Q2 2019 Earnings Call

Ladies and gentlemen, this is the operator todays conference is scheduled to begin momentarily until that time your lines will again be placed on musicals. Thank you for your patience.

All lines have been placed on mute to prevent any background noise.

After the speakers remarks, there will be a question and answer session.

If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question press the pound key.

Thank you Larry Merlo, you may begin your conference.

Well good morning, everyone and thank you for joining us.

Before we get started I'd like to introduce our new senior VP of Investor Relations Valerie Hartill.

Valerie brings more than two decades of Investor relations experience in the health care and financial services sectors and we're excited to have her on board. So with that let me pass the call to Valerie to get Us started.

Thank you Larry and good morning, I'm excited to join the Cvs Health team and look forward to working with all of you I would like to welcome you to the conference call to discuss Cvs Health second quarter, 2018 result, and outlook for the remainder of the year. As a reminder, this call is being recorded in addition to Larry I'm joined this morning by Eva Berardo Executive Vice President and CFO . Following our prepared remarks, we'll host a question and answer session, John Roberts, Chief Operating Officer, Karen Lynch President of Aetna.

Derica Rice president of Caremark, and Kevin heard Ken President of Cvs Pharmacy will also be joined answer the question answer session in order to provide more people with a chance to ask their questions. During the Q Rene please limit yourself to no more than one question with a quick follow up.

In addition to this call and our press release, we have posted a slide presentation on our website that summarizes the information in our prepared remarks as well as some additional facts and figures regarding our operating performance and guidance.

Our Form 10-Q will be filed later today and that too will be available on our website. Once filed please note that during this call we will make certain forward looking statements that reflect our current views related to our future financial performance future events and industry market conditions and forward looking statements related to the integration of the of the acquisition, including expected consumer benefits financial projections and synergies. These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from what may be indicated in the forward looking statements. We strongly encourage you to review the information in the reports we file with the FCC regarding these specific risks and uncertainties.

In particular those that are described in the risk factors section of our annual report on Form 10-K , and the cautionary statement disclosures in our quarterly reports on Form 10-Q .

You should also review the section entitled forward looking statements in this mornings earnings press release.

During this call we will use non-GAAP financial measures when talking about the company's performance and financial condition in accordance with FCC regulations, you can find a discussion of these non-GAAP measures and the comparable GAAP measures in this mornings earnings press 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. Following today's call now I will turn the call back over to Larry.

Thanks, Valerie and welcome to our team.

Well Q2 was a very strong quarter, where we continue to execute against our objectives and build on our positive momentum with adjusted earnings per share of $1.89 exceeding the high end of our guidance range.

Well this performance was driven by strong operating results across the enterprise with retail long term care and pharmacy services performing above expectation.

Importantly, these results reflect strong revenue and share gains across the enterprise.

Given our results to date as well as our expectations for the remainder of the year, we are raising our adjusted EPS guidance to $6.89 to $7 and evil will provide a more in depth review of our results and our updated guidance in her remarks.

We are highly encouraged by our strong results for the first half of the year demonstrating our continued focus on executing the strategic priorities, we outlined at our June Investor Day.

We are transforming our company and the health care industry and accelerating enterprise growth as we move forward.

Our first priority is to continue to grow and differentiate our businesses.

And nowhere is this differentiation more apparent than in our retail stores through the conversion of our health.

At our June Investor Day, we announced plans to convert 1500 locations to hub by the end of 2021.

As part of this plant will be expanding to three more metropolitan areas. Later this year and will add an additional 10 areas in the first half of 2020.

Our expansion strategy is reinforced by the strong results we are seeing in our initial hub locations.

Including increased customer traffic and incremental sales in pharmacy front store and met a clinic.

We've also received strong consumer feedback reflected in net promoter scores at the health Hobbs outpacing our broader chain by about 900 basis points.

So were extremely excited with the reception to our innovative offerings that will allow us to engage with consumers and a differentiated manner in the communities, where they live and importantly improve health outcomes.

In our health care benefits segment, we continue to show strong momentum, particularly in our government business.

On July 19th we were notified that we were one of two health plans awarded a statewide five year contract to serve the healthy kids program a floor.

So we're excited to build on our strong existing relationship with the state and its physicians health systems and other providers to support healthy outcome in this important geography and this win speaks to our breadth of capabilities in serving the Medicaid population.

We also continue to see opportunities to further grow our Medicare products.

With Medicare advantage, our competitive products strong stars performance and continued geographic expansion position us well to capture significant growth opportunities in the marketplace.

And our expansion for 2020 will provide coverage access to about 80% of Medicare eligible Lux.

In Medicare part D. We are utilizing the best practices of the combined organization and are pleased with the preliminary benchmark results received from CMS for the 2020 plan here, where we qualified in 31 of 34 regions.

Now I want to remind you that we see opportunities to accelerate PDP to make conversions to provide our members with incremental value from an integrated medical pharmacy benefit.

And our PDP bids reflect this strategy, which may result in fewer choose irrs selecting silverscript.

In our pharmacy services segment, we continue to provide value to our clients through our cost management programs, while also earning high marks in both client and member satisfaction.

We are pleased with our progress on the 2020 selling season.

Post Investor day, our gross new business has increased by 600 million with net new business improving by about 1.4 billion.

The second quarter also marked the beginning of the implementation of the in Jennie O Rx business.

The first wave of members were migrated on May one and by the end of Q2, we added millions of in Jennie O Rx members to our platform.

To date, the migration has gone flawlessly due to the thoughtful planning a dedicated execution of the joint implementation team comprised of colleagues from both in Jennie O Rx and Cvs health.

Our second priority is to deliver transformational products and services.

One of the key initiatives is our chronic kidney care program, which includes the early identification of chronic kidney disease.

Targeted patient engagement and education to help slow disease progression.

And the increasing access to transplants in home dialysis to optimize care.

Last month, we received FDA approval to initiate the clinical trial of our hemo dialysis system.

This system is designed to make home hemo dialysis safer in simpler, while allowing patients to receive longer more frequent dialysis treatments, whether research has shown leads to better health outcomes.

Now we have already enrolled our first patient and up to 70 patients will participate in the clinical trial, we expect the trial to be completed over the next 16 to 18 months with product launch to occur in 2021.

This strategy is aligned with the administration's recently announced advancing kidney care initiative.

Aim to help improve early detection and expand treatment options for kidney disease, including home dialysis.

The administration's focus it's in line with the core objectives of our own kidney care program, and we look forward to being able to dramatically improve the treatment experience for millions of Americans suffering with kidney disease.

We've also made meaningful progress on another key transformation program, our comprehensive oncology solution.

Where we're aligning stakeholders around a common goal of improving the quality of care, while reducing costs for plan sponsors and patients.

We recently launched our pilot program with a cohort of at the members and providers across 14 states.

This provider group will use our and Overwatch Ics proprietary technology platform to drive adherence the clinical guidelines.

Cost effective therapy choices and enable value based payments.

For patients, we are providing high touch engagement through a dedicated team of nurses to enhance the patient experience and improve adherence to their therapy regimen.

Our goal is to expand the pilot to more that's the members and providers later this year.

Our third priority is to enhance our consumer centric technology infrastructure to support many of the new programs and services, we are implementing through our transformation efforts.

This includes integrating data and enhancing our analytics capabilities.

Developing an intelligent engagement platform and seamlessly connecting digital and physical capabilities to improve the customer experience.

Now we've launched several new integrated next best action pilots in our health clubs in minute clinics aimed at closing gaps in care and improving chronic condition management.

Additionally, we have enhanced our extra care program system architecture.

We are now live with machine learning tools that will further improve the reach and relevance of our customer engagement.

Also we announced earlier this week the nationwide expansion of our care pass subscription program, which is delivering on our expectations to drive increased trips and spending levels from enrolled members and customer feedback on the program has been very positive.

And finally, we are focused on becoming a more innovative and efficient operator by executing on our integration strategy and modernizing our enterprise functions.

On the integration front, we are making excellent progress and are ahead of where we expect it to be at this point in the year.

We now expect to deliver approximately 400 million of synergy value. This year with the largest contributor to our outperformance being formulary optimization.

We have also fully integrated our mail operations ahead of our initial targeted integration date.

Our expectation of approximately 800 million in synergies for next year remains on track.

Our enterprise modernization efforts are also underway and we are still in the early stages of execution on the program with meaningful savings expected to begin accruing next year.

But we're encouraged by the early work to identify savings opportunities.

And the leadership structure and cross functional teams required to support these activities has been built out.

And through these opportunities, we expect to generate net savings of between 1.5 and $2 billion in 2022.

So as you can see in our results as well as our future plans. We are successfully executing on the priorities that we laid out at our Investor day.

Through these priorities, we firmly believe that we will be able to accelerate enterprise growth and position CBS sells to deliver on our operational and financial objectives, creating significant shareholder value in the process.

Now before I pass the call over to Eva Let me briefly comment on the current legislative and policy environment, along with our ongoing efforts to drive solutions that save patients' money and reduce overall healthcare costs.

First the administration's withdrawal of the rebate will provide perhaps the most significant recognition to date of the importance and the value of the PBM and the significant cost increases that would have resulted in eliminating the power of formulary to drive price discounts and lower premiums for Medicare part D beneficiaries.

Additionally, the administration's extension of our real time benefit capability to allow Medicare part D beneficiaries and their physicians and pharmacists the ability to find lower cost therapeutic alternatives will result in real savings from members and the Medicare part D program.

And our data shows that beneficiaries are saving about $90 per Phil when prescribers are utilizing the tool.

But beyond the PBM, we continue to advocate for policies that lower out of pocket costs for consumers and demonstrate the innovation and cost saving solutions. The private sector can deliver as the broader questions of access cost and quality are debated nationally.

So with that here's the best to walk through our financial results for the quarter as well as our updated expectations for the balance of the year.

Thanks, Larry and good morning, everyone as Larry said, Q2 s performance exceeded our expectations with broad based strength across the enterprise and as such we are raising our outlook for the full year to reflect this outperformance adjusted earnings per share of $1.89 was above the high end of our guidance range by 17 cents the quarter benefited by approximately six cents from nonrecurring items, including realized investment portfolio gains and prior year development health care benefits performed inline with expectations and pharmacy services, our PDN and retail long term care outperformed our expectations.

The quarter also benefited from a lower effective income tax rate due to timing and lower interest expense, primarily due to the early repayment of the outstanding term loan.

Consolidated adjusted revenue grew 35.8% in Q2 19 also exceeding our expectations.

The year over year increase was largely driven by the addition of it and then as well as higher volumes in both the PBM and retail long term care segment.

Health care benefits, which includes our Silverscript Medicare part D business contributed 17.4 billion of revenue for the quarter. Adjusted consolidated operating income grew 55.1% primarily due to the addition of the new business and growth in the PBM.

Partially offset by a decline in retail long term care the health care benefits segment contributed 1.4 billion to adjusted operating income.

Now, let me run through the results of our segments in our Pdm revenue increased 4.2% with adjusted claim volume up 4% versus Q2 2018.

The increase was driven by net new business and the continued adoption of our maintenance choice offerings.

TTM adjusted operating income increased 9.7% as operating margins expanded by about 20 basis points due to increased claims volume and favorable purchasing economics drug price inflation remains consistent with our expectations.

Our retail long term care segment also performed better than expected with revenue up 3.7% driven by higher prescription volumes, we delivered strong adjusted script growth of 5.9% with comp scripts up 7.2%. This was driven by the continued adoption of our patient care programs collaborations with other PBM and our preferred status in a number of Medicare part D networks as well as a prolonged allergy season.

As a result of our strong script growth our market share in Q2 increased 120 basis points to 26.5% versus Q2 of 18.

Additionally, front store comps sales increased 2.9% driven by continued growth in health and beauty, a longer cough and cold season, and an approximate 80 basis point benefit from the shift of Easter shopping season Q2.

Second quarter retail long term care adjusted operating income declined 8.3% year over year.

This represents an improvement from our expectation due to increased pharmacy volume and front store performance. The drivers of the year over year decline are consistent with what we have discussed previously.

And finally health care benefits continues to perform well revenue exceeded our expectations in the quarter driven by strong growth in Medicare products. As a reminder, year over year results for the health care benefits segment are not comparable to either legacy CBS or legacy Edna results due to a variety of factors, including the acquisition of that no inclusion of Silverscript in our 2019 healthcare benefits results and the temporary suspension of the health insurance fee in 2019.

Our total health MTR was 84% for the quarter.

As a result that benefited from favorable prior period reserve development across all of our core products.

Our MDR reflects overall moderate medical cost trends. However, we did experience modest pressure in a specific portion of our middle market commercial book.

We've taken appropriate actions to mitigate the impact. Despite this modest pressure we continue to expect our NVR for the full year to be within our initial guidance range with a bias towards the upper half.

Our days claims payable was 48 days for Q2 compared to Q1 days claims payable increased by three days due to the seasonality that is typical of our PDP business. We remain confident in the adequacy of our reserves and our reserving process.

As I mentioned earlier, the corporate segment benefited from $57 million of realized investment portfolio gain which contributed to the outperformance in the quarter.

Turning to cash flow and our use of capital. This quarter, we generated strong cash from operations of 5.3 billion due to improved working capital and earnings performance. We also returned more than 600 million to shareholders through dividends.

We repaid 1 billion of long term debt in may representing a portion of the term loan outstanding and in July we repaid the balance of the term loan of $1.5 billion.

Taking all of this into account since the close of the transaction. We have repaid approximately 6.6 billion of debt and we are focused on continuing to de lever and remain on track with the plan, we outlined at our Investor day in June .

With that let me turn to an update of our guidance for the remainder of the year.

As Larry said, we are raising and narrowing our 2019 guidance range to reflect the favorable performance. We now expect our consolidated full year adjusted earnings per share to be fixed 89 to $7. We now expect consolidated full year 2019 revenue in the range of 251.4 to 254.2 billion and adjusted operating income between 15.2 and $15.4 billion.

For the segments, we expect full year 2019, adjusted operating income in the pharmacy services segment to be in the range of 5.06 to 5.12 billion. The retail long term care segment to be in the range of $6.68 billion to $6.76 billion.

And the healthcare benefits segment to be in the range of 5.18 to 5.24 billion. The increase in guidance reflects the outperformance in the segments, including the acceleration of synergies primarily benefiting pharmacy services. It also reflects the investment portfolio gain and prior period development within the HCB in our Q2 results.

Our full year 2019, GAAP EPS guidance is now in the range of 493 to five over four.

This reflects the improvements across our business, partially offset by a loss of approximately $200 million on the sale of our Brazilian subsidiary enough rate.

This loss primarily reflects the elimination of the cumulative foreign currency translation losses from shareholders equity the transaction closed in the third quarter and is consistent with our strategy of optimizing our portfolio assets.

We are also raising our cash flow guidance and now expect to deliver strong cash from operation between 10.1, and 10.6 billion of which 4.5 to 4.9 billion will be available for debt pay down this year.

Our strong cash projections include the improvement to our underlying business performance as well as early benefits from our initiatives to reduce pharmacy inventory in our retail stores by a billion and a half.

We continue to expect capital spending of $2.3 billion to $2.6 billion.

Our earnings progression for the year is expected to be consistent with the cadence discussed on our May earnings call. The first three quarters will have the highest year over year growth as we wrap. The addition of Aetna and we expect health care benefits adjusted operating income to be the lowest in Q4 due to the cyclical nature of that business.

For the third quarter, we expect adjusted earnings per share to be in the range of $1.75 to $1.79.

In summary, we delivered a strong quarter of performance exceeding our expectations. We remain confident we will be able to achieve our financial and operating goals for the full year and over the longer term with that we would like to open it up for your questions.

Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile a Q and a roster.

And our first question comes from the line of Robert Jones from Goldman Sachs. Your line is open.

Great. Thanks for the questions I guess, maybe just on on synergies and the execution, there clearly things seem to be going well with the expectation now for 400 million, even if I heard you correctly versus the previous communication of three to 350.

Sounds like the 800 million still intact for next year. So was wondering if maybe you could just share a little bit on on where you're realizing synergies ahead of the previous expectation.

On a segment level and then any sense you can you can give us on on what those synergies might have contributed to the quarter would be helpful.

Yeah, Bob It's Larry I'll start and I think people will jump in in terms of.

Your your second question, but.

To your point, we're really pleased with how the integration is going.

The over delivery to our initial guidance is largely in.

In two areas one is the formulary optimization and the second one is we're just.

Being able to.

Transition functions a bit faster than we had modeled and probably the biggest example is.

The consolidation of our mail operations in pharmacy.

And Bob if anything I would add is you're you're exactly right. Our 800 million for next year remains in.

In tact, a 400 million for this year with the largest benefit accruing to the PBM I'd say the other impacts are pretty consistent with what we had previously and it was a contributor to the PBM outperformance.

And Bob just going back to analyst day recall, we said 800.002 million 20.

With a goal now have $900 million in 2021.

Got it no no. Thanks for that clarification, Larry and then I guess, just one quick follow up on the on the Rx comp really strong in the quarter.

Better than we expected probably better than we've seen for a few quarters could you maybe just talk about where you're seeing growth. There is it is it really coming more from a share shift from the other large retail players.

Or is this more.

Yes, maybe share gains from.

Some of the smaller independent players out there because I don't necessarily think theres been a an increase in just overall script volume and yet obviously you guys saw a nice pickup in the quarter. So just any clarity there would be really helpful. Thanks.

Hi, Bob This is Kevin I'll answer that question. So we're really pleased with our topline script growth we're growing at two times the market. The vast majority of our script growth is coming from our clinical programs.

Which are intended to increase medication adherence to the patients that we serve so those are existing customers of ours and if we can keep them more adherent on taking their medications that keeps them healthier and it also drives our business has even mentioned we also have strong strategic partnerships with third party payers and we are seeing growth with the major payers and being able to shift share to us based on our preferred relationships. Those are the two primary drivers.

Great. Thanks, so much.

Thanks, Bob.

Our next question comes from the line of Justin Lake from Wolfe Research. Your line is open.

Thanks, Good morning.

Did you talk about the PBM seeing a benefit in the quarter from increased synergies but.

Beyond that looks like a pretty dramatic improvement versus the trends. We saw in the first quarter Toby will walk us through the drivers of this improvement and talk about sustainability. It Doesnt look like you are projecting similar year over year performance or the back half of the year within the updated guidance range.

Yes, Thanks, Justin it's evolved start and then Derica will will jump in as as we look at the beat on on the PBM I would say it came from a couple of key areas.

First we had strong performance on overall script and continued growth in mail choice with maintenance choice being a contributor as well as what we just spoke about around the acceleration of of synergy.

We also had higher rebates earned in the quarter and this is a function of our procurement activities with pharma that we do on an ongoing basis as well as improvements in formulary compliance, which helps us to mitigate some of the.

Some of the.

Liability issues that we spoke about earlier in the year. So overall, we're pleased with the performance here specialty continues to perform well and I'll hand, it over to Derica.

Hi, Justin this is Derek I think EBIT captured it very well the team has done a good job of.

Driving formulary compliance with our clients and Thats allowed us to improve our earned rebates and cover that rebate exposure. So we're tracking very well to mitigating the headwind that we talked about at the beginning of year end, we fully do expect that it will peak this year in terms of our rebate exposure and you should absolutely expect anticipation or that exposure as we look forward to 2020 and 2021.

All right. Thanks, and just a quick follow up you talked about modest pressure in the middle market commercial book by the badge.

The managed care side over the world.

Before interest on that when you start talking about a pressure on the commercial side can you give us some more color whether it was price or cost that as much detail as you can find the drivers of that and what you're doing to mitigate.

Hey, Jeff and it's Karen I'll take that one.

What I would say is I think it's that it's a very specific portion at the low end of our middle market and we are seeing pressure in very specific region. We are seeing a little bit of pressure in utilization across the medical cath.

Medical cost categories, but what I would emphasize it is not cross our entire commercial book and it's a very specific.

Our its in our 51 to 100 and is in very select geography.

And what we're doing about it we put very specific actions, we're intensifying our medical management in those geographies.

And then can you talk about attitude.

Doug 10 to 25 Bips are all 200 bips.

Yes, Justin we're not going to call that out exactly but I would say is you look at our our overall mdrs was what we're expecting overall, we're still well within all are well within our guidance range and the other areas are performing well.

One of the things that I would point out.

To keep in the back your mind as we go forward that.

We are building natural hedges in our business, though when you look at this business model. So you know to the extent that we see utilization trends.

And.

You can go beyond what Karen was talking about and just look at something like a flu season that it's easy to get your head around that.

To the extent, we have an extreme flu season that is a headwind for our insurance business. It becomes a tailwind for our retail and PBM business. So we will have.

Some elements of those natural hedges as we move forward.

Thanks.

Our next question comes from the line of Lisa Gill from JP Morgan Your line is open.

Thanks, Good morning.

Larry you talked a little bit about the health hubs and talked about the trends in traffic Rx Minuteclinic front end et cetera.

I know you're going to say its probably pretty early on but is there any way to put numbers around that so as we start to think about this story over the next several years and we start to think about 1500 health Hobbs, what this could look like for the company.

Yeah, We said, it's a it's a great question and you know we see as we go forward, we want to we do want to get more stores under our belt.

To move from qualitative definition to more quantitative definition, we have talked about the fact that we are really pleased with the feedback that we're seeing from customers from a service performance point of view.

Net promoter scores up 900 basis points over the chain average and we are seeing additional traffic and we're seeing that translate into a sales momentum additional sales in the front store in the pharmacy.

As well as medical clinic visits.

And Lisa if we were to just contextualize, where the value is going to come from I'd highlight three areas as Larry said first the store traffic just the underlying dimensionality of our retail stores second the value we can bring to US and then the health insurance business around medical cost saving and third opportunities in the PBM in our open source model to deliver to deliver value there.

Okay, Great and then just as a follow up to that you talked about.

9900 stores today, 1500, ultimately having help hubs in them and any updated thoughts post analyst day on what the right number of stores is is that the 9900 or do you think that it will be a lesser number as we think about the next several years.

Hi, This is Kevin I'll take that one so we don't have a targeted store count what I'll do is I'll come back to our Investor day presentation, where we talked about the fact that we continuously evaluate our real estate portfolio. A couple of key points I'd like to highlight on todays call versus our portfolio of stores is robust and highly productive we view it as a competitive strength.

Important to note that we've reduced the number of new store openings per year. So if you go back a few years ago that would have been 300 per year. This year 2019, we opened 100 new stores. So obviously a reduction 2020 I, we're projecting to open approximately 50, new stores, so that does telegraph or reducing the number of new stores that we're opening our book is currently as Larry mentioned is on our whole hub expansion in order to increase the productivity of our retail stores through the new services and the traffic that we can drive to our stores through those services and to enable care and Derek as business lower medical costs through being in that local community setting and providing improved care.

Our new store openings will focus in the future on markets like the Pacific Northwest were under stored in high growth areas like New York City in places like Texas, where we can definitely fill and lastly, we will continue to aggressively evaluate our store portfolio to ensure we are delivering the highest level of financial returns.

And we say okay, great. Thanks.

Just maybe just a couple of other quick points I think.

Underlying kevin's comments are.

We have extreme flexibility in our portfolio and with the number of leases that come up.

On an annual basis, and we review the productivity of the entire fleet and.

We have flexibility for probably on average about 500 locations every year.

The other point also to keep in mind, we see your question started with the health hubs and.

We are continuing with our thought process around a hub and spoke model. So we are in the process of finalizing what that spoke.

How that supports the hub concept and the fact that there will be more subtle changes.

In folks across a geographic area.

Very helpful. Thank you Larry.

Our next question comes from the line of Ricky Goldwasser from Morgan Stanley . Your line is open.

Yes, hi, good morning.

Larry in the prepared remarks, you talked a little bit about the M&A strategy for next year can you expand on that and how you talk a little bit about kind of a potential decline in silver script.

Which could benefit the digital business. If you can help quantify kind of like the potential opportunity there.

Hi, Ricky it's Karen let me comment on the part D. What I would say is as a result of the combined company. Some of the successes that we both had relative to our.

Part D market, what we've done is we've modified our product design to better to reposition our portfolio to support a broader consumer appeal and then continuity for M&A PD conversions and sell the report that what we're doing with the portfolio. This year is it's a multiyear strategy and we are ensuring that our consumers will have choices that will better meet their specific needs and what we're really very happy about where our preliminary benchmarks came in.

Larry said, we're at 31, we quantified 31 out of 34 regions. So we feel good about where were positioned relative to R&D next year.

Okay and no follow up on the selling season, obviously, the EUV won some business.

And the state can you give us a little bit more detail on what parts of the market you're winning in and also where are we in the selling season. So how much of the book is left at this point.

Sure Hi, Ricky this is Derek I'll take that question, we're about 90, 91% of our way through the selling season. So we're off to.

Closing the end and we're actually beginning to get bids for 2021, if you can imagine but in terms of the updates since our analyst day discussion as you heard from Eva earlier. This morning, we were able to improve our gross new business by about 600 million.

Ed we approved on a net basis about 1.4 total and that was driven by both one we've been able to retain some business at a higher level than we thought we assess that we initially loss.

Both in the collectives and at the state level and then secondly, we've also seen a further delay in the centene migration and so thats, helping us a bit as well.

In terms of contributing to that number and operationally we continue to have very very high service level. So those growth new wins I highlighted earlier the majority of those were taking place in the employer segment and on the government side.

Thank you.

Our next question comes from the line of Steven Valiquette from Barclays. Your line is open.

Great. Thanks, Good morning, everybody, so with a large GPS beat in Twoq, you relative to guidance by almost 20 cents and then Three Q1 9 also coming in well above the street by almost 15 cents dosing at the full year 2019 as gas could have been raised by maybe even more than 10 to 414 cents that you're raising it by maybe it's just conservatism but.

The question really is just regarding the implied fourq guidance can you mentioned at her the HCB segment, having seasonally lower profits in Fourq you versus the rest of the year I'm. Just curious if there's anything else worth calling out regarding different seasonality you find that their retail segment or the PBM for Fourq you thats different this year or did the street just mismodeled the back half of the year from your from your view. Thanks.

Hi, Stephen it's Eva.

Overall, what I'll say is we're really pleased with how we're executing in the results in the quarter and the race to the raise to our guidance I think as you think about quarter in quarter out some of the headwinds that we spoke about how generics can affect us. The rebate guarantees you can have some some seasonality of that one quarter to two another you called out the lower profitability of that and then in.

In the fourth quarter with their typical seasonality you can get some lumpiness with the PDP between Q3 and Q4, that's always been something that depending on where you are on the <unk> on the curve there that that can change. So there there are the key items I would I would call out and overall, we're pleased with our performance thus far relative to our expectations.

Steve it's okay.

I'd I'd, just emphasize or underscore couple of diseases points, and and remind everyone that we did move the silverscript business out of the gate over too.

Do you have in the business and.

We're really happy that that we made that move out of the gate because I think it gives us the flexibility that.

Karen had alluded to earlier and I'm confident that that will pay dividends.

Next year.

Keep in mind that when you look at the quarterly cadence of the PDP business. It doesn't follow the cord the quarterly cadence.

Of.

Health care benefits business broadly, it's kind of backwards in terms of the role the Q1 Q4 in place so.

That.

That we're doing.

Uh huh.

Our best to provide that level of transparency in terms of the moving parts from a comparison point of view, but.

Certainly the IR team would be happy to follow up with you on that.

Okay No I appreciate the extra color and congrats on the results. Thanks.

Our next question comes from the line of Ross Muken from Evercore. Your line is open.

Hi, good morning, guys and congrats.

In the beginning why are you highlighted a couple of kind of interesting new endeavors for the business that sort of built off the at the analyst day, you talked about.

Even dialysis and some of what you're doing in oncology as a hospital to home I guess as you think about a number of these new programs at Allen and others are sort of working on across the business you know what's sort of the the customer response.

In terms of the consumer as well as sort of other plans and then what other types of entities are now also coming to you looking to sort of partner work. Because obviously you have a very unique sort of footprint across yeah, I was sort of the healthcare landscape, but now with sort of a lot of these new efforts in endeavors that may attract kind of others to want to work more closely with you to bring their you know sort of.

Technology et cetera are too.

Your member base, So just give us a feel for kind of how that's all developing and that the inbounds that are coming in to you.

Yeah Ross Thanks for the question because it is a great question and.

It really does speak to the opportunities in front of us from.

A customer point of view and I'll define that customer as the user now okay. The.

The feedback has been very good and you know.

And quite frankly, it's validating our belief in our strategy that there is a growing emergence of the retail health consumer.

And it's also giving us the confidence to move forward as we outlined where we're going with.

The products and services not just in pilot side.

The broader rollout of things that we've discussed.

The flipside of that is Theres also a growing interest from.

Our health plan partners in terms of how we can partner you know Eva alluded a bit to that in terms of the one of one of the potential value drivers and.

Certainly those in bounds are.

There are robust discussions with derica and his team.

In terms of the opportunities there.

And then the third bucket of opportunity is just.

The inbounds coming from other potential partners in terms of.

How we can work together.

To be part of the solution that yeah.

Leads to additional innovation. So you know Russ I would say that that is probably something that we underestimated in terms of.

The potential for those opportunities.

And what that can mean, and we certainly got a team.

Exploring those.

And we'll talk more about that as they come to fruition and Ross. This is Steve if I could just add one thing to Larry do you wrap it all up it just speaks to the power of our ability to touch the consumer through our retail through our retail footprint and bring and bring all of this together and just that the complimentary nature of our business to to others, who are in the health care system.

And maybe just on retail.

I think on a previous question sort of touched on front end, but it feels like it's actually even excluding the Easter shift sort of gone to fit that or at least you're executing well. There I know you also recently sort of rolled out kind of the care path.

Subscription more nationwide I guess, how are you feeling in general just about service the comp trajectory there and some of the things that you're changing and shifting in terms of being able to sustain not just yeah.

Gross profits in that part of the business might actually continue to comp.

Yeah, Ross, it's Kevin Thanks for the question and there were really pleased with our front store business is Easter shift did contribute positively but that was a reasonably small percentage growth in our business is coming from our health and beauty strategies that are taking share from the market and growing share of wallet with the customers that we continue to serve so that comes from a couple of key components. Our store remodels are increasing comp store sales in the locations, where we've remodeled a renewed focus on improving the customer experience within our stores, which is increasing npls. If you know the retail equation improving customer service. It does pay for improved sales in the future, we're improving our extra care program do targeted personalization, which is increasing the reach and relevance of the offers to our customers and were seeing.

Dividend from those.

Investments in technology that are fueling those capabilities.

I'll just touch on the gearbox question that you asked at the end, yes, we did announce earlier this week.

The expansion of care path nationwide I'll, just say a couple of points on that your press starts with the customer our customers increasingly are looking for time saving activities. There are times arb and they're looking for increased value.

We view care passes extending the convenience advantage of CBS by offering free delivery 24 access to a pharmacist in a 20% everyday discount.

We're seeing very positive results from the enrolled members that we have in our pilot markets. The $10 promotional reward in particular is what's an increasing trips to our stores into our digital properties and that increased visit frequency is what's driving the return positive for CBS . So therefore, we're confident to roll it out nationwide and now it's a matter of how many members we can enroll and what pace we get enrollment.

Great. Thanks.

Our next question comes from the line of AJ Rice from Credit Suisse. Your line is open.

Hi, everybody just first.

Your Medicare advantage enrollment obviously this year has been a.

A big bright spot for you I Wonder now we got two quarters of claims.

Under your belt, you haven't called that out so I'm, assuming your claims experience with those new labs has been about his expectations and I know your bids for 2020 and have already been submitted you guys. Some changing landscape there I think.

The opportunity for expansions, maybe has mitigated a little bit in the hip coming back any any early commentary on.

How you think about the opportunity for 2020 and M&A.

Hi, Jay it's Karen so.

We're very pleased with our Medicare growth and I'll, just remind you that.

As we as we grew substantial amount of members both in our individual and group membership.

Our growth in individual came from service area expansion that was about 25% of our girls and then the remainder came from.

The existing footprint our claims in our <unk>.

First your business as you would expect is performing exactly where we thought it would be so we feel good about the performance of the Medicare business as it stands today as you know we're halfway through the year. So the claims are still maturing, but everything all the metrics and everything looks in line with where we would have expected relative to our 2020 beds. We took a very balanced approach to Tony Tony.

Our go to market strategy included a broad portfolio of remaining at zero premium.

Hmm plans will feel good about our ability to preserve build plan. We also were able to offer.

New supplemental benefits and you're also able to leverage the enterprise.

Minuteclinics by offering zero co pay.

Or.

Lower co pay that Minuteclinics and we also were able to.

You sound incorporate some of our new differentiated capabilities within Cvs, So we'll be offering the health clubs in Houston.

We are operating as you might recall at Investor Day, I talked about the hospital to home benefit we're offering that across the portfolio. We're now calling that healing better. We also are offering over the counter and durable medical equipment benefit through our retail store and then on leveraging the pharmacists and pharmacy panel. So we aren't we'll look forward to telling you more about Medicare in the fall when more the information's of hub.

Publicly available.

Okay, and if I could just.

Quickly pivot.

Obviously, a public press is talking a lot about what the situation with China you guys haven't talked much about that I don't know whether the front end do you source much from China.

But I'd be interested I know some in that.

Retail pharmacy segment do I'd be interested to know how you're dealing with it if it's an issue at all for you and maybe you source better than others, and maybe even could be an opportunity for market share gains any comment on that.

Yeah, Hey, Jay it's Larry I mean, as you think about our overall portfolio, we do not have any sizeable.

Business that would go outside domestic so the impact in terms of the current trade issues.

We haven't seen material lives in our business, it's something that we continue to monitor.

As you think about.

Our suppliers, but.

It's a.

It's not something that.

Is is commanding a lot of our attention at this point.

Okay. Thanks.

Our next question comes from the line of Lance Wilkes from Bernstein. Your line is open.

Yeah. Good morning could you talk a little bit about performance in the Medicaid line and in particular are you are you seeing any sort of cost pressures and that our claims progressing and then what steps are underway to kind of work on the pipeline and conversion of that pipeline going forward.

Lantus Karen again so.

I just want to remind everyone that we manage.

Medicaid book of business.

Through a diversified set of contracts.

Performance as you know Barry.

The program by.

Programming.

We in 16.

Serving various programs right now what I would say is our Medicaid AMDR is performing in line with expectations and.

Perform where we thought it would perform.

As you would imagine we are working through pulling.

Barry plants operate at different levels of performance and we feel that we've got the right actions across the board so feel good about.

Relative to Medicaid I would also comment that I'd remind you that we have a new contract in Kansas.

That.

Is performing where we thought it would be we've had some operational challenges out of the gate, but we feel that we've got those covered through operational.

Execution, a remediation plan.

Great and just.

Related to your comment earlier on Silverscript too.

To me opportunities for conversion can you talk a little bit about with your experience.

What do you what do you see historically as far as conversion rates from PDP too.

And in a product and then what do you see as an outlook for that now that you've got the bigger and more sizable silverscript.

Pool there.

We were we were having very good.

Success in the conversion prior to the acquisition.

We obviously had to put it on hold.

Hi, Paul.

When we divested the business. So I view given that we have the largest PDP now this and given some of the repositioning of the portfolio that we will be doing I view. This as a good opportunity as I mentioned at Investor Day for continued growth in our Medicare business and we will be actively working on those conversions than our product positioning with the PDP will help assist that and were.

Very excited about the possibilities for growth there and Lance just to remind you carried his shared at our Investor day that.

As a standalone company between the years 2015, and 2019 was able to convert more than 82000.

The point, Karen made that was skewed to the earlier years in that range given the transactions going on in the <unk> and the focus of the business.

Great. Thanks, so much.

Our next question comes from the line of Michael Cherny from Bank of America. Your line is open.

Good morning, and thanks for all the color so far.

I wanted to dive a little bit back into some of the cost trend comments, you kind of talked Karen about the very narrow book of business within middle market commercial you gave some color on Medicare and Medicaid just more broadly across your business just give a little more clarity on some of the moving pieces, whether it's the elongated flu season the camp in retail.

Just like how to think about what you've seen so far from a overall broader perspective, and some of the commercial markets or some other areas.

Yes, what I would say.

Generally medical cost trends are performing.

In line across the board, what I mentioned earlier.

With the.

Small end of the middle market that very specific in geography, what we're seeing we're not seeing significant inpatient we're seeing.

Sure.

Broadly.

Cost and more in the specialty pharmacy area than than most but that's trending in line with.

Prior years at the same level. So there's nothing in medical cost trends that are really.

Our outperform outperforming and what we've seen in the past that we feel.

Like like every year, we're doing the things that we need to do relative to.

Medical cost management, but nothing stands out in medical cost performance really speak of other than those four markets that I talked about earlier.

Yes, Mike I, just I just want to reiterate we're still comfortably within the range of the initial guidance, we had provided albeit at the at the upper half at this juncture.

That's definitely helpful. And then just a question for you if we look at the new high end of the guidance range. You are essentially at where you had thought about for the at least number for 2020, how should we think about the new guidance relative to the base level heading into 2020 beyond relative to the analyst day targets.

Yeah. So thanks for that my overall, obviously you know we feel really good about the momentum of our business and and our execution here as we continue to progress through 19, and what I'd say at this point as we remain confident in the low single digit growth that that we provided at our Investor day.

That said I just want to go back to a couple of the comments that I made in my prepared remarks to contextualize some of the nature of the B as well as the range I'd remind you that about six cents that was distinctly 2019 item such as capital gains in prior years development in their thing.

That I wouldn't think about as a run rate or or annualizing.

Perfect. Thanks, so much.

Our next question comes from the line of Charles Rhyee from Cowen Your line is open.

Yes, thanks for taking the question.

I wanted to ask about.

If we think about the hilltop strategy here and sort of.

We're basically trying to.

No sort of redesign sort of the healthcare delivery experience for consumers here in this case.

But that's a trend that we're seeing elsewhere and out there we have a number of.

Private companies that have redesigned primary care experience.

For for employers and their members and their employees basically.

And we think when we think about the Cvs strategy here.

Is this something where we're going to have to invest more heavily in terms of the internal sort of infrastructure basically to make more higher end experience or or do you think in the future as we think about different types of people, who will be going to the health clubs are it will be stratifying sort of population types that will want to go to a cvs versus want to have a different experience trying to trying to think about how we should think about the market sizing up the opportunity here.

Yes, Charles it's Larry and I guess couple of points around that first from a capex point of view in terms of.

The Buildout is.

As we've said in the past.

We're able to re purpose.

I'll call it retail real estate capital that we've used in the past too.

The the growth of the health club concept so.

That is.

That is not.

Concern in terms of an additional cost point of view.

The second point embedded in your question is if you think about the assets that we have assimilated.

We're going to be able to create a more seamless experience than what may exist in the marketplace.

When you think about the role that.

Our health care benefits plays from.

A plan design and you know the role that.

PBM place and then obviously that all comes together as a community so.

Yes, we think that that.

Will create an advantage for us again.

Potential standalone competitors and it.

And it goes back to you know to the earlier point, where I think thats, where there is growing interest in terms of.

How we can work together.

In terms of.

The imbalance that are coming in from.

From other potential partners.

I think your third point is look as we think about the economics of that model beyond the built out obviously, we'll do that with the same financial discipline that we've done with anything else acknowledging that as Eva Eva pointed out you have.

Three value drivers in there you have the value of the health club as a standalone business entity.

You have the value that's created in terms of reducing medical costs that.

Accrues to health care benefits and then you know the value that is created in an open platform I'll call. It reseller model, where we can partner broadly with others.

That's helpful and if I could just one follow up.

I'm not sure you touched on it but obviously the the Senate Finance Committee passed.

This can be their version of the bill.

With some.

Pulling some significant changes in the part D program just wanted to get your thoughts on how you view those changes do you think that that will.

Create savings for seniors, who are struggling with out of pocket costs. Thanks, and so the impact for you guys. As you think about the the plan.

The program design change. Thanks, Yes, Charles look there are a lot of Oh proposals across.

Both you know both chambers of Congress. If you will at this point and you know first of all we share the goals and objectives.

Reducing healthcare costs, reducing drug costs further, okay, and reducing consumers out of pocket costs and.

We certainly advocate for those that we believe will in fact enable that you know to your point there absolutely are tools that have been used in the private sector and the commercial business as well as your Medicare part D. that.

Can be applied more broadly in the market and you know I would say that it is that you know as it relates to drug pricing. It validates the role of the PBM It actually expands the tools that.

We have been demonstrated to reduce drug costs. So a I would say on balance we're encouraged.

By the proposals that we're seeing in terms of.

Helping us do more not less.

Great. Thank you.

Our next question comes from the line of Kevin Coyne, Joe from U.B.S. Your line is open.

Hi, Thanks for taking my questions are you do you have any expectations.

For firemen or what are your expectations for pharmacy reimbursement in the second half of the year do you expect it to remain sort of stagnant or flat are you expecting any changes to that.

Hi.

Hi, Kevin. This is this is Eli I would say, we expect no changes from what we've communicated previously and as Weve been trending through the year.

Okay.

There's a question earlier about flu and I was thinking about this in terms of if we were to have a very.

Severe flu season.

When we think about the entire enterprise of Cvs would it be a positive or negative.

Given maybe the increased costs, but at the same time potentially increase sales through the pharmacy PBM whatever but how would you. When you think about that how would you think about it in terms of the enterprise.

Kevin I think it becomes.

It there become degrees of relativity in that question and.

You know I would say that it could end up falling both ways, depending on where you put that on the relative scale. My point earlier as you know perhaps different than standalone competitors.

We've got a natural hedge.

In our enterprise recognizing that.

We could have.

Edwin in one area and its a tailwind.

And another area and that provides a point of differentiation.

Yes, the other way to think about it too is it would depend on hospitalization because if they are significant hospitalizations and it would.

Tend to be higher medical costs, which would outweigh the pharmacy script, but I think if it wasnt hospitalizations it it might be could be potentially like Larry said net neutral.

Great well. Thank you so much guys.

All right. Thanks, we'll take two more questions. Please.

Thank you. Our next question comes from the line of Matt Borsch from BMO capital market. Your line is open.

Yes. Thank you.

I was hoping you could look I realize it's way too early for guidance for 2020, but when we think directionally about script volumes and the strength.

That you've been able to generate over at least the last couple of years do you think you can continue that in 2020, I mean, you talked to a number of wells in particular.

Getting on more.

Networks and revealed does a lot for that and and also medication adherence do you have further to go do you think you continue with this sort of rate.

Hi. This is Matt. This is this is either I'll start I'll go back to the comments that that we made at our Investor day, and we do continue to see script growth as a as a key driver of our expected performance.

And with our clinical services, we've been gaining market share with our rollout of the health club, we continue to expect to see that as a as an overall tailwind.

Now this is Kevin I'll take one piece of color to the adherence opportunity is still very large for us and for the industry.

Reports are that up to half of people, who beginning maintenance medication will not actually beyond that medication a year later due to a host of reasons forgetfulness.

Cost for some and we're doing a lot to help save money for our customers to address the cost barrier and helping them with the forgetfulness through programs like home delivery and our script that program. So we see continued strength.

And if I could ask one sub question I think your largest competitor is closing 200 stores in the U.S. you know those locations is that something that you could benefit from certainly in any material way.

Yeah, Ralph where we saw the announcement this morning, and you know we saw as part of that announcement the locations were not disclosed.

Okay. Thank you.

And our final question today comes from the line of Ralph Giacobbe from Citi. Your line is open.

Thank you thanks for squeezing me in.

I guess the enrollment number specifically on kind of the commercial risk market have been under pressure for a little while as we head into and maybe get more clarity on sort of the selling season on the medical side for 2020 can you just given to give us any color on whether or not you expect that trend to sort of stabilize or maybe improve and then how much of the value prop of the combined entity is sort of resonating or if it's just too early to tell at this point.

So.

Ill wrap I'll talk to the Tony Tony selling season.

In the National account space.

It's been a long season this year.

We still interestingly enough have we're in active discussions with some very large customers on new business, we still have some large renewal.

So it's really hard to predict what.

Excellent counsel look like for 2020 at this point I would say the same thing about our group Medicare business.

Our pipeline is still active it's a very late season, we have had some wins in our group Medicare business and we also were able to successfully retain one of our largest out to bid.

Tyree medical account and we were able to do a full replacement there. So we feel good about that.

And we don't anticipate any significant terminations in our group Medicare business.

So that's what that's what I'd comment on.

Season right now.

Okay. Thanks, and just one more quick one could you give us more of a sense of how the long term care business performed in the quarter.

And any detail on sort of underlying earnings power I guess for that business at this point and just how you're thinking about that segment relative to the to the broader strategy. Thanks.

Yes. So this is John I'll take that question. So we continue to make progress with Omnicare as Eva said, we are ahead of plan.

Our service is improving that was a big opportunity and our clients see it and are pleased with our progress as we are out competing for new business in the marketplace. I would say we are winning more than we have historically one over the last few years.

And our retention of our existing business is improving and thats, primarily due to our improved service, but it's not where we want it to be and we're continuing to work on that and we're also finally, making good progress on the on managing our costs. So we have more work to do we continue to see opportunity to grow an independent and assisted living and our differentiated offerings in that space are helping us win in that part of the market.

Okay.

So thanks, John and just as a recap where at the midpoint of 2019 and.

First we're very pleased with the strong financial results. We have delivered in the first half of the year. They they are demonstrating our ability to successfully execute on the priorities that we established in response to industry headwinds second it's still very early in our transformational journey, but I think you can see we're working quickly and the development of new products and services that will transform the consumer health experience and.

You are seeing tangible signs of those efforts we've talked about that this morning, its summarized in our slides and finally all of this provides provides and gives us the confidence that we will be able to realize the potential of our innovative and powerful new business model.

Delivering enhanced value to our clients the consumers, we serve and certainly our shareholders and we'll look forward to talking more about that in the quarters to come.

So with that thanks again for joining us today and have a great rest of the summer.

This concludes today's conference call you may now disconnect.

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