Ladies and gentlemen, good morning and welcome to the CVS Health Second Quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow CVS prepared remarks, at which point we will review instructions on how to ask your question. As a reminder, today's conference is being recorded. I would now like to turn the call over to Susie Lisa, Senior Vice President of Investor Relations for CVS Health. Please go ahead.

Thank you. And good morning, everyone. Welcome to the CVS Health Second Quarter 2021 Earnings call. I'm Susie Lisa, Senior Vice President of Investor Relations for CVS Health. I'm very excited to be on the call with you today and to have the opportunity to work with you going forward. I'm joined this morning by Karen Lynch, President and Chief Executive Officer and Shawn Guertin, Executive Vice President and Chief Financial Officer. Following our prepared remarks, we'll host a question-and-answer session that will include Alan Lotvin, President Pharmacy Services, Dan Finke, President Healthcare Benefits, Neela Montgomery, President Retail and Pharmacy, and Jon Roberts, Chief Operating Officer. Our press release and slide presentation have been posted to our website, along with our form 10-Q that we filed with the SEC this morning. During this call, we will make certain Forward-Looking Statements reflecting our current views related to our future financial performance, future events, industry and market conditions, as well as the expected consumer benefits of our products and services and our financial projections. Our Forward-Looking Statements are subject to significant risks and uncertainties that could cause actual results to differ materially from what may be indicated in them. We strongly encourage you to review the information in the reports we file with the SEC regarding these risks and uncertainties. In particular, those that are described in the cautionary statement concerning Forward-Looking Statements and risk factors section, in our most recent Annual Report on Form 10-K, this morning's earnings press release, and included in our Form 10-Q. During this call, we will use non-GAAP financial measures when talking about the Company's performance and financial condition. In accordance with SEC regulations, you can find a reconciliation of these non-GAAP measures to the comparable GAAP measures in this morning's earnings press release, and the reconciliation documents posted on the Investor Relations portion of our website. Today's call is being broadcast on our website, where it will be archived for one year. Now, it's my pleasure to turn the call over to Karen.

Good morning, everyone and thank you for joining our call today. This was another strong quarter for CVS Health. We are playing an integral role in connecting experiences across the healthcare system to deliver better health outcomes. This is what truly differentiates us and generates our growth. In the rapidly changing U.S. healthcare environment, we have proven that we can bring solutions, at scale, to meet individual health needs however they evolve. Our COVID-19 testing and vaccination campaigns for millions of Americans are just one example. We meet customers where they are. We're there when and how they want to access care. That is what's driving growth across our Company and it's where we'll continue to focus our innovation and investments. During the 2nd quarter, we delivered revenue growth of 11%. We generated adjusted earnings per share of $2.42 and strong cash flow from operations of $5.8 billion. We are raising our adjusted earnings per share guidance to $7.70 to $7.80. This reflects the continued positive momentum across our business, with growth both in new and current markets. Today, we announced an important investment in our employees. We will raise the minimum wage for our colleagues to $15 an hour by July 2022. This wage increase will boost our competitive edge in a tight retail labor market. We estimate it creates an incremental $600 million in labor costs over three years. Approximately, $125 million of that impact will be in the final four months of this year. Increasing our minimum wage for hourly employees will help attract and retain the talent needed for our customer-centric business approach. Just as critical, it aligns with our values and our purpose, and builds on a history of our investment in our people. Each of our businesses delivered strong performance, highlighted by overall sales and earnings outperformance and sequential margin improvement. Customers realize the value we are providing across our CVS Health assets which results in increased customer retention rates and new wins. In Healthcare Benefits, results were powered by growth in our government business. Our medical benefit ratio of 84.1% was modestly above expectations, driven by COVID-related costs. Underlying non-COVID costs emerged favorably. We continue to believe aggregate medical costs will modestly exceed baseline levels during the second half of the year. In addition to strong performance in our core business, we are leveraging our broad and unique portfolio of assets with our first CVS-Aetna co-branded offerings. We have submitted our exchange regulatory filings for a January 2022 entrance in 8 states outlined in our supplemental earnings materials. With Aetna's strong networks and CVS ' significant local presence, we believe we are creating a compelling new offering that combines health insurance, pharmacy, our retail presence, and behavioral health services. This is something that no one else can deliver. The 2022 national account selling season in healthcare benefits has been marked by a somewhat compressed, industry-wide pipeline. Employers have been focused on developing strategies for vaccinations and other return to work activities. As a result, we concentrated on client retention, delivering a strong result of 97%. For those cases that were out to bid for 2022, we have been successful in securing new business, and introducing new differentiated products. For example, our virtual first primary care product is the only nationwide program to offer long-term dedicated virtual primary care and a traditional in-person national network, including MinuteClinic and HealthHUB. Turning to Pharmacy Services, we outperformed expectations, delivering 9.8% revenue growth and very strong operating income growth. We continue to build momentum in Specialty Pharmacy with revenue up 8.9% year-over-year. Looking ahead, we have maintained an impressive 98% retention rate with more than 80% of renewals complete. We have also driven strong new business results, winning over $8 billion in new growth sales for next year. We remain well-positioned for continued specialty and pharmacy growth in 2022. The differentiation we offer is particularly important. It reflects our integrated offering with in-store, mail order, and specialty services. We added nearly 1,000,000 new integrated pharmacy and medical members through the 2021 and 2022 selling seasons alone. This is a testament to our success in the marketplace from the aligned interest and value we bring to our customers. Our Retail segment continues to play a crucial role as part of our community-focused strategy. We are a vital local health destination for millions of Americans who are resuming more normal activities and fueling macro improvements in the economy. Our second-quarter results for retail outperformed our expectations, and the market. In our pharmacies, we grew prescription market share to over 26%. Importantly, our customer-centric programs continue to improve adherence for our patients. At the same time, we saw a solid rebound in front store sales, which increased nearly 13% in the quarter, with strength across all categories. Nearly 2/3 of that growth was driven by health and wellness products. Similarly, pharmacy script growth in the quarter was strong, up more than 14% year-over-year, 1/3 of which is attributable to COVID vaccines. We now administered 30 million vaccines and 29 million tests through the inception of the program. Approximately 40% of vaccines we administered over the past 2 months were to members of underrepresented communities, a rate at or higher than the benchmark population. Our effort to make the vaccine accessible and convenient for all Americans continues. However, vaccination rates are slowing from a peak in April, despite the impact of new variants. Our COVID work is a powerful example of the trust and relationships we are building with consumers, augmented by our local presence and digital tools. For customers introduced to us through COVID testing, approximately 12% have subsequently chosen to fill new prescriptions or get their COVID vaccine at CVS Health. This helped drive overall strong script growth in the quarter. The COVID testing outlook remains strong. As public health recommendations evolve, we are prepared, and continue to play a critical role in helping Americans prevail against the pandemic. I'm grateful for the continued dedication and tireless efforts of the nearly 300,000 colleagues. We are making considerable progress across key drivers of our growth. The first is our role in care delivery. We continue to focus on our integrated platform to expand access to care that is local, affordable, and connected. HealthHUB represents one of many channels, and lower-cost sites of care, that allows us to address individual health needs. Aetna commercial members in the no co-pay low co-pay product are utilizing our MinuteClinic and our HealthHUB more frequently, more than twice as often as members without these benefits. We expanded the spectrum of health services we offer to include common services usually done in primary care settings, such as chronic care management, like diabetes, and behavioral health, a critical area of need that will continue beyond the pandemic. We expanded our Care Concierge program to support our Medicare members. Rolling out as planned, the HealthHUB Stars program designed to close gaps in the quality of care. Early intervention results are promising as they are demonstrating strong reach and a high engagement rate of 67% for a variety of health screenings such as diabetes and cancer. The second key area is technology. We are using the power of our digital capabilities to reinvent how consumers experience their care by creating choice, expanding access, and reducing complexity. And we are creating new sources of value while accelerating the speed, flexibility, and launch of new health solutions. Today, we regularly serve more than 35 million unique digital customers across our CVS Health assets. Our digital customers are important. Digital retail customers spend two-and-a-half times more in our front store, manage one-and-a-half times more scripts, and remain customers longer than other pharmacy patients. And customers who engage with us digitally have lower medical costs related to personalized data insights that guide health behaviors. This quarter, we also saw more than 37% of specialty prescriptions initiated digitally from the 85% of our pharmacy specialty members who have opted into our digital program. Building these trusted digital relationships with customers generates new growth opportunities across all of our businesses. At the same time, we are reengineering our cost structure by simplifying operations to benefit both customers and our own colleagues. Our technology-driven programs are leveraging blockchain, driving cloud migration, and intelligent automation, and streamlining processes to accelerate results and generate greater impact. One example is a specialty pharmacy script automation program that uses AI to yield better results more quickly, while eliminating more than 30 manual steps, such as benefit verification and prior authorization. Our commitment to shareholders, customers, and communities we serve does not stop at commercial product offerings. CVS Health plays an important role in the health and vitality of the communities where we live, work and serve. Our long-standing commitment to corporate social responsibility focuses on four areas: Healthy people, healthy business, healthy communities, and a healthy planet. Together, these efforts create our sustainability roadmap, known as Transform Health 2030. It represents an ambitious, but achievable agenda that aligns with eight of the UN's sustainable development goals. CVS Health is investing in inclusive wellness, economic development, and advancement opportunities for our colleagues and our suppliers. We are also making social impact investments that will improve health outcomes nationwide, which is already making a critical difference in our pandemic work. In addition, we have set science-based targets to reduce our greenhouse gas emissions by 67% by 2030 from a 2014 baseline. I am proud of what we've achieved, but there is much more to do and I'll provide regular updates about our continued progress. In closing, CVS Health is the leading health solutions company with a broad and unique set of assets. We are accelerating our pace of progress to drive value for our customers, our communities, our people, and our shareholders. Our unparalleled capabilities reach an enduring relationship with the consumer, uniquely positions us to support them throughout their lifetime, while also providing multiple avenues for sustained growth for our Company. I'll turn now to Shawn Guertin, who recently joined CVS Health as Executive Vice President and Chief Financial Officer in late May and has already made an impact. His deep healthcare expertise, financial acumen, and strategic mindset will be instrumental to the successful execution of our strategy.

Thank you, Karen and good morning, everyone. I'm very excited to be at CVS Health, particularly at such a dynamic and important time, not only for our Company, but for our healthcare system as a whole. Our differentiated portfolio of capabilities and local community presence creates a compelling competitive advantage that improves healthcare access and outcomes across a broad population, while generating strong cash flow and value for all our stakeholders. I look forward to executing on our growth strategy and reshaping the healthcare experience for the people we serve. I'll first discuss our Second Quarter Financial Results. As Karen stated, we delivered another quarter of outperformance across each of our businesses. Exceeding our expectations and further demonstrating the strength of our combined enterprise. Total revenues of $72.6 billion grew 11% year-over-year, and reflected strong contributions from each of our segments. We reported adjusted operating income of $4.9 billion and adjusted earnings per share of $2.42. We continue to generate excellent cash flow in the second quarter, with year-to-date cash flow from operations now exceeding $8.7 billion. Further, we have repaid $5.4 billion in debt during the first half of the year. All our cash-flow metrics exceeded our internal forecast during the quarter. Moving to the segments - Healthcare Benefits total revenue increased 11% year-over-year, driven by our continued growth in our government services business, slightly offset by the repeal of the health insurance fee or HIF. Our Medicare franchise continues to perform very well with quarterly sequential membership growth across all products. Medicare Advantage membership is slightly exceeding our prior expectations and is now on track to be up 9% to 10% for the full year. Dual special needs plans membership grew by double digits sequentially, and has more than doubled year-over-year, reflecting our strategic focus in this business. Medicare Supplement and Prescription Drug Plan membership also increased in the quarter, providing a sustained, strong pipeline of opportunities for future conversions to Medicare Advantage. Our midyear Medicare risk-adjusted revenue settlement was in line with our expectations. Finally, for our prescription drug plan business, we are pleased with our bid position below the 2022 low-income benchmark in all our targeted regions. Healthcare Benefits adjusted operating income exceeded our projections for the quarter, but was down materially on a year-over-year basis due to the depressed levels of utilization observed in the second quarter of 2020 at the start of the pandemic. The medical benefit ratio for the quarter of 84.1% was slightly higher than our forecast, driven by higher-than-expected COVID-related costs, which, while materially lower than the first quarter, did not fall off as much as we had forecast. Underlying non-COVID utilization continued its return toward normal baseline levels and was slightly favorable versus our expectations. The combined result was an MBR slightly higher than our forecast for the quarter. We remain comfortable with the adequacy of our reserves. Recording a modest amount of favorable prior year development in the quarter while days claims payable of 48 is consistent with both the 1st quarter of this year and the 4th quarter of 2020. Turning to Pharmacy Services, we continue to deliver exceptional value for our customers by producing industry-leading, low single-digit drug trends. This value proposition allowed us to produce strong revenue growth of nearly 10% versus last year, primarily driven by network volume and Specialty Pharmacy growth. Total pharmacy claims processed increased by more than 11% versus last year, with approximately one-half attributable to net new business wins from our 2021 selling season, and another quarter due to COVID vaccine administration. Our Specialty Network and Maintenance Choice business lines all delivered sequential claims growth in the quarter. Pharmacy Services adjusted operating income exceeded expectations in the second quarter, up more than $400 million or 32% year-over-year. The three major drivers of this increase are improved purchasing economics reflecting the products and services of our group purchasing organization launched in the second quarter of 2020, Specialty Pharmacy, including our 340B Claims Administration business, and increased pharmacy claim volumes. These favorable items were partially tempered by ongoing client pricing pressure. Lastly, it's important to note that the initiation of our group purchasing organization and certain generic specialty launches in the second quarter and second half of 2020, respectively, created relatively low comparisons in the first half of 2021 that will increase significantly in the second half of the year. Therefore, we expect a much smaller incremental year-over-year improvement in operating income in the second half of this year. Retail also delivered strong results this quarter exceeding expectations. Total revenue of nearly $25 billion increased by $3 billion or 14% year-over-year. This improvement is driven by three main components. One, approximately one-third or $1 billion is attributable to the nearly 17 million COVID vaccines and more than 6 million COVID tests administered during the second quarter. Two, an additional one-third or another billion dollars is due to the broad quarantine restrictions and civil unrest experienced last year, that depressed results in the second quarter of 2020. Three, the final one-third, or remaining $1 billion, was driven by a combination of improved pharmacy growth and mix during the second quarter, as well as broad strength in front-store trends. Front-store revenue increased by nearly 13%, while pharmacy prescription volume was up 14%, including COVID vaccines. This strong revenue growth combined with a 340 basis point improvement in adjusted operating margin, produced adjusted operating income well ahead of our forecast, and an increase of nearly a billion dollars year-over-year. COVID testing and vaccines, which were immaterial in Q2 2020, represent approximately half of the operating income increase. Second quarter 2021 results also reflect again from a legal settlement related to an anti-trust matter worth a $125 million which is included in both our GAAP and non-GAAP results. Turning to cash flows on the balance sheet, cash from operations remains strong at $5.8 billion for the quarter, and $8.7 billion year-to-date. We paid down $2.4 billion of long-term debt in the quarter while returning $650 million to shareholders through dividends. Since the close of the Aetna transaction, we have paid down a net $17.6 billion in long-term debt. Our commitment and discipline in this area was recognized during the quarter as S&P raised our credit outlook from stable to positive. Let me now turn to our updated guidance for 2021 and share some preliminary thoughts regarding 2022. But first, I want to provide a framework of the pandemic-related dynamics that will impact our business over the remainder of the year and the interplay between the Retail segment and the Healthcare Benefits segment. As mentioned, our Retail segment benefited from strong COVID testing and vaccine administration services in the second quarter, but began to see vaccines fall below expectations in May and June. As a result, we have reduced our forecast for vaccine earnings to below the midpoint of our original range for the full year. In healthcare benefits, given the ongoing fluidity of the current environment, we have incorporated a higher estimate of COVID-related costs in the second half of the year. As a result, our full-year MBR, while still well within our range, is approximately 20-30 basis points higher than our previous forecast. Overall, we believe the combined impact of our reduced outlook for vaccines in retail and a slightly higher MBR in Healthcare Benefits now make the pandemic a modest negative for 2021. Despite this, given our strong performance in the quarter, and solid outlook, we are increasing our guidance. We are raising full-year 2021 total revenue guidance to a range of $280.7 billion to $285.2 billion representing year-over-year adjusted revenue growth of 4.5% to 6.25%. We're also raising adjusted EPS guidance to $7.70 to $7.80 per share. A significant earnings outperformance in the second quarter is reflected in our updated full-year guidance, but it's partially offset by three key headwinds during the second half of 2021. The first is expectations for full-year COVID-19 vaccine volumes to be below the midpoint of our original guidance. As I mentioned earlier, we saw vaccinations peak in April then begin to decline in May and June. Although the recent rise in COVID-19 cases has caused a reacceleration in first dose trends, we believe it to be prudent to adjust our full-year outlook for vaccines to a range of 32 to 36 million. This includes a limited contribution from the administration of pediatric vaccines, but does not assume any contribution from booster shots. Overall, despite the slowdown in vaccine administration, we continue to be pleased with our expanded and strengthened customer relationships stemming from our local presence, and see ongoing customer connectivity from the significant role we play in combating the pandemic in our local communities. The second item is the investment in wages that Karen highlighted. Our work to retain and attract talent includes an additional $600 million investment in wages over three years, primarily for our retail colleagues and pharmacy technicians, with approximately $125 million impacting the last four months of 2021. Finally, the third item is increased investments in the second half of 2021, reflecting our efforts to drive and support growth, enhance our consumer experience, and improve our cost structure in 2022 and beyond. In aggregate, these three items are expected to negatively impact second half adjusted EPS by approximately $0.25 per share. In addition to increasing our EPS guidance, we are also raising our expectations for cash flow from operations by $500 million to a range of $12.5 to $13 billion. Our expectations for gross capital expenditures remain in a range of $2.7 billion to $3 billion to fund organic growth initiatives and our expanded investments in technology and digital. We remain committed to ongoing deleveraging and our investment-grade rating target. By segment, for Healthcare Benefits, we are maintaining our full-year adjusted operating income guidance of $5.25 to $5.35 billion. As discussed, our outlook assumes a slightly higher full-year MBR by 20 to 30 basis points, to reflect the higher COVID costs observed in the second quarter and our expectation that slightly higher COVID costs will continue into the second half. Our forecast assumes that non-COVID utilization will return to normal baseline levels by the fourth quarter. This MBR pressure is largely being offset by an improved revenue outlook and operating expense management. It's also worth recalling the natural seasonality of the Healthcare Benefits segment, with fourth-quarter operating income typically the lowest of the year. We believe that our forecast is appropriately positioned, given that there remains a high degree of uncertainty in terms of how COVID will play out during the second half of the year. For Pharmacy Services, given the strength in the quarter and visibility to the remainder of the year, we are increasing our full-year 2021 adjusted operating income guidance to $6.45 billion to $6.55 billion, representing year-over-year growth of 13.5% to 15.25%. While we expect the factors driving second-quarter performance to continue to benefit the second half of 2021, due to the timing elements I discussed earlier, we do not anticipate the same level of year-over-year growth observed in the first half of 2021. For retail, we are maintaining our full-year 2021 segment guidance for adjusted operating income in a range of $6.6 billion to $6.7 billion. Given the dynamic environment relative to the pandemic and its impact on vaccines, testing, and front store sales, we have taken what we believe to be a prudent posture in our outlook and have not fully pulled through the favorability we observed in the second quarter to the full year. This full-year guidance also reflects the reduced outlook for vaccines and the impact of the wage investment, approximately 80% of which is experienced in the retail segment. You will find further details in the slide presentation we posted to our website this morning. Moving onto 2022, while it is premature to provide forward-year guidance at this time, I want to share some preliminary thinking on some of the more visible puts and takes we are considering for 2022. Starting with tailwinds. It is reasonable to expect benefits from strong selling seasons in the Pharmacy Services segment and then, commercial national accounts in the Healthcare Benefits segment, anticipated lower COVID-related costs and improved Medicare risk-adjusted revenue reimbursement in the Healthcare Benefits business, and continued contributions from our ongoing cost savings initiatives. For headwinds, we anticipate consistent pressure in Pharmacy Services from client price improvements and reimbursement pressure in retail, both of which are consistent industry headwinds, which we seek to mitigate through improved purchasing economics. Second, the impact of annualizing the increase to minimum wage across the Company, and third, uncertainty regarding the expected revenue from COVID vaccines and testing in our retail operations. Lastly, I'd remind you that our standard practice is not to include any estimates of prior year development or realized capital gains in our Forward-Looking Guidance. On a year-to-date basis, these two items comprise approximately $0.15 per share. Again, this is not a comprehensive outlook for 2022, but represents some of the key items likely to influence performance next year. To conclude, CVS Health continues to produce strong results as we execute on our differentiated strategy. Putting the consumer at the center of what we do, and redefining the integrated delivery of healthcare. I look forward to updating longer-term financial targets at our Investor Day event this December, and detailing our key priorities, positioning CVS Health to deliver sustainable, long-term, profitable growth, and to return to a more balanced and strategic program of capital deployment.

We'll take our first question from Lisa Gill with JPMorgan, please go ahead.

Thanks very much. And thank you for all the detail. Shawn, just going back to your thoughts around 2022, am I thinking about this correctly? If I take the midpoint of this year at $7.75, add back the $0.25 that you talked about, we get to $8, minus the $0.15 that you think about and capital gains gets us to $7.85. And then how do I think about the headwinds and tailwinds that you talked about are they fairly equal between them? Is there any other color that you can give us as we think about the puts and takes going into next year?

I would be cautious about the specific calculations because there's uncertainty around things like vaccine and testing revenue. I also wouldn't fully add back the $0.25, since the minimum wage impact only covers four months and will annualize next year. There are various factors at play that we can't completely quantify yet. However, when discussing 2022, I want to highlight that we are very well-positioned in our core businesses, and our operating performance has been strong, as shown by our recent results. While I won’t provide guidance for 2022 today, I acknowledge that we have previously set targets for low double-digit earnings growth for that year. I want to emphasize that achieving double-digit adjusted EPS growth is always our goal and influences our strategic decisions. A lot has changed since 2019, not just in how our earnings are composed, but also in the uncertainty surrounding these components moving forward. Vaccine and testing costs are good examples, but their future trends are hard to predict. We need to consider the baseline from which we're measuring and how these factors may evolve. If I consider a starting point of $7.70 to $7.80, I cannot reaffirm the double-digit growth target for 2022 based on this forecast. However, this reflects the changing circumstances rather than the core performance of our business, which has been exceptional. We expect to discuss 2022 in more depth at our Investor Day, along with some of our long-term financial goals and the earnings potential of the business.

And Shawn, just as my follow-up, I just want to understand, you talked about COVID costs returning as we go into the back half of the year. Can you talk at all about what you've seen in the last few weeks with the Delta variant and potential increase to cost on the COVID side? And then are you seeing any non-COVID costs coming down, that people are pushing off elective surgeries because of COVID? Any incremental color would be helpful there. Thanks again for the comments.

In the HCB business, there's a delay in real-time insights, so we don't have clear information for July yet. However, I've noticed several media reports indicating that some facilities are starting to cancel elective procedures again, suggesting a renewed pressure on deferred utilization. It's still too soon to draw conclusions for HCB. On the retail side, we are observing strong momentum, particularly in testing. While vaccine numbers have declined in July compared to the previous month, there has likely been a slight increase as I mentioned earlier. It seems reasonable to conclude that ongoing COVID treatment costs are continuing into early July, which is why we've decided to be more cautious in our outlook for HCB.

And we will take our next question from A.J. Rice with Credit Suisse, please go ahead your line is open.

Hi, everybody. Welcome, Shawn and Susie. Anyway, I appreciate the conversation the last couple conference calls about how the three businesses can work together. When you look at today, what are the leading opportunities for the businesses to the Retail, Pharmacy Services and the Benefits business to capitalize on, that are still in front of the Company? Can you highlight maybe a couple of things that you guys particularly focused on and seized opportunities?

Good morning, A.J. I want to highlight a couple of key areas in front of us. One is our potential for expanding digital access and connections. We've observed that utilizing these digital connections leads to reductions in overall medical costs for those individuals. Additionally, we have the chance to grow our home service and delivery options; for instance, we are currently in Corum with kidney care, but I believe there are even more extensive opportunities available. This is a market worth over 100 billion dollars, and I think we can penetrate it further to enhance our overall care delivery. I would emphasize these two points. Furthermore, I believe we can achieve more within our core business through integration, by increasing the sales of our products, capturing a larger share of customer spending, and optimizing benefit designs to support more affordable care options like MinuteClinic and HealthHUB. These are a few areas I'd like to comment on. Thanks for the question, A.J.

Great. Maybe just a quick follow-up. I know the slide deck says that the priority remains to continue to pay down debt. At what point, Shawn, can you say onboard? What point do you think you might look at tuck-in acquisitions a little more actively, share repurchase, any of those type of things, what's the timeframe of that?

Thank you, A.J. It's great to hear from you again. Looking ahead to the rest of this year and primarily 2022, we have approximately $4 billion of debt maturing, and we aim to pay that off. If we maintain the cash flows from 2021 into next year, even after accounting for the dividend, there will still be significant opportunities for other capital investments, such as potential mergers and acquisitions, dividend increases, and share repurchases. Therefore, while 2022 may see a more measured approach, it is when we can begin to implement these strategies meaningfully. Longer-term, my top priority for capital allocation is to grow the business. We will require specific capabilities over the coming years to implement our strategy effectively, and that includes M&A. I believe balanced capital deployment yields the best long-term results, which should combine M&A, a growing dividend linked to EPS increases, and share repurchases that consistently support EPS growth.

Next question please.

Okay. Thanks a lot.

We'll take our next question from Ricky Goldwasser with Morgan Stanley. Please go ahead. Your line is open.

Hi, good morning. Thank you for all the details and congrats on a very good quarter. My main question, Karen is around the relationship and how you think about your Medicare Advantage book of business, and your vision for how you're going to evolve the HealthHUB presence? Then you talked about, Care Concierge for Medicare. Just curious to see how that marketplace is shaping your seeing of what HealthHUBs would look at the future versus what it is today? And then the follow up question would be to Shawn. Shawn when you talked about second-half guidance, you mentioned investments in future growth as a headwind. You didn't mention it as a headwind for fiscal year 2022. So just from a modeling perspective, should we think about these investments just as happening in the second half, or should we also run rate them as we adjust our models for next year?

Good morning, Ricky. I want to begin by discussing Medicare. It represents one of our largest growth opportunities, especially as we continue to sell more Medicare and target dual-eligible beneficiaries. We see this as a significant ongoing growth opportunity. In considering care delivery and performance metrics, the HealthHUB will be a vital component, but it's essential that we adopt a broad and comprehensive approach to care delivery, especially for Medicare patients. The HealthHUB will certainly contribute, particularly with our zero and low co-pay options. We are demonstrating our ability to conduct follow-up visits at our HealthHUBs, but we also need to enhance our home care capabilities and ensure we maintain digital connectivity with our patients. Our recently introduced program as part of our HealthHUB rollout aims to address gaps in care. By closing these gaps, we can improve performance metrics and increase revenue, thereby creating a beneficial cycle for us. I would like you to consider Medicare and care delivery in a broader context, with the HealthHUB as an integral part of our strategy. Shawn, I will now hand it over to you.

In terms of guidance for the second half, I believe there are two levels of investment to consider. One is when we experience growth that exceeds our initial expectations, such as what we anticipate with PSS. This requires us to hire additional staff to manage the increased growth. Regarding your question about 2023 growth based on our 2022 performance, I wouldn’t apply a uniform growth rate across the board. However, certain aspects of the business tend to maintain a consistent growth trajectory, like our ongoing investments in Medicare distribution and staffing for our customers. So, at this point, I wouldn't apply a uniform growth rate overall, as many factors are still uncertain. That said, there are elements likely to continue if we maintain our current growth path. Additionally, for the second half guidance, some spending tends to be delayed until later in the year, particularly towards the end. This, combined with the natural seasonality in the Healthcare Benefits sector, could lead to earnings being lower in the fourth quarter compared to the third.

Thank you.

Next question.

And we'll take our next question from Ralph Giacobbe with Citigroup, please go ahead. Your line is open.

Great, thanks. Good morning. Maybe just on the labor commentary. First, are you seeing underlying wage pressure outside of the minimum wage lift? And then just wanted to clarify the numbers. I think you said the cost would be $600 million, a $125 million the last 4 months of this year, but I think you also said it would stretch over three years. So just want to reconcile that versus that July 2022 date that you put out there?

Yeah. Hi, Ralph. Let me just start with the minimum wage adjustment. It's a series of investments that we've been making for our employees since the pandemic, and we are seeing 65% of our employees that are hourly are already at or above $15 an hour. This is a very targeted investment for our pharmacy technicians, our front store colleagues, and we will start a series of wage increases beginning in September, which is really what's driving that $125 million impact to the latter half of the year. Obviously, it's a tight labor market. We are paying attention. We've got a lot of hiring to do to support growth. And so far, we see pressure but we've been managing through it. But we're watching that labor market, we're seeing impacts in the stores. And that's part of why we're making this wage investment today. Shawn, do you want to answer the 3-year question?

Ralph, over the next few years, the situation will evolve as you noted. The change in September will result in a $125 million impact for the last four months of this year. This amount will annualize next year, and there will also be a second change in July of next year. The total cost for 2022 will be $485 million, which represents an increase of about $360 million from the initial $125 million. The second adjustment in July 2022 will also annualize in 2023, but not to the same extent. By 2023, the total cost will be approximately $600 million, reflecting an increase of about $115 million year-over-year from 2022 to 2023.

Got it. All right. That's helpful. And then just quick follow-up, just want to clarify, Shawn, I think you said you would not factor in low double-digit growth on the $7.75 basis, I think I heard that. But if I do look at consensus, it factors about 7% growth, so we know we're not at that double-digit level. And give me your commentary around capital deployment alone, are you willing to say if there is comfort in that sort of mid-single-digit EPS, or is it just still too early to even give that comfort or clarity. Thanks.

I would say it's too early for me to give you specific guidance. But if you go back to what I said, I think the businesses are performing very well, and we will have the ability, potentially, to deploy some capital next year. So I certainly wouldn't dismiss that as something that's not sort of in the thinking or not a viable target. But again, I want to stay away from giving precise guidance. But the core fundamentals of our business are excellent right now. And again, with the return to a more balanced capital deployment, I certainly feel good about the longer-term trajectory.

Next question.

And we'll take our next question from Mike Cherny with Bank of America. Please go ahead, your line is open.

Good morning, everyone. Thank you for the insights shared so far. I will approach the 2022 outlook cautiously, without making any commitments, Shawn. Regarding the favorable conditions you've mentioned, especially in relation to the robust PBM and commercial selling season, could you describe the types of customers you are attracting? What specific needs are they focusing on in relation to your market strategy? We know about the federal employee plans specialty that returned in Pharmacy Services, but are there any additional traits you can highlight that contribute to the strong performance seen so far this year?

Mike, it's Karen. As I mentioned in my opening remarks, we are experiencing strong performance, partly due to the integration of our products and services, and also because of the service delivery and value we provide to our customers. I'm going to ask Alan and then Dan to discuss what they are observing and the types of customers we are successfully attracting in the market. So Alan.

Thank you, Karen. When we examine the Caremark selling season and the range of clients we serve, the distribution seems quite typical. We have successfully secured the Federal Employee Program specialty and made gains in the Health Plans, Employer, and Coalition segments. Overall, we are consistently winning, and I believe the main factors contributing to this success include delivering on what matters most to our clients, which is managing their drug costs effectively. Additionally, we are providing exceptional service by not only avoiding issues but also proactively meeting our clients' needs. Lastly, we are innovating, particularly with new specialty programs like our oncology initiative and medical benefit management program. There isn’t a specific segment outperforming others, aside from specialty, which is clearly excelling due to the FEP win.

I would just add that, similar to Alan, we have several areas of focus that are resonating in the market, leading to the improved persistency that Karen mentioned. We are also seeing some significant wins in the market. Alan and I have been collaborating closely to enhance the penetration of our integrated offerings, particularly in pharmacy, which is performing very well. Additionally, we're focusing on Dental and Behavioral Health. Like Alan, we are also developing innovative solutions targeting new capabilities for chronic disease, utilizing the wide range of CVS assets, such as Transform Diabetes and Transform Oncology, which have been well received, along with our new access point products like Virtual Primary Care. These efforts are contributing to a strong and successful national account selling season.

Got it. If I can just ask one more. You highlighted a lot of the investments that you made into the store base, prepare for the COVID vaccines, COVID testing. As you think about your outlook going forward and the uncertainty around what the pacing will be of vaccines, pediatric boosters, et cetera, what happens to a lot of those costs, the incremental labor, the incremental staffing that you've done in terms of how that should factor into the model on a go forward basis?

Michael, you are correct. We did need to establish a significant operation to manage this volume, and it's a careful balancing act as we adapt to changing volumes. We know that volumes can fluctuate rapidly, so we've approached this with caution to ensure we have the necessary capacity. It’s vital that we are prepared, especially now that there are fewer large-scale sites available. As you consider the variations in vaccine volume, the effects of those vaccines may be more pronounced than usual. Therefore, we are closely monitoring this while maintaining balance.

It's Neela. I'll just add to Shawn's comments that we started the vaccine campaign with several dedicated clinics and staff. Since then, we've expanded to all stores, and we are now seeing about 40% of appointments as walk-ins, which helps us manage our existing pharmacy labor more effectively. This allows us to adjust more easily to the demand we observe on a weekly basis.

Next question.

And we'll take our next question from Kevin Caliendo with UBS, please go ahead. Your line is open.

Hi, thanks. I want to discuss the headwinds and tailwinds to understand the baseline. Lisa mentioned the vaccine benefit earlier, which was estimated at $500 million for the quarter. How should we consider that benefit for the full year? Specifically, what headwinds should we expect for next year concerning the economic impact of the vaccine? That’s my first question. My second question is whether you believe you can achieve the same purchasing synergies next year in the PBM, considering the significant growth you’re experiencing this year. Can we anticipate continued year-over-year growth driven by these purchasing synergies?

I can let Alan provide more details on the second question, but I would like to point out that some of these initiatives, as I mentioned earlier, started midway or in the latter half of last year. Therefore, the year-over-year impact is likely more apparent in the first half of this year than it will be in the latter half. Alan can also discuss the long-term potential. Regarding the vaccine and testing revenue, as we noted, a billion dollars of the revenue increase derives from those two areas. In our full-year outlook, the total revenue is expected to be roughly double that amount. The margin dynamics this quarter may appear inflated due to timing issues. However, I currently have no insights into potential changes in reimbursement or the labor model we are employing for service delivery. I believe we have a reasonable baseline to start considering for next year. Again, when weighing these dynamics, factors like FDA approval mandates and booster shots come into play. It's possible to make a bullish case based on current trends, and I wouldn’t dispute that. I acknowledge that our guidance may have some upward potential, and this could be a valuable area going forward, depending on how circumstances unfold. That said, I urge caution in viewing this in isolation. For instance, within retail, if we see increased activity, we should consider how it impacts cough, cold, and flu products, as well as front-of-store sales, along with the ripple effects in HCB. While there’s a bullish narrative to consider here, it’s important to recognize that conditions have shifted rapidly in recent months, and I encourage considering this in a broader context.

And Kevin, it's Alan. When considering the factors influencing purchasing economics on the manufacturer side and sustainability, the first point I want to make is, as Shawn mentioned, whenever you introduce something new, there tends to be a significant impact. That said, I believe there is a promising outlook for increasing competition through avenues like biosimilars and biosimilar interchangeability, particularly in the Specialty area as we've recently observed with generics. We are at the onset of the Specialty biosimilar era, which I see as sustainable and offering good long-term opportunities. I anticipate that our value creation will expand alongside volume growth. As we secure new business, we will continue to grow in that area. Lastly, we have established this platform for a range of services. With the launch of our first set of services, we believe there are several additional offerings we can introduce in the market through the GPO that will deliver significant value for both us and our customers.

Great, with that it brings us to 9:00. We appreciate your interest and time. And Ashley, if you could please give the replay information. Thank you all.

Thank you, and this concludes today's CVS Health Second Quarter 2021 Earnings Call and webcast. You may disconnect your line at this time and have a wonderful day.