CVS Health Corp (CVS) 2006 Q3 法說會逐字稿

Good morning.

I will be your conference operator today.

At this time I would like to welcome everyone to the Caremark Rx third quarter 2006 earnings conference call.

All lines have been placed on mute to prevent any background noise. [Operator Instructions] Thank you.

I would now like the turn the conference over to Caremark's management.

You may begin your conference.

Good morning, everyone.

Welcome to Caremark's third-quarter earnings release conference call.

This is Pete Clemens, Executive Vice President and Chief Financial Officer of Caremark.

Undoubtedly you've seen our press release yesterday regarding our combination with CVS.

As Mac and Tom discussed during yesterdays conference call we are extremely excited about the opportunities that this merger will bring us.

That aside, the purpose of this call is to focus for a few minutes on Caremark's earnings for the quarter.

First let me read the forward-looking statements.

During this conference call we anticipate making projections and forward-looking statements including earnings per share projections, revenue growth forecast, performance prospects and other assumptions about our future financial performance specifically including assumptions relating to our 2006 guidance, the impact of generic launches, and Medicare Part D enrollment.

Current and 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 due to various factors.

Examples of such things include adverse developments with respect to the Company's operating plan and objectives, competitive developments, the timing and launch of new branded and generic pharmaceuticals, regulatory and legal matters, government investigations, and pricing and reimbursement as well as additional factors that could affect your business which can be found in our forms 10-K, 10-Q and other filings with the SEC.

This conference call includes certain non-GAAP financial measures.

A complete reconciliation to the most directly comparable GAAP measures can be found in the tables attached to the earnings press release dated November 1st, 2006.

You can access the press release, a live and archived version of this webcast and conference call from the investor relations section of CaremarkRx.com until November 16th.

Okay.

As you can see from the earnings press release our earnings per share for the quarter was quite strong totaling $0.67 including a gain of $0.02 per share or over $17 million pretax resulting from the recognition of the value of a treasury lot which the Company put in place back in the summer of 2005.

Given our announcement with CVS we now do not intend to issue senior notes.

As a result under Generally Accepted Accounting Principles we are taking the value of the derivative to the P&L.

As our table's highlight without the one-time gain our earnings per share were $0.65 for the third quarter, above our prior guidance of $0.62 to $0.63 per share as well as $0.02 above First Call consensus numbers.

Our net revenues for the quarter were $9.1 billion, up 13%.

Growth in revenue was driven by increases in mail and retail sales including the addition of the new Medicare Part D program this year.

Within our top line retail revenues were $6 billion, up 18% from the third quarter of last year.

Retail revenues increased significantly primarily due to new business adds in the first half of the year including the Medicare Part D program.

Retail claims declined 5% compared to the same period last year primarily due to the termination of large retail oriented contracts.

I will remind you that during October of last year our contract with Humana was terminated.

This contract was significant in terms of the number of retail claims that we processed but was not significant in terms of the net revenue or profitability.

Mail revenues for the quarter were $3.1 billion, up 6%.

Within our total mail revenues PBM grew 2% with flat mail claims, especially mail revenues increased by 16% compared to the third quarter of 2005.

During the third quarter SG&A expense increased by 15% to $136 million.

SG&A expenses included $10.3 million of FAS 123-R share-based compensation expense compared to $2.7 million recorded in the third quarter of 2005 under the previous accounting rules.

Excluding the impact of share-based compensation expense, SG&A expenses were up 9% during the third quarter of 2006.

Combined depreciation and amortization expense were down slightly as a percentage of revenue compared to the third quarter of 2005.

For the quarter net interest income increased to $6.1 million reflecting our healthy balance sheet and cash position.

Net income for the quarter was $289 million and diluted earnings per share were $0.67, up 31%.

Net income for the quarter excluding the gain was $278 million and diluted earnings per share were $0.65 on this basis, up 28% from last year.

Moving onto some of the key metrics for the quarter.

As I mentioned earlier, total revenues grew about 13% to $9.1 billion.

However, higher generic expensing rates dampened our top line growth more than in recent quarters simply due to the number of generics that came off patent in recent months.

Our overall GDR for the quarter was 56.1% compared to 52.2% in the third quarter of last year.

If generic dispensing rates were the same in both periods our top line would have grown by 19% or by an additional 6%.

The generic dispensing rate at Mayo climbed to 44.1% from 39.8% a year ago.

Our retail generic dispensing rate was 57.6% compared to 53.7% in the third quarter of 2005.

Our overall mail penetration rate for the third quarter was 28.1%, up from 27.1% in the same period last year.

As we have mentioned on prior calls, mail penetration rate grew despite the fact that Silver Script, our Medicare PDP, has a relatively low mail penetration rate compared to the rest of the book of our business.

EBITDA grew 17% to $490 million.

EBITDA per adjusted claim on this basis was $3.19 in the third quarter.

This compares to $2.64 a year ago, a 21% increase.

Turning now to cash flow, the business continues to generate healthy cash flow from operations.

Cash flow from operations during the third quarter was $232 million and $855 million on a year-to-date basis.

During the third quarter capital expenditures were $28 million, and $79 million year-to-date.

During the third quarter we bought 1.8 million shares of our common stock for a total cost of $102 million leaving approximately $571 million available on a $3 billion authorization.

No shares have been repurchased since September 30th.

On a year-to-date basis Caremark has bought back more than $1.4 billion of our common stock.

In addition, Caremark paid its first quarterly dividend of $0.10 per share in July totaling $42 million.

We also paid a dividend of $0.10 per share during October.

Despite the significant investments in our common stock during the first half of the year, our cash and short-term investments as of September 30th totaled more than $1.3 billion.

Total debt outstanding at September 30th was $450 million of senior notes that actually matured on October 2nd.

We paid these notes off with cash and currently have no debt on our balance sheet.

Moving on to our guidance for the year, for the fourth quarter we believe EPS will be in the range of 68 to $0.69 per share.

As a result, our full-year 2006 guidance range is higher at $2.40 to $2.41, excluding the $0.01 gain from the settlement with a former client that we took in the second quarter and also excluding the $0.02 gain on the treasury lot during the third quarter.

Our prior guidance range for the year on this basis was $2.37 to $2.39.

Including the gain from the settlement with the former client and the gain on the treasury lot, our guidance for the year is $2.43 to $2.44.

As usual, this guidance assumes no further share repurchases for the remainder of the year.

As the press release indicates, there are several key assumptions underlying our full-year guidance.

We project 2006 revenue to grow in the range of 11 to 12%.

Stock option expense under FAS 123-R is expected to be approximately $41 million before taxes.

Depreciation expense is expected to be approximately $103 million.

Amortization expense is estimated to be $44 million.

We now estimate net interest income to be approximately $35 million.

The effective tax rate is expected to remain 39.5% and weighted average shares outstanding for 2006 should be in the range of 436 to 437 million on a diluted basis.

We expect capital expenditures to be about $150 million but could be higher or lower depending on the time and the certain projects.

As I have mentioned cash flow from operations for the year will be very strong.

We continue to expect the cash flow from operations will exceed $1 billion again this year.

As it relates to 2007 we are not providing guidance today as Mac indicated we will plan to give guidance on our fourth-quarter earnings call which is all the time that CVS provides its annual guidance.

With that in mind, I will give you an update on the first database situation.

As you know First Data Bank announced a proposed settlement in early October.

The proposed settlement relates to allegations that in late 2001 and 2002 First Data Bank and a large pharmaceutical wholesaler wrongfully inflated the markup factor used to determine AWP.

If the settlement is approved, first data bank estimates any changes to their reporting of AWP pricing will become effective in the second or third quarter of 2007.

If the settlement is proved, any changes will affect the baseline price, otherwise known as AWP, which is the basis for establishing discounts for many of the pharmaceutical products purchased by our clients.

It is important to remember that at this point the proposed settlement agreement is not approved.

The core could approve the settlement agreement in part or in its entirety or not at all.

We believe that Caremark has put forth significant efforts in managing our clients drug trend and offering other services aimed at lowering healthcare costs for people that we serve while continuing to deliver shareholder value.

This [inaudible] works as our incentives are aligned with that for our customers.

Our track record speaks for itself in this regard, and we intend to continue our efforts in the future.

Our contracts are put in place with this in mind and have potential change in one of the benchmark prices does not change our mission.

Following are some facts regarding our book of business.

As Mac indicated yesterday, of Caremark's total contracts roughly 90% of our contracts either give us the ability to use a data source other than First Data Bank or carry a reservation of [inaudible] language clause that would allow to us modify or preserve pricing terms if there is a change in the methodology in calculating the AWP or both.

In other words, they have one of these provisions or both of these provisions.

However, please understand that in some cases a negotiation will be required with a customer so the ultimate outcome cannot be predicted with accuracy.

The bottom line is the vast majority of our contracts give us the ability to address this issue and any potential change in one of the benchmark prices for our industry does not alter our long-term goals or our effectiveness in determination to continue serving our clients like we have in the past.

In summary, I know you will agree that Caremark's third quarter was very strong as is our outlook for the future.

If you have questions on numbers for the quarter, please give us a call in Nashville and we will get back to you as soon as we can.

Thanks for dialing in.

Operator, that concludes our call for today.

Thank you.

Thank you with that we will conclude today's conference.

And you may now disconnect.