CVS Health Corp (CVS) 2007 Q2 法說會逐字稿

Good morning.

My name is Lori, and I will be your conference operator.

At this time I would like to welcome everyone to the CVS Caremark Corporation second quarter 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 session.

(OPERATOR INSTRUCTIONS) Thank you.

I will now turn the call over to Nancy Christal, Vice President of Investor Relations.

Please go ahead.

Thank you.

Good morning, everyone, and thanks for joining us today for our second quarter earnings call.

I'm here with Tom Ryan, President and CEO of CVS Caremark, and Dave Rickard, our Executive Vice President and CFO.

Tom has joined us again this quarter so he can provide a business update and bring you up to date on our progress.

As you know the merger closed on March 22nd, so this is the first full quarter of results for CVS Caremark.

Our 10Q which will be filed on Wednesday will provide full MD&As for each of our segments, the retail segment and the pharmacy and services or PBM segment, which of course is now comprised of Caremark and PharmaCare.

In the meantime to help you understand the underlying performance of our retail and PBM segments on a comparable basis we've included three supplemental tables in today's earnings press release.

During this call we'll discuss some nonGAAP financial measures in talking about our company's performance, namely free cash flow, EBITDA, and cash EPS.

Free cash flow is defined as earnings after taxes plus noncash charges plus changes in working capital less net capital expenditures, so free cash flow excludes acquisitions and dividends.

EBITDA is defined as operating profit plus depreciation plus amortization.

And cash EPS is defined as EPS eliminating the effect of depreciation and amortization.

In accordance with SEC regulations, you can find the reconciliation of these items to comparable GAAP measures on the Investor Relations portion of our website at investor.cvs.com.

As always today's call is being simulcast on our IR website.

It will also be archived there for a one-month period following the call to make it easy for all investors to access the call.

Following our remarks we'll all be happy to take your questions.

During the Q&A session we ask that you limit yourself to one to two questions, including followups, as we have a large constituency of healthcare and retail analysts and investors to accommodate.

Now before we continue, our attorneys have asked me to read the Safe Harbor statement.

During this presentation we'll make certain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially.

These risks and uncertainties relate to among other things general industry conditions such as: competitive environment for retail pharmacy and pharmacy benefit management companies, regulatory and litigation matters, legislative developments, changes in tax laws and the effect of changes in general economic conditions.

Accordingly, for these forward-looking 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 risk factors and cautionary statement concerning forward-looking statements in our annual report on Form 10K for the 2006 fiscal year ending December 30, 2006, and under the caption cautionary statement concerning forward-looking statements in our quarterly report on Form 10Q for the quarter ended March 31, 2007.

Now let me review July same-store sales for CVS/pharmacy.

They were also released this morning.

Total comps are up 5.2% with pharmacy comps up 4.8%, despite being negatively impact by 720 basis points due to recent generic introductions.

Front store comps were up 6%.

On a two-year [GAAP] basis total comps were 14.7%, with pharmacy comps 15.4% and flex store comps up 13%.

Keep in mind that the impact of new generics on pharmacy same-store sales has grown significantly at 720 basis points this July, versus only 240 basis points in July '06.

We're also comparing against last year's ramp-up of the Medicare Part D business so we're pleased with these results.

On the front store side we experienced solid growth across our core categories in July.

This is also the first month that the save on and Osco stores we acquired from Albertson's last year are included in our comp.

And Tom will specifically address our progress on sales and more importantly margin shortly.

Despite the positive trends we're seeing in these stores, we estimate the inclusion of the 2006 acquired stores had a 25-basis-point negative impact on our overall front store comp, 100 basis point negative on our overall pharmacy comp, and 75 basis point negative on total comp.

The real win in these acquired stores is the improvement in margin that we're already experiencing and will continue to experience which Tom will discuss.

And now I will turn this over to our President and CEO, Tom Ryan.

That thanks, Nancy, and good morning, everyone.

Our second quarter performance once again demonstrates that we've certainly kept our eye on the ball and better yet we kept our eye on our customers.

Our results are very healthy both in our retail and our PBM business units.

At the same time, we've completed all near-term aspects of the merger integration.

We've made significant progress on our cost synergy opportunity, and we've made important progress on our go to market strategies.

In the second quarter, sales and gross margins were strong across the board in retail and healthcare services.

Operating margins improved by 70 basis points.

Diluted EPS for the combined company increased 18.3%, even with merger-related expenses and higher than expected amortization expense, which Dave will go into in detail later on.

Adjusting the quarter for the increased amortization assumption, we would have exceeded the high end of our guidance range by $0.02 a share.

On a cash EPS basis we earned $0.59 per diluted share, $0.02 above the high end our guidance.

And we generated $270 million in free cash flow in the quarter.

So the underlying performance of our enterprise is extremely strong, and I couldn't be happier with our continued focus on execution and customer service.

Dave will give us more financial details, but let me just briefly give you the highlights of the strength of our performance this quarter by business segment.

In our PBM business, if you assume Caremark and PharmaCare were combined in both years net revenues were up 2.3% to almost $10.6 billion.

Adjusting that for the impact of the generic dispensing rate, net revenues would have grown 9%.

Our PBM's overall generic dispensing rate rose to 59.6% on a comparable basis, an increase of 540 basis points over last year's second quarter which obviously helped our margins.

In fact, on a comparable basis gross margins for the PBM segment were up 150 basis points.

Growth of our PBM revenues on a comparable basis was driven by an increase in mail sales especially within our specialty business.

Our overall mail penetration increased 40 basis points over last year's second quarter to 28.2%.

Total mail revenues were $4.2 billion, up 8%.

PBM mail revenues grew 2% with mail claims growth of 1%.

The mail generic dispensing rate rose to 47.6% from 41.6% a year ago.

And again, our specialty pharmacy revenues increased a healthy 21% compared to the second quarter of '06.

PBM retail revenues were $6.3 billion, which is down 1.1% from the second quarter.

The generic dispensing rate increased to 61 -- to 61.2% compared to 55.8% last year.

Retail claims decreased 1.3% compared to the same period last year.

And this is primarily due it to the roll-off of contracts in the second half of '06 prior to the merger.

Then I believe most of you know who they were.

It was Cowper's, Wellmark and IBC.

Our EBITDA per adjusted claim which continues to lead the industry increased to $3.83, excluding merger costs in the second quarter, again this subpoena 34% over LY.

As far as Medicare Part D, today we serve 860,000 enrollees in 28 regions through Silver Script as well as our joint venture with universal American.

We provide PBM service to 35 health plans for Medicare participants which is close to another million lives.

Now let me talk about the retail end of our business.

In the retail side revenues grew 15.5%.

Gross margins improved 170 basis points, and operating margins improved 110 basis points.

So once again, all in all, a great quarter.

Our front-end business is strong across the company, both from a sales and a profitability perspective.

Front store comps rose a solid 5.9% in the second quarter and keep in mind that's a comping against 8.1% that we achieved in the second quarter of '06.

And I fully expect strong front store comps for the remainder of the year.

Pharmacy comps for the second quarter were 5.7%.

And while our pharmacy business is seeing growing pressure on the revenue line, obviously from the increase in generic scripts, our profitability per script is healthier than ever before.

Generics impacted pharmacy same-store sales by about 100 -- 610 basis points in the quarter.

This subpoena from 410 in the first quarter of last year, first quarter of this year, and 210 basis points in the second quarter of last year.

Let me give you a little update on where we are with the Osco Sav-On stores that we acquired last year.

You heard Nancy say that the stores had a slightly dilutive impact on overall comps in July, as we anniversaried the acquisition.

So while these stores didn't after a positive impact on our comps, I want to point out that these stores are ahead of plan on both margins and cash flow.

Now, let me give you some color.

As you know, we converted the stores, and when we convert stores we do a complete conversion.

It's not paint and paper.

We change the CVS systems, we change the lay-out, we change the promotional strategy, we change the staffing, we improve the product mix to focus more on higher margin health, beauty and private label production.

We've also eliminated some food items and other lower margin categories that you heard me say before were just hollow sales.

They were low-margin items, they were traffic builders, but they didn't build up any profitability for the stores.

In addition to that we reduced some promotional activity.

As you know, there's always some disruption during the remodeling process, and we experienced it with others in other acquisitions.

The front store tends to rebound more quickly than the pharmacy business.

So the reduction in front end sales was planned as we eliminated the low-margin low-return SKUs and categories I mentioned.

As a result, front-store margins are improving significantly in these stores and are near core CVS levels due to our improved promotional mix.

On the pharmacy side, remember this wasn't a turnaround situation, like some other acquisitions.

We experienced some of the expected customer disruption during the pharmacy store conversions.

Some of our customers actually transferred to core CVS stores in the marketplace during the remodeling, and, in fact, stayed there because they may have been closer to their home.

If we took into consideration business moving from the acquired stores to our core CVS stores within these markets, especially in the midwest where we have a fair amount of core stores, the negative impact on our overall comps would have been minimal.

Pharmacy margins are also improving significantly and are approaching core CVS levels resulting from improved execution around generic dispensing.

Our recent pharmacy marketing activity is producing results as these stores continue to deliver Rx volumes above core CVS.

All trends have been moving in the right direction each month throughout '07, so I'm confident that the former Sav-On Osco stores will both be a sales and and margin driver in the second half of '07 and beyond.

MinuteClinic as you know is another fast growing piece of our business.

In fact our clinic count increased 10% on July 4th alone.

Think about that.

We had a 10% unit growth in one day.

We currently have 230 clinics in 20 states.

About 210 of them are located within our stores.

We provide convenient quick cost-effective healthcare.

To put this in perspective, our clinics -- we have more than four times the number of clinics than our next largest competitor.

Clearly MinuteClinic will be part of our strategies as we expand our offering on the PBM side.

We remain on track to close -- to add close to 300 clinics and will end with about 450 or so clinics across 25 states.

And the real estate side of our business in the second quarter, we opened up 65 stores including 36 new and 20 relos.

We closed 15, so we basically added 21 net new stores for the quarter.

We're on plan to open up 275 stores for the year, 140 of which will be new and 135 will be relocations, so we'll end up with about 100 stores -- net new stores for the year, 3% square footage growth.

Okay, now let me turn to the merger integration that I obviously know you're all interested in.

As you know, our initial focus was on three areas.

The integration of PharmaCare into Caremark, the integration of Caremark and CVS at the corporate level, and the development of our new go to market strategy with new products and services.

I am very pleased to say that the integration is virtually completed with respect to the immediate changes required.

The PBM and corporate organizations are restructured and aligned.

We are mindful of the need to maintain high levels of service that Caremark clients have come to expect.

Nothing will distract us from client service.

We do have excess capacity from our facilities that we need to rationalize.

However -- that we need to rationalize, and we have constructed a preliminary plan to do so.

In addition, as you've heard me talk about we have a top-notch cross functional development team in place to develop our go-to-market strategy.

So by and large we are operating as one company today.

We have held three client focused meetings since the merger, and I can tell you we've received very positive feedback from our customers around overall account and client service.

We have seen enthusiasm from our clients with respect to the prospects created by the merger.

And contrary to some competitor rumors in the marketplace, existing and prospective clients do not see a channel conflict with our model at all.

In fact, quite the opposite.

They like the idea of flexible fulfillment at the same low cost.

It's all about low net cost and service.

And our track record on trend management speaks for itself.

Our new model will enable us to lower cost per payers while improving access and healthcare for consumers.

As the longer term aspects of our integration merged business, the necessary systems and process improvements will occur over the next several years as we roll out new products and services.

We will be optimizing our joint systems for years and making ongoing technology investments as we've done in the past.

Our go-to-market team has confirmed a large number of potential new revenue opportunities.

We formalized the baseline economics of these products.

We figured out how to leverage our cost advantages.

We've listened closely to clients to ensure that the products we are delivering are the ones that they want.

So we've narrowed the list of short-term opportunities, ones we can commit to contractually and put service metrics around.

We are currently in the process of rolling these products out in 2008.

Remember that most of our contracts are three-year contracts, so product offerings will evolve during the contract period.

Our clients clearly understand the reality of the evolution of this model and understand that it will take place over the next few years.

While, I'll give you some sense of our initiatives, there are some competitive sensitivities that I don't want to disclose around our specific plans.

Certainly not in our interest nor our shareholders' interest to give away the play book.

But let me give you some examples of near-term initiatives that will be developed for our clients.

In the near-term we'll have flexible fulfillment which is easy for the customer which is low cost for the payers, which is not a channel conflict.

We'll have improved generic and formulary compliance both at mail and retail.

We'll have enhanced persistency and adherence programs.

We'll have in-store pickup of mail order pharmacy, and we'll have unique OTC opportunities and offers.

In the medium to longer term, we will begin to create a single view of the patient from a broad-based health management program perspective.

These programs will result in the highest quality health and pharmacy services that will continue to lower the payer's overall healthcare cost.

These are breakthrough programs, industry changing programs that will occur late in '08 and beyond.

Some examples include unique disease management programs utilizing Caremark products and call centers along with CVS pharmacists and MinuteClinic nurse practitioners, enhanced specialty pharmacy pull-through enabled by our full view of the patient using Caremark's Accordant disease management products.

I should point out that our Accordant disease management program includes the chronic diseases like asthma, diabetes and cardio-pulmonary disorders, while Accordant rare product addresses conditions such as hemophilia, multiple sclerosis and sickle cell anemia.

These are fairly unique obviously and highly regarded programs in disease management.

We're the only the PBM to own these products which we believe puts us in position to add value without a channel conflict.

Now let me talk a little bit about recent headlines on the news of some lost government contracts, including the mail portion of FEP and the state of New York.

As a reminder, we did retain the retail portion of the FEP contract, representing about $4 billion of the $6 billion annual revenues.

And under our contract we will continue to provide retail PBM services, including network contracting and management of a comprehensive suite of highly customized clinical programs.

Let me be clear about this.

These contracts were not a service issue.

We did not lose these contracts because of service.

In fact, both clients gave us A-grades for service.

We were told by these clients that their decisions were driven by price, which is not unusual in this government world.

Keep in mind that the case in the state of New York, price was looked at as a package by both the insurer and the PBM.

This was not a PBM price issue alone.

Remember, both of these contracts have changed hands multiple times over the past years.

FEP was historically split between retail and mail.

And lastly, these decisions were in no way a reflection of our new business model.

The final bids for both of these contracts were submitted early in February, well before the merger even closed.

In fact, both of these clients told us that they saw the future value of the model, but with the scoring weighted as it were they couldn't take it into account.

One even said if it was a private company we might be able to look at the value proposition differently.

Now typically, as you know, Caremark has not talked about the current selling season until the third quarter.

But given the recent headlines, as I mentioned earlier, and some of the off-line comments by some competitors, I want to give you some color on the season.

Aside from government -- these government contracts, we are very pleased with the progress we've made.

We have close to 100% retention in the national employer accounts and health plans.

While we still have a number of renewals left in an employer space, we are pleased with what has happened so far.

In our large accounts we have retained all of those whose decisions have been made.

In the health plan book of business, besides the loss of two very small accounts, we have successfully completed all major renewals for '08, virtually without exception.

In terms of remaining renewals, we feel confident that our pricing is competitive, and more importantly, that employers understand the value they see in the future new offering and capabilities.

So given the loss of the government contracts that I mentioned earlier, and based on what we know today, we expect a retention rate of about 90% for 2008.

With respect to new business we've won over $1 billion of new business for 2008 since the merger.

And there's an additional $3.5 billion to $4 billion remaining in the 2008 pipeline in the employer and health plan segments.

We believe we could be one or two of the finalists for approximately $1 billion worth of this remaining pipeline.

Now, while we obviously can't predict the final outcomes we feel we are well positioned in some of these contracts that I mentioned.

So while we're never happy to lose a contract, overall this will be a very successful selling season for our Caremark business group.

In summary we had had a very solid quarter.

We are making steady and significant progress on combining both organizations while we stay focused on execution and customer service.

We achieved high quality results with terrific growth across our retail and healthcare business units.

Now I'd like to turn it it over to Dave for a more detailed financial review, and then we'll be back for question and answers.

Thanks, Tom.

Good morning, everyone.

I'll get right to the P&L.

In the second quarter total revenues increased 96% to $20.7 billion, just above the top end of our guidance range.

This includes $1.1 billion of inner segment eliminations produced as a result of Caremark clients filling their prescriptions at CVS/pharmacy stores.

The retail pharmacy segment which includes CVS/pharmacy, MinuteClinic and CVS.com grew over 15% to $11.2 billion.

The pharmacy services segment, which includes both Caremark and PharmaCare, grew by well over 1,100%, to $10.6 billion.

Of course, this growth is measured against PharmaCare sales alone during last year's second quarter.

The comparable PBM business grew by 2.3% as Tom said.

However, as in the past, higher generic dispensing rates dampened this top-line growth.

Overall GDR for the quarter was 59.6% compared to 54.2% in the second quarter of last year.

If generic dispensing rates were the same in both periods the PBM's top line would have grown by about 9%.

Let me mention here while we're speaking of the combined PBMs that in the third quarter we will be changing from the net method we have been using to recognize service revenue at PharmaCare.

By September of this year, the majority of PharmaCare's contracts will being changed so that they should be recognized on a service revenue basis on a gross method as Caremark currently does.

The impact from this will be the addition of approximately $190 million in reported third quarter revenues.

The addition of $770 million in reported 2007 revenues and about $2.3 billion in reported revenues annually.

However, given a parallel increase in annual cost of goods sold during each period there will be no impact on operating profit.

No contracts were modified during the first two quarters of the year so this impact on our statements will begin in the third quarter.

Please keep this in mind when you're modeling our growth.

I do think will you find it easier to track our performance once we have conformed our contracting approach and therefore our accounting for revenues.

Back to the second quarter.

Same-store sales at CVS/pharmacy rose 5.7% at about the midpoint of our expectations.

Front store comps were up 5.9%, while pharmacy comps up 5.7%.

Pharmacy same-store sales continued to feel the impact of the introduction of higher margin generic drugs.

New generic drug introductions dampened pharmacy comps by 610 basis points in the second quarter, an acceleration of four percentage points over last year's second quarter and two percentage points over the first quarter of this year.

When adjusted to account for this impact this quarter's pharmacy same-store sales remained on par with those of the first quarter.

That's despite the tougher comparisons due to last year's Medicare ramp-up that we started to see in May and June.

So we're very pleased with the CVS/pharmacy results throughout the store.

Tom provided the details of our PBM revenues which are also available in the supplemental tables of our earnings release so I won't repeat that here.

Our overall gross profit margin decreased by approximately 640 basis points in the quarter to 20.1%.

That, of course, mainly reflects the combination of the higher gross profit margin CVS/pharmacy business with the lower gross profit margin Caremark business.

Within the retail pharmacy segment, though, gross profit margin improved by 170 basis points.

Margins at CVS/pharmacy benefited mainly from four factors.

First, the amount of generic drugs dispensed increased with 62% of scripts dispensed as generics.

That's up almost 450 basis points from the second quarter of 2006.

Second, we are reaping larger portion of the purchasing synergies that made up the majority of the $500 million we projected for full year 2008.

These have come faster and more completely than we had planned on this year.

Third, front store margins are up, largely due to reduced markdowns.

This reflects the continued benefits of the ExtraCare card.

And fourth, the higher margin front store sales as a percentage of total sales have increased by 90 basis points to 32.4% of our total retail sales.

These were offset somewhat by continued pressure on generic reimbursement rates in light of the significantly increased utilization of generic drugs and an increase in percentage of pharmacy sales handled by third-party insurance.

Gross profit margin in the PBM segment declined by 440 basis points to 8.2% from last year's second quarter.

This not only reflects the difference in revenue recognition, but it also reflects differences in the mix of business at PharmaCare and Caremark.

PharmaCare is smaller and has a larger percentage of clients with higher margin plans.

If we include Caremark's results from last year on a combined basis we get an apples to apples comparison.

That shows the PBM segment with a healthy increase from last year of approximately 150 basis points.

As with the retail segment, the increase in the amount of generic drugs dispensed, as well as the progress we've made on purchasing synergies helped fuel this growth.

The mix shift to a higher percentage of mail class was also a positive factor.

So both divisions had solid improvement in pharmacy and front store margins on a comparable basis.

And it's coming from several contributing factors.

So it's broad based improvement.

So how did we do on expenses?

Well, as a percentage of revenues our total operating expenses, which include depreciation and amortization, decreased by about 700 basis points in the quarter compared to the second quarter of last year to 13.8%.

This decrease, of course, was driven almost entirely by the inclusion of Caremark.

Operating expenses included approximately $22 million worth of merger and integration costs as well as $288 million worth of depreciation and amortization higher than originally anticipated.

During the course of the quarter we were able to further assess the value of the fixed and intangible assets acquired in the merger and determined that these assets should be valued higher than previously estimated.

As a result, the depreciation and amortization related to these assets is also larger.

Amortization in the second quarter was approximately $45 million higher than we had originally estimated.

Within the retail pharmacy segment operating expense as a percentage of sales increased by approximately 60 basis points to 22.8%.

Included within this is approximately $6 million worth of merger and integration expense.

The remaining increase primarily is due to the addition of the Sav-On stores last year.

Due to their location in southern California and their larger format these stores operate at higher SG&A costs than the average CVS/pharmacy store.

Recall that we completed that acquisition in June of last year so we had only one month's worth of these higher costs in last year's second quarter.

Within the pharmacy services segment operating expense as a percentage of sales decreased by 140 basis points to 2.7%.

The expenses include approximately $16 million of merger related costs as well as an incremental $45 million of depreciation and amortization related to fixed and intangible assets.

If you include Caremark's results from the second quarter of 2006 on a combined basis, operating expense as a percent of sales decreased by approximately 10 basis points.

The key driver of this decrease was higher revenue.

So the PBM segment actually saw an improvement in leverage year-over-year excluding merger impacts.

As a result, total operating profit margin improved by 70 basis points to 6.3% of revenues in the second quarter.

The retail segment's margin improved by 110 basis points to 6.5% while the PBM segment's margin declined by 300 basis points to 5.5%, and the PBM segment's margin improved by 150 basis points over last year's comparable results.

So we continued to make excellent underlying progress on operating margins across the board.

Net interest expense was $106 million in the quarter, an increase over last year's second quarter expense of $38 million.

This was driven by the increase in debt issued in May to repay the bridged credit facility in commercial paper borrowings used to fund the Caremark special cash dividend, the tender offer, as well as a portion of the share repurchase program.

In addition, during the third quarter 2006 we issued debt to finance the Sav-On Osco acquisition.

Our tax rate was 39.9% in the quarter.

Weighted average diluted share count was 150 -- sorry, 1.54 billion shares.

This includes the initial impact of the $5 billion share repurchase program announced in May.

That program is currently being executed in the market and we expect to have it complete or nearly complete by year end.

So, GAAP diluted earnings per share were $0.47 at the top end of our guidance for the quarter as Tom said.

That was an increase of 18.3% over last year's second quarter.

The dilution in the quarter related to the additional amortization I mentioned earlier was $0.02 per share.

So the strength of the business was enough to fully cover the additional amortization and still bring us in at the top of our guidance range.

Said another way, had had it not been for the increased intangibles amortization our results would have been $0.02 above our range of expectation.

We introduced cash EPS last quarter as way of providing investors with a measure of operating performance on a basis more comparable to our healthcare peers who may be non acquisitive and noncapital intensive.

It was $0.59 in the second quarter, $0.02 above the top of our guidance.

This performance was driven by healthy sales growth in the stores, continued margin strength across the board and the benefit of not being whip-sawed by changes in valuation levels.

Now let's touch on our second quarter balance sheet.

Work on the valuation of the Caremark assets continued throughout the quarter and updates were made as needed.

The largest change was the increase in intangible assets I previously mentioned.

This change also caused the deferred tax liability to increase, but on the flip side goodwill decreased.

Let me stress that these values and estimated lives within the intangibles are still preliminary and are subject to change based on the final valuation.

So will you likely see tweaks in this in the future.

Outside of the changes to the value of the Caremark assets we continued to make good progress within the retail division on day sales outstanding and inventory turns.

Net capital expenditures amounted to $452 million in the second quarter.

Gross capital expenditures of $466 million were offset by approximately $14 million in proceeds from sale/lease-back activity during the quarter.

The PBM segment spent $29 million of capital.

Given all this we generated $267 million in free cash flow for the second quarter, in line with expectations, and $94 million above last year.

Year to date, we are $612 million ahead of the year-ago figure.

I should also note in that May we issued several tranches of long-term notes totaling $5.5 billion of principal.

The combination of three, 10, and 20-year notes, plus the hybrid security, compliments our schedule of debt and provides us with a great deal of balance sheet flexibility.

So, where are we going to come out this year?

Let's dig into the guidance.

As you've heard, both segments of the company are producing strong results.

And the positive trends influencing our business recently should largely continue.

For the full year total revenues are expected to increase by about 70% to 75% over CVS's 2006 results.

Within the retail pharmacy segment we anticipate between 12% and 15% growth over last year's sales of $40.3 billion.

Included in this guidance is the expectation of sustained strength in the sales turnaround at the former Eckerd stores, as well as benefit from sales growth at the former Sav-On and Osco stores.

At the same time we expect new generic drugs to continue to reduce top line growth, albeit with it higher margins.

Given all this we expect total comp store sales of 6% to 8%.

The remaining top-line growth comes from the PBM segment less intercompany eliminations.

As I said on the last call we are not including any of the merger related revenue synergies in our 2007 revenue growth projections as we do not expect to see much of those benefits until 2008.

Revenues are expected to increase between 2% and 4% over last year's combined revenues, driven by inflation, a small increase in volumes, as well as the PharmaCare contracting change I've already mentioned.

As with the retail segment, however, generics will play a role in dampening top-line growth.

Our consolidated gross profit margin rate is, of course, heavily impacted by the mix effect of combining the retail and PBM businesses.

On a combined basis we expect to see a decline in gross margin rate of approximately 600 to 650 basis points from 2006 CVS stand-alone levels.

Within this, we expect continued benefits from generic conversions across the retail and PBM businesses and improved fronts -- front-end mix, use of our ExtraCare card to improve promotional margins, and continued improvement in shrink.

We'll also continue to reap the benefits of the purchasing synergies from the merger.

And previously, we had also expected gross margins to be negatively impacted by anticipated reductions in Medicaid reimbursement rates beginning on July 1st.

Since our last conference call, CMS has announced that these reductions will not go into effect until late January of 2008.

Therefore, our guidance today reflects the absence of this negative impact in 2007 gross profit.

As for operating expenses as a percentage of sales, we anticipate an improvement of approximately six to seven percentage points over 2006 levels due to the mixe effect of combining the PBM and retail businesses and underlying improvement in trends.

These improved trends include the absence of Osco Sav-On integration expenses, improving efficiencies also at Osco and Sav-On, and increased sales leverage reflecting organic and acquisition-based sales growth.

Partly offsetting these SG&A positives, we'll have integration and other one-time CVS Caremark merger related expenses.

These are still expected to total about $150 million over this year and the next two years.

Approximately 80% of this will occur in 2007, while the rest will happen thereafter due to the timing of the retention program for Caremark management.

Year to date we have already seen approximately $33 million of merger and integration costs flow through the income statement.

As I noted before, the DNA expense related to intangible assets acquired in the merger has increased.

It is now estimated to total approximately $323 million this year, and $381 million on an annualized basis.

That's $123 million higher than we originally thought for the year and about $160 million higher annualized.

As a result, we continue to expect full year 2007 operating margin to show solid improvement from the 2006 operating margin level at CVS.

Net interest expense is expected to be approximately $400 million to $430 million.

This reflect the full-year impact of the debt issued as part of our Sav-On Osco acquisition, the additional debt we took on related to our merger, and the timing of our share repurchase program.

Our effective tax rate is still expected to approach 40%.

Capital expenditures net of sale/lease-back transactions are projected to be approximately $1.3 billion in 2007.

Free cash flow in 2007 is still expected to be in the neighborhood of $2 billion.

This reflects strong performance from both divisions of the combined company.

So all things considered, we continue to expect 2007 GAAP diluted earnings per share in the range of $1.86 to $1.91, in line with the guidance we provided during our last call.

However this now reflect the negative impact from the increase in amortization, offset by the positive impacts of the timing of the Medicaid cuts, the outperformance of the second quarter, higher synergy savings, and our expectation of continued strong performance in core businesses.

Cash EPS is now expected to be in the range of $2.34 to $2.39.

That's an increase of $0.05 on the top and the bottom of the guidance range.

In the third quarter of 2007, we expect total revenue growth to be in the range of 80% to 85%, and third quarter same-store sales growth to be in the range of 5% to 7%.

We expect third quarter GAAP EPS to be in the range of $0.42 to $0.44 per diluted share, up from last year's $0.33 per share.

Cash EPS is expected to be between $0.53 and $0.55 per diluted share, up from last year's $0.47 per share.

Although it it's still too early to provide full-year guidance for 2008 and 2009, I'm reiterating the accretion guidance we confirmed on the last call for the merger of CVS and Caremark.

We continue to expect accretion to diluted EPS in 2008 of $0.08 to $0.10, and of $0.14 to $0.18 in 2009 on a GAAP basis.

This does not include any impact from the incremental revenue synergies in 2008 of $800 million to $1 billion.

Of course, it does it include our previous projection of at least $500 million of net cost synergies in 2008.

The $500 million we projected is now locked in.

No further progress is needed to deliver it.

In fact, it is now clear that we will handsomely exceed the $500 million, enough to more than cover the additional intangibles amortization we have now identified and to further contribute to offsetting the profitability impact of the government contract losses Tom discussed.

So the accounting accretion remains intact, and accretion on a cash basis is markedly improved.

This is now reflected in our guidance.

So in summary, the second quarter was a very good quarter.

It delivered solid growth across the board.

Sales almost doubled to $20.7 billion.

Underneath that, pro forma sales are up 15% in our retail segment and 9% in our PBM segment adjusted for the higher GDR rates.

Operating margins expanded 70 basis points year to year.

EPS was at the top of our range of expectations at $0.47.

Cash EPS was $0.02 above our guidance.

Free cash flow was at a healthy $267 million.

And we're off to a terrific start to the CVS Caremark merger.

With that I will now turn it it back over to Tom.

Okay, thanks, Dave.

Obviously, it was a great quarter, and you can see we have a healthy outlook for the rest of '07 and beyond.

I'm certainly more optimistic than ever before about our short-term goals, as well as our long-term goals.

I would ask that investors remember that although it may feel longer, it's only been 120 days, approximately, since this merger was put together.

And our expectations have always been that we'd be building on our retail PBM foundation each quarter, each year, adding layers and new capabilities.

So if you're hearing from consultants that they need to see more or hear more that makes perfect sense.

We are right where we should be in the process and where we reasonably expected to be.

So at the end of the day we remain intently focused on giving clients and consumers what they want, that's better healthcare at lower costs.

So with that, I will open up the floor for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of John Heinbockel of Goldman Sachs.

Hi, Tom.

Two things.

You touched on the selling season a bit, but what about pulling contracts forward as some of your competitors have done?

Has there been a lot of work on pulling maybe '09 contracts forward, renewing those?

And how would you characterize the pricing environment outside of the government contracts?

Is it rational, or has it changed a bit?

The second part, John, pricing, there's nothing dramatic in pricing in the marketplace.

It's obviously, price has always been an issue.

You always have to be competitive.

I think there's been some early pricing from some competitors maybe around -- because nervous about a model or another competitor, but we look at it each year.

We have -- we do have conversations with people, and our clients in late '08 or '09 contracts, so it's on a contract-by-contract basis.

But I don't think it's, from a pricing perspective, there's been anything dramatic in the marketplace.

Okay.

And then, secondly, what additional thought have you done with respect to use of free cash beyond 2007?

Obviously, you'll complete the buyback, but cash flow will be strong, even stronger going out to '08 and '09.

Is -- what type of consideration have you given to that in terms of payback versus debt, paydown versus acquisitions?

John, this is Dave.

We obviously have had several recent large acquisitions, and then topped off by the merger all of which were cash consuming events.

I think the wise thing for us to do following the share repurchase, and it's a substantial share repurchase, is to restore some additional flexibility to our balance sheet for future strategic use as appropriate.

If -- once we have done that, we understand that we have a desire and an obligation to get cash into the hands of shareholders in appropriate ways, and we will do that.

Thanks.

Your next question comes from the line of Deborah Weinswig of Citigroup.

Hi, good morning.

It's Charmaine Tang for Deborah Weinswig.

You mentioned that the $500 million of synergies are locked in and that you expect to exceed the target.

Maybe if you could give us some color around what you thought primarily enabled you to exceed the initial expectation.

Thank you.

Yes, it's obviously around the cost synergy side of the business, and I think when we've had discussions with suppliers and they think about the overall enterprise, not only are PBM side of our business, but also the retail side of our business, we've been successful.

And I think they also understand the model a little bit.

At the end of the day we think about other retail acquisitions that we've done, and synergies that we get, we get synergies because the suppliers benefit from this on increased movement of their products, whether it's front store and pharmacy.

So we've had great discussions with manufacturers and ultimately at the end of the day we try to think about how we can lower the client's cost and improve healthcare with these synergies.

So I would say it's more the manufacturers looking at the total enterprise.

In addition to that, we're ahead of our overhead synergy projection from a time standpoint and also a dollar standpoint.

Thanks.

Then just one on -- follow-on on the share repurchase.

Do you think you can give us a little more color on how to think about your strategy on the share repurchase going forward?

Well, it's very straightforward.

We have adds $5 billion authorization.

We have entered the market in May with a $2.5 billion accelerated share repurchase program.

That will obviously exhaust half the authorization, then we will make a choice whether to do another ASR or whether to go into an open market process.

That decision will be made closer to the end of the first ASR.

But my hope and goal is to get this done or nearly done by the end of this year, and certainly if it's not done by the end of this year, done very quickly thereafter.

It's just a question of the time it takes to get these ASRs done.

Okay.

Thank you.

Your next question comes from the line of Matt Perry of Wachovia Securities.

Hi, good morning.

Appreciated the comments on the PBM selling season.

Wondering if you could give me a little color on whether this ended up being kind of a larger than usual renewal year for the Caremark business maybe because of the merger did you have to do more renewals than you thought?

And maybe you could give us a percentage on the total book.

I don't think it was -- from a renewal standpoint it was any larger than past years.

I said we had about a 90% plus retention rate on the renewals.

I will say that the renewals on a profitability standpoint were probably a little higher than the 90%, but there was nothing dramatic.

There's uncertainty in the marketplace, obviously, with the deal that we put together and the merger that we put together took a little longer than expected.

Mac and I had been talking about it for awhile that we need to get this deal done because of the marketplace.

So it hasn't been that dramatic.

And typically, as you know, we have our contracts are three-year contracts, and we go a third, a third, a third, and essential that's what happened.

I think some of the competitors in the marketplace may have pulled some contracts forward because of maybe some concern of -- that they saw in the market.

Okay.

And then secondly, I look at the pro forma PBM results -- PBM segment results year-over-year, and the year-over-year growth in EBITD looks very strong.

Maybe, big picture, could you comment on whether that segment was slightly better than expectations going into the quarter?

And then lastly, if I could get David just to give us detail on the number of shares repurchased in the second quarter and whether or not you've done any further in July.

Yes.

The -- on the second question, we have put into treasury stock 72 million shares in the course of the second quarter, and obviously, that gets adjusted at the end of the ASR program.

On the first part of your question, the PBM performed obviously slightly better, and was around obviously generics and some of the synergies.

But it was around the generic introductions that we had had also we had had a growth in mail, our mail business was up year-over-year, and then we had obviously key generic launches around Ambien, Lotrel, Norvasc, etc., but that's where the growth came from.

Thank you very much.

Thanks.

Your next question comes from the line of Mark Husson of HSBC.

Yes.

Good morning.

Could you walk us through the decision or necessity to increase the amortization charge?

Maybe just sort of talk about the acquisition or merger in big picture terms what.

What assets did you buy, what intangibles did you get, what was the good will, what needs depreciating, and what needs amortizing, and why?

Well, the -- I guess the big picture view is that the valuation work has shown that the assets are worth more than we thought they were.

That's the very good news here.

We based our initial model on the last major transaction that happened in the industry, as did our bankers and everyone else.

We all had about the same estimate, including modeling it from the the other side, the fine folks at Caremark.

So then we get into the specific valuation work, and the customer relationships are certainly very good and better than we thought they would be from a valuation standpoint.

That's because the profitability of the contracts that we have is higher than the last transaction had.

So it's just more profitable contracts.

Therefore, more value, therefore higher value in an asset sense, and therefore we amortized it over an appropriate period.

Okay.

So these are -- the animals that we're talking about that you're amortizing are the value of existing contracts.

It's mostly that, but several -- this is a multipart thing, and the trade name is more valuable, and there are other ups and downs there.

So it's a mix of things.

But I would say if you wanted to remember one thing walking away from the call, I would say the contracts is what you should remember.

And so the number you've used in this quarter is good to go for the next couple of quarters.

Well, it is, but obvious until is preliminary until it's final, and under FAS 141 we have 12 months to make that final, and there's a reason for that.

It's complicated work.

And you learn more and more every day as you go.

Okay.

And then just a play on numbers, I guess.

There's a lot of numbers floating around here.

Is there any chance of getting Q1 or Q3 or Q4 pro forma last year numbers out of you at some stage in the near future?

Since we have disclosed the effect of Q1, we probably can make that available.

Okay.

Thanks very much.

Sure.

Your next question comes from the line of Patricia Baker of Merrill Lynch.

Yes, good morning.

Just around the development of the go-to-mark strategy, and certainly understand why you can't share too much with us on what you're developing there, but give us a time line of when we will learn more details, like about where in '08, what proportion of the development will we be more cognizant of, and can we expect that to develop even further through '09 and '10?

We definitely can expect to the develop further in '09 and '010.

This is obviously not a static process.

It's dynamic and it's flexible.

We talk to each individual client, and individual clients are concerned, and they have certain needs and wants, and certain focuses for their -- either their enrollees or their employees.

So they may take different pieces of the go to market strategy, but we'll be seeing pieces of that, the early winds of that in '08, probably in the second half of '08.

But as I said earlier, the clients understand it's three-year contract, and when they see what's on the plate on some of the opportunities and products and services that we can provide, they look at it and say, we'll sign up, we'll see some of it in the second half of '08, and we know we'll see the rest of it in '09 and '010.

So it's not going to be something that we're coming down from the mountain on and all of a sudden saying, here's the large go to market strategy, here's the silver bullet.

It's going to be a combination of things that we continue to offer the client that's better for their employees, or their enrollees and it's lower cost for the client.

And it's obviously a continuous process.

So it's like anything else in any business we continue to look to improve it and we'll continue to modify it each time.

I can tell you the receptivity -- from the receptivity standpoint from clients they are anxious and they understand and they get the offerings.

Well, that makes a lot of sense, Tom.

And would it be fair to say, let's stay in the back half of 2008 both the street, as it were, will have a slightly better understanding of what that --

I think the street will have a better understanding, I think some of the consultants will have a better understanding.

Obviously, clients will see it.

So it will certainly be more obvious.

Tremendous.

Thanks.

Thanks.

Your next question comes from Meredith Adler with Lehman Brothers.

Hi.

Thank you.

This is Ivy standing in for Meredith today.

I don't know if you can, but can you comment on whether or not you've been successful to date in adding some of your new offerings to existing contracts?

We have.

I mean, some of the offerings we've -- when you think about working with obvious our existing clients on the PharmaCare side of the business, one, obviously, to maintain the level of service they're used to, then we can think about the capabilities and offerings that we can have -- that we can add from the Caremark book of products to those clients.

But once again, I'll remind you, it's 120 days, and these things have long life cycles, but we haven't done anything of any note from a go-to-market standpoint for the client.

Okay.

And quickly switching gears, looking at July comp growth, we were a little bit surprised at the negative impact from new generic introductions of 720, I think, basis points.

Can you help us understand why the large increase, especially since we've now cycled Zocor?

Yes, you have -- obviously there's a lot of introductions on the generic side of the business.

You have Norvasc, we had Zofran and Wellbutrin XL in the fourth quarter of '06, Norvasc, I think in -- I think it was the first quarter of '07, Ambien and Lotrel in the second quarter of '07.

These are big products that hit us in '07.

You've got Pravachol coming up -- actually hitting in June of '07.

And we have obviously upcoming generic launches in the latter half of '07, but it was certainly a big quarter and first half for generic launches and will continue to be in the second half.

Okay.

I guess we were just more interested specifically in terms of July -- the month of July why the large spike.

Also, much larger than some of your other competitors.

I think it was the Ambien and Lotrel on that side of the business was probably the two biggest ones.

You will get differences in impacts by competitor based on geographic representation and product representation.

Okay.

Thanks.

Appreciate it.

Your next question comes from the line of Eric Bosshard of Cleveland Research Company.

Good morning.

Two questions.

First of all, Dave, on the $160 million of amortization you said that you're maintaining the accretion guidance for next year.

Does that mean an incremental $160 million of savings or synergies to offset the $160 million of amortization for 2008?

At least.

Yes.

The bulk of the incremental $160 million --

In growth of the business.

The business is performing well, Caremark's business is executing extremely well, but the synergy by itself is also enough to do that.

So we're looking for that to be fully offset.

And then how quick is that $160 million burn off?

What do you mean, burn off?

Well, I mean, it it's not permanent amortization if the's on contracts that are three years in nature.

I guess may question is, how long do we have to deal with that incremental amortization?

15 years, the rest of my life.

Okay.

The second question I had was with the go-to-market strategy, Tom, as you think about rolling this out to market, and now you're talking about second half '08, and it sounds like your customers.

How do you think about managing your performance in contract negotiations between now and then, knowing that there will be some degree of less specificity in regards to the new plan in the market until then?

Yes, that's, obviously, that's a good question.

We have -- we're certainly giving more transparency to our clients, obviously transparency in pricing, but also transparency of our product offerings.

So to my point earlier, Eric, these are really three-year contracts that the client wants to understand how is this going to be phased in and we're going to look at it and talk to them about it.

And we can actually include some of the pricing and some of the products and some of the performance metrics around it early on in these contract negotiations, so that they can count on it.

They can, one, count on the pricing, and two, count on us delivering the product.

So obvious physical someone were negotiating, they're going to hold our feet to the fire and we welcome that.

And that's something that you -- because we've not really seen in that the market yet.

That something that you expect to commence in the next handful of months to give greater visibility in some of the math of the clients in these discussions?

Yes.

Yes.

Okay, great.

Thank you.

Your next question comes from the line of Mark Wiltamuth with Morgan Stanley.

Hi, good morning.

I want to ask about the MinuteClinic.

Have you gone through any retrofits there.

And if you can give us some performance of how the stores have performed after you've put a MinuteClinic in, and give us an idea how much it costs to retrofit a store for a MinuteClinic.

MinuteClinic, it's minimum CapEx, it's about 200 square feet in the store.

We have to move some particular category or products around, but it's very little CapEx, as you know to do in that an existing store, and even less, obviously, in a new store.

MinuteClinics continue to perform well.

We don't break out the numbers, but the fact that 35% to 40% of the people have never been into a store, we continue to see new customers in every single month in the stores.

We continue to open up new stores.

The customer service metrics around these clinics are just off the chart.

So there's no question around the metrics, the worth, and the quality of the clinics.

We struggle a little bit with some states around regulatory issues or around medical societies just because of lack of education.

Once they understand what MinuteClinic is and what MinuteClinic isn't, we're very successful.

So it's a win-win for the consumer, and certainly for the payer, and us, both at retail and in our healthcare services business.

So we're very pleased with it.

And what have the payers said about this as you've pitched it to the them, and --

Listen, the payers love it.

This is about improving access, improving quality and lowering cost.

I mean, I won't bore you with all the details, but there was a study of 55,000 patients on a particular -- I think it was pharyngitis or in -- 55,000 patients, and you looked at MinuteClinic and the protocols that MinuteClinic followed, it was 98.9% of perfect protocol.

And the rest of the medical community, because it was different in every different setting, was 55%.

So MinuteClinic, we get -- obviously, we have coverage of insurance coverage in MinuteClinic.

Nationally it's about 50% but in some markets 80 to 90% of the people are covered by insurance.

So it's well accepted by insurers and payers.

Okay, thank you.

Thanks.

Your next question comes from the line of Ed Kelly of Credit Suisse.

Hi, good morning.

Nice quarter.

I have a question for you, Tom.

This is related to something that Express Scripts mentioned on their last call.

They had said you guys were being more aggressive on pricing of contracts in markets where you had greater overlap with your stores.

Would you care to comment on that?

I was -- it was news to me.

That's how I'll comment on it.

I don't -- We don't --

Do you have any advantage when you're thinking about pricing contracts when you're looking at markets where you may have a heavy overlap of stores within an employee base, especially considering that you're looking to supplement with it other things like the OTC discounts, that type of stuff?

Yes, we have 60,000 pharmacies in our network.

So as I said, this was never about limiting it to the CVS networks or CVS stores or driving business to CVS stores.

We think we can execute some programs in stores that we may be able to do better than some others, so therefore, we'll get share, but at the end of the day this is an open network because we want to gift to consumers and clients the way they want it and how they want it.

It is about access.

So we don't structure it differently.

We don't price it differently.

As I said, this was news to me.

And it's -- I find it a little interesting about some of the sideline and off-line comments that are coming from competitors during this 120 days anyway.

Exactly.

Dave, I have a question for you on the SG&A at the retail business.

The increase that we saw this quarter, to me it was a little surprising just because last quarter your SG&A was flat, in the retail business.

I mean, granted, the PBM was in there as well, so maybe it's not quite apples to apples but now we're seeing a more sizable increase.

Is there anything else that you may want to call out that caused that to go up?

Well, as I said, the -- there are two things that we kind of have to bear in mind as we look at this and think about trends.

One is that the integration and merger related costs are going to be a little bit lumpy.

They happen when they happen.

And so they give us a little bit of variability in that.

Secondly, and very importantly, is the addition, or the inclusion of the Sav-On stores, which, as you know, are quite large, and also California is a high cost SG&A area to do business in.

And so that's averaging in and sort of nudging us up, but I still do expect on an apples to apples basis that we will continue to make good progress on SG&A as a percentage of sales.

So there is still that focus in that strategic intent as well as tactical reality.

Okay, great.

Thank you.

Okay, we'll take two more questions.

And just before I do that, I just want -- I get some more information from our analytics team.

They were listening to the call.

Question on the July generic impacts.

There were two products that came back in hit in July.

It was Lamisil, and also Toprol XL that impacted July more than other months.

Okay.

Two more questions.

Your next question comes from the line of David McGee of SunTrust Robinson Humphrey.

Yes, hi, good morning.

Couple quick questions.

One, you mentioned, I think that the generic reimbursement may have been under some pressure.

I know that was the case maybe in the first quarter.

Can you talk about the relative magnitude of that and what you're seeing relative to earlier in the year?

Well, generics is still a home run.

It's quadruple win for everybody, around payers, patients, the retail side of our business, and the PBM side of our business.

You're going to continue to see it, see some pressure.

We're [liking] generics, we're buying generics better, passing on savings to the clients so there's always going to be continued pressure on generics, but at the end of the day it's certainly better for us across our company, across our enterprise.

And as I said, it's better for patients and payers.

And secondly, everybody is worried about the macro environment.

A lot of retailers outside of your sector are suffering right now.

Just given that environment, any change in how you guys have to go to market on the retail side, or -- your front-end comps seem to be very strong.

-- how do you get market there?

Yes.

Our front-end comps continue to grow.

We're basically a store that our average ring in the front end of our store is about $11 or so, $11 plus, so it's a -- it's -- I always say we're not -- we're recession resistant, maybe until there's a big recession.

But the fact of the matter is, if you look at our staple business, the core products around -- in the front end of our business around health, around beauty, these are things that consumers continue to use, and we see less of it.

There are certain markets, I think, where we're seeing some pressure.

You think about the auto market in the midwest.

We're seeing maybe a little less seasonal activity in some of our stores, but overall it hasn't affected us as much as some of the -- either the fashion business or the big box retailers.

And you've heard me say this before.

We can meet our numbers and grow significantly over the years with front store comps in the 1% to 3% range.

Nevermind the comps numbers that we're hitting now.

So we feel pretty good about it.

But I will say this, just generally, that the consumer is obviously feeling less sanguine than they have before.

Thank you.

Thanks.

One more.

Your next question comes from the line of Scott Mushkin of Banc of America.

Just quickly, I don't want to beat on this PBM much more, but given the nervousness that the mergers created in the market with competitors, do you see this as diminishing your opportunities as you go forward into the '09 selling season next year, given what they've tried to do as far as locking down contracts and whatnot?

No, I think it's important that -- you pointed out, Scott, it's the nervousness in the marketplace is not from clients or customers.

It's from competitors, and I'll let them speak to that and how they're going to address that and why the nervousness.

But our clients are not nervous, our customers are not nervous.

They get it.

Once again, I need to point out, and I know you know this, but these contracts that we lost, these contracts have flipped over the years.

They've always been multiple players, and they were contracts that were RFPs long before our -- long before our merger took place.

And, the 0 -- '09 selling season, many of our competitors do annual market checks.

So they have contracts that require annual market checks in the marketplace.

So I don't think anything's changed dramatically here.

And I think emotions may be a little high, and rationale may be slightly on the lower scale, so I don't think people are that nervous out there.

Certainly not our clients or customers or our sales folks.

Then quickly on Sav-On, some of our channel checks, it seems that the employee base of Sav-On has been a little bit less enthusiastic, vis-a-vis Eckerd's employee base.

Maybe you can comment a little bit on how you think -- is it going a little bit slower -- my thought is maybe it's going a little bit slower from a revenue standpoint than you had thought.

And do you think there is some issues there from a cultural standpoint that you didn't face with Eckerd?

Yes, well, one -- first of all, it's less of a turnaround, and I would say that, as with any company it's not one homogeneous culture.

You have Sav-On, and then some of the Osco stores in the midwest.

I don't see -- I didn't see anything dramatic.

I think we had a lot of change in the way the processes that we had, particularly in the pharmacy.

But at the end of the day, if you talk to managers and pharmacists and now they see -- pharmacists in particular, that the new technology that we've put in place, they love it.

But it took awhile to get used to it.

And I'd venture to say that if you walked into an Eckerd pharmacist when we changed systems they probably weren't happy.

People are creatures of habit, and any change is disruptive.

But overall where our people are, they're great people out there in the Sav-On market and the Osco market.

Great pharmacists, great managers, a great field team.

We feel very good about it it.

And as I mentioned, the revenue loss was self-inflicted.

We've had to get out of selling asparagus at low cost.

I mean, enough.

We're not a food company.

So we get rid of these products, we get rid of certain categories, and when managers see the P&L and see the margins and see this their profit potential, capitalism works.

So I think that at the end of the day, they like what they see.

So I don't think it was more dramatic than any others and I feel very good about where we are.

Great, thanks.

And thanks for doing this call.

Really appreciate it.

Thanks.

Okay.

Thank you, everyone.

I know it was a long call.

Thanks for hanging in there, but we had a lot to describe.

So if you have any questions, any comments, obviously, you can call Nancy Christal.

Thanks.

Thank you.

That does conclude today's CVS Caremark Corporation second quarter earnings conference call.

You may now disconnect.