This summary is based on the third quarter fiscal 2008 earnings call conducted by CVS Caremark Corporation (CVS) on October 30, 2008.
Management:
Senior Vice President of Investor Relations: Nancy Christal
Chairman, President and CEO: Tom Ryan
Executive Vice President and CFO: Dave Rickard
Key Investors Issues
- EPS were 51 cents a share compared to 47 cents a share last year.
- Net income rose to $732.5 million from $686.6 million previous year.
- Revenue edged up to $20.86 billion from $20.5 billion a year ago.
Third Quarter Highlights
Total revenues on a consolidated basis increased 1.8% to $20.9 billion.
- This number is net of inter-segment eliminations of $1.2 billion.
- In retail drug store segment revenues increased 5.3% to $11.5 billion.
- Same store sales were up 3.7%.
- Front store comparable store sales were up 3.3% while pharmacy same store sales were up 3.8%.
- New generic introductions reduced pharmacy comparable store sales by approximately 280 basis points.
- PBM net revenues of $10.6 billion were down 1% to 2007 third quarter revenues. Adjusting that growth for the impact of generics net revenues would have grown 6.2% for the PBM.
The impact of the change in Pharmacare’s revenue recognition method was the addition of $429.6 million in reported revenues before inter-company eliminations and $328.1 million after inter-company eliminations. Given the Pharmacare change commenced in September 2007 this change has now been completely cycled.
- PBM total retail network revenues were $6.8 billion rising 6.6% from 2007.
- The PBM’s retail generic dispensing rate increased to 66.1% compared to 61.6% in the third quarter 2007.
- Retail network claims grew 2.7% and as with the previous few quarters this was largely driven by new business ERS being the prime among the new clients.
- The company benefited from the growth spurt in Med Part D business and adds on lives from existing clients. As expected mail claims decreased by 20.2% as with the first two quarters of this year. The impact of new clients was more than offset by the well known terminations that commenced in January of this year.
Total mail revenues declined 12.9% to $3.6 billion and within total mail revenues PBM mail was down 22.9% compared to the third quarter of 2007, while specialty mail revenues increased 6.6%.
- If excluding the FEP business from last year’s data total mail revenues decreased by 3.7% reflecting generic conversions while specialty revenues grew 16.7%.
- The mail generic dispensing rate rose to 55.2% from 49.0% a year ago or 620 basis points.
- Overall mail penetration rate decreased approximately five percentage points from 2007’s third quarter to 23.3% again this was largely as a result of the absence of the FEP mail business.
- The overall business expanded by 61 basis points over the third quarter 2007 to 21.1%. Within the retail segment gross profit margins were up more than 60 basis points improving to 30.4%. Like past quarters the primary drivers of these were the following. First, the 436 basis point increase in the retail generic dispensing rate to 68% of scripts filled. Second, increased private label penetration as consumers traded down. Third, the benefits from the Extra Care program that allows to more proactively target best customers, finally, improved shrink.
- Gross profit margins in the PBM segment came in at 8.4% that is down approximately 30 basis points versus the 2007 third quarter. Excluding the 35 basis point drag from the conversion of Pharmacare’s contracts the gross margin in the PBM would have been up approximately five basis points.
- As with the retail business the PBM pharmacy margin benefited from an increase in the use of generic drugs while the incremental boost from the merger related purchasing synergies waned as they recycled.
Overall operating expenses as a percent of sales improved 20 basis points.
- In the retail segment operating expenses decreased as a percentage of sales from 24.1% to 23.4% along with disciplined expense control this was driven by the continued improved expense leverage in the Save-On and Osco stores that the company is experiencing even now two years after it purchased them. Somewhat offsetting this was the large growth in generics which pressure sales dollars while improving profitability.
- In the PBM segment comparable operating expenses as a percentage of revenues improved by approximately 20 basis points to 2.2%. This was largely driven by solid expense control in the core PBM operations. All things considered the company saw expansion of operating margins specifically in the retail segment.
- The operating profit margin in the retail segment grew by 139 basis points over 2007 to 7%.
- The PBM segments operating profit margin was down 15 basis points from 2007’s comparable results to 6.3%.
- Caremark’s industry leading EBITDA per adjusted claim increased to $4.27, up 1.2% over last year’s comparable $4.22 or plus 7.6% from the second quarter. However, the loss of the FEP mail service contract obviously had a major impact. Excluding FEP mail EBITDA per adjusted claim was up in the high single digits versus last year.
- The company saw quarterly net interest expense on the consolidated income statement decrease to $113 million or by eight basis points as a percentage of revenues. This reflects primarily the more favorable short term rates experienced year over year and the impact these had especially on the three year floating rate note placed May 2007. Tax rate was 39.5% and diluted share count was 1.47 billion shares.
- As with the second quarter the shares are down from last year’s third quarter due to the timing of the commencement of last year’s share buy back program which occurred during the fourth quarter 2007. During this year’s third quarter the company did not repurchase shares.
