CVS Health Corp (CVS) 2008 Q4 法說會逐字稿

Good morning.

My name is Kristi, and I'll be your conference operator today.

At this time I'd like to welcome everyone to the CVS Caremark Corp., fourth-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 today's conference over to Ms.

Nancy Christal, Senior Vice President Investor Relations.

Thank you, Kristi.

Good morning, everyone, and thanks for joining us today for our fourth-quarter conference call.

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

Tom will summarize our key 2008 accomplishments and provide a brief business update highlighting our key areas of focus for 2009, then Dave will provide a financial review of the fourth quarter and hit the highlights for our guidance for the first quarter and year.

During the Q&A that follows we ask that you limit yourself to one to two questions, including followups, so we can get to as many as analysts and investors as possible.

I want to quickly touch on one important upcoming event.

We recently sent a save the day e-mail for our annual analysts and investor meeting which will take place on the morning of Friday, May 15th at the Mandarin Oriental Hotel in New York City.

We plan to send formal invitations in March.

So if you didn't receive our save the day and would like to receive an invitation, please contact me.

This event is the one-time per year that we provide broad access to an extended group of our senior management team, so we do hope you can be there..

Turning back to our year-end results, please note that we expect to file our 10K for the 2008 fiscal year by March 2nd, and it'll be available through our website at cvscaremark.com/investors.

This morning, we'll discuss some non-GAAP financial measures in talking about our company's performance, namely free cash flow, EBITDA and adjusted EPS.

In accordance with SEC regulations you can find the definitions of the non-GAAP items I mentioned as well as the reconciliations to comparable GAAP measures on the investor relations portion of our website on CVSCaremark/investors.

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 cal to make it easy for all investors to access the call.

Now before we continue, 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.

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 are described in the risk factor section of our most recently filed annual report on Form 10K and that you review the section titled cautionary statement concerning forward-looking statements in our most recently filed quarterly report on Form 10Q.

And now I'll turn this over to our CEO, Tom Ryan.

Thanks, Nancy, and good morning, everyone.

Obviously very pleased with the quarter we announced this morning particularly given the challenging environment.

Let me take a few minutes to review our significant accomplishments in 2008.

We posted industry leading retail same-store sales growth 4.5% total, 4.8% Rx, and 3.6% front store on a calendar basis.

And we gained share in our retail business.

All of these both in front and pharmacy during a difficult time.

We introduced our proactive pharmacy care offerings which provide earlier, easier and more effective pharmacy and health services that improve healthcare outcomes and reduce costs for our clients, their planned participants and our customers.

Our PBM had an excellent client retention and achieved all time industry sales and new business growth with 90 clients and $8.2 billion in 12-month revenues, that's $8.2 billion.

So for anyone wondering if our offerings are resonating they certainly are.

And for the third time our PBM call centers were certified by JD Power & Associates for providing outstanding customer service.

We also completed the acquisition of more than 500 Long's drug stores and the RxAmerica PBM.

The integration is well underway.

I'm confident that the Long's acquisition will be a solid medium and long time contributor to both our retail and PBM businesses.

We also opened up 317 new or relocated retail stores adding organic retail growth of about 3.6%.

We ended the year with more than 500 MinuteClinics, more than any other operator and we have plans in place that we expect will continue to improve the returns of these clinics.

We strengthened our management team in '08 with the additions of a new CIO, Stuart McGuigan, and our Chief Medical Office, Dr.

Troy Brennan.

And obviously our financial results were excellent across-the-board.

Revenues increased close to 15%, operating margins improved 63 basis points to a record 6.9%.

Adjusted EPS from continuing ops was up 18% and we generated $2 billion in free cash flow.

So let me talk a little bit about the businesses and why we're confident that we'll have solid long-term growth.

First I'll touch on the PBM.

Following on the heels of the most successful selling season in the company's -- in our company's history, our sales force again is looking forward to another good year.

While I won't talk about specifics this early in the season, we see significant new business opportunities in 2010.

With proactive pharmacy care, we have the ability to provide our clients and their planned participants with beneficial services that really no other competitor can.

We are hearing from our clients that in these tough economic times, they are more open than ever to changes in plan design and other cost containment tools that save money and improve outcomes.

Our proactive pharmacy care offering includes medication management tools like innovative plan designs, clinical programs, ExtraCare health along with integrated specialty Rx solutions and maintenance choice.

Let me take a minute to update you on a recent progress on maintenance choice.

Through maintenance choice, other than just relying solely on 90 day maintenance medications through mail, many of our plan members now have the convenient option of obtaining their prescription at any CVS/pharmacy at the same cost of mail for both plan participant and payer.

At the end of the year I told you we had 130 clients sign up for January 1st.

Since then we've added another 74 clients that have committed with an April 1st date.

That brings over 200 clients who are taking advantage of the maintenance choice option.

We're clearly well-positioned to help employers, payers and consumers achieve significant pharmacy and healthcare savings.

It's very early in the 2010 selling season, so we'll have more to say about this on our call -- on our next earnings call.

MinuteClinic.

Since its inception MinuteClinic has handled about 3.5 million patient visits, our retail locations delivered more than [1.1 million] flu shots and 700,000 of those were delivered at MinuteClinic.

Additionally acute visits were up over 50% since the third quarter.

With over 500 clinics across the country, we're clearly leaders in this space.

I suspect we'll end the year with roughly the same number of clinics we have today.

We are focused on increasing utilization, growing revenues and right-sizing the organization.

Here's what we're doing.

Consumer awareness is still relatively low but customers who try MinuteClinic love it.

So the first thing we're doing is we're focusing on leveraging our CVS advertising spend to drive clinic awareness.

Second, we're expanding our service offerings to extend relevance.

Payors recognize that our clinics provide high quality, cost-effective care, so we're forming strategic partnerships that offer health and wellness services, chronic disease services and monitoring and incentives that divert members from using the emergency room to using MinuteClinic for common ailments.

Third, we're growing our in-network covered lives because utilization goes up significantly obviously when patients have coverage.

We've added six million lives to our network in the fourth quarter and approximately 80% of MinuteClinic visits were third-party paid in the quarter and that's up from 70% in the third quarter.

Our goal is to improve returns on our clinic business.

This year as I've told we're investing $0.05 to $0.06 of diluted EPS.

We expect to invest less in 2010.

Now let me touch on our retail business which continues to perform better than most retailers, and we're at the top of our industry.

Our fourth quarter comps increased 3.6%, pharmacy comps rose 4.5% and were negatively impacted by 260 basis points due to generic introductions while front store comps rose a strong 1.8%.

We continue to gain share versus food, drug and mass.

And when you think about the categories in the front store categories where we're gaining share, those categories make up about 85% of our front store volume.

While we're not without our share of challenges given this recession, I'm confident that we will continue to gain retail share because of our convenient locations and store hours, our focus on execution and customer service, our customer loyalty program, upside from our acquisitions and [file-bys], and we'll benefit from our unique PBM relationship with payers and patients.

Our front store margins continue to be very solid helped by private label, shrink control and our ExtraCare card.

Our CVS and proprietary brands are increasing as we continue to strengthen our offerings and as in this economy, consumers are more willing to try private label products.

In fact, in December our private label business hit a new record climbing to almost 17%, private label sales were almost 16% for the quarter, up 60 basis points.

As you know, like generics a growth in private label sales neglectively impacts revenue but helps margin.

We see significant opportunity to grow private label sales in the recently acquired Long's stores.

Their revenues from private label sales are about 8% of front end, so you can see we have a fairly significant opportunity.

With regards to Long's, the Long's integration is basically proceeding on track.

We've recently completed the IT bridge so that our corporate offices can communicate directly with Long's stores.

We expect to close down Long's headquarters by late summer and have all the stores converted by the end of May.

All store planned resets and remodels will be completed by mid-October.

The integration will be complete and the stores will be reintroduced in the marketplace sometime during the fourth quarter.

These are good stores in good locations, but we think we can improve the sales productivity and the margins relative to our core business.

Let me talk a little bit about real estate.

We opened up as I said 317 new or relocated stores, we plan to open up 250 to 300 new or relocated stores in '09, excluding Long's stores base we'll add about 3% square footage growth.

Before turning this over to Dave for a financial review, I want to give you some news about Mr.

Rickard.

He has been our CFO since 1999.

Over the last few months, Dave and I have had some heart-to-heart discussions about his retirement.

I know it's hard to believe, he looks so young.

But Dave is in perfect health and the company is in perfect health, and that's why he feels it's really time.

So we've agreed that Dave will retire at the end of this year making his tenure with the company at just about 10 years.

We will be launching an internal and external search to fill this key role.

Dave has been a great CFO and a better partner with me for the past nine years and his shoes will certainly be hard to fill.

But we have some terrific internal candidates that have worked side-by-side with Dave.

And we will also take time to canvas the external environment before making this important decision.

Dave is not in a rush but he does have some personal goals he'd like to accomplish, and I certain respect his decision to start making plans for the next phase of his life.

He'll talk a little bit more about this later.

So with that, I'll turn it over to Dave for the financial review.

Thank you, Tom.

Good morning, everyone.

Let me walk you through our fourth quarter financial results with an emphasis on the segment details.

Afterward I'll reconfirm guidance for the first quarter and full year 2009, then I'd like to make a few short comments on the topic Tom just announced.

On a consolidated basis revenues for the fourth quarter increased 10% over 2007 to $24.1 billion, approximately half of that growth was due to the four additional days in 2008's fourth quarter versus the prior year.

The $24.1 billion in consolidated revenues is net of $1.5 billion of intersegment eliminations produced as a result of our PBM clients filling their prescriptions in CVS/pharmacy stores..

The intersegment eliminations as a percent of PBM revenues increased by 120 basis points over the prior-year period from 11.3% to 12.5%.

This provides some tangible evidence of the share shift within the PBM's book-of-business from other retailers to CVS/pharmacy.

In our PBM segment fourth quarter revenue of $11.8 billion increased 1.5%.

Adjusting that growth rate for the impact of new generics net revenues would have grown 7.8% in the PBM.

So what drove the growth of PBM revenues?

Well first we saw positive impact from the four extra days in this year's fourth quarter due to the calendar shift, that amounted to 4.9 percentage points.

Our PBM's revenue growth was also driven by PBM retail network revenues which rose 6.2% over 2007 levels to $7.7 billion.

The retail network generic dispensing rate increased to 67.7% compared to 63.5% in the fourth quarter of 2007.

At the same time, retail network claims grew 18%.

This growth was driven by the addition of RxAmerica, the net impact of client additions and terminations as well as add-on lives with existing clients and Med D growth compared to last year's fourth quarter.

Total mail revenues declined 6.7% to $4.0 billion.

With in-total mail revenues our specialty pharmacy unit experienced a healthy increase of 12.3% compared to the fourth quarter of 2007.

Our PBM mail revenues decreased 17%.

When the impact of the loss of the FEP mail business is excluded, mail revenues increased by approximately 12% with specialty revenues expanding by more than 23% and PBM mail revenues growing by more than 4%.

The mail generic dispensing rate rose to 55.2% from 49.7% a year ago, that's an increase of 550 basis points.

Our overall mail penetration rate decreased 630 basis points from 2007's fourth quarter to 21.7%, that was primarily due to the loss of the FEP mail contract but also reflects the predominantly retail mix of the RxAmerica business.

So what about the retail drug side of the business?

Well, it turned in a first-rate quarter.

Revenues increased 18.8% to $13.8 billion in the fourth quarter.

Long's added a little more than $1 billion of the quarter's growth.

The retail segment's revenue growth also saw a positive impact from the four extra days of 5.2 percentage points.

Tom covered the highlights of our industry leading retail same-store sales growth, so I won't repeat them here.

Moving on to gross profit, the overall business did well with margin up approximately 135 basis points.

Within the PBM segment, gross margins were up approximately 10 basis points.

The primary driver of the increase was the addition of RxAmerica which records retail revenue on a net basis, and, therefore, has higher reported margins.

Excluding RXAmerica gross profit margin in the fourth quarter would have been slightly down versus 2007 as expected.

The decrease in the gross-profit margin is primarily related to the decrease in mail order penetration from about 28% to about 22%.

Let me mention here that in the second quarter of 2009 we'll be changing the RxAmerica contracts to conform to the Caremark contract structure.

As a result, we will change the accounting from the net method to the gross method of revenue recognition.

The impact of this will be to add revenues as well as a parallel increase in annual cost of goods sold so there's no net impact on operating profit.

Revenue is anticipated to increase approximately $500 million per quarter in the second, third and fourth quarters of this year due to the change in revenue recognition method.

So keep that in mind for modeling purposes.

Gross-profit margin in the retail segment expanded to 30.4%, that's up 75 basis points versus 2007's fourth quarter.

Like the PBM segment, our retail pharmacy margin continued to benefit from a substantial increase in the conversion of branded drugs to generic equivalents.

The retail generic dispensing rate increased 310 basis points to 68.0%, even with the slight dampening effect of the inclusion of the Long's stores in this year's number which are have a lower GDR.

Concurrently front stores margins improved continuing to reflect increased private label penetration, shrink improvement and benefits from the ExtraCare card.

Offsetting these gains somewhat was the impact of averaging in the lower margin Long's stores as well as the increase in the percentage of pharmacy sales handled by third-party insurance.

And what about expenses?

While overall operating expense as a percentage of revenues increased by approximately 90 basis points, each segment individually saw a slight improvement in this measure with mix causing the consolidated increase.

In the PBM segment the improvement was about 10 basis points to 2.2% primarily due to the reduction in integration costs year after year.

In the retail segment the improvement was approximately five basis points to 23.3%.

We demonstrated excellent store level despite the pressures of the economic situation.

This was offset to some degree by some minor initial integration costs associated with Long's.

Given everything I've just discussed we again saw a sizable increase in operating margin driven largely by the retail segment.

The retail segment's operating profit margin grew by more than 80 basis points over 2007 to 7.0%.

That's an all-time record performance for the retail business.

The PBM segment's operating profit margin was flat year-over-year.

Our PBM's industry leading EBITDA per adjusted claim declined to $4.19.

This was driven by two key factors.

First, the absence of the FEP mail contract without which we would have seen near double-digit growth in EBITDA per adjusted claim.

Second was the impact of RxAmerica which has a predominantly retail claims mix.

As expected our Med D business was more profitable in the fourth quarter than it was in the third quarter and importantly more profitable in the fourth quarter than in the prior-year period.

For the year the Med D business operating profit increased more than 10% over 2007, so we had a very good year in our Med D business.

And we look forward to an even better year in 2009.

Moving to the consolidated income statement, we saw net interest expense in the quarter increase to $151 million, reflecting an increase debt position due to Long's.

Our effective income tax rate in the fourth quarter was 39.7% as expected and weighted average diluted share count was 1.47 billion shares.

What does all this mean for EPS?

Adjusted EPS from continuing operations rose to $0.70 up 19.8% from $0.58 in 2007.

So we produced robust earnings growth year-over-year.

GAAP diluted EPS from continuing operations rose 18.3% to $0.65 for the quarter, this compares to $0.55 in 2007.

Turning to the balance sheet and cash flows, we generated over $1 billion in free cash flow in the fourth quarter.

That brought our total free cash flow for the year to $2 billion.

That's round numbers what we expected but it would have been a bit higher except for two things.

First our accounts payable to inventory ratio declined a little outside reflecting an increase in pharmacy outside vendor product in our sales mix.

Outside vendor has shorter terms than warehouse-delivered product.

Secondly some of the Long's severance was moved up to the end of 2008 versus initial an expectation of early 2009.

So we're slightly ahead of original plan on that.

We ended the year with net debt defined as total debt net of cash and cash equivalents of $10.4 billion.

That's up approximately $2 billion from the prior quarter and up $1 billion from the end of 2007.

The increase over the third quarter was primarily due to the Long's acquisition.

Our total debt position includes $500 million of remaining bridge financing for the Long's transaction.

It also includes $2.5 billion in commercial paper, a market we have continued to access throughout even the darkest days of the past several months.

Note that despite the additional debt since the end of 2007 our debt-to-capital remains at about the same level now as it was at the end of 2007.

So our balance sheet is in very good shape.

Net capital expenditures amounted to $690 million in the fourth quarter, this was the result of offsetting the $697 million of gross capital expended with $7 million worth of sale lease back proceeds.

As most of you know, this is not typical of our fourth quarters due to the delay of our normal sale lease-back financing through for the quarter of 2008 to various times throughout 2009.

Now on to guidance.

Since we already provided our initial thoughts last month I'm only going to reiterate the EPS and free cash flow guidance here.

All of the additional details of the 2009 guidance we provided on January 9th are still valid, and, of course, all of my comments include the impact of Long's.

We expect to deliver adjusted EPS of $2.53 to $2.61 and GAAP EPS of $2.35 to $2.43.

There are several drivers inherit in these, this include the margin investment we made in the PBM this year, the integration and one-time costs for Long's and the start-up costs for new PBM contracts.

Excluding Long's, and additionally adjusting for three fewer days in 2009 versus 2008, this shows underlying growth of 8% to 11.5% on both an adjusted EPS and a GAAP EPS basis.

Free cash flow for the year should be around $3.5 billion give or take, some of that free cash flow is still expected to be dedicated to completing our $2 billion share repurchase over the second half of 2009.

For the first quarter of 2009 we expect adjusted EPS to be between $0.53 and $0.55 per diluted share, that compares to last year's $0.55 per share.

GAAP EPS is expected to be in the range of $0.48 to $0.50 per diluted share.

You should note that we expect the first quarter to be flat to down and this is not a typical expectation of ours.

The key factor is making the first quarter light from the growth perspective for this year are these.

First, our PBM is not expected to grow its operating profit in the first quarter due to significant new client pricing and start-up costs.

Second, the timing of new generics which will be a bit more back-end loaded.

Third the integration costs for Long's will be heavier in the first half than in the second half.

Fourth, we have one fewer day in this year's first quarter due to last year's leap year.

And finally, the Easter holiday shifts out of the first quarter and into the second this year.

We continue to expect all the other quarters this year to show good progress versus last year with the fourth quarter being probably the strongest quarter from a growth perspective.

Now just a word or two on my decision to retire at some point during this year.

A few years ago I thought I'd stay until late 2010, but I've decided that I want to move my retirement up a bit.

I've reached a point in my life where I've accomplished everything I want to from a career and financial perspective.

Now I have some personal goals I'd like to tackle and I want to get on with them while I still have plenty of energy.

I feel comfortable with my decision because the company is in a very strong financial position and is well-positioned for long-term growth.

We've melded CVS and Caremark into a unique company that has significant competitive advantages and I'm confident that this will play out well in the company's future financial performance.

We've got the strongest depth of management in the company's history to see that through.

I remain passionately committed to the growth and success of CVS Caremark and I will do whatever is necessary to promote that success including ensuring whatever transition process is helpful to the new CFO.

Now I'll turn it back over to Tom for some closing remarks.

Thanks, Dave.

Obviously it was a great year and a great quarter.

I'd just like to take time to thank our colleagues across the company who really remain focused on customer service, execution and expense control.

I want to thank them all for their efforts.

We recently had a PBM national sales meeting as well as our senior management meeting earlier this month, and I've never seen this organization so energized and so engaged.

Since the merger was completed, we've made significant strides in forming one culture across this enterprise that capitalizes on our unmatched breadth of capabilities.

So I couldn't be happier where we are, obviously we had a good year and we're looking forward to a good year in '09 and beyond.

So with that I'll open it up for questions.

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

Your first question comes from the line of Debra Weinswig of Citi.

Good morning and congratulations on a great quarter.

And Dave, we're going to miss working so closely with you.

We've got another year.

Okay.

Tom, you had talked about improving the returns of the clinics and one of the aspects of that was needing to leverage CVS's advertising spend to drive awareness of MinuteClinics.

Since you obviously don't have MinuteClinics in every market, can you dive into some of the details there?

Yes, we actually operated MinuteClinic separately, they have a separate marketing team, and we were marketing in different magazines and different media outlets and really not leveraging the amount of spend we have in our circulars and our TV advertising and radio advertising for CVS/pharmacies.

So it was really a matter of simply leveraging that investment that we've made on our -- on the CVS retail side.

So it's basically that simple.

We have the clinics across 25 states already, and I mean, if you look at -- it's interesting to see just the flu alone, the flu shots that we did.

To have that many done in the clinics, it was significantly more than previous year.

Okay.

And then with regards to the ExtraCare card, it sounds not only for your PBM customers but for your retail customers that that's continuing to drive traffic and ticket.

Any changes there, are you seeing a greater spend with regards to promotions on the ExtraCare card?

The ExtraCare card has been a win-win, a win for our customers and a win for us as far as margin.

And unlike -- we can track obviously our ExtraCare card customers and traffic is up and ring size is up with our ExtraCare card customers.

We actually focus -- they're the most loyal customers.

And we focus our attention and spend on those customers.

So we've been able to manage our promotional margin better using the ExtraCare card.

And then the ExtraCare health card that is going to PBM members or going to all customers continues to be a real benefit for us also.

So would it be fair to say that not only are you gaining new ExtraCare cardholders but also getting a greater share of wallet around existing cardholders?

Oh, yes.

Around the ExtraCare cardholders, certainly, yes.

Okay.

And then last question, which is a 10,000 foot view on is, can you talk about your outlook for prescription drug growth in '09?

Well, I think we kind of -- we gave you the outlook for script growth earlier, and we continue to feel the same way.

It's going to be slightly less than it was in '08.

Obviously more generics in the back end, and we think utilization will be 1% to 2% from that standpoint, so our issue is to gain -- to your point earlier, is to gain a greater share of the spend both on the Rx spend and the front-end spend and that's -- so far that's working out.

But clearly from a growth standpoint, it should be maybe slightly down.

In our plan it's certainly down from our projections from -- or our actuals from '08.

Okay.

Thanks for the color and congratulations again.

Thanks.

Your next question comes from the line of Lisa Gill from JPMorgan.

Thanks very much, and good morning.

Tom, you talk in the past as far as your starts and what you see out there as far as the landscape goes.

I know you said it's early in the year.

But are you seeing anything from a mid- year start perspective?

And secondly when you talked about the PBM, are you talking about just competitive wins or are you starting to see some of the business that previously was carved in now coming back and looking to potentially carve out with Caremark?

A little bit of both, actually.

We have some new wins already early in '10 -- early in '09 for 2010.

And so from that perspective, we feel pretty good about it.

And I can tell you from finalists meetings and what we're seeing early and what our sales team is pointing out, we feel pretty optimistic about the season.

Some of the ones that were presently carved out where people are starting to look to -- are apparently pulled in are starting to look to carve those out.

And we have some small opportunities for mid-year sign-ups.

And then you talked about the changes to plan design.

Are you seeing again where people are potentially looking to make changes to their plan design even midyear this year so we can see some impact in 2009, or are they just having the discussions now for 2010?

And then just my last question, you talked about the CVS stores taking share for the Caremark wallet.

Can you maybe -- do you have a number that tells us what the total share is that CVS stores has today so we can get a idea of what the opportunity that still remains?

From the plan design standpoint, the clients are obviously more receptive.

You'd expect that in this economic environment, and they're open to things that they would not normally be opened to before.

I clearly believe that's why maintenance choice is resonating.

I mean, people did not want mandatory mail before.

Now that they have this option with the retail option, they're more inclined to do it.

You see people looking at step therapies.

You see people maybe experimenting with limited networks or more importantly aggressive formularies.

Those are the things that they didn't do before that they're just looking for opportunities.

There could be some of that, Lisa, in this year, but it's more a '010 opportunity for us.

Okay.

So those discussions are happening now and then with plan designs we'll see for 2010?

That's correct.

Okay.

And then just the share that you have in the CVS stores today, do you have that number?

Well, we don't really -- our retail share, and the share varies by client, right?

I mean, depending on our share of retail stores in that client's geographic coverage where their employees are, it varies.

So we can see that depending on what the client chooses around the ExtraCare healthcare card that we do gain share and obviously maintenance choice helps us gain share.

Would it be fair to say that there's still a wide opportunity to --

Oh, yes, there's certainly an opportunity, yes, oh, absolutely, yes.

Okay, great, thanks for all the comments, I appreciate it.

Thanks.

Your next question comes from the line of John Heinbockel of Goldman Sachs.

Yes, Tom, how has the retail business fared first quarter to date?

Any color on that given how weak the consumer's been?

Yes.

Well we don't obviously provide the monthly numbers but I can tell you that January was a pretty good month.

We're not -- we're impacted by the recession, but we're somewhat resistant.

We're seeing some discretionary items slow down.

Whiteners, you think about things like tooth whiteners and salon hair care slowing down, but people are just trading down in those areas.

But our ticket size continues to grow.

Our private label is up.

Our general merchandise is up, consumables, healthcare, beauty.

So we're in pretty good shape.

There's some pockets, geographic pockets as you would expect.

Michigan's a little softer because of obviously what's going on out there.

But we're pretty -- we're happy with our January numbers.

Do you think -- it looks like pharmacy really across the industry has not been impacted yet by rising unemployment.

Is there a magic level where that begins to happen?

I don't know what the magic level is, but we have seen some impact in pharmacy a little bit with some splitting, people self-medicating a little bit which is kind of why our healthcare business is up on the front end.

But certain it's not impacted as you would expect in other categories.

Listen, if employment -- our numbers -- the projections that David gave you, we had a range of unemployment rates in the country, and we're still okay with that.

If unemployment goes to 12% to 15%, all bets are off and we have got to reassess.

But right now we think -- we feel comfortable with the guidance that we're given now and I don't know what the inflection point is, John, when that really impacts scripts.

And then finally when you look at Eckerds and Sav-on Osco EBITDA margins, how much below core CVS are they still running, how much opportunity is there?

When you look at similar volume stores, the Eckerds stores are getting pretty close to our core volumes, if you look at like stores in like states.

And we still have opportunity with Sav-On Osco.

We doubled the profit there.

And we obviously have the opportunity with Long's.

Now I'm not sure Long's can get to the exact operating profit percentages, as a percent of sales that the core business is going, just because of the fact that they're larger stores but there's significant opportunity.

These are great people in these stores with great locations.

We just have some opportunities around private label, around our ExtraCare program, around shrinkage, around mix.

I was just out -- I just did a west coast swing and spent some time in our Long's stores and spent time with some PBM clients and both were kind of uplifting trips, because the new Long's store that we laid out really is fantastic and I think it's going to drive sales productivity and margin growth.

And then the meetings that I had out in California, I think -- I was excited to see the client excited about our new proactive pharmacy care programs.

Okay, thank you.

Thanks.

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

Hi, good morning.

A couple questions on the theme of prescription drug demand, maybe in a recession.

And you saw very strong PBM retail claims volumes in the fourth quarter and obviously a lot of that was the Long's addition.

But trying to think about whether you guys think there was any kind of forward buying in that fourth quarter before deductibles reset.

And you talked about a strong January but have you seen maybe any slack in demand relative to a typical January?

Kind of the early buy-in has been happening for a long time in pharmacy.

You usually get a little uplift in December because of what you indicated.

So I don't think -- we didn't see anything abnormal around that in our business.

And it's a mix, right?

There's some obviously slowdown in scripts.

You can see it, yet we continue to take some share.

So we got a situation where we're taking some -- we're getting a bigger share of the spend of our customer, and we're taking some share from some competitors.

And as you obviously know, the flu season is certainly lighter than it has been.

And we kind of projected that in our numbers.

So, like I said, January was a pretty good month for us across-the-board.

And kind of on that same theme, just want to make sure I understand your comments on the 1% to 2% utilization increase.

Was that your comments on what you think the industry is or what you think CVS is taking some share?

That's kind of the overall industry.

So you guys should be better than that, right?

We think so.

Okay.

All right, those are all the questions I have.

Thanks.

Thanks.

Your question comes from the line of Scott Mushkin of Jefferies & Company.

Hey, guys.

Thanks for taking my questions.

So I wanted to poke at the maintenance choice thing a little bit.

You guys said you're adding 74 more clients as of April 1st.

How many additional lives, would be one?

I guess the second question, do you expect to see the 200 clients that have adopted maintenance choice have more 90 day script penetration rate, and would you guys start to give us that number, the 90 day penetration rate as a supplement to the mail penetration rate?

And I had a final question on sale lease-backs but maybe I'll just end it there?

Yes, the -- it's about -- we added about half a million lives with the additional clients on the maintenance choice, and I don't think we are going to be given the penetration, the difference in the penetration, not yet.

We'll give you some more color on that later on.

And do you expect them to have a lot higher 90 day penetration rate as you move forward?

I know when the beta testers had --

Yes, we should, absolutely, yes, no question.

There's no question about it.

That their utilization was -- the utilization of maintenance choice was higher than we originally projected, right, the switch.

So, yes, they will have a higher penetration than the 90 days.

The 74 clients, Tom, were they as much mail heavy clients than the beta testers were -- this year?

I don't know if they were as heavy.

The delta wasn't dramatically different.

I think about, maybe, something around 50% of those or a little less were mandatory mail clients before.

So it's probably similar.

Okay.

And then --

Lease-back.

A quick question for Dave on the sale lease-back front.

What if you can't get these done, Dave?

Is there kind of a plan B in the real estate or is that not really a thought?

There's absolutely a plan B in the financing consideration.

There's no plan B in real estate.

We'll do the real estate.

There are a variety of ways that we can finance this.

Good treasury operations meaning having plan B, plan C, plan d, and we have those.

And would you expect if you can't get the sale lease-backs done to still do the stock repurchase or would you have to do that less?

I would suspect that those are not linked and they're independent decisions and they have been made.

Perfect.

Thanks, guys.

Thanks for taking my questions.

Your next question comes from the line of Helene Wolk of Sanford Bernstein.

Hi.

Thanks for taking my question.

I have another follow-up up on the maintenance choice question.

I'm trying to understand the mix of clients, whether they're new clients to Caremark, existing clients converting.

And then a second question on Long's.

Actually it's a mix of both from a client standpoint, but I'd say it probably skews more toward existing clients for obvious reasons.

Yes.

It's a conversation you can have with the client.

They understand the history.

They understand the service metrics that we provide and so you have obviously a deeper relationships so it probably skews more to existing clients.

And then the Long's, you gave us a sense for the timeline integration.

I'm also curious if there's any update around the timeline for realization of synergy benefits.

Well we're obviously closing the offices in mid-June so we've got those overhead synergies.

We're already having discussions with both front-end vendors and pharmacy vendors around the purchasing synergies.

So you'll see those coming throughout the year.

Thank you.

Thanks.

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

Hi, good morning.

Nice quarter, and Dave, congratulations on a great career, it's going to be definitely missed.

Thanks.

Your retail gross margin performance has been nothing short of stellar in this environment.

Can you just help us understand how you've outperformed your competitors by such a large amount?

Is it really all about the ExtraCare card and can this continue into 2009?

Well, it's a lot of things.

There's no silver bullet on it.

I think our merchants, our marketing team and our operations team have just done a stellar job to your point because it's a tough thing to do in this environment.

We've been diligent about no unplanned promotions.

I think we've done a good job on the buys, around seasonal buys, anticipating the economic downturn.

The ExtraCare card obviously has helped us as we manage the spend.

And we continue to add P&L and proprietary And we continue to add P&L and proprietary items in the front end which obviously helps us.

And also I don't think you can diminish the fact that the work we do around shrinkage control.

The technology investments that we've made.

The fixtures investments that we've made, the training that we've invested in for our folks I think is obviously coming home to roost.

So in retail, obviously in any business it's not just one thing, it's a lot of little things and our folks have done an excellent job and we continue to do it.

I will say our promotional mix, i,e., the consumer coming in, our promotional mix of business on the front end is higher than it has been, so we haven't been promoting more.

We're just the customer is skewing to that end because of this economy and the good news is we're offsetting it with those other areas I talked about around private label, around shrinkage and around smart investment in ExtraCare.

And do I think -- we keep doing it every year.

And we keep looking for new ways to do it.

So our folks -- we're never satisfied, so we're always looking for new opportunities, whether it's new categories or a new way to go to market or a cheaper way to -- lesser expensive way to promote.

That's what we keep doing.

Okay.

And then my last question for you, could you maybe just give us a little perspective on what you're seeing today in the drug retailing landscape?

You've got a large competitor that's clearly struggling and another competitor cutting growth, and I've heard of a regional player who's exiting the business and the pending attrition goes up in recession.

So to me the supply side seems to be looking healthier today than it has been in a long, long time.

So it'd be great to get your thoughts on that and maybe how you're positioning yourself in this environment.

It's a tough economic environment, and reimbursements -- there's going to be pressure on reimbursements and pressure on margin and scale is important, especially as you look to make investments in stores, investments in technology, and you have to stay up-to-date, because, listen, we are going to come out this recession, right?

I mean, people question why did we do Long's at this time.

Was Long's the best time to do it?

Probably not given the California economy.

But when the economy comes back, and it will, we are going to be in a great position because those stores are going to be retrofitted and they're going to be up to date, and we're going to get the benefit of that while some of our competition is kind of pulling back, and, in fact, not investing in stores and people and technology.

So we're fortunate.

You'd rather be a good company in bad times, and that's kind of where we are.

We've been fortunate, we have great people, and we've kind of stayed true to our knitting, and so I do think there's going to be pressure on independents, we'll buy an independent every day next year.

And they'll probably be pressure on some regional players, and you can certain read about the national, what's going on there.

And so we don't have any other comment around our competition other than the fact that we just keep doing what we do, executing, providing the right customer service and the right expense control.

We watched our expenses.

We watched the size of our stores.

We watched what we put into the stores as far as payrolls, and we're in a position that I think we can maybe take advantage of some of the uneasiness in the market.

Great, thank you.

Thanks.

Your next question comes from the line of Robert Willoughby of Bank of America-Merrill Lynch.

A quick one.

Dave, did you update us what's outstanding under the bridge loan?

Is it still the $1.4 billion?

And then just a question, what is the minimum cash balance you'd need on your balance sheet just to run the business just on an ongoing basis?

At year end we had $500 million of the bridge still in place, and that has a maximum duration into August of 2009.

So we're using it as in effect, short-term financing.

Minimum cash, I'll have to -- I'd like to give you more a thoughtful answer than I would give you off the top of my head here.

So I think we're seeing each other some time next week or the week after.

Perhaps that's a time when we can talk about that concept.

Wonderful, thank you.

Yes.

Your next question comes from the line of Meredith Adler of Barclays Capital.

Thanks, and Dave, I'm happy for you, but very bummed for myself.

Maybe I'd just like to talk about the Part D business which was a concern at the end of 2008 and I'm interested to know since it sounded like the fourth quarter came in well.

In terms of people hitting the donut hole and general funding in Part D, how did they come out versus where you thought you'd be at the beginning of the year, after you had the problem I think it was in the first quarter?

Med D came in exactly where we thought it would be in the fourth quarter and it's starting out basically right on plan early this year.

So there were kind of no surprises when we readjusted and made the -- little bit of a course correction there.

And did you win new Part D members for this coming year, for this year?

Yes, yes, we did.

We absolutely won new Part D members.

And then my find question is, I've been getting questions from people about maintenance choice and the impact economically on your mail order business and on your retail business.

I think people are concerned that if you shift enough [perps] to retail you really hurt profitability for the company.

Is that right?

No, absolutely not right.

We're not in the business of shifting business where we make less money.

This is -- the maintenance choice program is a win-win-win.

It's a win for the client.

It's a win for the plan participant and it's a win for us.

There are more kind of variable costs in the mail facility.

We can readjust those down as we shift work or shift these prescriptions to the store.

We also obviously save a significant amount on postage.

And then in the stores, as you know, there's fixed costs and more fixed costs in the store, so your next prescription is really your most profitable prescription whether there's a 30 or a 90 and there's no more labor in a 30 or a 90 day prescription.

So from that standpoint it's a win.

Then you add the fact that people will be more inclined and what we're seeing is more inclined to pull their prescriptions all in one spot.

If they're close enough to a CVS to pick up their mail prescriptions, then they're probably close enough to get their acute medication.

So it's just more convenient.

This is not a force fit.

There's no plan.

This is letting the consumer decide and the plan participant decide what's the easiest and most effective way they can get their medication.

So absolutely not.

And, by the way, one has to realize that it has to be a plan design that is driving mail.

I mean, we're not in a situation where someone has 20% mail penetration, and we're going to move them to that.

There the economics don't work.

It's someone who has a deepen interrogation in mail already or in a plan design that's going to move to a deeper penetration in mail.

Okay.

Great, thank you very much.

Okay.

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

Hi, Mark Wiltamuth from Morgan Stanley.

I wanted to dig in a little bit on the unique attributes of the PBM retail business model.

If you look at maintenance choice and the discounts you offer on the CVS items on the front end, how far through the customer base are you on introducing these new features to the customers?

Really in the first inning, maybe bottom of the first or top of the second inning on that.

We still have a big opportunity there.

I guess with that in mind, where do you feel you are on realizing revenue synergies from the merger?

I think we're -- we obviously achieved the purchasing and cost synergies.

I think we're probably in that same area.

Maybe a little further along than the first or seconds inning, but 2010 I think we are going to see those revenue synergies ramp up.

And is the gating factor just the timing on contracts rolling over through the three year cycles?

Yes, it's that.

It's new, right?

It's new in the marketplace.

It takes a while for people -- no one wants to be the first.

I think as it starts to take affect, people will say, I get it.

And you can see the 90 plus new clients we've taken in.

They get it.

They're open to it.

So I think it's a combination of things.

There's a longer lead time on this than maybe anybody expected.

But we're really confident about it.

I mean, people are -- haven't said they don't like it, right?

They may say they don't take it or they're going to be a little -- they're hesitant or maybe they will maybe they'll wait, but nobody says they don't like the offering or it doesn't make sense.

Okay.

And the 204 clients you have, roughly what percentage of that sales base on the PBM side would that represent?

I don't know the answer to that.

It's a small piece now.

We'll get that for you.

I don't know the exact answer over the top of my head.

Okay.

But still in alignment with the first comment that we still have a lot to do.

Yes.

Exactly.

Okay.

Thank you very much and good luck to David on your future endeavors.

Thanks.

We'll take two more questions.

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

Hi, guys, good morning.

Good morning.

Quick question on generics and reimbursements.

I believe last quarter there was some mention that you expected that this should be less pressure on reimbursements, that maybe the pricing would improve for that part of the business.

Is that something you still feel will be the case this year?

I don't recall the comment about it.

I mean, there's always going to be pressure on reimbursement but if you at whether it's states or private plans or people, they want to move to more generic utilization, so maybe -- I don't know if -- is your question will there be less generics introduced in '09?

Talk more the relative pricing pressure, the reimbursement on the reimbursement --

I don't think -- I think it's going to be similar to what it was.

I don't see any increased pressure on reimbursement no, on generics at all.

Okay, great.

Thank you.

Thanks.

Your final question comes from the line of Eric Bosshard of Cleveland Research?

Good morning, two things I wanted to cover.

First of all, in terms of comps, I think the guidance you gave a month ago or so for comps in '09 was [3.5% to 5.5%] range and you reported [3.5%] for the fourth quarter.

Can you just talk about components of what gives you confidence of that range being reasonable in light of what we are seeing with demand and what we saw coming out of the fourth quarter?

Yes, the plans that we have in place, right?

We put plans in place to grow the businesses.

This has just not -- obviously it just doesn't happen.

We're aggressively going after new customers in both the front and the pharmacy end.

So we think that the plans that we have in place kind of moderated by what we're seeing in the economy, we still feel pretty good about that number.

Then obviously the Zyrtec situation, when you look at the -- that obviously helps the cycling of Zyrtec for '09.

And then secondly as we start to look out to 2010, I think that the PBM profit growth this year you've talked about is at a 2% to 5% type level.

Can you give us any sense as a baseline to consider as we look out to 2010 for PBM profit growth?

We're not ready to give that.

We just said it would be significantly better than '09.

Fair enough.

Thank you.

Thanks.

Thanks, everybody, and as usual if you have any questions, you can call Nancy Christal.

Thanks.

Thank you, again, for participating in today's conference call.

You may now disconnect.