Earnings Call Transcript - CVS Q3 2020

Valerie Haertel, Senior Vice President of Investor Relations

Thank you and good morning everyone. Welcome to the CVS Health third quarter 2020 earnings call. As a reminder, this call is being recorded. I'm Valerie Haertel, Senior Vice President of Investor Relations for CVS Health. I am joined this morning by Larry Merlo, President and CEO; Eva Boratto, Executive Vice President and CFO; and Karen Lynch, Executive Vice President and President of Aetna. Our question-and-answer session will also include Jon Roberts, Executive Vice President and Chief Operating Officer; and Alan Lotvin, Executive Vice President and President of Caremark. We have also posted a slide presentation on our website. During this call, we will make certain forward-looking statements reflecting our current views including projections and statements related to our future performance. Our forward-looking statements are subject to significant risks and uncertainties. You should review the information regarding these risks and uncertainties in particular, those described in our annual report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC. You should also review the cautionary statement concerning forward-looking statements in our earnings press release. During this call, we will use non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is included in our earnings press release and the reconciliation document posted on our website. 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 and good morning everyone and thank you for joining this morning's call. Before discussing our Q3 results, let me say a few words about this morning's news. After more than 40 years with the company and a decade as CEO, I will be retiring from CVS Health next February and I'm very pleased to share that we have chosen Karen Lynch to become CVS Health's next President and CEO effective February 1. As you know Karen is currently President of Aetna and she is ideally positioned to lead CVS Health on our ongoing journey to transform health by making it more accessible and affordable, while delivering better health outcomes. I will work closely with Karen and our Board of Directors to ensure a seamless transition as I remain on the Board and serve as Strategic Adviser through May of next year. Our strong Q3 demonstrates the value we're creating through the resilient, strength and flexibility of our diversified business model and underscores the impact of our transformation and growth strategies. We are accelerating elements of our strategy with innovative healthcare offerings that address the evolving consumer landscape providing both personalized and connected care that deliver better health outcomes. Importantly, as we expand our range of offerings our client and customer satisfaction metrics are at all-time highs. We continue to serve our local communities as a trusted provider of essential healthcare services and now as the leader in diagnostic testing during one of the most challenging times in our nation's history. We are working closely with local community organizations as well as federal, state and local governments to expand COVID-19 testing, especially, within traditionally underserved communities. Additionally, we are pleased to have been selected to partner with the government in administering COVID vaccines when available for long-term care facilities. Our track record with COVID testing along with our experience in vaccinations has demonstrated our ability to rapidly scale services and we expect to play a significant role in all vaccination administration.

Karen Lynch, Executive Vice President and President of Aetna

Thank you, Larry. I'd like to start by thanking you and the Board of Directors for this opportunity to lead CVS Health. I have tremendous pride in our company and in the 300,000 talented colleagues who work tirelessly every day for millions of Americans.

Eva Boratto, Executive Vice President and CFO

Thanks Larry. I want to thank you for your leadership over the last 10 years. It's been a true pleasure to work together. I'd also like to congratulate you Karen, and I look forward to continuing to work closely with you as we enter our next chapter of growth at CVS Health. During the third quarter, we made steady progress on our strategic priorities, keeping us on our long-term growth trajectory. Our diversified assets are delivering innovative health solutions, as Larry noted, and have also provided enterprise-level resiliency through the challenging market conditions as evidenced by today's results. During the quarter, we generated $1.9 billion of cash from operations, bringing our year-to-date total to $12.3 billion and we have paid down $4.75 billion of net debt in the quarter. We remain committed to achieving our low three times leverage target in 2022. We maintained our commitment to delivering solid shareholder returns through our dividend while also investing in our enterprise to support our customers during the pandemic and accelerate future growth. Our core operations performed above our expectations with the Pharmacy Services segment driving continued momentum. The quarter reflected the benefit of our successful COVID-19 diagnostic testing in retail long-term care. Additionally, we had some lower medical utilization in the Health Care Benefits segment, partially offsetting the planned COVID-19 cost in both Health Care Benefits and Retail/Long-Term Care during the quarter.

Larry Merlo, President and CEO

Thanks, Karen and congratulations. I also want to thank all of our CVS Health colleagues, past and present, especially our management teams with whom I have been privileged to serve. I know you'll have questions for Karen, a few for me, but for now let's get down to the business of our third quarter results. And our strong Q3 demonstrates the value we're creating through the resilient, strength and flexibility of our diversified business model and underscores the impact of our transformation and growth strategies. We are seeing continued improvement in patient access to care, and we are proud of our response during the pandemic.

Lisa Gill, Analyst

Thanks very much. Let me be the first to congratulate you, Larry, on your retirement. It's been great working with you and to see the strategic vision that you put together for this company, so congratulations. And obviously congratulations to Karen also. I am incredibly happy to have a woman as CEO of one of our large-cap companies. So all the way around, I think this is great for CVS.

Larry Merlo, President and CEO

Thanks, Lisa.

Lisa Gill, Analyst

So Larry, my question is just to understand, you gave us a lot of information today. Clearly, moving in the right direction around some of the initiatives that you've put in place. When we think about, for example, the HealthHUBs—450 in 30 states—is there a way to think about how that has driven the performance of the enterprise or has driven the performance of those stores to get a baseline of how we think about some of these opportunities going forward? As well as you talked about incremental chronic visits in the MinuteClinic. How do we think about those things coming together? And what are going to be the most important metrics for us to follow as we think about the progression of the company into 2021, 2022?

Larry Merlo, President and CEO

Yes. Lisa, thanks for the question. As you look at the HealthHUBs today and the performance within the four walls of the store, we continue to be pleased with what we're seeing even in a COVID world. In terms of additional visits—whether it's MinuteClinic, whether it's pharmacy utilization—and as we look at front store performance, we are selling a different mix of products that includes a higher margin profile for the front store. The second part of the story is really what the HealthHUBs enable across the enterprise. We have now begun to turn those marketing activities back on along with some of the integrated products that will help drive growth.

Karen Lynch, Executive Vice President and President of Aetna

Lisa, another way to think about this is that between Caremark and the health segment we have 100 million members between the two of us. So if you think about those 100 million members and the opportunity we have to change our products and services to attract them to the HealthHUBs, that gives us a good opportunity for growth as well.

Eric Percher, Analyst

Thank you, Eric and Josh here. And credit to the board on succession and congrats to Larry and to Karen. Question on PDP. The plans nationally next year had premiums of around $7. This appears to be about half of the next closest competitor. So I think the question is what is the strategy driving this? And can you show positive income in PDP on those premiums?

Karen Lynch, Executive Vice President and President of Aetna

Relative to PDP, when we took over the SilverScript business, we had a defined strategy to rebalance the product portfolio to achieve higher margins. The product is designed for specific individuals that we believe can ultimately be interested in moving to Medicare Advantage. So we're pleased with where we are priced and the products and services that we are offering in PDP.

Larry Merlo, President and CEO

Yes. Eric, thanks for the question and comments earlier. I'll flip it over to Alan.

Alan Lotvin, Executive Vice President and President of Caremark

When we think about purchasing economics, it spans a broad range of activities. It's about drug purchasing within our own pharmacy, retail network contracting, and contracting with pharmaceutical manufacturers. All of these aspects are essential in driving our purchasing economics.

Ricky Goldwasser, Analyst

Yes, good morning and you know, Larry always appreciated your long-term vision. Best wishes in everything, and Karen looking forward to working with you for a very long time. My question is related to the 2021 guide. Can you share how we should think about this opportunity within the 2021 growth target?

Eva Boratto, Executive Vice President and CFO

Thanks, Ricky. Overall, looking at all the aspects of our business and the variables that could affect it, we remain confident with mid-single-digit growth. We believe we've made the right investments over the last several years to position ourselves for continued growth. Our diversified portfolio is really coming together nicely.

Larry Merlo, President and CEO

If we told you a year ago that six million people would have gone to their local CVS Pharmacy for a diagnostic test related to some virus, we'd probably get an eyebrow raise. The reality is, that's happened, and it speaks to our strategy that has come to life in a meaningful way.

Ricky Goldwasser, Analyst

Just a quick follow-up, as you think about the strategy. In the retail segment, you highlight long-term care as still a headwind. You've been evaluating this business for a while now. Do you view it as a strategic asset to the business despite keeping it at the losses?

Larry Merlo, President and CEO

As we look at the challenges in long-term care, we view these as cyclical challenges that are tied to COVID. We think that once COVID is behind us, occupancy will return to more historic levels, and we are continuing to explore those opportunities.

A.J. Rice, Analyst

Congratulations to you Karen and best wishes to Larry. I would like to ask about the Medicaid business and re-determinations helping enrollment growth. With the underlying economic situation, do you think that the headwind of re-determinations will be less whether people remain eligible?

Karen Lynch, Executive Vice President and President of Aetna

Relative to Medicaid, we are excited about the integrated value and growth opportunities we can bring to the marketplace. We are also monitoring re-determinations closely, as this has been a big part of our growth this year.

George Hill, Analyst

Good morning guys, and thanks for taking the questions. Let me echo my congratulations to Larry and to Karen. Given the week we're in, it's always good to see a peaceful transition of power.

Karen Lynch, Executive Vice President and President of Aetna

Consumer behaviors have changed dramatically because of COVID and we do believe that we need to meet people where they need to be cared for. This includes our HealthHUBs and MinuteClinics, telehealth capabilities, and serving members in their homes.

Larry Merlo, President and CEO

The customer satisfaction and patient satisfaction levels are extremely high. We're optimistic that in a post-COVID world, we won't revert back to old practices.

Michael Cherny, Analyst

Thinking about the front end of the store, clearly, there's been a redefining on how people are shopping, both in your stores and through digital capabilities. As you think about the next few years of store-based adjustments, how do you think about the changing dynamics of SKUs and potential investments on the digital side?

Jon Roberts, Executive Vice President and Chief Operating Officer

In the HealthHUBs, we're seeing an increase in sales even in less space, and we're continuing to pivot our SKU offerings toward more health and wellness products to further drive margin.

Eva Boratto, Executive Vice President and CFO

As you think about the incremental operating costs due to COVID, I would estimate that they run in the $7-million range monthly. However, this can fluctuate depending on market specifics.

Larry Merlo, President and CEO

With that, it was a long call. We appreciate everybody joining us this morning. Our enthusiasm for the progress we've made is apparent, and please stay safe, stay healthy and we will talk to all of you soon.

Operator, Operator

This concludes today's CVS Health Third Quarter 2020 Earnings Call and Webcast. You may disconnect your line at this time. Have a wonderful day.