CVS Caremark bullish on international opportunities

WOONSOCKET, R.I. — CVS Caremark executives expressed optimism Wednesday morning as the company posted record fourth-quarter results, raised its 2013 guidance and continues to work to leverage its distinctive business model to help people on their path to better health amid a rapidly changing healthcare environment.

“We are very pleased with the strong results we posted in the fourth quarter and full year 2012 with solid performance throughout the enterprise,” CVS Caremark president and CEO Larry Merlo told analysts during Wednesday morning’s conference call. ... Our fourth-quarter results reflect strong performances at the high end of our expectations in both the [pharmacy benefit management] and retail segments.”

The quarter exceeded the high end of the company’s guidance by 3 cents per share.

Net revenues for the fourth quarter ended Dec. 31 increased 10.9%, to $31.4 billion, up from $28.3 billion in the three months ended in the year-ago period.

Income from continuing operations attributable to CVS Caremark for the quarter increased 2.7% to $1.13 billion, compared with $1.10 billion during the year-ago period.

During the call, CVS Caremark told analysts that late last week it closed on the acquisition of privately held Brazilian drug store chain Onofre. Merlo said the acquisition of the 44 stores is not financially material to CVS Caremark; however, it does mark CVS Caremark’s foray into the international drug store space.

“As you know, we have been exploring opportunities for possible international expansion, and we have said many times that our approach would be measured and we would exercise financial discipline,” Merlo said. “We believe this acquisition is a great example of that strategy and action.”

According to Merlo, Onofre has a strong reputation in the marketplace and is successful in tailoring its stores to market to different customer segments.

“We view Brazil as an attractive market given that health care and pharmacy are expected to grow double digits for the next decade, and while chains are prevalent, it is still a highly fragmented market. So, we see nice opportunities to grow the business over time,” Merlo said.

It has been reported in published reports that Onofre is the eighth-largest drug store chain in Brazil in terms of revenues, posting gross revenue of BR1.2 billion in 2011.

As for the retail business, Merlo said the company had “a very strong quarter” with same-store sales increasing 4%. Pharmacy same-store sales also increased 4% as front-end same-store sales increased 3.9%. Revenues in the retail pharmacy segment increased 5.1% to $16.3 billion during the fourth quarter.

Merlo noted that quarter benefited slightly from flu-related scripts, and flu shots increasing during December, as well as the retention of scripts gained during the Walgreens and Express Scripts impasse. As expected, CVS Caremark retained at least 60% of the scripts gained during the impasse, and it expects to continue to retain at least 60% of the scripts in 2013.

Eager to touch upon the company’s ExtraCare loyalty program, Merlo told analysts that the program continues to be a “key differentiator” with the scale of the program increasing dramatically in 2012 despite increased competitive activity in the loyalty program space.

“Increased engagement of our ExtraCare members is driving meaningful results. As an example, we have doubled our email program to more than 15 million active participants. Many have received over 60 million personalized email offers; that’s up 69% versus the prior year,” Merlo said. And its ExtraCare Beauty Club program now stands at about 11 million members.

Meanwhile, the chain announced Monday the launch of the ExtraCare Pharmacy & Health Rewards program, which allows members to earn larger and more frequent rewards when filling prescriptions or making healthy decisions, as well as providing another choice for members and giving them the ability to opt-in to parts of the program most relevant to their needs and preferences.

“While ExtraCare has been in the marketplace for 15 years, I think these [enhanced programs] are examples of how we are not sitting still,” Merlo said.

Given its solid results throughout the enterprise, the company raised its earnings guidance for the full year 2013 to reflect the anticipated 2 cents per share of EPS accretion related to the debt tender and refinancing that was executed during the fourth quarter of last year. The company currently expects to deliver adjusted EPS of $3.86 to $4 and GAAP diluted earnings per share from continuing operations of $3.61 to $3.75 per share in 2013. The company confirmed its 2013 free cash flow guidance of $4.8 billion to $5.1 billion, and its 2013 cash flow from operations guidance of $6.4 billion to $6.6 billion. These 2013 guidance estimates assume the completion of $4.0 billion in share repurchases.