CVS Health Corp (CVS) 2009 Q1 法說會逐字稿

Good morning and welcome to the CVS Caremark first quarter 2009 earnings 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.

Miss Nancy Christal, Senior Vice President of Investor Relations, you may begin.

Thank you.

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

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

First let me provide a quick reminder.

Our annual analyst and investor meeting will take place next Friday morning, May 15th, at the Mandarin Oriental Hotel in New York City.

We've had a big response to the meeting and look forward to seeing several hundred of you there.

If anyone else would like to attend and need the specifics of the meeting, please call my office and we'll do our best to fit you in.

The presentations will also be available via webcast.

This 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 in person.

Given that we have our big meeting next week, today's business update will be somewhat more brief than usual.

We'll focus primarily on the quarter's results.

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

Turning back to our first quarter, please note that we expect to file our 10-Q by the end of day today and it will 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 just mentioned as well as the reconciliations to comparable GAAP measures on the investors relations portion of our website at cvscaremark/investors.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 investor to access it.

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 10-K and that you review the section entitled Cautionary Statement Concerning Forward-Looking Statements in our most recently filed quarterly report on form 10-Q.

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

Thanks, Nancy, and good morning, everyone.

I'm obviously very pleased with our first quarter results, which were at the high end of our expectations.

Let me review some of the highlights.

Total revenues increased 9.7% with PBM revenues up 7.2%, and retail revenues up 13.9%, and that's even with one fewer day than last year.

Mail Choice prescriptions.

Mail Choice is our new metric, which includes mail order scripts plus 90-day scripts filled at retail via Maintenance Choice.

So Mail Choice prescriptions were up 6.6%.

PBM retail network revenues rose 6.8%, while mail service revenues rose 8.4%.

Our EBITDA for adjusted claim, adjusted for RX America, Maintenance Choice, and the increase in litigation reserves increased 3.2% to $3.46.

David will give you some details later on.

We achieved a Best in Class generic dispensing rate, our retail comps up 3.3%, once again leading the industry.

While the Longs stores are not included in our comps, sales in those stores are performing well overall despite the California economy.

SG&A increased, as we expected, due to the Longs' integration expenses, the dilution -- the dissolution of United or Universal American joint venture and other items which Dave will review in detail.

Adjusted EPS from continuing Ops were up $0.55 at the top of guidance and we maintained a healthy balance sheet generating approximately $311 million in free cash.

Let me touch on our PBM.

As Nancy said, you'll hear a lot more about this next week from Howard and Dave Joyner and others.

As far as the selling season goes, in 2009 we reached a new record level of $8.9 billion in annualized new name sales.

That's up previously from the announced $8.2 billion.

On a 2009 impact basis, our gross new revenues are $7.6 billion.

This is up from previously reported $7.0 billion and our net new 2009 revenues are $3 billion, up from previously announced $2.5 billion.

The primary driver here is an increase in Med D revenues due to higher enrollment.

We've also seen some gains in the employer and health plan segment, as our sales force remains active in the market.

While we won't talk about specifics this early in the current selling season, we see plenty of new business opportunities for 2010 and we're very pleased with the early results of the season.

In addition, clients are more open to -- than ever to changes in plan design and other cost containment tools to save money.

As you probably heard last week, we lost the Coventry commercial contract, which is about $1 billion in revenues and a relatively low mail penetration account.

This was not unexpected.

In fact, as we began to set our goals for 2010, the loss of this account was considered.

We have a lot of irons in the fire.

We'll provide more details later on as the selling season progresses.

Our Maintenance Choice offering has really taken off.

The number of scripts being filled at retail 90-day is well over our plan.

Through Maintenance Choice, rather than relying solely on mail for their 90-day maintenance medications, many of our plan members now have the convenient option of obtaining prescriptions at any CVS pharmacy using mail order pricing discounts for both the plan participant and the payer.

This is really just an extension of our mail service offering.

As of April 1st, we had over 200 clients actively using Maintenance Choice and the feedback has been extremely positive.

We are in the process of finalizing commitments for Maintenance Choice for July 1st.

starts, and we expect -- we are excited about those prospects, as well as the clients that have expressed interest for a start in January '10.

Dave will review the impacts of Maintenance Choice and some key metrics for our PBM and retail segments.

And we'll talk in greater detail about the economics of Maintenance Choice at our meeting next Friday.

But the short story is, Maintenance Choice is profitable to our overall enterprise.

Let me touch a little bit on MinuteClinic.

In the first quarter we saw traffic up 42% on an overall basis.

As we said before, our focus is on raising awareness, expanding our services, and increasing third-party insurance coverage.

First we're leveraging our retail advertising spend to drive clinic awareness through messaging in our circulars and in-store signage and Extra Care communication.

Second we are expanding our service offerings to extend our relevance.

For example, TB testing as well as injection training were recently launched nationwide.

Troy Brennan, our new Chief Medical Officer, will provide many examples of some new services that we're introducing at MinuteClinic at our analyst meeting.

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

We've added 17 million additional lives to our network in the first quarter, putting us over 100 million lives in the third-party network for MinuteClinic.

I should point out that more than 81% of our visits were third-party paid in the quarter.

As I said on the last call, we're investing about $0.05 to $0.06 of diluted EPS in MinuteClinic this year.

I expect MinuteClinic will be less of an investment in 2010.

Now let me turn to our retail business, which continues to perform at the top of the industry.

Now, while our business is certainly not entirely recession proof, it's pretty defensive and we continue to gain share.

As I mentioned, our first quarter comps increased 3.3%, pharmacy comps rose 4.6%, and front store comps increased 0.7%, even with the later Easter.

I think these are great results in a very difficult economy.

In fact, if you look at our March/April comps, which we should really think about because of the Easter shift, our front store combined March/April comps were 3.4% and our total comps were 6.9% when you think about March and April together.

In our core CVS stores, we continued to gain share versus food, drug, and mass competition.

That's both in pharmacy and front store categories, which make up about 90% of our front store volume.

Private label sales were 15.4% of front sales, up about 60 basis points, and that's excluding Longs.

And to take advantage of the growing willingness to try private label, especially in this economy, we're introducing a store brand proprietary Try-Me section in over 4500 stores.

We're also adding new private label products.

We've introduced 200 in the first quarter alone and I expect private label to grow to be about 20% of our front end sales over the next several years.

People are asking about the Longs' integration.

I'll tell you it's extremely -- proceeding extremely well.

We're right on track in every aspect of the integration.

Our store operations team has done a great job.

We have all store systems conversed by the end of May.

We'll be closing down the Longs headquarters in late summer.

We have all the store planned resets and remodels completed by probably mid-October and then the stores will be reintroduced in the marketplace during the fourth quarter.

And I'm convinced we can clearly narrow the gap between the sales and productivity margins that these stores had versus our core stores, similar to what we did with Eckerd and Save-On.

As far as new stores go, on the real estate side we've opened up 92 stores or relocated stores in the the quarter.

So 92 new end relocated stores.

And we have closed about 50 others.

Approximately 40 of those closings were Longs' closings.

We plan to open about 250 to 300 new and relocated stores in 2009.

Excluding Longs from our base, that will add about 3% square footage growth.

Now, before I turn it over to Dave, let me give you a little update on the CFO search.

As I said on our last call, Dave will be retiring some time towards the end of this year.

We're conducting an internal and external search to insure that we have the best candidate for the job.

We've engaged an executive search firm and we have identified a lot of interest in the position.

Obviously, you can imagine with a search at this level, it takes some time.

I would say probably six to eight months in a situation like this, so we'll have more to report later this year.

In the meantime, I can assure you, Dave Rickard is fully engaged and committed to stay until his replacement is up and running.

So with that, l will turn it over to David.

Thank you, Tom, and good morning, everyone.

This morning I'll walk you through our first quarter financial results, noting the segment detail where appropriate.

After that I'll provide initial guidance for the second quarter and update our full year 2009 guidance.

So let's dive right in.

On a consolidated basis, as Tom said, revenues in the first quarter increased by 9.7% over 2008 to $23.4 billion.

Having one less day this year reduced our top-line growth by approximately 150 basis points.

Putting that aside, a bit more than half of this quarter's growth over the comparable period last year was due to the addition of Longs.

The $23.4 billion in consolidated revenues is net of $1.6 billion of intersegment eliminations.

Those are produced as a result of our PBM clients filling their prescriptions in our stores.

The intersegment eliminations, as a percent of PBM revenues, increased by 230 basis points over the prior year period, from 11.9% to 14.2%.

This is up sequentially from last quarter's 120 basis point increase, providing further tangible evidence that there's a growing base of Caremark customers choosing CVS as their retail pharmacy, with unmatched offerings like Maintenance Choice and Extra Care Health contributing to the list.

In our PBM segment, first quarter net revenues of $11.5 billion increased 7.2%.

Adjusting that growth rate for the impact of new generics, net revenues would have grown 11.4% in the PBM.

So what drove the growth of PBM revenues?

Well, first, we saw a positive impact from the addition of RX America.

It contributed almost a third of the growth in this year's first quarter.

Also, we benefited from net new client additions.

Offsetting these, we saw a negative impact from the one fewer day due to the calendar adjustment.

Given this back drop, PBM retail network revenues rose 6.8% over 2008 levels to $7.5 billion.

The retail network generic dispensing rate increased to 68.8% compared to 65.2% in the first quarter of 2008.

At the same time, retail network claims grew 4%.

This growth was driven by the addition of RX America, offset to some degree by the net impact of new business and terminations.

Total mail revenues grew by 8.4% to $4 billion.

Within total mail revenues, our specialty pharmacy unit saw a strong increase of 16.7% compared to the first quarter of 2008.

The mail generic dispensing rate rose to 55.5% from 52.8% a year ago.

That's an increase of 270 basis points.

Our overall mail penetration rate of 23% was essentially flat to the rate in the first quarter of 2008 on a reported basis.

However, there are two important adjustments you need to make to understand the underlying growth in mail penetration.

First and most importantly, RX America's claims mix adversely effected the mail penetration rate by 220 basis points.

Second, the shift of some 90 day scripts from mail to retail via Maintenance Choice reduced the mail penetration rate by an additional 50 basis points.

Adjusting for these two factors, our mail penetration rate grew from 23.1% to 25.8%, up 270 basis points.

So we're aggressively driving mail penetration in our book of business despite some scripts moving to retail via Maintenance Choice.

And what about the retail drugstore side of the business?

Well, it turned in a first rate quarter.

Revenues increased 13.9% to $13.5 billion in the first quarter.

Longs made up approximately $1.2 billion of that growth during the quarter.

The retail segment's revenue also saw negative impact from one fewer days.

That amounted to about 150 basis points year to year.

As Tom mentioned, our first quarter comps increased 3.3%.

Pharmacy comps rose 4.6% and were negatively impacted by about 310 basis points due to recent generic introductions.

Front store comps increased 0.7%.

The later Easter had a negative impact of approximately 150 basis points on front store comps -- I'm sorry, I misspoke, 115 basis points on front store comps and approximately 40 basis points on total comps.

And there's a new impact I would like to highlight.

Maintenance Choice had a positive effect on our retail comps, benefiting pharmacy comps by approximately 120 basis points and total comps by approximately 80 basis points.

We're really pleased with the strong adoption of our groundbreaking Maintenance Choice offering, which I'll talk more about next week.

Moving on to gross profit.

The overall business improved with margins up approximately 20 basis points despite each segment being down individually.

That's because the overall business reflects the impact of the interCompany elimination, which reduces revenues while margin dollars remain constant.

Within the PBM segment, gross profit margins were down approximately 45 basis points.

The primary drivers of the decrease were the margin investment we made this year with certain key contracts, as well as the startup costs of a significant amount of new business, as expected.

Additionally, let me remind you here that in the second quarter we'll begin to change the RX America contracts to conform to the Caremark contract structure.

RX-America contracts are currently accounted for using the net method.

As these contracts change over to Caremark structure, the accounting treatment changes from the net method to the gross method of revenue recognition.

The impact will be to add revenues as well as a parallel addition in annual cost of goods sold, so there is no impact on operating profit dollars.

When we told you about this in February, there were some contracts for which the accounting was not yet clear.

Those have been resolved and they bring the total expected gross up to approximately $700 million to $750 million per quarter versus the earlier estimate of about $500 million per quarter, beginning in the second quarter of this year.

Gross profit margin in the retail segment declined to 29.3%.

That's down approximately 30 basis points versus 2008 first quarter.

That reflects the impact of averaging in the lower margin Longs' business for the full -- first full quarter, less cough and cold due to the weak traditional flu season, and customers opting for more sale priced items as a percent of total purchases.

Partially offsetting all that was the fact that the retail generic dispensing rate increased 260 basis points to 69.2% and our private label percent of front store was up approximately 60 basis points versus the prior year quarter.

And what about expenses?

Overall operating expenses as a percentage of revenues increased by approximately 70 basis points.

The increase overall is a lot higher than the increase in each segment.

It is, again, exaggerated by the interCompany elimination, which reduces revenues while expenses remain constant.

In the PBM segment the increase was about 25 basis points to 2.7%, including the impact of the elimination of the Universal American joint venture, the income from which was historically an offset to expenses, and an increase in litigation reserves related to pre-merger matters.

In the retail segment, the increase was approximately 20 basis points to 22.7%.

That's primarily related to Longs' integration costs and simply averaging in the Longs' business for the full quarter, which has a higher SG&A percent to sales profile.

Given everything I've just discussed, we saw operating margin decline, as expected, by approximately 55 basis points.

The PBM segment's operating profit margin was down by 70 basis points year-over-year to 4.2%.

Our reported EBITDA per adjusted claim was $3.03 versus $3.35 last year.

But to put it on an apples to apples basis, you need to adjust this year for three things -- the inclusion of RX America, which is virtually all retail claims and wasn't in the number last year; secondly, the shift of some mail scripts to retail via Maintenance Choice; and finally, the litigation reserves taken in this quarter in the PBM related to pre-merger matters.

Those adjustments result in an EBITDA per adjusted claim of $3.46 this year versus $3.35 last year, up 3.2%.

In the retail segment, operating profit margin was 6.6%, down from last year's all-time record high 7.1%.

Recall that we accomplished this even with the onetime expenses associated with the Longs' integration.

Moving to the consolidated income statement, we saw net interest expense in the quarter increase to $142 million, reflecting an increased debt position largely due to Longs.

Our effective income tax rate in the fourth quarter was 39.8%, as expected, and our weighted average diluted share count was 1.47 billion shares.

As Tom said, adjusted EPS from continuing operations was $0.55, flat to last year's first quarter and at the high end of our guidance.

Recall that the quarter includes the onetime integration expenses associated with Longs, our planned investments in MinuteClinic, and the short-term margin investments we made in key PBM contracts to generate long-term gains, all of which should help drive our future growth.

GAAP diluted EPS from continuing operations came in at 51% for the quarter, also the same as last year.

Turning to the balance sheet and cash flows, we generated over $310 million in free cash flow in the first quarter.

Net capital expenditures amounted to $461 million in the first quarter.

This was the result of offsetting the $466 million of gross capital expended with approximately $5 million worth of sale lease-back proceeds.

In January we announced an increase in our quarterly dividend of 10.5%, marking the sixth consecutive year of dividend increases for our Company.

And we ended the quarter with net debt, defined as total debt net of cash and cash equivalents, of $10.1 billion.

That's down approximately $300 million from the prior quarter.

Now on to guidance.

All of my comments here include the impact of Longs.

For the retail segment, we continue to expect revenue growth of between 11% and 13% for the year.

Same-store sales are expected to be in the range of 3.5% to 5.5% for the retail segment for the year.

For the PBM segment, we have revised expectations for revenue growth, primarily to capture the additional gross up of RX America contracts, as well as the increased Med D business Tom mentioned earlier.

As a result, PBM segment revenues should up between 15% and 17% for the year.

As for growth in mail order volumes, we said on our last call that we expect growth of over 10%.

Given the uptake of Maintenance Choice and the share gains we have made to date as a result, we expect to do even better this year.

Combining our mail order prescriptions with those from Maintenance Choice, we expect to see growth in our new metric, mail choice scripts, of more than 11%.

For the total Company, we expect revenue growth of roughly 12% to 14% for the full year.

That's after interCompany eliminations of approximately $7 billion, which is higher than the guidance we last provided.

Again, partly because of the RX America accounting change.

Also impacting the larger interCompany elimination is the better than expected momentum we're seeing from the Maintenance Choice offering, as well as the Extra Care Health card, both of which are driving incremental scripts to our stores.

We continue to forecast that new generics will be beneficial to our gross margins, but to a lesser degree than in 2008.

We continue to expect our Med D business to be more profitable this year than last year.

For the total Company, gross profit margins are expected to be modestly below 2008, with retail slightly up and the PBM segment down.

We forecast that total Company operating expenses as a percentage of revenues will be modestly up, reflecting the integration and onetime cost of Longs, the increase in litigation reserves, as well as first year economics of new PBM business.

All of that will lead to operating profit margins for the total Company, which are moderately below the record levels of 2008.

We expect EBITDA per adjusted claim to be down slightly on a reported basis, but up low to mid-single digits when adjusted for RX America, Maintenance Choice, and the increase in litigation reserves.

We forecast net interest of about 4 -- sorry, $540 million to $560 million, slightly up from our prior guidance due to our terming out $1 billion in March to payoff the Longs bridge loan and reduce commercial paper balances.

We expect our tax rate to approach 40% and we're forecasting approximately 1.45 billion weighted average shares for the year, including the completion of the share buyback program in the second half of 2009.

We still expect total consolidated amortization for 2009 to be approximately $450 million.

Add in projected depreciation and the number becomes about $1.5 billion.

Net capital expenditures are expected to be in the range of $1.1 billion to $1.3 billion for 2009, free cash flow is expected to be in the neighborhood of $3.5 billion.

We still expect to complete the sale lease-back transaction we deferred from 2008, as well as the normal 2009 transactions.

Adding it all up, we're raising our guidance for the full year.

We now expect to deliver adjusted EPS of $2.55 to $2.63 and GAAP EPS of $2.37 to $2.45.

This increase of $0.02 over our prior guidance comes largely from the better performance we're experiencing in the Longs' business, including RX America, for the full year, from both a sales, margin, and SG&A perspective.

We had previously guided to Longs' dilution this year in the range of $0.06 to $0,07 per share.

We now expect the Longs' dilution to be in the range of $0.04 to $0.05 per share.

As with our previous acquisitions, our integration and operations teams are turning in another stellar performance.

Now let me give you second quarter guidance.

In the quarter we expect revenue growth for the total Company to be in the range of 16% to 18%.

This significant growth is being driven in part by the RX America accounting change in the PBM segment.

We expect total same-store sales growth to be between 4% and 6%.

As the first quarter comp was negatively impacted by a later Easter, the second quarter will benefit from the shift of holiday sales into the quarter.

We also expect to see a positive impact from the cycling of Zyrtec, which went over-the-counter during the first quarter of 2008.

We expect second quarter adjusted EPS to be between $0.63 and $0.65 per diluted share, compared to last year's $0.60 per share.

GAAP EPS is expected to be in the range of $0.59 to $0,61 per diluted share.

So stepping back from it all, here we are in the worst economic environment we've seen in most of our careers, yet we're turning in very respectable results.

The Company is gaining share across all markets and segments, generating significant revenue growth and free cash flow, raising our earnings guidance, increasing the dividend, and at the doorstep of a substantial share repurchase program.

So we continue to deliver significant shareholder value.

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

Thanks, David.

Obviously we're pleased with the results and our position in the marketplace and, as I said, we will give you some more details around some of that next week in the analysts meeting in New York.

Okay, we are -- open it up for questions.

(Operator Instructions) Your first question comes from Eric Bosshard with Cleveland Research.

Good morning.

Two questions.

First of all, the comp, retail comp improvement that you talked about in March/April, the combined number seems like the 2Q comp guidance may be a little bit conservative.

Can you just talk about what's going on there?

And then secondly, can you talk about how the year-over-year PBM profit should play out as we move quarter to quarter through the year?

For the front end comps, I told you our front end comps for March and April were 3 - 4.

Obviously we had a very good Easter selling season and we think it's fairly reasonable, our projections, for the quarterly comps.

And the other -- the second piece was what.

I think you had originally talked about 2% to 5% profit growth for the PBM this year.

Right.

It was down in the first quarter.

I know there was some noise in the number here in the first quarter, but can you talk a little bit about how we should expect that to play in.

Is the profits going to be down again in the second quarter and then turn up in the second half?

No, the 2% to 5%, we're still comfortable with the 2% to 5% and the profits should kind of ramp up through the year.

Can you give us any sense should the profits be up in the second quarter in that business?

Well, Eric, you know that we don't actually disclose --

They're going to ramp up through the year, Eric, and 2 to 3 to 4 each quarter.

Right.

I mean they typically ramp up each year anyway in the beginning to the end, so it would be consistent with typical PBM performance.

Okay.

Okay?

Thank you.

Thanks.

Your next question comes from Lisa Gill with JPMorgan.

Thanks very much and good morning.

Can you talk on an enterprise-wide basis, is Maintenance Choice more profitable, less profitable, or equally as profitable to mail order scripts?

So not comparing PBM to retail, Tom, let's talk about the whole enterprise, when you get a person into the store and tell us is that more profitable?

And then secondly, a customer of yours, Chrysler, looks like it is going to go through bankruptcy.

There's some question around what's going to happen with the vivos trust.

Can you maybe talk about what's happening in your customer base right now as companies like this try to work through bankruptcy and what it means for somebody like CVS?

And then just one classification, I'm wondering if Dave can just talk to us about what that litigation reserve is for as it pertains to the PBM side.

I'll hit all three, actually.

The Maintenance Choice program is definitely more profitable for the enterprise, when you look at the entire book of business.

And Dave will go into that.

Now keep -- keep in mind, you have to make sure that either it's a mandatory mail program or it's a mail program as a plan design that drives mail to make sure that happens.

But once you have that with a client, when you think about what's picked up in the store and then the ancillary purchases, the overall -- the acute scripts, it is more profitable for our enterprise around Maintenance Choice.

We pick up share.

As far as Chrysler goes, and David will walk -- we'll give you the kind of the walk-through next week, Lisa, on the details of that, because I know people are questioning it and saying that it's -- we've had some in the market place say, listen, it's just a temporary process, they're just trying to drive it to retail.

That's not the case at all.

This is a mail order offering that we've extended to retail.

It's kind of that simple.

So think about it.

It is kind of the mail business in the store and, overall, it's certainly more profitable for us.

Chrysler, obviously, has its problems and the problems are certainly not due to its PBM contract.

They have certainly other matters to deal with, but we think, obviously, they're going to emerge from this, the people, the employees need prescription benefits during this time, so it would seem likely that they would maintain -- maintain their pharmacy benefit program.

It's -- unemployment, obviously, is a challenge for the economy and for us and for all retailers and PBMs alike.

The good news is that we have cobra extension.

It's, when you look at our book of business, is a very small percentage of our business around the layoffs, but we're watching it closely.

Obviously the VBA process is moving forward and there should be some resolution on that in the near future, but we're pretty confident that Chrysler will keep the benefits as they go through, even if they go through the bankruptcy and then we'll see what, obviously, what happens with Fiat.

As far as the litigation, we don't, obviously, disclose the litigation reserves, but I will tell you that it's all pre-merger and nothing to do with CVS, nothing to do with Caremark, it's three-plus years back and it's an old case.

Okay.

Great.

thank you.

Your next question comes from Deborah Weinswig with Citi.

Good morning and congratulations on a great quarter.

Can you go through your expectations for specialty pharmacy growth and the initiatives to drive increased distribution and how the integrated specialty management program is going so far?

Yes, our specialty business and you'll hear a little bit more about this, also, in -- on Friday.

But our specialty business continues to meet our plan and grow -- it's obviously the fastest growing piece of -- of the pharmacy business.

We have a few things going on with injection training around specialty and our MinuteClinic.

And we also have the program that you mentioned around retail mail pickup.

That was just kind of introduced.

And that's actually a big plus.

Once again, it's -- think about it like the Maintenance Choice program.

It's about access and it's about ease and it's about low cost.

So you have a situation where we don't -- typically you have to call to make sure someone was home as we're delivering this medication because of the storage requirements, et cetera, now they can pick it up in the store.

So it's early -- it's early on that, but it's going well and overall we expect, I think, specialty to grow in the 14% range.

Okay.

And then last question, on Longs, is the timeline progressing as expected?

Sounds like things might be going a little better?

And I know it's early, but are there any best practices that are impacting the CVS stores as of now?

It's actually going better than -- a little better than we expected.

We've gotten pretty good at predicting how these -- how the integrations go.

Interestingly enough, I mentioned that we had closed some 40 stores.

We've retained more customers in those closings than we originally thought, so that's been helpful.

Most of the work that we've done has been around the back end, so to the customer it's been relatively transparent, which is good news.

And we'll have, obviously, some disruption when we redo the stores, but it's going very well and especially considering the California -- the California market, which we're starting to see some activity coming back.

You probably recently read about some housing starts and people starting to come back and spend in the California market, so we're pretty happy with the performance there.

And we are learning some things around seasonality, particularly in the Hawaii stores.

We continue to learn there, as I said.

We'll maintain those stores separately and we'll apply some of that -- some of those learnings to the rest of our stores.

Great.

Thanks, again.

I look forward to seeing you next week.

Yes.

Your next question comes from Robert Willoughby with Banc of America/Merrill Lynch.

Thanks.

You did close more of the Longs stores than we thought, as well as some of the specialty and mail facilities.

I guess I'm a bit surprised why profitability wouldn't have ticked up a little bit higher on some better capacity utilization, assuming that was the rational behind closing the stores.

Is that the case?

No, I mean we close stores when we do acquisitions all the time.

We look at store location, we look at the performance of the store, we look at the location of like stores.

We look at the location of, if in fact in some markets there's other CVS stores, obviously that would be the case in Southern California and Arizona markets, in particular Phoenix, et cetera.

So our closings are basically right on plan that we expected for -- for Longs.

In fact, we got, obviously, as I said early, a little better retention on some of those customers.

On the mail in the specialty side, though, are you done with that infrastructure consolidation or is there more to go there?

There's more to go there.

Yes, we're still looking at that and how we're going to -- obviously those are, when you start looking at those facilities, different than -- different than store locations, there's obviously logistics implications around that.

So, no, there's more to go as we look to rationalize that network.

Thank you.

Your next question comes from Ed Kelly with Credit Suisse.

Good morning and good quarter.

Tom, could you discuss your current thoughts on acquisitions given that it sounds like other captive PBMs may be for sale following the Express WellPoint deal.

Medco's indicated that it -- it may have some interest.

I was curious what your thoughts are.

Well, we -- we obviously look at all opportunities.

Can't comment on individual acquisitions, but I think -- I think with any acquisition we've said it time and time again, that we look at acquisitions we can grow.

And you've got to make -- one you've got to make sure that you pay the right place.

People overpay for acquisitions.

It's a problem.

People can't integrate the acquisitions, whether it's the retail side or the PBM side.

So we'll continue to look at those appropriately in both -- both segments of our business and we'll do the, obviously, the proper due diligence and look for the opportunities.

All right.

And then on -- on the Maintenance Choice side, it looks like the impact to reported mail claims was about 400 basis points.

If you just do some math on that from an EBITDA per claim basis, it seems like it may be $0.15, $0.20 or so to this quarter.

Is that ballpark?

I don't know if that's ballpark.

I don't think --

We don't -- we haven't disclosed that kind of detail, so I don't think this is the time to start.

I know we did disclose -- I mean David did say the impact -- the impact on our front store pharmacy comps -- .

Was about 120 basis points.

And overall what, 70 or 80, or something.

About 80, yes.

So, yes, that's -- that's -- .

I guess if we think about -- think about it qualitatively, that impact, whatever it was to EBITDA per claim, will likely ramp throughout the year.

Yes.

That's correct.

We've had -- we've had one more -- more clients reach for it and then the utilization is also higher than we expected.

Does that impact in itself -- how much do you think it -- it grows by?

Is it something that could double by the end of the year or is that much too aggressive?

It sounds high to me.

It sounds high, but it's certainly going to increase, which is why I'm trying to -- we're trying to talk about the enterprise wide growth when you think about the Company, because there's going to be interCompany transfers, there is going to be pieces back and forth, and we're moving people between divisions now.

We have our bonuses are incentivized around the enterprise.

When you look at how people are paid at the highest levels and also with middle management, our middle management teams, who are the closest to our customers, so we're thinking about this from an enterprise wide standpoint.

And, yes, it will -- it will certain ramp up.

All right.

Thank you.

Thanks.

Your next question comes from Matt Perry with Wachovia Capital Market.

Hi, good morning.

Tom, just a couple of questions on healthcare reform.

You guys kind of sit in a unique position with both the PBM and retail pharmacy business.

Wondering what your thoughts are on some of the current proposals and your views on reform in general.

And then if we think about where you might benefit more in your business from a reform plan that covers the uninsured, in you could just talk about that, too.

I wish I had a crystal ball on healthcare reform.

I think there's obviously an appetite for the administration to do it.

They certainly have the votes to do it and the question is, how the -- what will happen in the House versus the Senate.

At debates just starting now, I think the Senate or the House is certainly seems to be more aggressive in their -- some of the pieces of their reform legislation they're looking at and the Senate may be a little more conservative, but more to be seen.

But just from a kind of broad brush standpoint, we think at the end of the day healthcare reform will be good, one, for the country and good for us.

Because, one, you're going to have more coverage.

Anytime you have coverage, that's, obviously, good for us and we think pharmaceuticals are the best return in healthcare, when you think about what they do.

So people will think about that as they look to expand it and think about wellness and prevention, they're going to strengthen that, which obviously plays in with our disease management and MinuteClinic approach.

They've invested $165 billion in technology.

We think that's a real opportunity for healthcare in this country.

We -- I think we do 17% or 18% of the retail scripts in this country and we do about 25% to 26% of all the electronic prescriptions in this country.

So we are really pushing around electronic prescriptions, electronic medical records, so that we can, obviously, improve safety, improve access, and improve outcomes.

And then, obviously, the push on the biotech drugs.

These are drugs that are off patent that are on -- that have generics in Europe and they're opportunities for us here that can lower payers costs, lower patients costs, and is good for us.

So overall, there are, obviously, puts and takes.

People talk about this public plan.

What does that mean.

Is it -- will it be truly a public plan or will it be a public plan with -- that looks like a private plan.

We don't know about that.

And that's, I guess -- that's, I guess, will be the biggest discussion over the next coming months, how -- what that quote unquote public plan looks like.

So there's a lot of devils in the detail there, but overall, I think the healthcare system will be good for pharmacy in general and certainly our Company as we're integrated.

Thanks.

And then just brief follow-up.

You do mention the public plan.

Does -- does that idea concern you at all, that if the government -- if the public plan is -- doesn't really compete on a level playing field with private, private sector, that that could be a negative for your business?

Yes, I mean, we getting into my philosophical bent on where the government should be, but it's hard to have an equal playing field with a government-run plan.

Are they going to be taxed on it?

Are states going to tax it?

Are the regulators going to run it, the same people who are going to manage it?

Are they going to have the same requirement on reserves?

I mean all of these issues have to be fleshed out, and if it -- if it -- to me, this is my just personal opinion, if you have a public plan that mimics the private plan, well, then, it's just another private plan and the question is do we need another private plan in the market place.

And so I -- I just think if you have the appropriate regulations and maybe we need some enhanced regulations around some of the private plans.

I think that's enough.

I think it will get done, but like I said, those are my personal opinions and from a business standpoint, we can -- the Draconian public plan would be neutral, I think, to us at best.

Okay, great.

Thank you.

Thanks.

Your next question comes from John Heinbockel with Goldman Sachs.

Tom, in the past you've talked about you win new contracts on price and you keep them on service.

Is the dialogue now, because of Maintenance Choice the new model, where does it stand where you can win on service or the new model, as opposed to price?

Are we getting there, are we close?

Where are we on that?

Well, listen, in this economy, especially in this economy price is always going to matter.

I mean, that's kind of the ticket to the game to get in, but when people are making these decisions, especially the big employer groups and big healthcare plans, they're looking at how can this Company help me lower my healthcare costs and not just drug costs.

How can they help me engage my members or my employees?

And that kind of discussion we're seeing more of that.

Once you have the price discussion kind of out the way, what is your price for generics, what is your price on mail, retail, specialty, et cetera, now the discussion comes around how can we help them -- how can we help them lower their overall healthcare costs?

And one of the ways is Maintenance Choice is why it's so big.

We just came from a client conference and I can't tell you the number of people that have come up to me and just said we were thinking about mandatory mail, we didn't want to do anything mandatory.

Moving our people to more mail order prescriptions, this is a perfect opportunity for us.

It's kind of the best of both worlds.

So I think that combined with our proactive pharmacy care program, where we're trying to intervene earlier and help our -- help our payers, help our clients lower their overall healthcare cost.

That kind of discussion is happening more in the last -- certainly in the last six months to a year than it happened, obviously, before that.

Certainly when we -- we never had that discussion before, really.

And do you think because you have brought -- you've repriced so many of those contracts and don't have a lot coming up here, how much freedom do you have to be -- for you to go out and cultivate new business aggressively on price?

And you don't want to over rely on price, but it seems you -- you do have more opportunity to win some business here on price over the next year than lose it, because you've locked up a lot already.

Yes, I think price is -- price is fairly rational in the marketplace now.

Now -- listen, if you look at it, people understand their costs, people understand what they need for a return, and so do -- so do clients.

So I think there's a rationalization in the marketplace.

The issue is what are the services and what are the services you can offer and the scale that you can apply.

You look at our prescription drugs, I mean even with the latest acquisition in the PBM industry, you look at our purchasing power compared to that entity, we purchase five times the prescription medications than -- than the new -- this new combined entity in the marketplace.

So I think scale is important for a variety of reasons and we'll look at -- we'll look at clients on an individual basis and you'll see some, I think, maybe some lower pricing in certain markets for certain clients.

But, overall, the issue, the real tenor and tone of the discussion is around the services that one can provide and how it can lower overall healthcare costs, not just pharmacy.

And one final thing, is Maintenance Choice yet helping 30 day scripts?

Yes.

Yes, we believe it is.

We have evidence that it is.

And once again, it's the customers' choice.

We -- we have people talk about the network and the pharmacies.

We have 64,000 pharmacies in our network.

I mean, we have probably as many or more than most and we haven't cut it down since this merger.

So the issue for us is letting the customer decide and we're seeing some uptick in acute medication, also.

All right.

Thanks.

Your next question comes from Helene Wolk with Sanford Bernstein.

Thank you and good morning.

A question to follow-up on the Maintenance Choice.

The statistic that you refer to around the contribution to pharmacy comps at 120 basis points, does that include both the mail conversion as well as the acute script uptick?

Yes.

Yes.

It does.

And can you sort of give us a dimension or a sizing for what the relative contribution of those.

It's hard.

It's more, obviously, more mail, but its hard to break it out.

And how about in terms of the contribution of existing client conversion versus sort of new client enrollment in Maintenance Choice?

Well, it would be mostly existing clients.

But I will tell you, we've had some significant wins with clients, new clients, that one of the reasons they came or they have cited, was the ability to -- to have this -- this offer.

So it's mostly -- it was initially mostly main -- mandatory clients and now it's moving kind of up the scale to clients that have plan designs that are moving to more mail.

So the first pass was really mandatory mail clients and now it is moving down the line.

And a second question about the sustainability of the retail script growth, particularly in light of sort of IMS's revised guidance around negative growth in '09.

Any soft of comments or helping us understand the dynamic at play?

Well, there obviously is a slight slowdown.

We're obviously benefiting from the Zyrtec wrap around, but we're also taking share, I believe.

When you look in the marketplace, we're taking share in the -- in the front end of our business on the retail side and we're also taking share on the pharmacy side from a variety of areas.

So we think that's -- that's obviously offsetting some of the quote unquote slowdown in the pharmacy trends that you see.

But our numbers for the last certainly four quarters plus have kind of led the industry.

Thank you.

Thanks.

Your next question comes from Scott Mushkin with Jefferies.

Hi, thanks, guys.

Kind of along the same lines with the Maintenance Choice program.

Tom, do you have enough data now?

I know there's been some resistance in the consulting area to Maintenance Choice and actually running those numbers through as comparison, do you have enough data now to show people that have like kind of shunned mandatory mail programs, if they choose Maintenance Choice they will actually save quite a bit of money per script?

Yes, I think there's -- there's less skepticism in the market than there was now that people -- not only from consultants, but also from our clients.

No one wants -- no one wants to be on leading edge.

They want to see how this thing plays out and what they're seeing with the number of clients that have taken it and signed up not only now, but also in 2010.

But we can show clients -- I mean, the reason they -- right, the reason clients choose it is because there's better savings.

From the early clients choice it because of better access and convenience.

They already had mandatory mail.

The clients that are moving towards it, are moving towards it for savings and convenience.

So we can show them anywhere from a 10% to 15% savings and they get it.

And how much uptick do you expect in July?

I know you said there's going to be another bunch of clients coming in in July.

I think it's 2.5 million now.

Where is that going to go as we get to July?

I can't -- I can't quantify that, but we have more coming on in July and we have, obviously, others coming on in January of '10.

So we'll (multiple speakers) see it ramp up.

And then as a percentage, that 2.5 million, how much are -- do you have any percentage of how many are new to Caremark and how much was mandatory mail?

Are you going to give us any percentages there?

From a -- from a -- from a -- yes, from a -- I tried to quantity it -- it was definitely mostly existing customer and mostly maintenance-- mandatory mail customers initially.

Now that pendulum has swung in both sides, so less mandatory mail customers and it's trending more towards new customers.

But the bulk of it is existing customers.

But as we go through this -- ?

You'll see -- listen, from a penetration standpoint, we still have a lot of runway to go.

If it's a nine inning game just in penetration of our existing business, we're in the second or third inning.

So as we do this, and not to get too excited here, but as we -- as you pull things from other PBMs and win contracts and they come into Maintenance Choice, it was talked about the enterprise profitability of someone like that, it seems to me that that is just amazingly profitable business for your Company, as non-CVS people, non-Caremark people start rolling through the CVS retail platform.

Is that incorrect?

Will certainly be beneficial for our Company.

All right.

Thank you very much.

Thanks.

Your next question comes from John Ransom with Raymond James.

Good morning.

Dave, could you help us frame the part D improvement this year versus last year?

Does it -- what's kind of the ballpark EPS impact from doing better in that line of business this year versus last year.

Well, we haven't broken out the EPS of individual components of PBM profitability, but the year to year profitability improvement is high single digits.

It's related to both the way we bid the business for this year.

It's related to the enrollment, which is up versus prior year.

A number of things are going in the direction there.

Okay.

And then -- and secondly, on the Long -- Longs revenue, obviously you're doing better on the cost side then the integration side, but given what's happened in California, when you roll Longs into the comp base, at this point do you anticipate that to be a positive, negative, or neutral effect on your comps?

I would say it would be initially neutral to negative, actually, because you've got disruption.

Right?

I mean -- .

Right.

That's -- so we -- it's -- it kind of runs the same.

Now, the wildcard you have here is your point the California economy.

Right?

We didn't -- we didn't have that, obviously, with a Revco, we didn't have it with an Eckerd, we didn't have it with a Save-On per se, so you do have that wildcard.

But overall, we always know that there's a little bit of a trough on that and so it's kind of neutral to negative and then it kind of -- it ramps up.

Yes, the only thing to keep in mind there is the effect of the net to gross mark-up of revenues and that will have -- that will play through there.

But in terms of the business trend, Tom is exactly right.

But that wouldn't -- would that affect the retail comps?

That wouldn't affect the retail comps.

Yes, okay, fair enough.

So it is just the PBM.

Okay.

I got you.

Right.

All right.

And then thirdly, it looks like the debt market is starting to unstick a little bit.

Do you have any new thoughts about monetizing some of your Longs real estate holdings?

Is there a better shot you might do that sooner rather than later or is it still - is the cap rate still not where you need them?

We're going to -- it's loosening up, but it's still relatively tight.

We have -- we're going to look at some sale lease-back offerings where obviously we have some inventory built up besides the Longs stores.

But I would say we'll have other opportunities from a sale lease-back standpoint, excuse me, in other markets prior to the California market.

Sure.

And then the last question, thank you for this.

It's -- this is an educational question, at least for me, but let's say we continue to move a little bit left on the political spectrum and the government starts talking about quote unquote negotiating pharmaceutical prices, i.e.

dictating pharmaceutical prices and using a big stick as part of a public plan to drive down pharmacy costs, et cetera.

It's not clear to me, at least, what role a PBM plays if the government starts dictating those prices and especially if the Loewen Group's study suggests we start seeing some migration from private plans to public plans because of the lower costs.

And I just -- I know philosophically we have a view, but mechanistically do you have any insight into how that would work and what kind of efforts you might be making to communicate your views to the policy makers about what that might do to the network of private contracts that are already out there.

Yes, we're -- obviously, we think the free market is the way to go and I think if you look at -- you look at Med D as kind of really a perfect example of that.

That was a program -- that was a program that really was driven by the private sector.

And we enrolled a significant number of seniors.

There is significant savings, the savings is improving each year.

Now, they may have been off a little on their projections on prescription utilization, but when you look at the total overall return, I think the government is pretty happy.

I can't -- it's hard to speculate on kind of where they're going to go on that area, but I -- I just think from a standpoint, you will always need the PBM when you think about the overall clinical programs, the monitoring of the network, the rebates, the best price issues, working with them on the specialty side of the business.

So it's more than just setting the price.

I mean -- and I'm not making the assumption it's going to go that far left, because I don't think that's where the market place goes.

I don't think you ever get kind of the best price.

Okay.

Thank you very much.

Okay.

We'll take two more questions.

Your next question comes from Simeon Gutman with Canaccord Adams.

Tom, can you diagnosis the customer both pharmacy and the front end, in particularly the pharmacy.

Putting the IMS forecast aside, it looks like script volumes have been ticking up.

Are you seeing anything that would tell you maybe compliance is improving as people all of a sudden are taking their drugs again, as they should, and then anything observable at the front end?

Yes, our front end business, we'll start with that.

Our front end business in the last few months is actually increasing.

We're getting -- I mean across our main categories.

And we have slight uptick in promotional mix, not that we're promoting anymore, but customers are obviously in this economy are leaning towards it.

So we're starting to see our -- our best customers are spending more in the categories that we emphasize.

Around the pharmacy side of the business, we've done a lot of work around it here in -- in the stores and now we're obviously combining it on the PBM side of the business.

It's really -- there's two -- there's kind of two opposite poles here, right?

You have the consumer in this economy cutting pack a little bit, cutting drugs in half, maybe skipping a dose.

Yet on the other hand, the pilot programs that we're putting in place, the calls that we're making to customers to restart, to stay on their medication, working with clients in particular, we're seeing a pretty dramatic increase.

So I think it's -- I -- I wish I could give you one silver bullet, but it's not.

You have got a combination of factors there that I think adherence in the programs that we're putting in place is improving.

Script unit growth, I think that the share that we're taking because of performance, vis-a-vis some of our competitors, is improving script growth.

And then the flip side, you still have people, I think, maybe cutting back less than they did before, but still cutting back.

Okay.

And then the follow-up, to clarify on the Maintenance Choice offering, I understand that a lot of it is coming from existing customers, but that's existing to the PBM.

Can you separate out how many of these customers are first time to the CVS store?

And, of course, there has to be something captured in there, because you're citing it in the numbers, but I'm curious if there is a bigger mix of people that are first time sort of CVS pharmacy customers as opposed to enterprise-wide customers.

Yes, there's a -- there's a percentage of that that we're not going to disclose that now, because it obviously varies, but there are certainly a percentage of customers that haven't been into a CVS store or haven't used our store for acute medications, right?

They're maybe going somewhere else for acute medications.

But maintenance, it's a combination of Maintenance Choice, and don't forget, we also have the Extra Care Health program out there, where we have 8 million cards and another 8 million coming up in -- by middle of '10, so where people get 20% discount.

So you have a lot of that are also new customers.

And then in MinuteClinic, we've already -- we've cited that, where 15% to 20% and 25%, in some cases, are new customers to CVS.

So I think we're pulling in from a variety of sources.

Okay.

Thanks..

Thanks.

Your final question comes from Meredith Adler with Barclays Capital.

Thank you for taking my question.

First, I just like to ask you if you want to comment on your wholesale contract?

I think there were some discusses with McKesson and Cardinal?

Yes.

We won't comment on our negotiations with our wholesalers.

Okay.

And then another question about the business that you believe will be available for the PBM for 2010.

There are -- do you think that there are a significant number of contracts that are up and how does that compare between what you have to renew and what your competitors have to renew?

Well, I told you last year, obviously, we renewed a fairly significant amount of renewals, more though -- more so than we typically do in the past and we've obviously invested in price and you've -- you've kind of -- you've heard me talk about that.

So just for that nature, we probably have less renewals than some of our competitors.

As far as the 2010 pipeline, overall it's kind of reasonable from last year, $8 billion plus, maybe $10 billion out there.

We're obviously aggressively going after the appropriate -- the appropriate business, but we think -- when you think about renewals, where we are right now at this point in the season, we're essentially on plan, in good shape, and obviously we feel comfortable where we are with some of the new business going on.

And I'm sorry I have one final question.

The economics of Maintenance Choice kind of assume that you have excess capacity at retail so the marginal cost of labor is not high.

Can you talk about how -- how many stores or what percentage of the store base, in fact, doesn't have excess capacity?

And I know you had talked about centralizing some of the functions.

Is that still going on or is that part of how you see the economics of Maintenance Choice working?

Yes, you have to -- you have to look at Maintenance Choice, where it's coming from a few mail facilities being spread across 7,000 stores.

So on a store by store basis it may not be a lot.

So there are, I guess, some stores, Meredith, that have capacity problems that you may need to add technicians, but don't forget we're working on taking work out of the stores with our call centers.

But where we are now and the uptake that we've had, which is pretty aggressive and more than we thought that would move from the mail to the retail, we haven't seen any dramatic need to add any incremental payroll in the stores because of that.

Don't forget, you'll hear people talking about the costs that they're taking out of the system.

We've been talking costs out of our system for a number of years.

We did a whole work flow presen -- project a few years back in pharmacy that took significant savings out of the pharmacy and, and improved service.

So you had significant savings come out, you had improved service, and you had better engaged pharmacists.

So we've already done that and now we're taking it to the next level with the call centers and taking out some of back end costs.

But overall just keep in mind that this -- that these scripts that are going to the stores are spread over 7,000 stores and fortunately, we do have capacity.

Okay, great.

Thank you, that's very helpful.

Thanks.

Thank you very much.

Obviously if you have any questions, you can call Nancy Christal and we hope to see you all next Friday.

Thanks.

Thank you.

This does conclude today's CVS Caremark first quarter 2009 earnings call.

You may now disconnect.