Earnings Call Transcript - CVS Q2 2020

Operator, Operator

Thank you, and good morning, everyone. Welcome to the CVS Health second quarter 2020 earnings call. I am joined this morning by Larry Merlo, President and CEO; and Eva Boratto, Executive Vice President and CFO. Following our prepared remarks, we'll host a question-and-answer session that will include Jon Roberts, Executive Vice President and Chief Operating Officer; Karen Lynch, Executive Vice President and President of Aetna; and Alan Lotvin, Executive Vice President and President of Caremark. In order to provide more people with the chance to ask a question during the Q&A, please limit yourself to no more than one question with a quick follow-up. In addition to this call, our press release and Form 10-Q, we have posted a slide presentation to our website. Please note that during this call, we will make certain forward-looking statements that reflect our current views, including our financial projections and statements related to our future financial performance, future events, industry and market conditions, and the future impact of COVID-19 on our enterprise. Our forward-looking statements are based on management's estimates, assumptions and projections and are subject to significant uncertainties and other factors, many of which are beyond CVS Health's control, including the future impact of COVID-19 on our enterprise. We strongly encourage you to review the information we filed with the SEC regarding these risks and uncertainties, in particular those that are described in the Risk Factors section of our 2019 Annual Report on Form 10-K and the Cautionary Statement Concerning Forward-Looking Statements and risk factor disclosures in our quarterly report on Form 10-Q. You should also review the section entitled Cautionary Statements Concerning Forward-Looking Statements in this morning's earnings press release. During this call, we'll use non-GAAP financial measures when talking about the company's performance and financial conditions. In accordance with SEC regulations, you can find a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in this morning's earnings release and the reconciliation document posted on the Investor Relations portion of our website. And as always, today's call is being broadcast on our website where it will be archived for one year. Now, I'll turn the call over to Larry.

Larry Merlo, President and CEO

Thanks, Valerie. Good morning everyone and thank you for joining our second quarter earnings call. I don’t have to tell you that this past quarter is unparalleled and unprecedented as we navigate the health, social and economic impacts of COVID-19. Having said that, our earnings in this environment demonstrate the strength in our strategy and the power of our diversified business model. The environment surrounding COVID-19 is accelerating our transformation and it is providing new opportunities to demonstrate the power of our integrated offerings and the ability to deliver care to the consumer in the community, in the home, and in the palm of their hand. The pandemic has made it a necessity to contribute in ways that have called on the capabilities, expertise, and footprint of many of our assets in combination to rapidly deliver solutions at scale that meet client and consumer needs and preferences. Now those of you who have been following us for some time, know that CVS Health is much more than just your corner drugstore. And in this era of COVID, our strategy of diverse assets across healthcare, this triad of care where connections are delivered in the community, at home and in the palm of your hand could not be more important. We have substantially expanded our community reach, which has proven to demonstrate the value of bringing differentiated assets and delivery mechanisms to bear, meeting consumer needs and delivering lower cost, high-value care and nationwide testing, which we'll talk about in depth in just a moment. Increasingly, the power of our assets is taking us into areas that provide greater choice, as well as new areas for growth, ranging from diagnostic testing to B2B solutions, to the potential of clinical trial recruitment and enrollment. The results we share with you today underscore that our strategy is right, that it's working, and COVID-19 is driving us to bend our innovation curve markedly and accelerate solutions that will have long-term sustainability. There are numerous interdependencies in our three core businesses that the pandemic has made more apparent, driving the strength in our diversification while bringing new solutions to market. So with that, let me summarize our second quarter results and the proactive steps we have taken in light of the pandemic as our team has shown great flexibility and responsiveness adapting quickly to our clients' and consumers' evolving needs. For the second quarter, adjusted earnings per share increased to $2.64 with total revenues of $65.3 billion. Our consolidated enterprise core performance was in line with our expectations and our results reflect the very impacts of COVID-19 across our business.

Eva Boratto, Executive Vice President and CFO

Thanks, Larry, and good morning everyone. Echoing Larry, these are certainly unprecedented times for all. We have been on the frontline supporting our local communities while continuing to advance our key strategic priorities, including product and service innovation, the delivery of integration synergies and cost savings initiatives. Looking at our second quarter performance, the diversity of our portfolio of assets enabled our enterprise to exceed our expectations. During the quarter we generated $7.1 billion of cash from operations, reflecting the underlying performance, as well as the impact of the deferral of certain tax payments in connection with COVID-19 related extensions of payment deadlines. In July, we repaid $2.75 billion of scheduled debt principal and we remain committed to achieving our low three times target leverage ratio in 2022. We also returned approximately $660 million to shareholders through cash dividends. In the third quarter, we completed the sale of our workers compensation business for $850 million in gross proceeds in our Health Care Benefits segment. This divestiture is expected to be about a $0.02 drag on adjusted EPS in the remainder of 2020, which is included in the guidance we have provided this morning. As I've said previously, we remain laser-focused on delivering long-term value. In support of that focus, we are continuing to evaluate and assess all aspects of the enterprise to identify areas that may not be consistent with our long-term strategic priorities. Moving to the P&L, consolidated revenues of $65.3 billion increased 3% year-over-year with growth primarily coming from the Health Care Benefits and Retail/Long-Term Care segments. Adjusted EPS grew to $2.64, with the majority of our growth attributable to the Health Care Benefits segment, which saw an unprecedented decline in utilization due to the pandemic. Our Retail/Long-Term Care segment was affected by substantial investments made at our stores, colleagues, and consumers, a reduction in new therapy prescriptions due to lower provider visits and reduced front store traffic. The Pharmacy Services segment continues to execute and deliver underlying core growth in the quarter. The total favorable impact of COVID-19 on our second quarter results is estimated to be $0.70 to $0.80.

Jon Roberts, Executive Vice President and Chief Operating Officer

Yes, Mike, this is Jon. So, we do expect these enhanced cleaning procedures to continue for the foreseeable future and I think that's until we get a vaccine and COVID essentially goes away. As Larry said, we're making a significant pivot to healthcare services, whether it be the COVID testing we're doing, we're gearing up for a pretty significant flu vaccine season, and the repositioning of our retail footprint in the HealthHUBs supports that healthcare services move. So we view it as evolving to higher margin health care services as we move forward.

Karen Lynch, Executive Vice President and President of Aetna

Good morning Steve, it's Karen. Relative to commercial, we had anticipated more losses in commercial than we saw in the second quarter. We do think that's related to companies doing more furloughs and eliminating jobs. However, as we turn the corner for the rest of the year, we anticipate that we'll see continued commercial losses due to unemployment as the year emerges, although what we're seeing in July is similar to what we saw in each month of the second quarter, but you can anticipate lower membership for commercial for the latter half of the year.

Alan Lotvin, Executive Vice President and President of Caremark

Yes, so on the selling season in general, we're about 90% through the sales season, we have a 98% retention rate as Eva said and we have $4.3 billion in gross new wins. I would say this season itself has been interesting and the lumpiness with COVID, but overall ending up about where we thought. The health, specifically on HealthHUBs we've seen a tremendous amount of interest in the HealthHUBs, not just from National accounts, but also from our health plan customers who want to understand how to better connect with their members in the community. So, very happy with where the sales season is right now. So and again, as I said a strong interest in the HealthHUBs.

Larry Merlo, President and CEO

So, with that, let me just go ahead and wrap up before we sign off here. And a big thank you, and my sincere gratitude to our 300,000 colleagues for all of their hard work across all parts of our organization, especially those that are working the front lines. And they have just displayed incredible commitment and effort during these unprecedented times. All of that represents our best in terms of our commitment to helping people on their path to better health and we're proud to be able to serve our communities. It's such a crucial time in our nation's history. So with that, thanks again for joining us this morning and please stay safe and healthy.

Operator, Operator

And this will conclude today's CVS Health second quarter 2020 earnings call and webcast. You may now disconnect and have a great day.