indicator for a host of reasons, among which is, that it goes across all classes of trade, and different classes of trade have different relationships to it.

Secondly, it's at all times, a sorely outdated measure. So it's not a workable system, and in some respects, because it's not workable and it's obviously not workable, that's one thing that will get in the way of this legislation sizzling through. So in some respects, that's helpful. But who knows? I mean they may go to some kind of a modified ASP system, or modified AWP-- who knows? We're in there.

We're lobbying through our NACDS lobbyists and so forth. So we will be aware of it. We'll be on top of it. Right now it's, I think, still pretty early days for that.

Okay, and I just have one final question. You talked about investing some of the upside from the first quarter in advertising. Could you just talk a little bit about specifically what you're doing? Is this brand advertising, or something else?

It's CVS brand advertising. It's advertising our capabilities and our professional pharmacists and so forth and so on. It's incremental broadcast advertising in markets where, through the budget process we weren't able to do as much as we thought we would like to do. Now we can do it.

Got it. Thank you.

We'll go next to Steve Chick with J.P. Morgan.

Hi, thanks.

Hi, Steve.

Hey. Couple things. I can understand maybe that you don't want to speak to the accretion numbers by quarter, but can you say I guess for the first quarter, are we in positive territory or negative territory, relative to the $0.15 to $0.20 target?

We're in positive territory relative to the $0.15 to $0.20 target.

Okay. So you're still-- but that's a net target. So your synergies are already offsetting the costs you're still incurring?

Yeah.

To get Eckerd up, okay. And then second thing, you know, looking at Eckerd sales and the aggregate performance is up year-over-year, January and February had a very good flu benefit. If you extrapolate that out roughly, are you still-- is the trajectory still upward sequentially?

Yeah, I think that first of all, the flu incidence peak that we got, the spike that we got, was not so much based on southern states. It was more Northeast/Midwest, but that said, I think that the, the sales trends that we have right now in Eckerd, suggest to me that they will continue to be positive, and obviously I'm projecting them to continue increasing in their positiveness as we go through the year.

Okay. Great. That's helpful. Now I guess, do you have visibility into maybe commenting on within your comp guidance for the year, like how additive Eckerd may be?

I don't want to do that right now, Steve. There's a lot of year left, and obviously we have some assumptions around that, but that's getting into more detail than I really want to right now.

Okay, and one last thing, small question. It got asked on what the Easter benefit might have been per share for the first quarter. I didn't hear what your answer was. Can you quantify that?

I don't have a number for that. We probably could figure that out. But, you know, we've given you the comp store sales impact. I guess you could rattle that through a P&L and get pretty close.

Okay. Thanks, Dave.

Okay.

We'll go next to David Magee with SunTrust Robinson Humphrey.

Hi, good morning, guys. Good quarter.

Thank you.

Just a couple of questions. One is are you able to cull out the effect of the closed Eckerd stores, from the comp performance on the remaining stores in Florida? And if so, are you-- is it fair to say you're still satisfied with what you're seeing ex that impact?

Again, we haven't broken it out publicly and probably won't, but we do do that kind of analysis, and the answer is it is helpful, but we are on-track in Florida and Texas with where we wanted to be right now. So, yes, we're still satisfied, with or without that impact.

Okay, and then secondly, the-- you mentioned some efficiencies with regard to purchasing. I'm just curious whether you're still happy with the worldwide auction process, and is there any changes given of the combination of the two major auctions recently?

Well, you're referring to the worldwide retail exchange. We were, as you know, a founding member, and we have been an aggressive participant in the auction process there. We've gotten terrific results. I just saw a report a week or so ago on first quarter results, which were multi-million dollar savings. So yes, we're quite happy with that.

The evolution of the, of the exchange and the combination should not interfere with our ability to continue to execute that, and if anything, it should make it more stable and more-- more likely to have a very long-term future so. We're very pleased with that.

Great. Thank you.

Sure.

We'll go next to Mark Wiltamuth with Morgan Stanley.

Hi, Mark Wiltamuth from Morgan Stanley.

How are you doing?

Doing fine. Dave, I just wanted to ask you on the sales increase you're seeing in the Eckerd stores, is there any way you can attribute how much that have is to extended store hours? Maybe you had a figure for aggregate store hours at Eckerd now, versus what it was a year ago, in terms of percentage change?

Again, I don't have that number at the tip of my fingers. Obviously extending the store hours is a positive for sales, and we have extended store hours in a majority of the Eckerd locations. So it's an important piece. But, you know there, are a lot of things going on that are positive. Dropping prices on over 5,000 items in the front, the initial advertising blasts, the improved staffing, improved hours, isolating one versus another is a little difficult. What I can tell you is I'm delighted to see the turn that we've seen.

Okay, and in the comments there in the quarter, just in general on Eckerd, you are expecting a multi-year turnaround. You've got guidance out there for $0.25 to $0.30 of accretion for Eckerd in 2006. Obviously none of that includes revenue improvements, so there's, seems like there's some potential for that number to be larger, but I'm curious if you have any thoughts beyond 2006 on that accretion rising into 2007 and 2008?

Well, first of all, I think that was our total accretion estimate for 2006, including the positive benefit of sales. Now, could sales be a bit better? Sure, Could it be a little worse? I hope not.

But yes, I would expect that we would see more than that going into 2007, 2008, but just let me remind you that we normally guide for the current year only, and we gave the guidance on the acquisition of the Eckerd stores, because of the enormous amount of shareholder cash that we used. I thought we owed a more than normal comment on expectations.

But I don't want to keep going out multi-years with guidance, and especially now that we're talking about a piece of CVS as opposed to total CVS. So my expectation is we'll continue to see this thing grow. We'll continue to see great improvements in margin as well as sales, and that we'll be looking at several years of very, very satisfying returns from this.

Okay. That's fair. Thank you.

Yes.

We'll go next to John Ransom with Raymond James.

Hey, John.

Good morning. I want to talk about your PBM for a minute. What sort of-- and I realize this is not material to your overall financials, but just more directionally. What sort of growth rate in terms of lives and mail order scripts, would be kind of a reasonable expectation for that business over the next three years, in your view?

To some extent, that's the $64 question. Remember that we've changed the character of this business pretty dramatically with the acquisition of EHS. And they are now operating together on a single management system, and all that stuff, but to some extent, it remains to be seen how the growth will change.

The fact that we're getting some synergistic growth in specialty pharmacy I think is very encouraging in that regard. But I don't have a real great answer for you right at the moment. Let me see if we can get something built into the June 2nd discussion on that.

Sure. I mean do you think double-digit growth is reasonable to expect, or is it still in kind of a transition turn around mode at this point?

Certainly the mail piece of it should be solid double digits. The question is what the entire blend will be, but mail is a big portion of the total.

And secondly, as you go out and talk to new customers or potential new clients about your program, I know your friends in Chicago talk about their PBM and how they don't keep retained rebates. Is there a transparency sale-- I know you've got a nice vertically integrated package, but is there a transparency angle you can put on those, relative to some of your PBM comps out there?

Certainly we can provide transparency and we can always provide low net cost.

Okay. And just finally, on the generic drug piece, I'm sorry, let me back up. This-- more importantly, obviously GM shook everybody up with their mandatory mail. As you're one of the member of the club of the Fortune 100 or Fortune 500, what do you see out there in terms of mandatory mail programs? Is there going to be a trickle, is this going to be a landslide or do you think GM will be an outlier here?

Well, I think what is happening in the industry, or in the industry generally, is there is beginning to be a realization that mandatory mail isn't necessarily more cost effective, than 90 days at retail, and other alternatives. So it seems to me that companies like GM, who adopt mandatory mail will find that they don't get the net savings that they were expecting, and they will be somewhat disappointed by that.

In fact, I think I read that GM has publicly stated that they are having earnings problems, partly because their healthcare costs are out of control.

So it seems to me that the realization that pharmacy is a great place to save some money if you're an employer, and a great place to do business if you are an employee, is going to sink in more and so I think, yeah, we'll see less and less pressure from mandatory mail.

Okay. Thanks a lot.

Okay. We'll take one more question.

We'll take our last question from Mark Husson with HSBC.

Hey, Mark.

Good morning. I wondered if you could go through just a couple of the nuts and bolts of integrating the Eckerd acquisition, relative to what it was like doing the same thing with Revco, and then because you seem to be rather good at this, what's out there that you could have a go-at next?

Well in, terms of the integration process with the Eckerd stores in comparison with Revco, we actually organized it in very much the same way. Tom designated a single executive to have overall responsibility, and he chose a dedicated team, most of whom were full-time players, some of whom were part-time, where that was the most sensible thing to do.

We used the play book literally that we used in Revco, started with the Revco organization. It was, what needed to be done, by whom, by when, how will you know if it's done or not, red, yellow, green, realtime reporting.

So all the same basic things. We also had the benefit of having many of the same people available this time around as we had last time around. And that's an enormous benefit. People remembered what worked, what was hard, what they had to re-do. Same players with the same playbook executed with the same efficiency.

The thing that made this one so fast, and so apparently much faster than Revco, that we have improved systems in place across core CVS today at a quality level and at an efficiency level, that we simply didn't have back in 1997, so that made it quick.

This is the quickest large scale acquisition in the industry ever, and it goes to the dedication of the people who worked so very, very hard on it and the systems capability we could bring to bear.

Now you've set the system up, it's a shame not to feed something else into it, is it not?

I can only imagine what you have in mind.

I'm sure our bankers have got some ideas. Thank you.

Thanks very much. And thanks everybody for listening.

Thank you. That does conclude today's conference and you may now disconnect.