This summary is based on the second quarter fiscal 2008 earnings call conducted by CVS Caremark Corporation (CVS) on July 31, 2008.
Management:
Senior Vice President, Investor Relations: Nancy Christal
Chief Financial Officer, Executive Vice President, Chief Administrative Officer: David B. Rickard
President, Caremark: Howard A. McLure
Executive Vice President and President - CVS/Pharmacy - Retail: Larry J. Merlo
Key Investors Issues
- EPS to common shareholders was 53 cents a share compared to 47 cents a share last year.
- Net earnings available to common shareholders rose to $771.2 million from $720.1 million a year earlier.
- Sales rose to $21.1 billion from $20.7 billion a year earlier.
Second Quarter Highlights
Total revenues on a consolidated basis increased 2.1% to $21.1 billion.
- This figure is net of inter-segment eliminations of $1.3 billion.
- In retail drugstore segment, revenues increased 4.6% to $11.8 billion.
- Same-store sales were up 3.1%.
Pharmacy same-store sales grew 3.7%.
- Sales of new generics negatively impacted this number by 280 basis points, so if adjusted for the impact of new generics, pharmacy comparable store sales would have been 6.5%. The generic dispensing rate in retail segment was 67%, up about 460 basis points from last year and up about 40 basis points sequentially.
- Although there are some headwinds impacting pharmacy growth across the industry, such as RX to OTC switches and a weak brand drug pipeline, CVS continues to grow and gain market share.
- As for the front-end, comparable store sales increased 1.8%. Adjusting for the negative impact of the Easter shift, front-end comparable store sales increased 2.9%.
- Average front-store ticket continues to increase.
- Front-store margins continued to improve. One important driver of improved margins is the use of the extra care loyalty program to drive more profitable sales. Front-store margins are benefiting from a notable increase in private label sales. Private label made up 15% of front-end sales, up 114 basis points from last year.
PBM segment net revenues of $10.7 billion increased 1% over the 2007 second quarter.
- Adjusting that growth rate for the impact of generics, net revenues would have grown 8.4% for the PBM.
- The impact of the change in Pharmacare’s revenue recognition method on the second quarter was the addition of $667.6 million in reported revenues before inter-company eliminations, or $521.7 million after eliminations.
- Total retail network revenues were $6.9 billion, rising 10.3% from 2007 levels. Setting aside the increase from Pharmacare’s revenue recognition change, retail network revenue was essentially flat to last year, due to the increase in generics.
- The PBM’s retail generic dispensing rate increased to 65.5% compared to 61.2% in the second quarter of 2007. At the same time, retail network claims grew 2.7%. This was primarily driven by new business, including the growth spurt in PDP and add-on lives.
- As expected, mail claims decreased by 18.9%. As with the first quarter, the impact of new clients was more than offset by well-known terminations during 2007, namely the FEP mail business, State of New York, and Ohio State Teachers retirement system.
- Total mail revenues declined 13.2% to $3.6 billion, and within total mail revenues, PBM mail was down 22.4% compared to the second quarter of 2007, while specialty mail revenues increased 4.4%. If excluding the FEP business from last year’s data, total mail revenues increased 3.2% and specialty revenues grew 14.4% in the second quarter.
- The mail generic dispensing rate rose to 54.5% from 47.6% a year ago, or 690 basis points. Overall mail penetration rate decreased approximately five percentage points from 2007 second quarter to 23.5%.
The overall business expanded by 60 basis points over the second quarter of 2007 to 20.7%.
- Within the retail segment, gross profit margins were up 60 basis points, improving to 29.9%. The primary drivers of this were the increase in the retail generic dispensing rate, the merger related purchasing synergies, improved shrink, increased private label penetration and the benefits from the extra care card that result in a lower percent of products sold on promotion.
- Gross profit margins in the PBM segment came in at 8%. That’s down 20 basis points versus the 2007 comparable second quarter. However, excluding the 53 basis points drag from the conversion of Pharmacare’s contracts, the gross margin in the PBM would have been up 33 basis points.
- The PBM pharmacy margin benefited from some of the same factors that helped the retail business, namely an increase in the use of generic drugs and the purchasing synergies derived from the merger.
Overall operating expenses as a percent of sales improved by approximately 10 basis points due to solid expense control in both segments of the business.
- In the retail segment, operating expenses decreased as a percent of sales from 22.8% to 22.6%. This was driven by disciplined expense control and improved expense leverage in the Save-on and Osco stores acquired back in 2006. That was somewhat offset by the growth in generics, which pressure sales dollars while improving profitability.
- In the PBM segment, comparable operating expenses as a percentage of revenues improved by 17 basis points to 2.2%. This was largely driven by the absence this year of integration and other merger related expenses seen in last year’s second quarter.
- The company saw expansion of operating margins, specifically in the retail segment. The operating profit margin in the retail segment grew by 80 basis points over the 2007 level of 7.3%. The PBM segment’s operating profit margin was flat with 2007’s comparable results at 5.8%.
- Caremark’s industry leading EBITDA per adjusted claim increased to $3.90, or 3.7% over last year’s comparable $3.83. Excluding the FEP mail business, the company would have had double-digit growth in EBITDA per adjusted claim, so the underlying growth of the business remains robust.
