CVS Health Corporation

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 Health's 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 Suzy 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 Sean Gerton, Executive Vice President and Chief Financial Officer. Following our prepared remarks, we will host a question and answer session that will include Alan Motvin, President, Pharmacy Services, Dan Finke, President, Healthcare Benefits, Neela Montgomery, President, Retail and Pharmacy, and John 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 document 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 are 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 second 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 realized 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 eight states outlined in our supplemental earnings materials. With Aetna's strong networks and CVS's 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 MinuteClinics 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 million new integrated pharmacy and medical members through the 2021 and 2022 selling seasons alone. This is a testament of our success in the marketplace from the aligned interests 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-centered 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 two-thirds 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, one-third 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 two 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 am 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. Health Hubs represent one of many channels and lower-cost sites of care that allows us to address individual health needs. Aetna commercial members in a no-copay, low-copay product are utilizing our MinuteClinics and our Health Hubs 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 Health Hub 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 offering. 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, and 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 Sean Girtin, 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. Sean?