CVS Health Corp (CVS) 2014 Q1 法說會逐字稿

Welcome to the CVS Caremark Q1 2014 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded Friday, May 2, 2014.

I would now like to turn the conference over to Nancy Christal, Senior Vice President of Investor Relations.

Please go ahead, ma'am.

Thanks, Matt.

Good morning, everyone, and thanks for joining us today.

I'm here this morning with Larry Merlo, President and CEO, who will provide a business update; and Dave Denton, Executive Vice President and CFO, who will review our first-quarter results as well as guidance for the second quarter and year.

Jon Roberts, President of PBM, and Helena Foulkes, President of the retail business, are also with us today, and will participate in the-question and-answer session following our prepared remarks.

During the Q&A, please limit yourself to no more than one question with a quick follow-up, so we can provide more callers with a chance to ask their questions.

Please note that just before this call, we posted a slide presentation on our website that summarizes the information you will hear today, as well as additional facts and figures regarding our operating performance and guidance.

Additionally, please note that our quarterly report on Form 10-Q will be filed by the close of business today, and it will be available on our website at this time.

During today's presentation, we will make forward-looking statements within the meaning of the Federal Securities Laws.

By their nature, all forward-looking statements involve risks and uncertainties.

Actual results may differ materially from those contemplated by the forward-looking statements for a number of reasons, as described in our SEC filings, including the risk factor section and cautionary statement disclosure in our most recently filed Annual Report on Form 10-K.

During this call, we'll also use some non-GAAP financial measures when talking about our Company's performance including free cash flow and adjusted EPS.

In accordance with SEC regulations, you can find the definitions of these non-GAAP items, as well as reconciliations to comparable GAAP measures, on the Investor Relations portion of our website.

And as always, today's call is being simulcast on our website, and it will be archived there following the call for one year.

And now, I'll turn this over to Larry Merlo.

Thanks, Nancy.

Good morning, everyone, and thanks for joining us today.

We posted solid results in the first quarter, with adjusted earnings per share growing 22.5% to $1.02 per share.

Both our PBM and retail segments delivered solid operating profit growth, despite the impact of a fair amount of unforeseen weather-related issues.

And when combining the weather issues with a higher than anticipated tax rate, the estimated impact to our adjusted earnings per share versus our expectations was at least $0.03 per share.

Now let me just say that it's unusual to hear us talk about the impact of weather on our business.

Historically, it has been our practice to not blame the weather when we explain our results.

But this quarter, the amount of severe weather was so abnormal that quite frankly, it's hard not to talk about it.

I want to emphasize that our underlying trends were very strong, and given the weather issues noted, retail operating profit increased a very healthy 14.2%, just below the low end of our expectations.

PBM operating profit growth was slightly above the high end of our expectations, increasing a very strong 28.5%.

Also of note is the $1.8 billion of free cash generated in the quarter, which puts us well on our way to achieving this year's free cash flow goal.

So while disappointed that the severe weather put a damper on an otherwise excellent quarter, we remain very confident in our outlook for the full year.

And Dave will discuss our financial results and guidance in greater detail during his financial review.

So with that, let me turn to a brief business update, and I'll start with health reform.

As I'm sure everyone's aware, the latest available data suggests that 8 million individuals have enrolled in the public exchanges.

Now, it's still too early to estimate the impact this might have on utilization trends, acknowledging that the mix of those lives is unclear.

So obviously, more to come on this issue.

With regard to Medicaid expansion, available data indicates that 3 million individuals have gained coverage, and its forecasted this number will continue to increase in the coming months.

And as expected, we have seen a slight positive impact on our results from this growth in the Medicaid segment, and we continue to believe that CVS Caremark is well positioned to serve these new customers across our enterprise assets.

I also want to touch briefly on our 10-year agreement with Cardinal Health.

That agreement forms the largest generic sourcing entity here in the US.

Both CVS Caremark and Cardinal continue to work closely together on all aspects of the launch, deepening our longstanding working relationship and building on our combined sourcing expertise.

Initial reactions from suppliers have been positive, and we remain on track for a go-live date as soon as July 1 of this year.

The Company will be staffed with individuals from both Cardinal and CVS Caremark.

The entity will be located in Foxborough, Massachusetts, and will operate under the name Red Oak Sourcing.

So progress continues, and we're looking forward to this exciting new venture.

Moving to our PBM business, and I'll start with an update on the 2014 selling season.

And since our last earnings call, we did add some second-half wins.

And we learned that the transition of some business lost through acquisition, primarily the Amerigroup business, would be delayed from 2014 until 2015.

And as a result of these changes, our client net new business for 2014 increased to $3 billion.

And that's up from $2.4 billion at our last update.

I should also note that Amerigroup would have been required to pay an early termination fee, had the business transitioned this year.

So the improvement in the 2014 net new business is expected to be immaterial for this year's financial results.

I also want to remind everyone that the 2014 net new business excludes the impact from attrition in our Med D PDP business.

As we discussed during our Analyst Day, we lost approximately $1.3 billion in 2014 revenues related to last year's CMS sanction.

And with the sanction listed, we are now able to enroll newly eligible Medicare lives, as they age into the program throughout the year.

However, we missed the opportunity to gain lives through open enrollment last Fall.

In our SilverScript plan, as just mentioned, we began to enroll new choosers for February as they aged into Medicare.

And we expect to begin receiving low income subsidy auto assignees this month.

And we currently have roughly 3 million lives in our individual PDP, and we continue to see significant opportunity to grow the business over the long term.

I'm pleased to report that we have had a very successful 2014 welcome season.

We've effectively handled hundreds of implementations, with very high levels of service, and the success has been driven by investments that we've made in our people, our processes and our technology.

As for the 2015 selling season, it's still too early to provide a substantive update, but I'll just say that the marketplace is active.

We are seeing a significantly higher level of RFPs relative to the 2014 selling season, and would also say that RFP activity is generally consistent with the levels experienced two years ago.

In mid-April PBMI released its annual pharmacy benefit manager customer satisfaction report.

It's a broad survey.

It includes the opinions of nearly 400 plan sponsors who represent almost 65 million members.

And we're pleased that CVS Caremark ranked first among large, publicly traded PBMs on overall satisfaction.

And we think these results underscore our commitment to excellent service.

And we believe that we are very well positioned in the marketplace to both retain business and gain share with our strong service record, along with our unique suite of capabilities.

We recently announced the renewal of a three-year contract to provide integrated pharmacy benefit services for the federal employee health benefit program, or FEP, as it is commonly called.

And we continue to provide mail, retail and specialty PBM services, along with highly customized clinical programs, to FEP's more than 5 million federal employees, retirees and dependents.

And we're certainly very pleased that FEP continues to recognize the value and services that we provide to their plan and to their members.

Moving on to specialty, our business remained strong in the first quarter.

Revenues were up approximately 34% year-over-year.

Today, about 60% of specialty revenues in our PBM book of business are dispensed through CVS Caremark specialty pharmacies.

And our service model is resonating with our PBM customers, as well as in the specialty standalone market, impacting those specialty clients for which we are currently not the PBM.

At our recent client forum last month, conversations confirmed that finding solutions that will stem the specialty cost trend is our clients' top priority.

And we believe the tools used in the PBM market to manage the traditional pharmacy spend can be effectively applied in the specialty sector.

We're very well positioned to help clients through a variety of unique programs that improve cost, quality and access, whether the drugs are paid for under the medical benefit or the pharmacy benefit.

We recently released our annual trend management report.

We call that report Insights.

And while spending for traditional medicine was up just 0.8% in 2013, overall trend was 3.8%, and that was largely driven by a 15.6% increase in specialty medicine.

Among our clients, specialty now represents about 22.5% of total drug spend, and projections have that growing to as much as 50% by 2018.

So let me highlight two offerings that utilize our unique assets to help our customers manage specialty costs: medical pharmacy management and site of care management.

First, we believe our suite of offerings and medical pharmacy management, or lets call it MPM, is a significant differentiator in our strategy to manage all aspects of the specialty patient.

According to a recent Millman report, the transition of that portion of specialty flowing through the medical benefit, moving into the pharmacy benefit can save payers an average of 19% across 14 classes of specialty injectables.

For those classes that payers choose to pay under the medical benefit, our NovoLogix claims platform allows plans to manage these drugs with the same level of precision that is routinely expected from PBMs.

And again, that leads to significant cost savings.

So the opportunity here for payers is large, and we continue to have meaningful discussions regarding how CVS Caremark can best help them.

Secondly, we can offer patients more convenient, lower cost alternatives to hospital outpatient infusion.

And this could be the physician's office, it could be a retail infusion site, or even the patient's home.

All of these create opportunities to reduce costs, and our recent acquisition of Coram will enable us to execute and do just that.

Coram is a market leader in specialty infusion services and enteral nutrition.

The integration to date is going well.

Our sales forces are being aligned, and we are beginning to develop integrated products for both hospitals and health plans.

Now in addition to those two opportunities, the rollout of our new Specialty Connect offering is expected to be completed at the end of this quarter.

And Specialty Connect integrates our mail and retail capabilities, providing choice and convenience for members, while preserving the central clinical expertise that leads to better health outcomes.

And as of late April, more than 15,000 specialty patients have been served by this new model, and adherence and satisfaction rates are already meeting or exceeding those we see in traditional specialty.

So we continue to be excited by the prospects for our Specialty Connect offering, as clients see this as another tool to achieve their objectives.

So I think I've given you some examples.

I think you can see how we're positioned to continue to gain share in the fast-growing specialty marketplace, as we develop innovative offerings that capitalize on our unique ability to optimize cost, quality and access.

Moving on to the retail business, again, we had solid operating profit growth in the quarter, despite the tough comparisons with last year's strong flu season, along with the extreme weather we experienced throughout the quarter.

Total same-store sales increased 1.4%, while pharmacy same-store sales increased 3.8%.

Pharmacy sales comps were negatively impacted by about 120 basis points, due to recent generic introductions, and by approximately 90 to 100 basis points from the impact of weather, along with the comparison to last year's flu season.

Pharmacy script comps increased 2.1% on a 30-day equivalent basis, and we estimate that the impact of weather and flu resulted in a negative impact to script comps of 180 to 200 basis points.

As for the front store business, comps decreased 3.8%, and we estimate that the combined effects of weather and the flu resulted in a negative impact of 140 to 160 basis points.

Comps were also negatively impacted by about 80 basis points due to the shift of the Easter holiday from Q1 last year into the second quarter this year.

Now I'll note that, excluding any impact from our exit of the tobacco category, we do expect our front store comps to improve in the remaining quarters of the year.

We plan to break out the impact of comps upon exiting the tobacco category, so you'll be able to easily see this underlying performance.

Also worth noting, the response to our exit from the tobacco category continues to be extremely positive.

And we remain confident that this strategic decision will lead to enhanced enterprise-wide opportunities for growth, as CVS Caremark plays an expanding role in our evolving health care delivery system.

In the first quarter, we continued to see an increase in both the breadth and depth of promotional activity out in the marketplace, and as we've stated many times in the past, we continue to reduce our dependency on the weekly circular, and to begin to shift promotional investments to more personalized offers through our ExtraCare program, all with the goal of driving profitable sales rather than chasing those empty sales.

And as competitor promotional activity grew higher, we actually reduced our circular ad blocks year-over-year.

We reduced them by about 6%.

And as a result of staying true to our targeted promotional strategy, I'm pleased to say that we saw growth in our average basket size, along with notable growth in our front store margin in the quarter.

Now of course, we would like to see better front store comps.

But it's important that we have a sustainable front end strategy, and we're doing a number of things that we believe will drive our front store business long term.

And while we're at an early stage for some of these efforts, we are beginning to see what could become meaningful change as we go forward.

Again, with the goal of delivering the right value to customers while driving profitable sales.

And let me give you a couple of examples.

Through Insights from ExtraCare, and our predictive modeling for personalized e-mails, we've experienced e-mail open rates that are two times the industry average, with response rates that are five times the industry norm.

The importance of that lies in our ability to increase share of wallet of our best customers.

Beauty Club is another example where we see the impact of personalization, as we engage 13 million of our best beauty customers.

These Beauty Club members are shopping our stores more, and they're spending 2.5 times the average beauty customer.

Driving higher margin store brand sales is another area of focus for us, and our store brands as a percent of front store sales increased about 25 basis points, to 17.6%, in the quarter.

And our goal remains to drive store brands to more than 20% of front store sales over the next few years.

So I hope you can see that we're not sitting still at retail, and we'll continue to explore innovative personalization strategies through ExtraCare Insights to drive results.

Turning to our Real Estate program, we opened 22 new stores, relocated 9, closed 7, resulting in 15 net new stores in the quarter, and we are on track to achieve square footage growth of 2% to 3% for the year.

Before turning it over to Dave, let me briefly touch on MinuteClinic, which continues to post strong results.

In the quarter, revenues increased 11.4% versus a year ago.

We opened 28 net new clinics in the quarter, and we currently operate 828 clinics in 28 states, plus the District of Columbia.

And we plan to open at least 150 new clinics this year, about one-third of which will be in new markets.

MinuteClinic added two new health system alliances during the quarter, bringing our total number of affiliations with major US health systems to 32.

We also recently announced our move to the Epic electronic medical record, which we believe will allow us to better integrate records with other hospital and provider groups.

It will also enable MinuteClinic to respond more quickly to the needs of our patients by accelerating our ability to offer new services.

And these enablers will allow us to achieve our goal of creating a national platform that supports primary care by providing integrated high-quality care that is convenient, accessible, and affordable.

So with that, let me turn it to Dave to go through the financial review.

Thank you, Larry, and good morning, everyone.

As always, I plan to provide a detailed review of our first-quarter results, followed by a review of our guidance.

But before I get to that, I want to highlight how we continue to enhance shareholder value through our disciplined capital allocation program.

During the first quarter, we paid approximately $325 million in dividends, and given our continued strong earnings outlook for the year, we remain on track to surpass our targeted payout ratio of 25% at some point during this year, more than a year ahead of our original schedule.

Additionally, we repurchased 11 million shares for approximately $801 million, at an average price of $72.69 per share.

And we still expect to complete at least $4 billion of share repurchases for the full year of 2014.

So between dividends and share repurchases, we returned more than $1.1 billion to our shareholders in the first quarter alone, and we continue to expect to return more than $5 billion for the full year.

And as Larry mentioned, we generated approximately $1.8 billion of free cash in the first quarter.

Strong growth in earnings and working capital improvements were the key drivers of this large year-over-year increase, and we continue to expect to produce free cash of between $5.5 billion and $5.8 billion this year.

Now turning to the Income Statement, adjusted earnings per share from continuing operations came in at $1.02 per share, up 22.5%, reflecting very solid growth across all of our segments, despite being $0.01 below our EPS guidance range.

And as Larry stated earlier, the estimated impact to our adjusted earnings per share from the combined effect of the unforeseen bad weather and the higher than anticipated tax rate was at least $0.03 per share.

GAAP diluted EPS was $0.95 for the quarter.

While the retail segment produced excellent growth in operating profit, it performed just below the low end of our expectations.

Now in contrast, the PBM came in just above the high end of our expectations.

Let me quickly walk you through our results.

On a consolidated basis, revenues in the first quarter increased 6.3%, or approximately $1.9 billion, to $32.7 billion.

PBM net revenues increased a healthy 10.3%, or approximately $1.9 billion, to $20.2 billion.

The strong performance was driven by specialty, inflation, and net new business.

Offsetting this to some degree was lower mail choice claims, as well as negative impact on claims from bad weather.

The PBM's generic dispensing rate increased approximately 190 basis points versus the same quarter of LY to 82%.

Revenues in the retail business increased 2.7% in the quarter, or approximately $441 million, to $16.5 billion.

Sales in the retail segment were a little light, due to the unforeseen extreme weather, as well as our decision to remain true to our strategy of not responding to aggressive promotions by others in the marketplace.

Retail GDR increased by approximately 170 basis points, versus the first quarter of 2013, to 83%.

Turning to gross margin, we reported 18.2% for the consolidated Company in the quarter, an increase of approximately 5 basis points compared to Q1 of 2013.

Within the PBM segment, gross margin increased approximately 45 basis points for the same quarter of LY to 4.6%, while gross profit dollars increased approximately 21.8% year-over-year.

The increase year-over-year was driven by growth in our specialty business, better acquisition costs and rebate economics, and the increase in GDR.

These positive margin drivers were partially offset by typical client price compression.

Gross margin in the retail segment was 31.5%, up about 60 basis points over LY.

This improvement was driven by the increase in GDR, as well as a notable increase in front store margins.

Additionally, gross profit dollars increased 4.8% year-over-year within the retail business.

Total operating expenses as a percent of revenues improved by approximately 65 basis points from Q1 of 2013, to 12%, while total SG&A dollars grew by only 0.9%.

The PBM segment's expense growth kept pace with revenues, as the SG&A rate was flat to LY at 1.5%.

In the retail segment, SG&A as a percent of sales improved approximately 45 basis points to 20.8%, while expenses grew just 0.5%.

Now keep in mind that our SG&A dollar growth in retail was minimal, largely due to the comparison with last year, as we are lapping the highest SG&A growth rate quarter of 2013.

Now this was partially offset by weather-related costs incurred during the first quarter.

Within the corporate segment, expenses were down approximately $9 million, to $190 million.

And adding it all up, operating margin for the total enterprise improved approximately 70 basis points to 6.2%.

Operating margin in the PBM improved approximately 45 basis points, to 3.2%, while operating margin at retail improved about 105 basis points, to 10.6%.

For the quarter, PBM operating profit was strong, growing at 28.5%.

This was, again, just above the high end of our expectations for operating profit growth in the PBM segment.

Retail operating profit increased a very healthy 14.2%, and while retail sales were negatively affected by weather, retail operating margin was in line with our estimate, at 10.6%.

Going below the line on the consolidated Income Statement, net interest expense in the quarter increased approximately $33 million from LY, to $158 million.

The debt we issued in the forth quarter was the primary driver of the increase.

Our weighted average share count was 1.19 billion shares.

And finally, our effective tax rate was 39.5%, slightly higher than we anticipated.

Now let me update you on our guidance, and I'll focus on the highlights.

You can find the additional details of our guidance in the slide presentation that we posted earlier this morning on our website.

As we stated in our press release, we are maintaining our 2014 EPS ranges, given our confidence in the outlook for the rest of this year.

We currently expect to deliver adjusted earnings per share in 2014 in the range of $4.36 to $4.50, reflecting strong year-over-year growth of 10.25% to 13.75%.

And that's after removing the gain of approximately $0.04 associated with the legal settlement in the third quarter of 2013.

GAAP diluted EPS from continuing operations is expected to be in the range of $4.09 to $4.23 per share.

We've increased our top line outlook in the PBM, and now expect revenue growth of 8.75% to 10%, about 150 basis points higher than our prior guidance.

This revised guidance reflects our expectations for better than expected growth within specialty pharmacy, fueled by a combination of both inflation and new product mix, as well as the impact of the change in net new business.

And as a result of this improved expectation, we are raising our guidance for consolidated net revenue growth to 5.25% to 6.5%, 100 basis points higher than our previous guidance.

Guidance for operating profit growth in our segments remains the same.

We continue to expect retail operating profit to increase 7% to 8.75% year-over-year, and PBM operating profit to increase 6.75% to 10.75%.

We are increasing our expectations for amortization for the year slightly, by approximately $5 million, to account for additional expense related to Coram.

And we now expect amortization of approximately $520 million for the year.

And as I've said before, our free cash flow guidance for the year remains in the range of $5.5 billion to $5.8 billion.

Now in the second quarter, we expect adjusted earnings per share to be in the range of $1.08 to $1.11 per share, reflecting growth of 11% to 14.75% versus Q2 of 2013.

GAAP diluted EPS from continuing operations is expected to be in the range of $1.01 to $1.04 per share during the second quarter.

Now within the retail segment, we expect revenues to increase 2.5% to 4% versus the second quarter of LY.

This revenue increase will be driven by solid prescription growth, as well as the positive impact of the Easter shift on front store sales.

Adjusted script comps are expected to increase in the range of 2.75% to 3.75%, while we expect total same-store sales in the range of 1.25% to 2.75%.

The PBM, we expect revenue growth of between 10.75% and 12%, driven by continued strong growth in specialty and inflation.

We expect retail operating profit growth of 4.5% to 6.5% in the second quarter.

We expect PBM operating profit growth of 18.25% to 23.25% in the second quarter.

Now just a couple of notes on second quarter margins.

During the second quarter, we expect that a large state will finalize its reduction in Medicaid reimbursement rates.

Given our historical rate estimates, this finalization will likely have a positive impact on pharmacy margins in the second quarter, as we reconcile to the confirmed rate structure.

On the flip side, we expect total -- front store margins to decline in the second quarter, due to the anticipated discounting of some inventory related to our exit of the tobacco category, as well as tough comparison with the second quarter of LY, the highest rate quarter of 2013.

And I note that we expect front store margins to turn positive again in the back half of the year.

All things considered, we expect another very solid quarter in Q2.

So in closing, I'll leave you with three key thoughts.

First, we posted solid growth this quarter, and we're off to a very good start for the year.

Second, our outlook for 2014 for both businesses and both at the enterprise level is unchanged and very strong.

And finally, we expect to continue to generate very strong free cash, and we will use a disciplined approach to capital allocation to ensure that we maximize the value we return to our shareholders.

And with that, I will turn it back to Larry.

Okay, thank you, Dave.

And let me just wrap up with a reminder that all the ongoing changes that we're seeing in the healthcare environment are certainly creating unique opportunities for CVS Caremark.

And our unmatched model and innovative solutions make us well-positioned to capitalize on these opportunities and, we believe, create a sustainable competitive advantage.

And our Management team remains laser focused on driving enterprise growth while enhancing shareholder value.

So with that, let's go ahead and open it up for your questions.

(Operator Instructions)

Our first question comes from the line of Charles Rhyee with Cowen and Company.

Yes, thanks, guys, for taking the question here.

Larry, Dave, wanted to talk about, on the PBM side, a lot of discussions over the last few months, particularly around all of the new drugs in Hep C. And just want to talk about what your experience has been so far in PBM side?

And then also, and particularly in and around specialty pharmacy, but also on your Part D [lies], I think you talked about 3 million members in your individual Part D plans.

Do you have a sense on your exposure there, as more of the risk barrier?

And can you talk about what your -- per patient, what your exposure would be in Part D?

Thanks.

Yes, Charles, it's Larry.

Let me just start, and then I'll ask John to jump in here.

But I think as we alluded to in our prepared remarks, specialty patients are dealing with complex issues.

And again, as we heard last month at our client forum, our clients are more focused than they have ever been on managing this trend without compromising care.

And the private market has solutions that have proven to be successful, and there is an acceptance and a growing interest, in terms of bringing some of those tools to -- that have been successful on the traditional side of pharmacy to specialty.

And in addition to that, we talked about some examples this morning, where we believe we have unique integrated products that even take that one step further.

So our goal is to bring these tools to the entire specialty market.

Hep C just becomes one of those categories.

So Jon, why don't you --

Yes.

Okay.

And Charles, Sovaldi is about $80,000 for 12 weeks of therapy.

We do have prior authorization programs in place today to ensure appropriate utilization.

And I think the most important thing is, we're expecting new drugs into the marketplace in the fourth quarter that will create competition and allow us to leverage our formulary capabilities that we introduced three years ago very successfully.

So it is getting a lot of attention.

I agree with Larry that the tools that we have can appropriately manage this, and we're expecting to be able to leverage those as new drugs come to the marketplace.

As far as our Part D plan, there is usage in there, and we expect that to continue.

But we do have protection in the risk quarter, so we expect the impact to be minimal for this year.

Okay, that's helpful.

And Jon, just to follow-up there, you talk about your formulary tools.

Can you talk about some examples in specialty where your formulary tools have been able to leverage the pricing?

I guess an example would be, maybe your experience in multiple sclerosis.

Could you look at the list price for some of these drugs, like even an Avanex, which is older therapy relative to some of the other ones, the price has still increased over the years.

But is that an issue that we're looking at the list price versus, maybe, what the prices that your clients are actually paying?

Thanks.

Charles, how we leverage our formulary strategy is formulary placement, access to the drugs for our clients and their members, and we negotiate with pharma rebates that -- those pass back to our clients and reduce the cost of that drug.

The gross cost you see, they get a rebate on top of that, and it reduces the ultimate price that they pay.

So that's how it works We've done it with -- specialty growth hormone is a good example, and we've been very successful.

And that will expand to other categories, and Hep C is a very good example of how we'll expand that moving forward.

And Charles, the only thing I would add is that, among clients, there has been a growing interest in formulary management.

And I think as you're aware, we've seen competitors introduce very similar strategies, and we introduced our formulary program some three years ago.

So we think it's a real opportunity to drive down costs.

Our next question comes from the line of Robert Jones with Goldman Sachs.

Thanks for the questions.

Just looking at the pharmacy same-store sales results, pretty impressive, considering the weather impact.

Factoring the impacts from generics, and it would appear that pricing was up about 300 basis point, obviously still very healthy, but a pretty significant step down from the pricing impact from the previous quarter.

We've heard some comments around inflation moderating.

And just wondering what you guys are seeing on the pricing front?

And have trends in pricing, on both generic and branded, changed at all, in your view, since you gave guidance back in December?

Bob, I'll start, maybe, and Dave may want to jump in here, as well.

But we haven't seen anything out of the ordinary that we haven't anticipated or comprehended in our outlook.

And on the branded side, I think that the trends there have been very similar to what we've seen in prior years.

And in the generic market, there has been -- we've seen some price increases, but it's relatively off of a -- it's a small number off our entire book of business.

And really not material in our results.

Yes, and I'll just add just a bit to that, more around the generic side.

As we look at it, from a generic marketplace, there is a lot of generic capacity in the marketplace today, and there's a lot of generic competition.

So as we think about it long term, we think there's a lot of opportunity remaining in our book of business to continue to drive down our cost of goods sold.

And we're doing that both on our own, but more importantly, here in the next several periods, beginning to do that through our joint venture with Cardinal Health.

Got it.

And I guess just a follow-up around pharmacy moving over to scripts.

Obviously, appreciate all of the detail on the impact from weather.

Scripts looked like they still grew 2% on a same-store basis.

I think you said 180 to 200 basis points was negative impact from weather.

So really would have been pretty impressive growth on the script front.

I think I saw on the slides, Dave, you might have mentioned the outlook for Q2 is 2.75% to 3.75%.

I think this is clearly a step forward from what we've been seeing, as far as prescription growth, really over the last few years.

Can you guys just talk about -- or break out what the drivers are from the underlying growth, in both the quarter, and behind your expectations for script growth going forward?

Maybe I'll start.

Maybe I'll ask Larry and Helena if they want to add to this.

We -- as you know, we continue to take share in the marketplace.

And I think, importantly as you look at our business over the past couple of years, we've continued to take more share of the Caremark clients' dispensing volume into the CVS channel and/or into the Caremark mail channel.

And that has enabled us to outpace the marketplace in general.

And if you look at our script trends, you look at how we performed in Q1, and our expectations for the next several periods, we're continuing that process.

And we've not really fundamentally changed our strong underlying trajectory there.

Our next question comes from the line of Ross Muken with ISI Group.

Good morning.

Good morning, Ross.

On the PBM selling season, if you had to break it down into the key drivers of why you think you're seeing more interest in the platform, and why you sound, I would say, incrementally more enthusiastic on your potential capture rate this year.

Do you think you're getting some positive tail winds from the tobacco announcement?

Do you feel like it's Maintenance Choice driving it?

Do you think some of your honed strategy and specialty strategy is resonating?

I'm just trying to get a sense for where you think you're -- the key points, where you're getting momentum?

Yes Ross, it's Larry.

Let me start, and then I think others will jump in here as well.

I think that the ticket to the game is, you've still got to be right on price and you've got to have demonstrated high levels of service performance.

And I think that once you get the ticket to entry from that, I do think many of the elements that you mentioned, and some that we alluded to in our prepared remarks, become differentiators, where the client can check the box there.

And in some cases, there's not a competing offering.

And I think tobacco is another one of those items that you check the box on, recognizing that there is more and more and growing evidence, in terms of the cost of tobacco in overall healthcare costs, and the desire of health plans and employer-sponsored coverage, to begin to curb the costs associated with that.

And they -- I think in many cases, they see us as leading the way to bring solutions to that.

And Ross, this is Jon.

Let me just add that we feel very good about our positioning in the marketplace.

So our service levels are strong.

Larry talked about that in his opening remarks.

Our differentiated capabilities are resonating in the marketplace, like Maintenance Choice, what we're able to do with MinuteClinic, what we're able to do with specialty.

Specialty is clearly our clients' top priority, and we talk about our capabilities with Specialty Connect, NovoLogix and Accordant as an example.

I will tell you that, as I sit in front of clients, tobacco always comes up, and they applaud our move.

And I think it's just another intangible that, as they're making decisions around which provider they want to go with, they feel really good about a Company that's made a move like that.

And then the last question you asked about that was platform.

That does not come up in our client meetings.

They're on a platform.

They are on one platform.

It's really a non-issue for them.

It's an internal opportunity for us around efficiency and productivity.

Great.

And maybe one question on capital deployment.

Dave, you've done a fantastic job.

You've talked about where the payout ratio has gone, and you guys have obviously been buying the stock.

You still have room on the M&A front.

There's been more chatter in the public markets about, you may be doing more down in Latin America and Brazil.

How has that venture gone so far.

How are you -- updated thinking about that market.

And is that still your preference, in terms of some of these higher growth markets, for expansion versus maybe other more developed markets that have lower growth?

Ross, this is Dave.

I'll kick it off, and then I'll ask Larry to chime in here.

As you pointed out, we're fortunate in the fact that we have a very robust cash flow generation organization, in the sense that we'll throw off a lot of cash both this year, but more importantly, over the next several years.

As you've said, we've been very focused on the fact of using that cash, to put it to use in the most effective manner to drive shareholder value.

And we still have opportunities, importantly, to increase our dividends to do meaningful share buybacks/.

But importantly, we can also add to, and invest into, our business when it makes sense.

And there's opportunities, both here in the states, but also opportunities elsewhere around the globe.

And I'll ask Larry to transition into maybe a conversation around what we're seeing in Brazil at this point in time.

Yes.

Ross, we've been -- I guess its been just under a year since we've been operating in Onofre.

The results have been in line with our expectations, and we remain focused on learning from our international operations.

We've got several pilots that are underway that are allowing us to bring expertise to the market, and at the same time, understand which of our capabilities can work in Brazil.

We've seen good results from those tests.

And today, we've got -- I think it's 47 stores.

We'll look to accelerate that growth in future years, both organically as well as inorganic.

And as we've stated in the past, and as Dave alluded to, we will take a disciplined approach to our international expansion plans.

Our next question comes from the line of John Heinbockel with Guggenheim Securities.

So Larry, two things.

One on specialty.

If you take Coram out -- the impact of Coram, would the growth rate have been similar to the last few quarters?

Yes.

And then -- would it have been?

Yes, it would have been.

Okay.

And then, do you think, as you build out your capabilities in specialty, the last four quarters, roughly 20% or so.

Is there a scope for that to accelerate much, say, over the next couple of years?

John, I think there is.

And I think that the significance around the Coram acquisition was our ability to not just manage the specialty drug, but to manage the specialty patient holistically.

And the infusion component was that missing piece of the puzzle that would allow us to do that.

So we're very excited about the capabilities that we have.

And we touched on some of the unique offerings that we can bring to market.

And we're -- that, combined with just the anticipated growth in the specialty market, I think that we're in a very good place.

And John, this is Jon.

With the Coram acquisition, with the NovoLogix acquisition, when you think about specialty pharmacy, half of the spend is on the pharmacy side, which PBMs have traditionally managed.

We've essentially doubled the size of the pie.

With those assets, we can now participate in specialty pharmacy across both pharmacy and medical.

And we've built out our specialty strategy, really, across three pillars: cost, quality and access.

And we have solutions, the marketplace is looking for solution.

This is our top priority, and we believe that our assets will allow us to disproportionately grow in this area.

And maybe I'll just close on the statement that we -- as you look at the specialty market, we're plugging ourselves into payers and capturing more share of the payer spend.

But we're also, importantly, plugging ourselves into the patients and using our Specialty Connect and our retail and MinuteClinic assets to capture more of the open market.

And all of that, from an environment perspective, is being fueled, yet again, by new products over the next several years coming into the marketplace, as that will further drive utilization in this category.

So John, obviously, you can tell that we're excited about it.

(laughter)

So just transitioning to retail for a second.

You guys have done an incredibly good job of improving retail profitability.

So the question becomes -- and I guess it's a moving target.

But how close do you think we are to getting to peak margins in that business?

Do you know?

And then let's assume that there are things with personalization that are game changers.

How much more upside is there to retail EBIT margin?

And is personalization and what you do with the circular, is that the single biggest driver?

Yes, John, let me take the first part of that, and then I'll flip it over to Helena to talk more about the personalization strategy.

But John, when you think about the opportunities at a very high level at retail, our ability to -- from an operating margin point of view.

Our ability to pump more volume through our box is what the key driver is there, especially when you think about the pharmacy opportunities.

Acknowledging the fixed costs that exist, not just with the bricks and mortar, but the cost of the pharmacist.

So I think that many of our strategies and our thought processes with that in mind.

And then I'll ask Helena to talk a little bit more about the personalization strategies as it relates to the front end business.

Sure.

So overall, you can see that we continue to focus on driving long-term profitable growth in the front.

And while front store is still a small part of our overall business, we see a growing roll of both digital and personalization.

So our personalization efforts are really at the key.

And some of what we hear from our suppliers is, given we've been at it for 16 years with Extra Care, they're definitely noticing our unique ability to use the data to drive profitable growth.

So in particular, if you look at areas like health, beauty and personal care, these are areas where we continue to grow share in the marketplace.

And we are essentially staying out of the promotional fray and growing our margins and our profits in these businesses.

So this continues to be a very important part of our overall growth strategy.

And John, as we alluded to in our comments, obviously, we would like our front store comps to be better.

And I think, as I've talked about on past calls, there's a balance there.

It's a little bit of art and science.

And we'll continue to work to innovate to find that sweet spot there, but I think that, again, as you heard from my earlier remarks, our goal is to create a sustainable front end strategy.

And quite frankly, we think there are elements of the current promotional marketplace that are not sustainable for the long term.

Our next question comes from the line of Scott Mushkin with Wolfe Research.

Hi, guys.

And I actually wanted to follow on with what John was talking about, and Larry, what you were talking about.

Just basically, as you look at your -- it's kind of a strategic question.

As you look at your asset base, whether it be the clinics, the stores, specialty, of course, the back end of the stores, how interconnected do you believe the businesses are?

Scott, I'll start, and then others may want to jump in here, okay?

I actually think that, if I can use a baseball analogy, that we're probably in the second inning in a nine inning game.

Okay?

I think that we're doing some things that you don't see in the marketplace, largely driven by plan design for our PBM clients and their members.

But I think there's so much more that we can do.

And that's what our team -- and I say teams, because it's not just a retail focus.

It's an enterprise focus, when you think about our retail offerings and how that intersects with our PBM offerings and plan design, as well as MinuteClinic.

Scott, this is Jon.

Let me bring what Larry talked about to life.

So there's -- we have a client that's a health plan that is -- has a focus on the primary care medical homes.

And so we're connecting into their technology platform.

Our PBM services, our stores, our MinuteClinics, and Coram.

And we're able to work with the primary care doctor and message patients, message the providers, message the pharmacy, message the MinuteClinics, with the goal of being all aligned to influencing that member in a way that ultimately reduces overall costs.

So we positioned ourselves as an integral part of the healthcare network, leveraging our assets and our technology capabilities.

So I think that's a very good example of how the assets all come together and interplay.

Yes, and just building on Jon's point, I think if you look at -- and Larry alluded to this before, but we have spent a great deal of time, John's team and my team, working together on the rollout of Specialty Connect.

We're really excited about where that's going.

It's a great example of how we're working together to bring a solution for the marketplace that is truly unique and holistic, and thinking more from an enterprise perspective than our individual business units.

So if you guys think, and it sounds like you do, that you would agree with this idea that the stores can be -- become a center for health and wellness.

And looking at that asset base, where do you think the biggest lever is in that store to increase return on invested capital or return on assets?

Scott, I think it goes back to the question that John asked.

I think ultimately, it's generating more volume through the box, okay?

And that's where we'll see the biggest ROI.

Our next question comes from the line of Lisa Gill with JPMorgan.

Hi, thanks very much.

Good morning everyone.

Good morning, Lisa.

Larry, I noted that when you talked about the 2015 selling season, you said more RFPs than we've seen historically.

Is there any way for you or for Jon to size the potential pipeline or opportunities for 2015?

Lisa, I think that's hard.

We look at the -- I guess the season opportunities, more based in terms of the RFPs that are out in the market.

And as you well know, RFPs are not all equal, as you look at volume.

And I think that one of the questions that we always get is, how much business do we have up for renewal?

And we see it as a normal renewal season less FEP, okay?

And I think we've said on past calls, we had 16 billion to 17 billion up for renewal.

And again, that excludes FEP.

But I think that, again, as people compare this year to last year, recognizing that last year was a down year from RFP activity, the marketplace is very active at this point in time.

And Lisa, this is Jon.

Obviously, it's still very early, and so we'll have more to say on our next call.

Jon, could you characterize it?

Do you see more Managed Care business that's up for renewal this year, more employer business?

Any color around how we should think about this year's selling season?

Yes, I think it's hard to say.

Clearly, you see the Managed Care business come out early in the season, so we've seen that.

And we're just now beginning to see the employer business come to the market.

So -- and the activity is tracking, essentially, to what we saw a couple years ago.

So I'd probably think about it in those terms.

Our next question comes from the line of Dane Leone with Macquarie.

Hi, thank you for taking the questions.

On mail choice penetration, it has dipped down to a low not seen in many years at this point.

I was just curious to get some insight into the cause of that, whether it has to do with the PTP volume loss from the CMS sanction?

Or something more fundamental in the market?

So anything there would really help us.

Dave, let me start, and again, others may jump in.

But the -- as we have said in the past that we did not -- we don't see traditional mail as a growth driver.

We saw that slowing, okay?

And one of the drivers behind that is payer mix shifts.

As more business migrates into the Medicare and Medicaid segments, the traditional drivers of mail just don't exist within those government programs.

And I think we're beginning to see that.

And Dane, Jon again.

But we are seeing our mail, the Maintenance Choice volume grow at retail, while not enough to offset what we're seeing at mail.

So we do think, as we look at the -- we have about 17 million lives in our Maintenance Choice program.

We've talked about the opportunity to grow that to 34 million lives.

So we still think that it's an opportunity to grow.

Larry talked about the mix shift difference.

And specifically, about our PDP plan.

Part D plans have very low mail penetration.

So it's really not a factor here.

And so, as we think about your unique model versus some of your competitors, from the outsider view, generally, we hold that mail volumes carry a much higher margin for the business than retail volume.

Does that still hold true?

Or has that really changed over time, as you've developed your integrated model?

Dane, this is Dave.

That's a little different for us.

If you think about the economics of, let's say a 90-day maintenance prescription, be that at mail or at retail, they carry the same economics for us.

So we're truly financially agnostic to that.

And what's nice about our models is we -- as we plug into payers, and as we work with patients, we can give them that opportunity at the same economics as a -- I'll say mandatory program pushing them into a channel that they may not choose to utilize.

Our next question comes from the line of Peter Costa with Wells Fargo Securities.

Thank you for squeezing me in here.

Regarding the -- your assumptions on weather.

Do you assume the basket size increase had to do, to some extent, with the severe weather?

Or do you think that that's sustainable going forward?

And then how do you know that some of the impacts weren't from the competitors advertising programs, or perhaps from the greater seasonality that you should probably be expecting, relative to higher deductible plans being sold?

There's so many changes going on this year with healthcare reform.

How were you able to parse away some of the weather impacts from some of those other impacts?

This is Helena, Peter.

I would just say that our basket size growth continues on its normal trend.

We haven't seen anything out of the ordinary.

And for us, as I said before, it's a continued focus on personalization.

We have -- as Larry mentioned before, as others have increased their promotional activity, we have actually reduced ours, and instead are spending this on our top customers.

That is our particular focus.

These are the top customers.

We're typically looking at the 5op 20% or 30% of our customers who are driving the lion's share of our volume and profit.

And we have a continued focus on increasing the number of personalized out-reaches we have to those folks.

Peter, keep in mind that, when we're talking about basket size, it is just the front end basket, and does not encompass anything in the pharmacy.

Yes, I understand that.

My question is more, though, how were you able to parse away the weather impacts from all of the other things going on?

Because the weather, theoretically, is impacting not just the front end but the back end, as well.

Yes, this is Dave.

I think the team does a pretty good job of analyzing by market, and understanding where we, quite frankly, have stores that are on limited hours, or stores that are closed, and/or severe weather, we can see the traffic patterns.

And so I think we can do it by day, by store.

And so it's not -- you can't 100% lock that down, but I think the team does a pretty good job of analyzing that.

And that's why we give you a little bit of a range in the commentary that we provided today.

Our next question comes from the line of Edward Kelly with Credit Suisse.

Yes, hi, good morning, guys.

Good morning, Ed.

Couple quick questions for you.

First, I don't know if you can -- I know you don't usually do this.

But since we had the impact of weather in Q1, could you help us at all, in terms of how things shaped up in April?

A couple things within that, right?

One, it seems like underlying script growth for the industry has accelerated.

And I was wondering if you saw any of that?

And what you thought might be the drivers?

And then second, how did the front end business look through Easter, with better weather?

Anything better there?

Ed, those are great questions.

Unfortunately, we can't comment on that at this point in time.

Okay.

Question on tobacco.

Any thoughts on what you might do with the space behind the store?

And whether there's an opportunity to maybe offset some of that sales loss in the back half of this year?

This is Dave.

I'll start, and then I'll ask Helena to chime in.

I want to be clear on the tobacco category, and as we exit it.

While we -- we'll come up with ways to use that space, there's -- it's unlikely that we're going to come up with something that is going to materially replace that product line.

As you know, the tobacco category, at least from a financial metrics perspective, is very productive.

So with that, maybe I'll turn it to Helena.

Yes, that's absolutely right.

So we're still working on our plans.

We've been testing a number of things.

But as Dave said, we certainly don't expect that what we put behind that space will make up for the lost tobacco sales.

What we have really been looking at is -- as a question before I alluded to, we're increasingly positioning ourselves as a healthcare company, and making sure that our store more and more represents ourselves as a healthcare company.

Our next question comes from the line of Steven Valiquette with UBS.

Thanks, good morning.

I guess for me, just a quick question on the JV with Cardinal.

Aside from the $100 million in annual payments that you'll get from them, I guess the question is, do you expect a fairly quick turnaround time after July?

And improving your overall COGS by pooling the purchasing with Cardinal?

Or will that happen slowly over time?

And the reason why I ask is that we've heard about some letters being sent out by the various parties in the other procurement collaborations in the supply channel to the generic suppliers, where they are trying to capitalize on those quickly.

So I'm curious to get your thoughts on what's going to happen after July, whether there will be quick improvement, or is it gradual?

Just any color there would help.

Thanks.

This is Dave.

Maybe I'll start here.

Clearly, we're working pretty aggressively right now, with both folks from CVS, as well as folk from Cardinal, to get the joint venture up and running.

We still have a little bit of work to make that happen.

So I think the teams are working very collaboratively to make it happen productively.

I do think that it's probably just a little too early to provide too much color on that.

I will think it's important that we're going to figure out ways in which we get the joint venture up and running, that we're going to partner with generic manufactures.

That working to create win-win scenarios for them.

And you could imagine that some of that would happen quickly.

I think some of that could happen over time.

So the cadence of improvement, I think, it is probably too early to give much color to at this point.

Okay.

All right.

Great, thanks.

Our next question comes from the line of Mark Wiltamuth with Jefferies.

Hi.

On the specialty, what's the primary lever on getting some of that specialty spend out of the medical benefit and into the pharmacy benefit?

Is it just changes in benefit design?

Yes, Mark, this is Jon.

So that's essentially it.

So if a payer allows it to be paid under the medical benefit, and its billed that way, it goes through.

They do have the ability to say, we are not going to allow that to be paid under the medical benefit.

It has to be moved over to the pharmacy benefit.

And the value proposition there is in lowering cost of goods.

So we think it's an opportunity for the marketplace.

And again, we feel like our assets position us to help our clients find ways to save money in this rapidly growing area.

(multiple speakers) And the Coram fits into that as well?

I'm sorry?

The Coram fits into that as well, so you can aim people towards your Coram business on infusion, rather than going to a medical facility?

Yes, it's interesting.

When you look at Coram, they have people out in 1,200 hospitals across the country, and they essentially recruit patients one at a time.

We believe the opportunity is very fragmented market, working with payers, to reduce the infusion network, funnel more volume through Coram, and there's a value proposition there for the payer.

And it's not just in drug costs, but it's -- we can help get patients out of the hospital faster, because of our capabilities to do many of the procedures at home versus in the hospital.

And we can also help to reduce readmission rates.

And so, as we've been out in the marketplace, payers are very interested in these capabilities.

And I think very open to skinning down those infusion networks, which means more volume through Coram.

Mark, the only other point I want to emphasize is, back to the first part of your question, is that I think the data is powerful here.

And showing clients, whether it's a health plan and employer, the cost savings opportunities, is an important part of the story.

Our next question comes from the line of Ricky Goldwasser with Morgan Stanley.

Yes, hi, good morning.

A couple of follow-up questions.

First of all, on the specialty, and especially on Sovaldi, we are hearing that the payers are looking to narrow the net growth they're using in order to save costs.

I -- just gearing their patient population toward pharmacy -- their own specialty pharmacies.

So when you think about your specialty scripts, or maybe Sovaldi as an example, what percent of that script is coming from the Caremark population and your other health plan partners?

Ricky, this is Dave.

We don't provide that level of detail at this point in time.

I would say that, just as Jon maybe indicated earlier today in his remarks around how we manage specialty, one lever that is available to specialty is -- I'll say narrowing the network and pushing those -- and centralizing those fills into a centralized provider.

And we do that in some cases where it makes sense.

Or some cases, we have an open network, but that's an opportunity.

Yes, and Ricky, so we have not heard a lot of activity in Sovaldi from payers around narrowing the network.

Most of the activity is around making sure which patient should be placed on the medication.

And really, the biggest opportunity to lower the cost for Sovaldi is going to be around formulary Management.

And that will happen in the fourth quarter when these new drugs come to the market and there's more competition in the Hep C class.

Okay.

And then secondly, just on generic Nexium, obviously, there is some uncertainty around the drug.

So do you include a Nexium benefit into the 2014 guidance?

Ricky, this is Dave.

We -- when -- Nexium, like many other products, there's always some level of uncertainty in it.

And our guidance ranges comprehend, I guess, a series of different scenarios around both that product and other products.

Our next question comes from the line of David Larsen with Leerink Partners.

Hi.

Can you comment on how you would enhance the level or number of services that a retail store could provide to become more primary care physician-like, in particular around lab?

Is that something you're contemplating bringing to the stores?

Thanks.

Yes, David, we're doing a number of point of sale lab testing today, whether it's A1C, we've piloted some testing for some other disease states, and we're -- there's a lot of technology out there.

The technology in that space is moving very quickly.

And we're evaluating what is in the marketplace, and I think it's not a question of if; it's more a question of when, and finding the technology that we believe is right for MinuteClinic.

Okay.

And just in your view, in a perfect world, would these be lab tests that are done in the store?

Or would blood be drawn and then sent to a lab and then brought back in?

Or a combination of both?

No, it -- I think we're thinking about it as lab testing that's done in the store that really satisfies the goal of increasing the services that we can provide around the management of chronic disease.

Our next question comes from the line of John Ransom with Raymond James.

Hi.

I know this is getting late in the call.

I just had a quick follow-up to make sure I understand something.

When you're talking to clients now about their specialty trend, what do you think the market specialty trend is now?

And what can you bring that number to, using the most aggressive tools that you have?

Thanks.

John, it's Larry.

I think as I mentioned, in 2013, we saw the specialty trend at -- approach -- I think it was just a tic under 16%.

And we have a variety of models that we share with clients that, if left unmanaged, that trend is going to be in the high teens.

And I'll flip it over to Jon, because he's got a very nice presentation for our clients that show, by adopting all of these various programs, what the trend could ultimately come down to.

Yes, and John, so we think we can actually get a double-digit trend like that down to almost flat.

And there are programs that we have, such as advanced control specialty formulary, that we can reduce trend by 1.5%.

Medical claims editing and repricing that can bring it down 2.5%.

Site of care medical carve out that can bring it down 3.6%.

I won't go through all of them, but there's numerous programs that we have, that we've been building over the last several years, that can take these high trend rates in specialty and really make a huge impact on them.

And get them down to almost zero, if they adopted everything.

Right.

And as you look in your crystal ball, say, out to 2016, 2017, what do you see the overall drug trend being, including specialty, left unmanaged?

That's a good question.

And at our client forum, I spent some time actually talking to our clients about how they should begin to think about their pharmacy benefit.

Because if you look at utilization being somewhere in the 2% to 3% range moving forward, you see inflation overall across their book being somewhere in the 7.5% range.

You see the generic pipeline subsiding as an example.

So we think the trend overall can be somewhere in the 6% to 10% range, if unmanaged.

And obviously, we're encouraging them to adopt strategies such as more aggressive formularies, narrower networks, to bring that trend down.

And it's interesting, the marketplace, I think, is very open to these types of solutions that have been developed.

John, I think in Jon's presentation at the client forum, I think there was one of those a-ha moments for our clients that, recognizing that over the last several years, the influx of generics has been a key driver to bringing the cost trend pretty flat.

And a reality that as we migrate post 2015, and generics entering the marketplace, while they're still there, at a slower rate than historical averages, that they're going to have to do some things differently and think about things differently.

And they appreciate the fact that we're thinking about those thins for them and bringing them solutions.

Our next question comes from the line of Meredith Adler with Barclays.

Thanks.

A lot of questions have been asked.

Maybe I'll ask something that hasn't been asked at all, and you did mentioned that the strong free cash flow in the first quarter was tied to working capital.

And could you just talk a little bit about what you've accomplished in managing working capital?

And what you think the opportunities are?

Yes, sure Meredith.

It's really two things.

One is, we also posted very aggressive growth rates from an earnings perspective, so that obviously helps free cash flow yield.

But secondly is, we continue to push on our working capital.

I would say, Meredith, there's not one program that we have there that's driving all of it.

We continue to push on AR and AP.

I think, as we talked about in the past, probably our biggest opportunity continues to be to enhance our inventory position from a supply chain perspective within the retail stores.

If you look and you try to compare our performance with -- I'll say a top performance in the marketplace, we still have anywhere from $1.5 billion to $2 billion of inventory that I think we can get out of the pipeline over time.

And the team is working on that today.

It's not -- there's not one silver bullet to that.

It's going to be a lot of little changes that we need to do to really enhance -- I'd say our safety stock, as opposed to really dramatically changing our SKU count in the stores, if you look at it from that perspective.

Great.

And then I have a question, probably for Helena.

Based on everything you're saying, it doesn't sound like there's a point in time in which you will cycle reduced page count, or anything like that.

Is that the right way to think about it, that this is an ongoing process of using your Marketing funds more wisely?

Or will we see less impact at some point?

Yes, no, I think that's -- your first assumption is right, Meredith.

If you look at overall household penetration of the Sunday circular for the last five years, and projections for go-forward, it continues to decline.

We see that just continuing at its current pace.

And so to be ahead of that curve, we have really been investing outside of the circular.

So there's no one silver moment where we're going to cycle something, and I think this will continue.

Okay, we'll take two more questions.

Our next question comes from the line of George Hill with Deutsche Bank.

Hello.

Good morning, guys, and thanks for taking my questions.

How are you guys?

Good.

I guess first thing, I wanted to talk a little bit more about the PBM.

Results were pretty impressive.

And if I boil it down to profitability per script, or profitability per adjusted script, really strong growth year over year.

I guess, can you talk about what's driving that there?

How much should we think about that as the contribution of mix from acquisitions versus just continuing improvements in the business?

Or what else is the key there?

This is Dave, George.

Maybe I'll touch upon that.

We don't really use that metric that much.

We think it can give you -- that metric can give you a false positive or a false negative, depending upon your client mix, where you are in the profitability cadence of Medicare Part D, as they hit the risk quarters through all of the cycles, and the benefit levels.

I would say, though, having said that, there's a couple things that are driving our profitability we talked about.

We continue to push on specialty, and specialty has become a bigger portion of our business, and we continue to enhance our performance from a specialty perspective.

We furthermore have worked aggressively to improve our cost structure from a cost of goods sold perspective, and you've seen us continue to ratchet down and improve our buy side economics.

And then finally, from a PBM perspective, driven somewhat by our formulary strategy, have improved our rebate yield over time.

So all three of those continue to enhance our profitability.

And then I'll just say sliding on top of that is, we made some investments over the past several years, from a streamlining perspective, and we're -- our cost structure is in a much better position today than probably what it was three or four years ago.

So all those components are contributing to that growth and profitability.

Yes, I remembered that you guys didn't see that as a core metric.

But even -- as it's a metric that I continue to look at, because other companies in the space use it, very strong improvement, even on the tough comp year over year.

And then, I'd follow-up with one more quick one.

And I don't know -- do you guys have any data, and are you able to break down, what is the capture rate, or what is the cross sell, as the MinuteClinic business continues to grow pretty strongly?

You guys are posting very strong script volume.

What's the script capture from people who show up at a MinuteClinic?

And how should we think about the tie between the growth in the MinuteClinic business to the tie in the pharmacy sales?

Yes, there is a tie between patients who utilize the MinuteClinic.

Typically, when a prescription is written at MinuteClinic, is 95% plus of the time filled at CVS Pharmacy, something like that.

I would say that MinuteClinic is still relatively small in the grand scheme of -- as it relates to CVS Pharmacy.

So it's not a major contributor of script comp growth, but it is a nice complement to our business.

And quite honestly, we don't really think about MinuteClinic as it relates to the front, although there's probably some halo into the front of our business, as well.

Our final question comes from the line of Robert Willoughby with Bank of America Merrill Lynch.

Larry, do you envision adding oxygen therapy or durable medical equipment to your stable of businesses there, on top of the infusion business?

And then just secondarily, your primary competitor in the PBM world was graced with three subpoenas.

Do you anticipate seeing similar disclosure in your Q this evening?

Yes, Bob, good morning.

In terms of -- I think you'll see in our Q later today that we did receive a subpoena from the US Attorneys' office for the District of Rhode Island, requesting documents concerning some drugs, very similar to one of our competitors, as it relates to fees and rebate.

And obviously, we're cooperating fully on that matter.

We have not received a subpoena from the Department of Labor.

And then on your first question, we do not have any plans to get into the oxygen space.

We had that opportunity, when you look at the Coram acquisition, it was part of Apria.

And we purchased the infusion, and the investor kept the oxygen business.

I think for -- with durable medical, I think we continue to explore what options we may have.

We do a little bit of that today, and I think it's something that continues to be on our radar screen that -- can we do it in an effective fashion?

And when I say effective, I'm thinking of convenience of the patient in mind, as well as, obviously, the economics as it relates to the business.

That's great, thank you.

Okay, thanks, Bob.

Listen, we appreciate everyone's time this morning.

It was a long call, but we wanted to get to everyone's questions.

And if there's any follow-up, Nancy and her team will be available.

And again, thanks for your ongoing interest in CVS Caremark.

Ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation, and ask that you please disconnect your line.