Q2 2021 CVS Health Corp Earnings and FY 2021 Guidance Call
And our prepared remarks, we will host a question and answer session that will include Alan Latvian President Pharmacy services, Dan Thinkgeek, President and health care benefits, Neil and 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 are 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 and 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 and 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 <unk>.
<unk>.
Today's call is being broadcast on our website, where it will be archived for 1 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 and connecting experiences across the health care system to deliver better health outcomes. This is what truly differentiates us and generates our growth.
And the rapidly changing U S health care 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 1 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.
For $7.80.
This reflects the continued positive momentum across our business with growth both in new and current markets.
Today, we announced and important investment and 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 and a tight retail labor market.
We estimate it creates an incremental $600 million and labor costs over 3 years.
Approximately $125 million of that impact will be and the final 4 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 Jeff.
Just as critical and it aligns with our values and our purpose and builds on our history of our investment and 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 and increased customer retention rates and new wins.
And health care benefits results for powered by growth and our government business, our medical benefit ratio of 84, 1% was modestly above expectations driven by COVID-19 related costs on.
Underlying non COVID-19 costs emerged favorably we continue to believe aggregate medical costs will modestly exceed baseline level during the second half of the year.
In addition to strong performance and 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 entrants and 8 states outlined in our supplemental earnings materials.
With Aetna's strong networks and Cvs has 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 1 else can deliver.
For 2022 National account selling season, and health care benefits has been marked by somewhat compressed industry wide pipeline.
Employers have been focused on developing strategies for vaccinations and other returned to work activities.
As a result, we concentrated on client retention and delivering a strong result of 97%.
For those cases that were out to bid for 2022, we have been successful and 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 minute clinics and health hub.
Turning to pharmacy services, we outperformed expectations delivering 9.8% revenue growth and very strong operating income growth, we continue to build momentum and 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 and new gross sales for next year.
We remain well positioned for continued specialty and pharmacy growth in 2022.
The differentiation, we offer is particularly important and 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 2020.2 selling seasons alone.
This is a testament of our success and 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 focus strategy.
We are a vital local health destination for millions of Americans, who are resuming more normal activities and fueling macro impute proof and and the economy.
Our second quarter results for retail outperformed our expectations and the market.
And our pharmacies, we grew prescription market share to over 26% and.
Accordingly, our customer centric programs continue to improve adherence for our patients.
At the same time, we saw solid rebound and front store sales, which increased nearly 13% and the quarter with strength across all categories.
Nearly 2 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, 1 third of which is attributable to COVID-19 vaccines.
We now administered 30 million vaccines, and 29 million tests to the inception of the program.
Approximately 40% of vaccines, we administered over the past 2 months, where 2 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.
And for customers introduced to us through Covid testing approximately 12% have subsequently chosen to fill new prescriptions or get their COVID-19 vaccine at Cvs health. This.
And this helped drive overall strong script growth and the quarter.
The Covid testing outlook remains strong as public health recommendations evolve we're prepared and continue to play a critical role and helping Americans prevail against the pandemic I'm grateful for it for the continued dedication and tireless efforts of the and nearly 300000 colleagues.
We are making considerable progress across key drivers of our growth. The first is our role and care delivery. We continue to focus on our integrated platform to expand access to care that is local affordable and connected health.
Health hubs represent 1 of many channels and lower cost sites of care that allows us to address individual health needs and.
And the commercial members and then no co pay low co pay product are utilizing our minute clinics 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 and 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 hubs stars program designed to close gaps and the quality of care early intervention results are promising and 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 areas 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 regulate serve more than 35 million unique digital customers across our Cvs health assets. Our digital customers are important digital retail customer spent 2 and a half times more and our front store manage 1 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 generate 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 are technology driven programs are leveraging block chain driving cloud migration and intelligent automation and.
And streamlining processes to accelerate results and generate greater impact.
1 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.
B S health plays an important role and the health and vitality of the communities, where we live work and serve our long standing commitment to corporate social responsibility focuses on 4 areas healthy people healthy business healthy communities and a healthy planet together these efforts create our sustainability roadmap.
GAAP known as transform health 2030.
It represents and ambitious but achievable agenda that aligns with 8 of the UN sustainable development goals.
Cvs health is investing 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 and our pandemic work. In addition, we have set science.
<unk> 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.
And clothing 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 are unparalleled capabilities reach and enduring relationship with the consumer unique.
<unk> 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 and Cvs Health as Executive Vice President and Chief Financial Officer, and late May and is already made and impact his deep healthcare expertise financial acumen and strategic mindset will be instrumental to the successful execution of our strategy.
Sean.
Thank you Karen and good morning, everyone.
And I'm very excited to be at Cvs health, particularly on such a dynamic and important time not only for our company, but for our health care system as a whole.
Our differentiated portfolio of capabilities and local community presence and creates a compelling competitive advantage that improves health care 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 health care experience for the people we serve.
I'll first discuss our second quarter financial results.
As Kevin 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.
We reported adjusted operating income of $4.9 billion and adjusted earnings per share of $2 and 42.
We continue to generate excellent cash flow and the second quarter with year to date cash flow from operations now exceeding $8.7 billion.
Further we have repaid $5.4 billion and debt during the first half of the year.
All our cash flow metrics exceeded our internal forecast during the quarter.
Moving to the segments health care benefits total revenue increased 11% year over year, driven by our continued growth and our government services business.
Offset by the repeal of the health insurance fee for him.
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 and 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 mid year 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 2020 to low income and benchmark and all our targeted regions.
Health care 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 and 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-19 related costs, which while materially lower than the first quarter did not fall off as much as we had forecast.
Underlying non COVID-19 utilization continued its return towards normal baseline levels and was slightly favorable versus our expectations for.
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 and the quarter. While days claims payable of 48 is consistent with both the first quarter of this year and the fourth quarter of 2020.
Turning to pharmacy services, we continued 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 process increased by more than 11% versus last year with approximately 1 half attributable to net new business wins from our 2021 selling season and another 1 quarter due to Covid vaccine administration.
Our specialty network and maintenance choice business lines, all delivered sequential claims growth and the quarter.
Pharmacy services, adjusted operating income exceeded expectations and the second quarter.
More than $400 million or 32% year over year.
The 3 major drivers of this increase are.
Improved purchasing economics, reflecting the products and services of our group purchasing organization launched and the second quarter of 2020.
Specialty pharmacy, including our $3.40 day claims administration business.
And increased pharmacy claim volumes these.
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.
And certain generic specialty launches and the second quarter and second half of 2020, respectively.
Created relatively low comparisons and the first half of 2021 that will increase significantly and the second half of the year.
Therefore, we expect a much smaller incremental year over year improvement and operating income and 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 3 main components.
1 approximately 1 third or $1 billion is attributable to the nearly $17 million COVID-19 vaccines and more than 6 million Covid tests administered during the second quarter.
2 and additional 1 third or another $1 billion is due to the broad quarantine restrictions and civil unrest experienced last year that depressed results and the second quarter of 2020.
3 the final 1 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 and 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 and adjusted operating margin produced adjusted operating income well ahead of our forecast and an increase of nearly $1 billion 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 a gain from a legal settlement related to and antitrust matter worth $125 million, which is included in both our GAAP and non-GAAP results.
Turning to cash flows and the balance sheet cash from operations remained 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 and 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 and 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 health care 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 and 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.
And health care benefits given the ongoing fluidity of the current environment, we have incorporated a higher estimate of COVID-19 related costs and the second half of the year.
As a result, our full year MBR, while still well within our range is approximately 20 to 30 basis points higher than our previous forecast.
Overall, we believe the combined impact of our reduced outlook for vaccines and retail and a slightly higher MBR and health care benefits now make the pandemic a modest negative for 2021.
Despite this given our strong performance and the quarter and solid outlook, we are increasing our guidance.
We are raising full year 2021, total revenue guidance to a range of $287 billion to $285.2 billion.
Representing year over year adjusted revenue growth of 4.5% to 625%.
We're also raising adjusted EPS guidance to $7.70 to $7.80 per share.
The significant earnings outperformance and the second quarter is reflected in our updated full year guidance, but is partially offset by 3 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 and then begin to decline in May and June.
Although the recent rise and COVID-19 cases has caused a reacceleration and first dose trend, we believe it to be prudent to adjust our full year outlook for vaccines to a range of $32 million 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 and 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 and combating the pandemic and our local communities.
The second item is the investment and wages that Karen highlighted.
Our work to retain and attract talent includes an additional $600 million investment and wages over 3 years, primarily for our retail colleagues and pharmacy technicians.
And with approximately $125 million impacting the last 4 months of 2021.
Finally, the third item is increased investments and the second half of 2021, reflecting our efforts to drive and support growth.
Enhance our consumer experience and improve our cost structure and 2022 and beyond.
And aggregate. These 3 items are expected to negatively impact second half adjusted EPS by approximately <unk> 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 billion to $13 billion.
Our expectations for gross capital expenditures remain in a range of $2.7 million to $3 billion to fund organic growth initiatives, and our expanded investments and technology and digital.
We remain committed to ongoing deleveraging and our investment grade rating targets.
By segment for health care benefits, we are maintaining our full year adjusted operating income guidance of $5, 2.5% to 535 billion.
As discussed our outlook assumes a slightly higher full year MBR by 20 to 30 basis points to reflect the higher COVID-19 costs observed and the second quarter and our expectation that slightly higher COVID-19 costs will continue into the second half.
Our forecast assumes that non COVID-19 utilization will return to normal baseline levels by the fourth quarter.
This MBR pressure is largely being offset by and improve revenue outlook and operating expense management.
It's also worth recalling the natural seasonality of the health care 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-19 will play out during the second half of the year.
For pharmacy services, given the strength and the quarter and visibility to the remainder of the year. We are increasing our full year 2021, adjusted operating income guidance to $6.45 to $6.5.5 billion.
Presenting year over year growth of $13.5 to $15.2 5%.
While we expect the factors driving second quarter performance to continue to benefit the second half of 2021 due.
Due to the timing elements I discussed earlier, we do not anticipate the same level of year over year growth observed and the first half of 2021.
For retail we are maintaining our full year 2021 segment guidance for adjusted operating income and a range of $6.6 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 and our outlook and I have not fully pulled through the favorability, we observed and the second quarter to the full year.
This full year guidance also reflects the reduced outlook for vaccines and the impact of the wage investments approximately 80% of which is experienced and the retail segment.
You will find further details and the slide presentation, we posted to our website. This morning.
Moving on to 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 <unk>.
It is reasonable to expect benefits from <unk>.
And 1 strong selling seasons, and the pharmacy services segment, and and commercial national accounts and the health care benefits segment.
To anticipated lower COVID-19 related costs and improved Medicare risk adjusted revenue reimbursement and the health care benefits business and 3 continued contributions from our ongoing cost savings initiatives.
For headwinds, we anticipate first consistent pressure and pharmacy services from client price improvements and reimbursement pressure and retail both of which are consistent industry headwinds, which we seek to mitigate through improved purchasing economics.
Second.
The impact of annualized the increase to minimum wage across the company and third uncertainty regarding the expected revenue from Covid vaccines and testing and 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 and our forward looking guidance.
On a year to date basis. These 2 items comprise approximately <unk> 15 per share.
Again this is not a comprehensive outlook for 2022, but represent 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 health care.
I look forward to updating longer term financial targets at our Investor Day event. This December and detailing our key priorities positioning.
Positioning Cvs health to deliver sustainable long term profitable growth.
And to return to a more balanced and strategic program of capital deployment.
We will now open the call to your questions operator.
And at this time, if you wish to ask a question. Please press star 1 on your telephone keypad and you may remove yourself from the queue by pressing the pedal and Keith and the interest of time, we do ask Steve. Please limit yourself to 1 question and 1 quick follow up.
Take our first question from Lisa Gill with Jpmorgan. Please go ahead.
Alright, thanks, very much and thank you for other detail.
John just going back to your thoughts around 2022 am I thinking about this correctly if I take the midpoint of this year at 775 add back for 25 says that you talked about we get to $8 minus the <unk> does we think about P. P b and and capital gains gets us to $7.80.
5 and then how do I think about the headwinds and tailwind 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.
Okay.
Yes.
I think I'd be careful on the specific math, there because to some extent as I mentioned for example, about vaccines and testing revenue Theres, just and uncertainty about the level.
Of those things and.
I would also not add back the full 25 as an example, because the minimum wage impact and that is only for for months and obviously that will annualize next year. So there is some moving moving pieces.
Sort of in there, but honestly some of these things I think we can see youre going to be factors, but we don't have completely quantified at this at this point.
But I do think.
And when we talk about 2022.
It's worth talking about a couple of things.
I would say at the outset.
We remain very well positioned and our core businesses and our operating performance is very strong as evidenced by the last couple of quarters of results.
And as I mentioned in my remarks, I don't want to provide 2022 guidance today, but I do recognize that their previous targets out there for a low double digit earnings growth for 2022 and.
And what I would say is make no mistake, our double digit adjusted EPS growth remains the benchmark.
Debt, we're always trying to achieve and frankly, the benchmark that we're using and considering the strategic choices that we'll make.
But an awful lot has changed since 2019 when that on that target was was out there and stated.
And it's not just the composition of our earnings but sort of to the point of your question was what's the visibility that we have into how those components are going to trend forward.
Again, the vaccines and testing and Covid treatment costs are just too good examples of factors, but the direction and the degree is a bit hard to say so a lot of this will come down too.
And about what baseline we're measuring from and.
And how we see these factors playing out here, but as I sit here today, if I consider a starting point of $7.70 to $7.80, I would say at this point no.
Debt from this forecast forecast based on I would reiterate the double digit sort of growth target for 2022.
But again as I mentioned this is more about the shifting factors. It does not have anything really to do with the core performance of our business, which has been really outstanding.
Obviously, we hope to talk and much more detail about 2022 at our Investor day, as well as some of the longer term financial targets and the earnings power of the business.
And John just as my follow up I, just want to understand you talked about.
Covid costs, returning as you go into the back half for the year can you talk at all of what you've seen and the last few weeks with the Delta variant and.
Potential increase to come.
On the Covid side, and then are you seeing any non.
Non COVID-19 costs coming down that that people are pushing that off elective surgery because of COVID-19 any incremental color would be helpful. There. Thanks again for the comments.
Yes, so what I would say as you know and the HCV business, obviously, there's a lag and and sort of what we see and any real time. So we don't have great great insight necessarily into July.
But what I would say there certainly has been I've seen a number of media reports about various facilities beginning to cancel elective procedures again and so it does feel like there is certainly some push and the system on the deferred utilization side again, but again premature to conclude for HCV.
I would say, though that what we do see on the retail side is pretty strong momentum continuing and testing and particular.
And again, while vaccines are still down in July versus the prior month.
They've probably had a bit of an uptick as I mentioned in my remarks, So I think clearly.
And could reasonably infer that there's sort of the ongoing COVID-19 treatment costs are persisting.
Certainly into into early July here and again, thus why we thought it made sense to be a bit more cautious and our MBR outlook for HCV.
Okay, great. Thank you.
And we'll take our next question from a J Rice with credit Suisse. Please go ahead. Your line is open.
Hi, everybody welcome Sean and Susie.
Anyway.
And I appreciate the conversation for the last couple of conference calls about how the 3 businesses can work together when you.
Look at it today what are the.
Leading opportunities.
And for.
And the businesses too.
Retail pharmacy.
The services and the benefits business.
Capitalize on that are still in front of the company can you highlight maybe a couple of things that you guys are particularly focused on and seize opportunities.
Yes, good morning, a J.
And highlight a couple of things and for.
Front of US 1 is as you know we have more opportunities and expanding our digital access and digital connections we've seen across the board with our next best actions I'm using digital connections we've seen for those individuals we've seen reductions and overall medical costs.
We also have the opportunity to expand our home service and delivery as you know we are and corum today, we have kidney care, but I do think that there is more expansive opportunities. It's 100 billion plus market that I think we have more opportunities to penetrate and really enhance our.
Overall care delivery, so I would point to those 2 is it ones and then I think there's more that we can do with just the fundamental core business through integration through selling more of our products capturing more share of wallet driving benefit designs across the support lower sites of care like Minuteclinic and the health hubs.
So those would be a few I would comment on thanks.
Thanks for the question David.
Yes, maybe just a quick follow up.
And I know the slide deck says that the priority remains good day.
And to pay down debt.
Point.
John Lucia Board 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 on that.
Thanks, a J and good to hear from you again as well.
So if I thought about.
The near term being sort of the rest of this year, but primarily 2022.
We have $4 billion of debt or thereabouts, a little more than that maturing and it would be our intention to continue to delever by paying that off.
However, if you think about the level of our cash flows and 'twenty..1 if we achieve the similar level of cash flow next year.
Even with the dividend that would still leave a lot of room for other capital deployment potentially M&A potentially dividend increase and potentially share repurchase so I think 2022.
And is a year, where we begin to can begin to do that and a potentially more and more limited way, but still meaningful.
And I would say is longer term as I think about this.
And as you've heard me say before my first use of that and most preferred use of that capital. All the time is to grow the business and.
And undoubtedly that there are capabilities that we will need over the next few years.
And to sort of affect our strategy as efficiently as we can.
And so M&A is a part of that but I've always found also found that balanced deployment of capital.
Tends to produce sort of the best long term results and so that is a combination of M&A.
A dividend that moves up.
EPS moves up.
And share repurchase that's accretive to your EPS growth on sort of a steady basis.
Next question and thanks a lot.
And we'll take our next question from Ricky Goldwasser with Morgan Stanley. Please go ahead. Your line is open.
Yeah, Hi, good morning, Thank you for all the details and and congrats on the on very good quarter.
So my main question Karen is around 15 relationship and how you think about your Medicare advantage book of business.
And your vision for how you're going to evolve.
On the health hub presence can you talk about care can cash for Medicare just curious to see how and how that kind of like market place.
Is it really kind of like shaping youre, saying go for health hubs will go for the future versus what it is today and.
And then.
And the follow up question would be to Sean Sean when you talked about second half guidance, you mentioned investments and future growth is the headwind you didn't mentioned it is a headwind for fiscal year 2022 suggests on and modeling perspective.
Should we think about these investments just as happening and second half or should we also run rates and.
And we adjust our models for next year.
Good morning Ricky.
Let me just start with a relative to Medicare first of all that is 1 of our single biggest growth opportunities continuing to sell more on Medicare driving.
And the duals and so we do think that is a big opportunity for growth on an ongoing basis as we think about care delivery and you think about stars performance and the other health on full play a critical role, but as I said, we have to have a broad.
Expansive approach to care delivery, particularly as it relates to the Medicare patients. So the health hub will play a role as you know we have the.
Zero co pay low co pay now asking.
Demonstrating that we can have follow ups visits at our health hubs, but we need to expand our capabilities and the home and we need to make sure that we're staying on digitally connected to them for this new program that we had.
<unk> recently introduced as part of our planned rollout and the health hubs is really intended to close gaps in care and the more that we close gaps in care. The better stars performance, we got the better revenue we get so you can see that cycle and that really is.
Big opportunity for Us and I really want you to think about Medicare care delivery and a broader role with health hubs being part of that care delivery strategy, John Let me turn it over to you yes in.
In terms of the second half guidance Ricky I do think there's sort of 2 levels of investment here and 1 of them. Each year is when we do have.
Growth better than our original plan for example, as we foresee.
And PSS now we do then have to staff up and be prepared for that higher growth. So that's always and elements of part of your question is how you feel about and essence 23 growth that will achieve and 2022 and I and I think broadly there's I would not run rate the whole thing, but I do think there are pieces that tend to run rate forward and the business.
And whether they're ongoing investments, we make and Medicare distribution.
And as I mentioned and staffing up for customer so per.
As I sit here today I wouldn't run rate the whole thing a lot of this is still to be determined but there probably is a piece that kind of continues if we continue on the trajectory that we're on.
The other element I would say about second half guidance with some of this is.
Some of the spending gets sort of pushed back into the year.
And more towards the and I think you sort of take that with the natural seasonality of.
The health care benefits business and that that would tend to get sort of a slope of earnings for the rest of the year, where Q4 is likely less than Q3.
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, and maybe just on the labor commentary first of all are you seeing underlying wage pressure outside of the minimum wage lift and then just wanted to clarify the numbers because I think you said that.
Cost will be $600 million 125 to last for months of this year, but.
I think you also said it would stretch over 3 years. So just wanted to reconcile that versus that July 22nd.
On July 2022 day that you put out there.
Hi, Hi, Ralph let me just start with the minimum wage adjustment and yeah. There's a series of investments that we've been making for our employees since the pandemic and we are seeing.
65% of our employees at our hourly are already at or above $15, an hour and a very targeted investment for our pharmacy technicians, our front store colleagues and we will start a series of wage increases beginning in and.
In September which is really what's driving that $125 million impact to the latter half of the year.
And obviously, it's a tight labor market, we are paying attention. We have 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 markets, where theyre seeing impacts from the stores and you know that's part of why we're making this wage investment today, John do you want to answer this for your question Ralph.
The way this will play out over the next few years as as you mentioned there would be the change in September would be $125 million for the last 4 months of this year.
That will annualize next year, but they will also be a second.
Change sort of and in July of next year I believe so the total cost of this in 2022 will be $485 million, which is a step up if you will of about $360 million from the $1.25.
That second step and July 22, we will annualize again in 'twenty, 3 but not to the same degree. So the total cost is right around $600 million by the time, you get to 'twenty, 3 and that's a step up year over year from 'twenty to 'twenty 3 of about $115 million.
Got it alright, that's helpful. And then just a quick follow up just wanted to clarify Shawn I think you said you would not factor and low double digit growth on the 775 days I think I heard that but if I do look at consensus and factors about 7% growth. So we're not at that double digit level and given your commentary around capital deployment alone.
Are you willing to say if there is comfort and that sort of mid single digit EPS or is it just still too early and even give that.
For clarity thanks.
Okay.
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.
And so.
And I, certainly wouldn't dismiss that as something that's not sort of into 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 and right now and again with the return to kind of a more balanced capital deployment.
I certainly feel good about sort of the longer term trajectory.
Next question fair enough. Thank you.
And we'll take our next question from Mike Cherny with Bank of America. Please go ahead. Your line is open.
Good morning, everyone. Thanks for all the color so far so.
Dance around the 'twenty outlook about without obviously try and hold you to anything.
Sean but as you talked about some of the tailwind to particular with regards to the strong pbms and commercial selling season. So far can you give us any characteristics of the type of customers that you're winning what the real pitch that they're looking at relative to how youre going to market and what that driving forces. Obviously you had the federal employee plan.
T that came back that we know about relative and the pharmacy services, but beyond that any characteristics and you can point to that are really resonating in the strong performance year to date.
Yeah, Michael It's Karen I, Yeah, we as I mentioned in my opening remarks, very much having a strong 1.1.
And part of it is due to the integration and the products and services that we're offering and part of it's just due to the service delivery that we've been delivering to our customers and the value that we've been delivering to our customers I'm going to ask Alan and then Dan to talk about specifically, what they're seeing and the types of customers that.
And that we're winning and the market so Alan.
Thank you Karen so when you look at the caremark selling season on the caremark kind of array and clients. It is a I would say relatively normal distribution of clients. We won obviously the federal employee program and specialty, but we won and the health plan segment, we won and the employer segment, and we're winning and the coalition segments.
So across the board, we continue to win and I think the key drivers there are 1 on <unk>.
Delivering on and what is most important to our clients which is <unk>.
Controlling their drug trend number 2 on providing kind of an outstanding level of service. So avoiding all net not just avoiding service issues, but proactively addressing our clients' needs.
And the third sort of on.
Related to the first and innovating, particularly around.
New programs and specialty like our oncology program medical benefit management program. So it's really there isn't a specific segment that is over performing other than specialty obviously because of the FEP win.
And I would just add debt similar to Alan.
We have quite a few areas of focus that are resonating in the market, that's leading to that improved persistency that Karen stated, but also some really strong wins and the market Alan and I've been working really close together on it.
Proving the further penetration of our integrated offerings, specifically and pharmacy, which is resonating really strongly also dental and behavioral health.
And then like Alan with our innovative solutions, we're targeting some new capabilities for a chronic disease that use the breadth of the assets of Cvs like transform diabetes and transform oncology, which are resonating as well as.
New access point products like our virtual primary care and so that's really what's leading to a strong and improved national account selling season.
Got it and so I can just ask 1 more you highlighted a lot of the investments that you've made in the store base to prepare for the Covid vaccines Covid testing as you think about your outlook going forward and the uncertainty around what the pace and will be a vaccines pediatric boosters et cetera, what happens to a lot of those costs the incremental labor day.
Incremental staffing that you have done in terms of how that should factor into the model on a go forward basis.
Okay.
Michael and so you're right I mean, we did have to stand up a fairly sizeable operation to sort of handle handle volume like this and.
It's a delicate balance of.
And are trying to adjust that as you see volumes change, but we sort of see how quickly.
Volumes can go up and down so I think we've been a bit cautious with that and tried to make sure that we have the capacity.
If thing things go go on a different direction. This is kind of an important role that we play even more important now with out as many large scale sites.
And so we want to make sure we have the capacity.
So as you think that the thing I think that kind of comes off of that is.
As you think now about sort of vaccine volume up and down the marginal impact right of those vaccines is probably greater than average.
So it is something that we're paying very close attention to but but a balance.
And it's Neil I'll, just add to that that and insurance call and switches that we started the vaccine campaign with a number of dedicated clinics, which had dedicated labor and since then we've expanded total stores and are seeing about 40% of the appointments and now walk and appointments a day already within our <unk>.
This thing labor model within the pharmacy, so that does help us to flex up and down much more with demand that we're seeing on a weekly basis.
Next question.
And we'll take our next question from <unk>.
Kevin Kelly.
Kelly <unk> with UBS. Please go ahead your line is open.
Hi, Thanks, I just wanted to go through the debt headwinds and <unk> and try to figure out I think we're all trying to figure out and sort of what is the baseline I know.
Lisa tried earlier I think when we think about the facts benefit right. I mean, you sized it earlier, it's $500 million debt.
With that for the quarter and how should we think about that benefit for the full year net net and I guess Dave.
The question really is how to think about what that headwind could be for next year like what can we anticipate over the economics for the vaccine and change in your opinion.
That's the first 1 and then the second 1 is do you think you can still get the same purchasing synergies.
And that Youre seeing this year next year and the PVM.
It sounds like Youre getting massive new growth there I'm. Just wondering if you can continue to see that sort of year over year kind of growth, which I'm guessing is driven by the purchasing synergies next year.
Yes, I can let Alan comment more deeply on the second 1 but what I would say is recall that some of these initiatives as I mentioned on my comments were launched sort of midway or and the second half of last year. So the effect, we're seeing year over year.
It's probably more per is more pronounced and sort of the first half of the year, then we'll see and the second half of the year, but Alan can kind of comment on the longer term potential.
On the on the vaccine.
And the testing economics.
As as we mentioned.
$1 billion of the revenue increase is attributable to those 2 things and our full year outlook for full year revenue is probably double that.
On the margin dynamics are probably.
A little high just and this quarter, just because of some of the timing issues, but.
To date.
And have any insight into sort of changing reimbursement are changing.
Kind of the labor model, we are using to sort of deliver those so I think thats as reasonable.
The baseline to begin to work off of.
As we can and as we think about next year and again I mean, as you think about the dynamics here as you have ft.
FDA approval mandates booster shot theres, a lot of things and.
And listen and you could make a bulk case if you wanted to on this certainly with what's with what's going on now and I wouldn't dispute that and I would acknowledge that if our guidance has some upside this could be a place depending on how things how things play out.
The only caution I would put there though is to think about some of the interplay.
Just looking at this and isolation.
And so even and sort of inside retail.
If we do see an uptick and it does see increased activity well what does this mean for cough cold and flu.
For this what does it mean for front of store.
And then obviously the HCV ripple so.
And again I would acknowledge that there is a bull case that you could make here, but I'd also say this has changed rapidly over the last couple of months and I. Just ask you to sort of think about it and in a broader context.
And Kevin as Alan and I was wanted to think about the.
Drivers of.
Purchase data economics on the manufacturer's items and sustainability and the first thing I'd acknowledges as Sean has said and when you launch something new there is always going to be and outsize step up having said that I think the future viewpoint on the ability to create more competition through.
Other it's biosimilars and Biosimilar interchangeability as we saw recently through generics for <unk>.
<unk> and our specialty area, we see that as a as we're at the beginning of the specialty or other.
Generic or Biosimilar arrow specialty so I think that sustainable and a good good opportunity longer term I think the.
Growth of our value creation will grow as volume growth. So as we continue to win new business will grow we will continue to grow there and Alaska as we built on this platform as a platform for a series of services. So we've just launched our for a set of services, we think Theres a number of other ones that we can continue to launch into the mall.
<unk>.
Within the GPO that will create meaningful value for both us and for our customers.
Great with that brings us to 9 o'clock. We appreciate your interest and time and actually if you could please give the replay information. Thank you all.
Okay.
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.
Oh.
[music].