CVS Health Corporation (CVS) Q2 2011 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the CVS Caremark Second Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, August 4, 2011. I would now like to turn the conference over to the Senior Vice President of Investor Relations, Ms. Nancy Christal. Please go ahead.

Thank you, Frank. Good morning, everyone, and thanks for joining us today. I'm here with Larry Merlo, President and CEO; Dave Denton, Executive Vice President and CFO; and Per Lofberg, President of our PBM business. [Operator Instructions] As a reminder, we posted slides and supplemental financial schedules on our website this morning and summarized the information on this call, as well as some key facts and figures around our operating performance. This morning, we'll also discuss some non-GAAP financial measures in talking about our company's performance, namely free cash flow, EBITDA and adjusted EPS. In accordance with SEC regulations, you can find the definitions of the non-GAAP items I mentioned, as well as the reconciliations to comparable GAAP measures on the Investor Relations portion of our website. As always, today's call is being simulcast on our website, and it will be archived there following the call. Please note that we expect to file our Form 10-Q by the end of day today, and it will be available through our website at that time. Now before we continue, our attorneys have asked me to read the Safe Harbor statement. During this presentation, we'll make certain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. Accordingly, through these forward-looking statements, we claim the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. We strongly recommend that you become familiar with the specific risks and uncertainties that are described in the Risk Factors section of our most recently filed annual report on Form 10-K and that you review the section entitled Cautionary Statement Concerning Forward-looking Statements in our recently filed quarterly report on Form 10-Q. And now I'll turn this over to Larry Merlo.

Well, thanks, Nancy, and good morning, everyone. I am very pleased with our second quarter results, which came in at the high end of our guidance. We reported adjusted earnings per share from continuing operations of $0.65 with the PBM segment in line with our expectations, and the Retail segment exceeding our expectations, benefiting from solid expense control and higher-than-expected generic utilization, positively impacting our gross margin. Additionally, we generated more than $800 million in free cash flow this quarter and $2.4 billion year-to-date. So we are very confident that we will generate between $4 billion and $4.2 billion for the full year. Now taking into account our solid year-to-date results and our confidence in the remainder of the year, we are narrowing the 2011 guidance range. We now expect to deliver adjusted earnings per share from continuing operations of between $2.75 and $2.81 compared to our previous guidance of $2.72 to $2.82, and Dave will provide full details on our guidance during his financial review. Now before getting into the business update, I want to give you our perspective on the recent PBM industry news. Many of you have been asking about the implications of 2 of our largest peers combining into one company, what this might mean for CVS Caremark and the competitive landscape in the prospects of that transaction obtaining FTC approval. Now I'm not going to comment on the regulatory implications of other company's acquisition announcements. We'll certainly leave that up to the regulatory agencies. But assuming the proposed transaction is completed, I am more confident than ever that CVS Caremark can and will effectively compete in this vibrant industry. That's because we believe that our suite of assets uniquely positions us to assist payers in controlling costs while enhancing member access and improving health outcomes. And with the evolution of U.S. health care to more consumer-directed care, our multiple consumer touch points make us best positioned to promote cost-effective and healthy behaviors. And the success that we're having in both the 2011 and '12 selling seasons clearly demonstrates that our model is resonating with payers. So I'm confident that we can continue to gain share, add value for our clients and their members and deliver healthy long-term returns to our shareholders. So with that, let me turn to our business update, and I'll start with the PBM and address our progress on each of the 5 key elements of our PBM plan for growth that we outlined earlier this year. The first key element of that plan is to achieve continued momentum on new business wins and client retention. As you know, we had a terrific 2011 selling season, highlighted by the landmark long-term contract with Aetna, and we also had solid retention at more than 96%. And the 2012 selling season has also been very successful to date. More than 50% of the contracts scheduled for renewal for '12 has been completed, which is right in line with where we were last year at this time, and our retention rate stands at 98%. Our renewals include the $4 billion FEP Retail contract, AT&T and General Electric among others. Now we've also had some significant wins. As of mid-July on a 2012 impact basis, we've won $4.8 billion in net new business, including the FEP mail and specialty contracts, CalPERS in the state of Hawaii. Now in addition to the $4.8 billion in net new wins, the PBM contracts associated with our Universal American business that we just acquired, plus Universal American's MAPD business are expected to contribute about $5.5 billion in incremental revenue in 2012. So as we sit today, we'll see net new '12 revenues in excess of $10 billion. And while many of the largest contracts out for bid in 2012 have been decided, there are still opportunities for new business, and we will certainly keep you posted on our progress. So obviously, we're all very pleased with the progress that we've made in both the '11 and '12 selling seasons and our significantly improved client retention rate. And as we said on our last Analyst Day, we're focused on retaining and adding lives while maintaining a rational pricing strategy. That's because we believe that driving the top line will offset the usual margin compression associated with renewals in this sector, and will be an important component of successfully driving our operating profit growth over time. Now the second key element of our PBM growth plan is to continue to develop and upsell our unique clinical offerings, and we've made a lot of progress in this area. For example, our Pharmacy Advisor program for diabetes that was launched in January now has 11.2 million active members with another 1.3 million members committed for 2011 implementations. So we'll have approximately 12.5 million active members by year end, and we have an additional 700,000 members already committed for next year. We're also excited about our ability to offer Pharmacy Advisor to Aetna's 8 million commercial lives as they begin the migration to our systems in 2012. Since the launch, we have delivered over 370,000 live counseling messages to members, and these messages are having an impact with positive trends emerging in key adherence and gaps in care measures. We expect to build on our experience in '11 and launch Pharmacy Advisor for 4 key cardiovascular conditions in 2012, and we'll continue to expand to other conditions over time. The third key element of our plan, to aggressively drive growth in mail choice and generics. Our Maintenance Choice population now totals 655 clients, representing 8.2 million lives committed to implement by January 12. And this number includes recent contract wins opting for Maintenance Choice, including CalPERS, along with other employer segment wins. We continue to see a shift toward new clients, as well as former voluntary mail programs adopting Maintenance Choice. In fact, 54% of the lives adopting Maintenance Choice in 2011 came from voluntary mail plans compared to only 16% in 2009, and let me provide some additional interesting statistics. For former mandatory mail clients adopting Maintenance Choice back in 2009, when the program was first initiated, 90-day utilization has increased more than 250 basis points. While mail to retail migration continues to grow in the second year of the program. And I think that speaks to how members value this choice. For former voluntary mail clients adopting Maintenance Choice, again back in 2009, we have seen 90-day utilization grow from the mid-30s to more than 65%. So there's no question that the Maintenance Choice product has been successful in broadening access, while reducing costs and improving prescription adherence. Now let me move on to generic utilization because we continue to encourage the adoption of plan designs to improve generic dispensing rates. Approximately 230 clients, representing about 6 million lives, have adopted generic Step Therapy plans. And clients with high-performance generic plan designs have seen a 360 basis point improvement in their GDR, nearly 4x the increase across our book of business over the same time frame. And given our strong alignment, these generic Step Therapy programs translate into significant savings for clients and enhanced profitability for our business. And we continue to enhance our Step Therapy offerings, adding 6 new drug classes last month, again helping to differentiate us in the marketplace and drive even more adoption. The fourth key element of our plan is to focus on the high-growth areas, Medicare Part D, Specialty and Aetna. Now as you know, we completed the acquisition of Universal American's Med D business during the second quarter, and the integration is well underway, and the results this quarter met expectations. Yesterday afternoon, CMS released the low-income benchmark results for the 2012 Medicare Part D competitive bidding process. And based on the bids we submitted, we were below or within de minimis in all 33 of the 34 regions where we qualified for 2011. And obviously, we're very pleased with these results. Now the total number of beneficiaries that will ultimately be enrolled in our PDP plans during the 2012 year will not be known until we find out specifically how many low-income subsidy members we are assigned for the '12 plan year, along with learning the results of the open enrollment period at the end of the fourth quarter. So more to come there. But as we've discussed, we view the Med D business as a significant growth opportunity over the next several years, especially in light of the number of employers who may decide to shift their retirees to an EGWP program or simply into the open PDP marketplace. Another area of significant opportunity is the rapidly growing Specialty Pharmacy sector. And during the second quarter, our Specialty revenues grew a very healthy 19.9%, driven by healthy underlying growth, as well as the addition of the Aetna Specialty business. Now on our last earnings call, I spoke about our new medical pharmacy management program that will be available to clients beginning in January of next year. And the offering provides a comprehensive solution for oncology patients and providers in an area that typically falls under the medical benefit and has been largely unmanaged. So we're fully engaged with our partner, New Century Health, along with a few candidates for pilot launches this year. And we have seen significant interest from our broader client base for potential launches beginning in 2012. The third high-growth area is capitalizing on the long-term potential of the Aetna contract. Now the implementation phase is ongoing, and we expect the systems migration to begin in 2012 and continue through Q1 of 2013. We began dispensing specialty prescriptions from CVS Caremark pharmacies in April, and that transition is essentially complete at this point. And we recently began dispensing Aetna mail prescriptions through CVS Caremark facilities, a transition that we expect to complete by year end. Importantly, the sanctions on Aetna's Med D business were lifted. So they are, once again, free to market and grow their Medicare business, and we are excited about the opportunities to support them in that regard. Furthermore, we continue to work closely with Aetna to build their messaging around their value proposition for 2012 and beyond. Our goal is to help them service their clients and build their client base by providing innovative solutions that deliver low-cost, high-quality care for their members. So overall, the Aetna relationship is progressing and going very well. And then the fifth and final key element of our plan is to execute successfully on the PBM streamlining initiative. And our efforts here are proceeding to plan, and we continue to expect to deliver over $1 billion in related cost savings from 2011 through 2015. And you may recall that our initiative is focused across 3 main categories. The first is streamlining operations to improve productivity. Second is rationalizing capacity, and then the third is investing in technology. So in regard to streamlining operations, we completed several productivity improvement projects during the quarter. These included enhancements to our Customer Care IVR system, as well as the implementation of a new order entry system in the regional order centers that support our mail-order pharmacies. With respect to rationalizing capacity, we closed one call center during the quarter, 5 specialty mail-order pharmacies and the evaluation of capacity across the business will be an ongoing process, especially given the amount of new business we have won for 2012. And then in regard to investing in technology, we continue to make progress on upgrading our technology infrastructure. The upgrades will enable rapid implementation of new and unique product offerings while allowing us to reduce costs over time. And as I mentioned last quarter, we concluded the first wave of platform migrations with 0 disruption to our clients and members. And the work involved in the second wave of platform migrations is well underway and on track. So I'm confident that the platform migration will be a win-win for both us, as well as our clients. So in summary, we're pleased with the progress that's being made. In addition to the anticipated benefits from this 5-point plan for PBM growth, 2012 also begins the generic wave, which will carry through the next several years with about $100 million of branded products coming off patent between now and 2016. So I remain very confident that 2012 will be the year that our PBM breaks trend and demonstrates healthy operating profit growth. We have the right people supported by the right technology and processes to deliver the full value of this business over time. So with that, let me turn to the Retail business, which continues to grow in at a healthy pace and gain share. Our same-store sales increased 2% in the quarter. Sales came in at the low end of our guidance range due to higher-than-expected generic utilization, as well as our disciplined approach to managing front store sales. As we have often discussed, we are relying on our ExtraCare loyalty program to drive profitable sales as opposed to what we call empty sales, sales without a profit flow-through. So while sales were at the lower end of our guidance range, I'm pleased with our performance since we achieved higher front store margins in the quarter and a record second quarter retail operating margin. Now front store comps increased 0.8% in the quarter. As expected, front-end comps were positively impacted by approximately 45 basis points due to the Easter shift. We saw strength in a number of categories, especially cold and allergy, consumables, store brands. As a matter of fact, store brand and proprietary products now make up 17.2% of front store sales in the quarter, up 70 basis points from last year as consumers remain value conscious. Our Pharmacy comps increased 2.6% with script comps up 1.9%, and that is reflecting 90-day scripts equaling 1 script. When you convert those 90-day scripts into 3 scripts, our script unit costs increased a very healthy 4.2%. And our pharmacy share in the markets in which we operate grew approximately 40 basis points versus the prior year. Our Pharmacy comps were negatively impacted by approximately 170 basis points from new generics in the quarter. And in addition, Pharmacy comps benefited from the continued growth of Maintenance Choice, which added approximately 160 basis points on a net basis. Our Retail adherence program that we internally refer to as the Patient Care Initiative is now in its fourth year, and it continues to deliver results that are a win for our patients and a win for CVS Caremark. In the first half of this year alone, our Pharmacy teams performed nearly 30 million adherence interventions across our store base, and the results are pretty compelling. With first-fill counseling, patients are 15% more likely to get to the second fill. With adherence outreach, patients are 25% more likely to obtain their refill. And with new script pick-up reminders, 20% of scripts are picked up that may have otherwise been returned to stock. So in combination, these adherence initiatives are helping our patients stay compliant, resulting in healthier outcomes. Now let me update you on our store clustering initiatives, which have helped fuel both the top and bottom lines. We're now into the second year for the urban rollout, and we have plans to complete more than 200 stores this year on top of the approximately 200 we did last year. Our urban stores continue to post very strong results, and our test earlier this year in California yielded especially exciting results. So we expect California to be a key expansion market for our urban layout later this year. As for our real estate program, we opened 59 new or relocated stores. We closed one, resulting in 40 net new Retail stores in the second quarter, and we remain on track to open approximately 150 net new stores for the year, delivering Retail square footage growth of 2% to 3%. Now before turning it over to Dave, I also want to update you on our progress at MinuteClinic, which continues to see healthy growth. In fact, in recent weeks, we achieved a tremendous milestone surpassing 10 million patient visits since the company's inception. In the second quarter, MinuteClinic revenues increased a very strong 28%, and we are on track to break even on an all-in basis by the end of this year. We opened 31 new clinics in the quarter, 39 year-to-date, and we expect to add about 100 clinics annually over the next 5 years, which should position us well to play an important role in providing care to the 32 million newly insured beginning in 2014. So as we sit today, we operate 598 clinics in 26 states in the District of Columbia. And with this continued expansion, MinuteClinic will increase its role as a collaborator in developing integrated health networks and accountable care organizations. And over the past couple of years, we have formed some valuable affiliations with a number of leading health systems. Since the end of the first quarter, we have added 5 strategic affiliations with Advocate Health Care and Advocate Physician Partners, the Inova Health System, Ohio Health, Cleveland Clinic Florida and the Henry Ford Health System, enhancing the high-quality, affordable health care services provided to patients and communities across the country. These affiliations encompass collaborations with health system medical directors, clinical program development and eventual integration of electronic medical records. So I'm very pleased with our continued progress at MinuteClinic. So with that, I'll turn it over to Dave for the financial review.

Thank you, Larry, and good morning, everyone. Today, I'll provide a detailed review of our second quarter financial results. I'll also review our 2011 guidance for the full year and provide guidance for the third quarter. I'll start with an update on our capital allocation program. First, we have paid approximately $340 million in dividends year-to-date. And keep in mind that we raised our quarterly dividend by 43% back in January. So based on our expectations, we anticipate a payout ratio for 2011 of between 19% and 20%. Second, during the quarter, we repurchased 13.3 million shares at a cost of approximately $504 million. And year-to-date, we have repurchased 27.5 million shares at an average cost of approximately $35.30 per share, and we have spent approximately $1 billion. So with about $1 billion left to go, we are well on our way to completing the $2 billion buyback authorization for this year. Now between dividends and share repurchases, we have returned over $1.3 billion to our shareholders in the first half of 2011. And enhancing shareholder returns remains the high priority for us at CVS Caremark. Given our strong free cash flow outlook, our ability to return significant value to our shareholders should continue now and well into the future. As Larry said, we expect to generate between $4 billion and $4.2 billion of free cash this year. And in the first half of this year, we have generated approximately $2.4 billion, an increase of more than $1.5 billion over the same period last year. Beginning last year, we renewed our focus on enhancing working capital performance, and as a result, we are just beginning to see the true cash flow power of the company. While adjusted EPS had decreased slightly year-to-date, our free cash flow has increased a staggering 180%, adding $1.5 billion in the first 6 months of this year. This significant increase is driven primarily by improvements to our use of cash within inventory and accounts payable. As you know, across our Retail chain, we set $1 billion inventory reduction target for 2011. And I'm happy to report that during the second quarter, we reduced our related inventories by another $325 million, bringing the year-to-date total to more than $550 million and placing us more than halfway to achieving our $1 billion inventory reduction goal for the year. You can see the improvements we've made in our accounts payable and inventory on the balance sheet and in our strong cash flow. Inventory days within the Retail segment is more than 2 days better than it was at the end of last year, and DPO has improved by 1.5 days. So we are confident that we can meet our targets for 2011 while our teams lay the groundwork for additional improvements in 2012 and '13. Year-to-date, gross capital spending was $710 million, down from $866 million last year, mostly due to timing of store construction costs, which will be more back-end loaded this year. Given sale-leaseback activity of $11 million in the first half, our net cap spending so far this year has been $699 million. Turning to the income statement. Adjusted earnings per share were $0.65 for the quarter, at the top of our guidance range. GAAP diluted EPS came in at $0.60 per share. On a consolidated basis, revenues in the quarter increased by 11% to $26.6 billion. And drilling down by segment, net revenues grew by 23% in the PBM to $14.6 billion. The majority of the increase from last year was driven by the addition of the Aetna business to our book. PBM Pharmacy network revenues in the quarter increased 28% from 2010 levels to $9.7 billion while Pharmacy network claims grew by 36%. Total mail choice revenues increased 16% to $4.8 billion, while mail choice claims expanded by 12%. Our overall mail choice penetration rate decreased by approximately 330 basis points versus last year to 22.6%. This decrease was driven almost entirely by the addition of Aetna and the Universal American Med D business, both of which have lower mail penetration rates than our average book of business. In the Retail business, we saw revenues increase by 3.6% to $14.8 billion in the quarter. This increase was primarily driven by our same-store sales increase of 2%, as well as net revenues from new stores and relocations, which accounted for approximately 150 basis points of the increase. Pharmacy unit costs increased 4.2% on a 30-day supply basis. Pharmacy revenues continue to benefit from our Maintenance Choice product. As Larry noted, Maintenance Choice had a net positive impact of approximately 150 basis points on our Pharmacy comps this quarter. Additionally, a higher generic dispensing rate negatively impacted Pharmacy revenue growth. Now turning to gross margin. The consolidated company reported 19.1% in the quarter. While gross margin contracted 180 basis points compared to last year, it improved 75 basis points sequentially versus Q1. Within the PBM segment, gross margin was down about 195 basis points versus last year, but improved approximately 45 basis points sequentially. The decline versus last year's second quarter mainly reflects the price compression associated with contract renewals, including the one-year extension of the FEP contract, which became effective in September of last year. It also reflects the impact of the addition of the Aetna business. Partially offsetting this was the positive margin impact from the 310 basis point increase in the PBM's generic dispensing rate, which grew from 71% to 74.1%. Gross margin in the Retail segment was 29.7%, an increase of approximately 20 basis points from last year and approximately 130 basis points sequentially. Versus last year's second quarter, gross margin was positively impacted by increased generic dispensing rate with Retail GDRs increasing by 290 basis points to 75.6%. The benefits from our various front store initiatives and increased store brand penetration. These positive factors were mostly offset by continued pressure on Pharmacy reimbursement rates. The growth in Maintenance Choice, which compresses Retail gross margin, but helps the overall enterprise and the continued shift in the mix of our business toward Pharmacy. Overall, operating expenses as a percent of revenues improved by approximately 110 basis points versus the second quarter of last year. The PBM segment SG&A rate improved by approximately 5 basis points to 1.9%. This was primarily due to the expense leverage gained by the addition of a large Aetna contract, which was partially offset by costs related to streamlining initiatives, as well as the cost related to the Universal American Med D acquisition. The Retail segment also saw nice improvement in SG&A leverage, which was largely driven by store-level operating efficiencies and reduced legal expenses. SG&A as a percent of sales improved by approximately 50 basis points to 21.4%. And within the Corporate segment, expenses were $162 million or less than 1% of consolidated revenues, roughly in line with last year. The increase in expense was primarily related to higher payroll and benefit-related costs and increases in depreciation. And with the change in gross margin more than offsetting improvements in SG&A as a percent of sales, operating margin for the total enterprise declined by 65 basis points to 5.6%, better than expected. Operating margin in the PBM was 3.1%, down about 190 basis points, while operating margin at Retail was 8.4%, up about 70 basis points, and at a record high for us in the second quarter. Our EBITDA per adjusted claim was $2.49 in the quarter, up sequentially from the first quarter due to the seasonality of the legacy Med D business and the improving profitability as we move throughout the year, partially offset by the addition of the Universal American business. Retail operating profit, which makes up more than 2/3 of our company's overall operating profit, continued to demonstrate healthy growth. It increased approximately 13% and exceeded our guidance range. PBM profits decreased 23%, which was at the high end of our guidance range. And now going below the line on the consolidated income statement. We saw net interest expense in the quarter increase by approximately $13 million to $148 million, slightly higher than our expectations. And as I noted at our last earnings call, we incurred additional interest costs with the earlier closing of the Universal American transaction and the associated cash needs. Additionally, we placed $1.5 billion of senior notes, a portion with a 10-year term and another larger portion with a 30-year term. We decided to take advantage of the robust 30-year debt market and locked in long-term debt at historically, low rates. So the longer-term debt maturities increased our interest expense a bit, but it was an opportunity that we didn't want to pass up. Additionally, our effective income tax rate was 39.2% and our weighted average share count was 1.36 billion shares. Now let me touch upon our guidance for the full year of 2011. As we said, we've narrowed our guidance range. The tighter range obviously reflects the fact that we're halfway through the year, and our outlook remains optimistic. Adjusted EPS from continuing operations is expected to be in a range of $2.75 to $2.81, while GAAP diluted EPS is anticipated to be between $2.55 and $2.61. We fully expect to complete the $2 billion share repurchase authorization this year, and these ranges take this into account. For the PBM segment, we expect revenue growth of 23% to 24% and adjusted claims of approximately 895 million to 915 million claims. This estimate reflects our lower expectation for utilization in the back half of the year. This is consistent with the softer-than-expected utilization trends occurring throughout the industry. We are also assuming incremental start-up costs for our significant 2012 new business. As a result, we're tightening the range of the PBM operating profit and now expect it to decline by 7% to 9% for the year. Within the PBM, we continue to expect the significant decline in gross margin, partially offset by a modest improvement in operating expenses as a percent of revenues. About half of this year's gross margin erosion is due to the addition of Aetna, whose margins are lower than those in our typical book of business. Furthermore, our guidance includes approximately $100 million to $110 million or between $0.04 and $0.05 per share of PBM streamlining costs. Now this is a slight change versus our prior expectations and merely reflects the shift of some expenses into 2012. We still expect to incur expenses totaling approximately $200 million over the 2 years of '11 and '12, but more will occur in '12 than we previously thought. So we now expect our EBITDA per adjusted claim to be approximately $2.90 for the year. If we exclude Aetna, our EBITDA per adjusted claim will be approximately $3.30. Now for the Retail segment, we expect revenue growth of 3% to 4% and same-store sales growth of 1.5% to 2.5%. We've reduced our expectations for the top line growth in the stores as our GDR is now expected to be stronger than we had planned for the remainder of the year. So while revenues will be adversely affected by this, profit should benefit, and we now expect operating profit growth of 7.5% to 9% in the Retail segment. Gross margins now are expected to be relatively flat with moderate improvement in operating expenses as a percent of revenues given the deleveraging effect of higher generics. For the Corporate segment, we expect to see operating expenses in the range of $625 million to $640 million as we gain modest leverage against consolidated revenues. So given all of this, we expect to see a moderate decline in operating margin for the total enterprise. Revenue is expected to grow by approximately 10.5% to 11.5% with a significant decline in gross margins, partially offset by a significant improvement in operating expenses as a percent of revenues. Now this is after intercompany eliminations, which are projected to equal about 9.5% of combined segment revenues. We forecast net interest of about $585 million, higher than our initial guidance for the reasons that I noted earlier. Moving on, we expect a tax rate of approximately 39.2% and approximately 1.35 billion weighted average shares for the year as we execute our repurchases from the back half of the year to complete our current authorization. We expect total consolidated amortization for 2011 to be about $460 million, and when combined with depreciation, we project approximately $1.6 billion in D&A. We still expect gross CapEx to be in a range of $2 billion to $2.1 billion. This includes approximately $170 million of capital associated with the PBM streamlining project. With sale-leaseback proceeds anticipated to be between $550 million and $600 million, our net cap expenditures are expected to be in a range of $1.4 billion to $1.5 billion. And as Larry said at the start, we expect free cash flow to be in the range of $4 billion to $4.2 billion in '11 growing by over 20% versus last year. Now as we've demonstrated so far this year, we are keenly focused on enhancing our cash flow through solid working capital and CapEx discipline. The working capital improvements we've achieved and continue to drive, specifically within inventory and accounts payable, will continue to fuel our free cash flow performance, building upon our strong year-to-date results. This performance is expected to yield solid cash flow from operations in the range of $5.5 billion to $5.6 billion for the year. Now turning to the third quarter. We expect to deliver adjusted EPS from continuing operations in the range of $0.66 to $0.68. GAAP diluted EPS is anticipated to be between $0.61 and $0.63. Growth in enterprise-wide revenues is expected to be between 10.5% and 12.5%. For the PBM segment, we expect operating profit to decline by 2% to 5% with revenue growth of 23% to 26%. Like the first half of the year, gross margin in the third quarter is expected to decline significantly due to the impact of renewal pricing on FEP and other contracts, the addition of the Aetna contract and the streamlining effort. However, we will cycle the impact of the FEP renewal pricing by the end of August, resulting in easier comparison throughout the remainder of the year. Additionally, we are expecting the normal progression of increasing profitability as we move into the third quarter in our Med D business. And of course, the net impact of the streamlining cost and benefits are expected to improve as the year progresses. As a result, the first quarter was the weakest quarter of the year for the PBM, and we expect the fourth quarter to be the strongest quarter of the year. And in fact, the improvement from the third to the fourth quarter is expected to be the most dramatic sequential improvement of the year for the PBM. For the Retail segment, we expect another solid quarter with operating profit improving 6.5% to 8.5%, revenue growth of 2.5% to 4% and same-store sales growth of 1% to 2.5%. And so with that, I'll turn it back over to Larry.

Okay. Thanks, Dave. And before opening it up for questions, I wanted a couple of minutes just to talk about the timing of our 2012 guidance and our Analyst Day. Now given the timing of our internal budget and planning cycle, we typically have our financial plan in place late in the year for the upcoming year. And as a result, and as you know, we provide guidance for the upcoming year on our fourth quarter earnings call in early February. Now I have certainly come to appreciate that visibility to our initial guidance for the upcoming year is an important factor in your investment decisions. So going forward, our plan is to provide the upcoming year guidance to you in December, once our plan is in place and earlier than we have historically. Now I've also given a great deal of thought to the timing of our Analyst Day, and I believe that it makes sense to reschedule our Analyst Day so that we can have a more complete discussion about our outlook for next year in addition to our usual deep dive on our strategies for long-term growth. And I think that one without the other is going to result in a meeting that won't be as good as we can make it. So instead of October 7, we will host our Analyst Day on the morning of December 20 at the Mandarin Oriental Hotel in New York City, where we will provide our 2012 guidance at that time. And while I know this may cause some inconvenience regarding your schedules, I hope you agree that this will allow us to have a more productive and successful meeting. So once again, our new date for the Analyst Day is Tuesday, December 20 in the morning, and we will send to you all the meeting details shortly. So with that, let me open it up for your questions.

[Operator Instructions] Our first question comes from the line of Larry Marsh from Barclays Capital.

Just really just a couple of quick things on the PBM marketplace. I know you're not commenting specifically on the merger, but big picture follow-up and Per at the Analyst Meeting last October cited growth opportunities in the PBM market led by Med D, but also suggested direction of margins could be down given mix of customers and renewals as you've also communicated today. Some would suggest that recent industry events may be confirming that overall view. Do you still think that's the right directional commentary given the margin pull down we've already seen? And do you think a contributing factor of that is the additional reporting requirements to health plans for their MLR calculations going forward. And then I have a quick follow-up.

Well, just to the last part of your point there, Larry, I think it's way too early to really make any projections about what the impact of the MLR reporting is. It's really just now beginning to go into sort of into practice. So we're working with our health accounts to really provide the necessary reporting. And in the first quarter of 2012, they will be required to provide that the MLR reporting, of which Pharmacy will be a small component. So time will tell what that really would mean. So it's really kind of premature to talk about that now. I do think that the macro trends that you alluded to in the early part of your question in terms of top line growth and earnings growth still is very much in play. I mean, we see continued opportunities to grow our revenues at a higher rate than we grow our profits, and we don't really see any kind of -- any change to that outlook.

And Larry, I think, just adding one component to that. We're focused and excited by the opportunities that we have to bring products and services to market that can make those lives more productive and profitable over the relationship that we build with that prospective client, and that's what our focus is.

Okay. And then just a quick follow-up. Congrats on where you came in on the low income subsidy figures. Now you've talked about the importance of touch points in the consumer and Med D, obviously, you're the #2 player in that marketplace. But clearly, some of your biggest competition are health plans, some of whom are your important customers. So in a world, as you think about it of increased consumer touch points with more corporates perhaps moving their retirees to Part D, how do you balance the 2? And is it your view that you'd rather be a direct PDP that running a service function for a health plan who has their own PDP?

I believe we can really do both successfully, Larry. We support today probably somewhere around 50 health plans around the country for their Medicare Advantage and PDP businesses, and we have, as you alluded to, pretty substantial PDP business ourselves with about 3-plus million retirees. So in many ways, both of those businesses rely on an infrastructure that is very dedicated to the Medicare marketplace, and we have the scale to really build systems that are able to handle both of those market segments. And I think both of them are going to be significant growth drivers for us going forward.

Our next question comes from the line of John Heinbockel with Guggenheim Securities.

Larry, 2 things I wanted to just drill down on. One, PBM positioning and marketing. And then two, on the front end a bit. But on the first one, if you look at the new landscape okay, with the merger and then with the UNH moving in house, how do you think the Caremark message and differentiation to the customer is different or is it better in the landscape we're moving to? Is it easier to get differentiation? Will your message be better or is it more difficult in that environment? I'm sure you've given that some thought.

Yes, John. I think we all believe that our model resonates very, very well in the future landscape. For all the reasons that we've touched on many times that you think about the evolution of the health care system to more consumer-directed care, we have more touch points with patients than anyone else. And our data is showing that we can better impact adherence and close gaps in care than anyone else. And so we're excited with the prospects that we have. And by the way, I think that when you look at the success that we've had this year with our selling season that is certainly resonating with payers.

Just to kind of add one thing going back to Medicare that we spoke about a minute ago, if you look at the Medicare business and the Medicaid business quite candidly, which are both important growth segments if you look out over the next several years, those 2 market segments really require a more open model than has been the kind of the case in the traditional PBM business, where there is a lot of opportunities to create restrictive plans, putting a lot of emphasis on mail order as the principal dispensing mechanism. So I think we're very well positioned to deal with a much more sort of open and consumer-directed health care environment going forward.

All right. And then with respect to the front end, look, I think it's terrific to be disciplined. You were clearly doing that. Does there come a point at which when you look at the comp spread versus your competitors that the spread bothers you or it's indicative of maybe not share loss, but not taking advantage of opportunity out there? Just talk about that, the spread itself. And then secondly, I assume you'd say the reduction of inventory has not negatively impacted comps. That's not a reason for the spread?

Yes, John. Let me talk about the spread, first of all, because I think at the end of the day, our results speak for themselves that we have margin expansion, SG&A leverage and operating profit expansion and growth. So we certainly delivered the bottom line on the Retail side of the business. And I acknowledged on our last earnings call that we are making a conscious decision to focus on profitable sales growth in the front end of our business versus chasing sales that would not have a margin flow-through. And the second quarter, we did just that. We are using ExtraCare, as we've often talked, as our principal vehicle for executing that strategy. I think if you look in the quarter, you saw a couple of things. ExtraCare examples like the gas car promotions, which we view as being successful, millions of $10 gas cards have been earned. We have a program called Money Trashers, which has resulted in the redemption of ExtraBucks increasing from 49% to 55%. And I would point out that these are programs that provide instant gratification to the consumer. You don't have to count points or track shopping trips to get a reward. At the same time, we're reducing our dependency on our circular. And actually, in the second quarter, our year-over-year page count actually decreased 13%. So we look at it as getting more share of wallet from our loyal customers, and those sales are profitable sales. Now we may be losing some cherry pickers along the way, but those are largely, as we know, unprofitable sales. So, John, I think back to your question about how do we think about it going forward, we're constantly evaluating the success of our programs, along with market conditions. We'll make some tweaks where it make sense and where we see opportunities. But we intend on staying disciplined to our philosophy of driving profitable sales. And John, in terms of your inventory question, that is not having an impact on our in-stock levels or creating sales issues. As a matter of fact, when we look at our in-stock level versus the first quarter versus last year, it's essentially on par. And when you look at the out of stocks that we do have, between 70% and 80% of them are attributable to supplier issues, and those have been well documented out in the marketplace. And at the same time, we, through our customer service metrics, we track the consumer's level of satisfaction with being able to find everything that they're looking for. And we have seen a dramatic reduction in out-of-stock complaints year-over-year. So the inventory initiative is not having an impact on our sales performance.

And just finally, do you think food and gas inflation is -- you have a fairly broad demographic, but do you think that's adversely impacting people's ability to spend in your stores?

Well, John, I think we've always talked about ourselves as being recession resistant, not recession proof. And we believe the consumer continues to be wary and looking for value. And we've seen evidence that where she has traded down from a premium product to a less expensive product. And in some cases, the store brands, which has benefited the business.

Our next question comes from the line of Lisa Gill, JPMorgan.

I had a couple of quick questions first on the PBM. Per, can you maybe just give us an idea of what's still left as far as opportunities go for 2012? Do you have a ballpark number of decisions that haven't been made that are obviously not your book of business?

Well, I'm not sure I can give you specific numbers. But basically, we're probably at the tail end of the season as far as really large customers are concerned. There are still some out there that we expect will kind of make decisions within the next month or so. Then the kind of the second half of the year, we tend to shift into the renewals and the bidding on smaller accounts. And we also have, of course, in the last quarter, the open enrollment period for Medicare. So those are going to be the growth drivers for the second half of the year.

And then just secondly, when we look at some of the renewals, AT&T, GE, as you called out, even my own organization, we have heard that Maintenance Choice played a sizable role and the decision around maintaining the relationship with CVS. Can you or Larry comment on what you're seeing around stickiness as it pertains to Maintenance Choice and how we should think about that going forward? And then I just had a quick follow-up for Dave.

Yes. I can certainly start from my perspective and then Larry can add to it. I do think that there is no question that this year, we did get some significant competitive differentiation as a result of Maintenance Choice. So either in terms of renewing customers that or even in some cases, some of the wins that we achieved were in part related to Maintenance Choice. You never know exactly the sort of the detailed equation why somebody makes a decision to go one way or another. But clearly, Maintenance Choice was a prominent aspect of the decision-making process in terms of the successes year.

And Lisa, I've had a chance to spend time with many clients and we've talked about this very issue. And I think what is resonating for many, acknowledging this program, started in 2009, is we now have the benefit of being added for a couple of years. And we can show, in a quantifiable fashion, the results of the program. And it's saving money for payers and consumers, and it's helping those patients stay more compliant with their meds. So it's a win across the board.

And then just a clarification. Dave, when you talked about the streamlining shifting from '11 to '12, you talked about $0.04 to $0.05, can you tell me what you previously had in the guidance? I just don't have it in front of me. So we can think about it from a modeling perspective. And I think the second component that would be new around modeling would be any of the implementation cost for '12 now that their selling season has been better than expected. Are they offsetting each other or are you seeing more of a benefit by shifting some of the streamlining to '12 versus '11?

Yes, Lisa, that's a great question. Previously, our guidance was $1.15 to $1.30. It is now essentially -- we lowered it a bit due to some of the subprojects. While there's some puts and takes in all the different subprojects, in general, some of the near-term projects are costing a little less than we had originally estimated. Yet some of the costs of the longer-term projects are just a little bit higher than what we thought. But I would say in general from an offset perspective, they more or less, the implementation cost and the shift in expenses related to streamlining cost more or less offset one another.

Our next question comes from the line of Edward Kelly, Credit Suisse.

Larry, I would like to touch on the front-end comps again. And I know you're talking about focusing on more profitable sales, but I guess I'm just a little confused, because when I look across the drug store industry today, it seems like baskets up across the board because we have some inflation rolling in. If that's true for you as well, I guess, it means that your traffic has been down. And I guess the question is, I mean, obviously, retailers don't want negative traffic. You're saying you're focusing on more profitable sales. Is that because historically, you haven't been as focused on that or is it because you're seeing your competitors are being more promotional and that's how they're driving their traffic? I'm just trying to connect all the dots here.

Yes. Ed, I think the answer to that lies in the fact that we see an opportunity to do that, again, using ExtraCare. And the fact that we believe that we can get a bigger share of wallet out of our most loyal customers, which is going to have a more profitable sales segment to it. I will tell you our traffic from the second quarter was flat. It wasn't down. And while we have seen -- while we've gotten notification of cost increases coming down the road, we have not seen them be in effect in the second quarter. So they are more second half related in terms of seeing the notification. So inflation did not play a big part in our front-end numbers in the second quarter. That said, we are getting a bigger share of wallet from our best customers. So as I mentioned earlier, when John had asked the question, there is no question that there's a fine line here, and that we're constantly evaluating how the programs are doing and making tweaks where it makes sense, and we'll continue to do that.

Okay. And second question for you, Larry, and maybe I read this wrong or heard this wrong, but you talked about growth in the PBM business and returning to healthy growth. And I don't think I've heard you say healthy historically in the past. Am I reading too deeply into this or do you feel better about this business going into next year than you did, let's call it, 6 months ago?

Ed, I think, you're reading too deeply into that. If I acknowledged in the ending comments, we're certainly not going to talk about 2012 at this point, but we will certainly be in a position in December to give a complete review of our outlook for 2012 at that point.

Okay. And just last question for you. Any thoughts on this whole dispute between Walgreens and Express Scripts? I know you've been down this road with these guys. It doesn't seem to make any sense that they would want to go through next year without each other. But I guess #1, do you see this as an opportunity for you on the current selling season because you're selling as a company that has some questions? And secondly, do you think major clients care about losing a large pharmacy?

With respect to the selling season, keep in mind that the dispute if it isn't resolved won't really play out until 2012. And I can't say that it's been a major factor in the discussions with both existing customers or the new prospects. It hasn't had a major effect.

Our next question comes from the line of Frank Morgan from RBC Capital Markets.

Two questions, one very high level. Have you received any feedback at all from any of your existing customers or potential customers with regard to how this potential merger might influence their future decisions? And then really 2 that are more specific, what are your longer-term targets on, with Aetna now on board, the mail order penetration rate? What are you really trying to target there over the long haul? And then the last one that's a specific, it's just the -- appreciate the color on the streamlining, how that's shifting over in some of the smaller dollar items not rolling back, but basically, specifically, what are the initiatives that you're looking at there that are moving around?

Well, I think with respect to the second part of your question about -- we certainly believe that there is significant room to expand the use of 90-day supply either through our mail-order pharmacies or the CVS retail pharmacies over the coming years, and that's a win-win for us and for our customers. So that will continue to be a focus for us in working with our customers to both create margin opportunity for us, as well as cost savings for them. And that's very much alive and well, and I think we'll continue for quite some time. I mean, obviously, I don't have any way to sort of kind of speculate about what our customers think about the proposed merger. We obviously have a fair amount of -- we get questions about it and people are obviously curious to what this might mean and so on, but we don't have any particular comments around that. We feel very confident that our model is different, increasingly different and will help us compete successfully, regardless of what happens to the merger.

Okay. And the shifting of the streamlining cost, any specific color on which items, and as far as that's concerned.

Frank, this is Dave. Why don't I take that? Just maybe stepping back for just a minute. I just wanted to make sure that people understand. First of all, we are very pleased with the progress that we have made within those efforts, and we're very focused on making sure that we can deliver the results both this year and next year, but importantly, the $1 billion results over the next several years. So we're highly confident in that. Keep in mind that these streamlining efforts while we've talked about them in kind of major buckets, there are literally tens of projects going on within each of these efforts, and we're focused against them. We have dedicated teams and personnel and objectives and targets associated with them. So really, this is a pretty immaterial move if you think about it in totality between where we think the actual expense is going to occur in the back half of the year versus kind of the first half of next year. So this is just an immaterial shift between that. So again, I don't want people to read too much into that. It's just kind of moving around within a few quarters there.

Our next question comes from the line of Neil Currie, Dahlman Rose.

I just wanted to follow up on that last question, obviously and themselves, the streamlining costs shifting to 2012 may be relatively immaterial. But if you add to that the significant wins that you've got from the 2012 selling season and historically, we found that in the initial period or initial, particularly, the first year of a new contract, particularly sizable contracts, they tend to be less profitable in the first year. Does this directionally change your view on how quickly the PBM can show profit recovery? Previously, when you spoke last October, you talked about 5-year CAGR targets of between 9% and 11% operating profit growth for the PBM. I was very encouraged to hear you say that you should see profit growth in 2012, but will these factors temper that profit growth in 2012, particularly?

Yes, Neil, this does not change our outlook and our 5-year CAGRs. And again, we'll talk about 2012 in great detail in December. But this does not change our view around our outlook.

That's good to know. I'm sure it doesn't change maybe the 5-year view, but I'm just wondering whether it just pushes it out a little bit further the majority of that growth.

That's not how we're looking at it, no.

Our next question comes from the line of Tom Gallucci, Lazard Capital Markets.

A couple of quick ones here. I guess just on the margins on the retail side of the business, we've obviously talked a little bit about the types of customers or the products that you're sort of targeting. Is the margin increase more a result of the mix that you're seeing in the business as a result of some of your efforts or are you also doing some incremental things on the cost side as your revenues are a little bit lighter?

Yes, Tom, it has more to do with the mix than it does with the cost side. There are some cost benefits that we're seeing as a result of the inventory reduction initiative. But it really has more to do with the former, not the latter.

And then just, I guess, on the sales growth, I'm sure there's always variations regionally as you look among your markets, but is there anything that's unusually strong or unusually weak that we should think about in terms of specific markets across the nation in your stores?

Yes, Tom, I would say that you always see variations across the country. And we have pockets of strength, pockets that aren't as strong, and I think that, that largely follows the unemployment situation. So you can look at those markets that have been well documented with double-digit unemployment numbers, and our sales performance there is a little weaker than many of the other markets.

So that's interesting. So more macro as opposed to any other unusual moving parts with respect to specific markets?

Yes, that's a good way to look at it.

Okay. And then last one just on the PBM side. You mentioned the medical management, and I guess you sort of highlighted some positive commentary there. Can you talk any more granularly about the uptick you're seeing as you either win or renew business and you look out to 2012 and how many clients may be implementing anything in that respect?

Well, I think the basic issue, there will opportunity I should say from that, that we're focused on is that there is a growing number of drugs especially kind of in oncology, but not limited to oncology, that are large molecule, injectable drugs that are reimbursed under the medical benefits as opposed in the PBM contract. And a lot of our customers are seeing very high growth rates of those drug costs. And so we are basically developing an approach for them to manage that and to basically realign the incentives to use more cost-effective treatments in those areas in conjunction with health plans that we serve. I think it's a really important area to address in years to come, especially as you look at the drug pipeline and the likely new drugs that are going to be expensive new additions over the coming years.

Are these things that are sort of being advertised to the customers for the first time or are they things that you're actually taking, I guess -- you have as a part of renewals and wins and as you're thinking about the benefit designs and what you're going to do for customers in '12?

Well, it's an important part of the dialogue right now in terms of what the initiatives might be especially with our health plan customers in 2012. And I'm not going to sort of make any specific comments on which plans or how many of them are going to adopt this program in 2012, but it's a very important initiative that I think pretty much all of our customers appreciate and are evaluating as part of what they like to get into to further control their health care costs.

Tom, I think the point that Per just made is the key point that clients are looking at their traditional spend and they see that there are a lot of things that are being done to manage the cost escalations. And they don't see some of those same things on the specialty, and this brings a solution to the specialty side of the prescription market.

Our next question comes from the line of Matthew Fassler from Goldman Sachs.

I'd just like to get a little are more color if possible if we essentially decompose the progression that you expect in the PBM from Q3 to Q4. If you could try to quantify the relative importance of the different pieces, most notably UAM and also FEP focusing specifically on how much better that gets sequentially. Obviously, you're cycling an easier compare, but the dollars need to go up sequentially. So as you move past that first anniversary, how much less problematic does that contract become?

Yes, I think -- maybe, I can just touch on at least conceptually because we don't kind of break those out in details. But clearly, overlapping the FEP contract at the end of August is an important factor. As you know, we had a fairly significant downdraft from a margin compression perspective associated with that renewal last year. So that's an important factor. Secondly, if you look at now our Medicare Part D business as we entered 2011, first and foremost, we grew a substantial number of lives in that business. And so that business itself is always more profitable in the back half than the front half, and so that is contributing to the ramp up in earnings in Q3 and Q4. And then you turnaround and layer on top of that Universal American, which again is very focused in -- is solely focused in Medicare Part D where the profits are solely in the back half versus the first half of the year. So all those 3 factors are contributing nicely to the enhancements in the PBM profitability in the back half of this year. [Technical Difficulty]

And our next question comes from the line of John Ransom.

If we look at 2011 versus 2012, in the PBM, what is the difference between your spending and your cost savings in '11 versus your spending and your cost savings in '12 on the rationalization program?

At the end of the day, if we look at '11, the costs outweigh the benefits. In '12, we break that trend and the benefits outweigh the costs as we think about 2012.

I understand that. Could you give us a number though, is there a ballpark? We had calculated around $200 million of swing, but I wanted to make sure that number was still in the ballpark.

John, we'll be happy to give you some color on that as we approach the Analyst Day, and we give our full guidance for 2012.

Okay. All right. Secondly, when you did the FEP renewal, you indicated that some government contracts are looking for pass-through pricing on generics now and not spread pricing. How much a factor is that going to weigh on your margins as you reprice all your government contracts over time? Is that something we should be concerned about in the PBM side?

Well, it is, I mean, a phenomenon that is, I think, clearly playing out, especially in the federal and the state government contracts. And we certainly see that in some of the 2012 RFPs that have we have been working on. But at least at this point, it is primarily centered around that particular customer segment, and so it will be a factor. But we still feel confidently in the outlook that we've communicated.

And John, we had talked I guess a few months back before the announcement on the FEP contract, and we talked about the fact for the reasons that you mentioned, that retaining the retail business we would see a step down in profitability certainly not to the degree that we experienced the end of last year and through August of this year with the one-year renewal. And obviously, the mail and specialty programs, while they're based on a cost plus arrangement, they're incremental to our P&L.

Okay. And then just lastly, the big Aetna contract, obviously, that's a huge slug of revenue. How do we think about, if you can drive those customers into your stores, obviously, you replace a fulfillment margin of maybe 1% or 2% with a store gross margin. How can you do that, given that you're kind of working behind that now with those patients? How do you drive Maintenance Choice with the Aetna population?

Well, we basically worked with their customer-facing organization with our sales and account management leadership to develop proposals and sales collateral and value propositions that they can then take to their customers. And in some instances, we collaborate directly with them. And in many cases, we basically provide them with a backup material so that they can successfully make those cases when they are in conversation with their customers and prospects.

Is that more of a 2013 kind of late '12, 2013 before we start to see any of shift or can you do it sooner?

Well, I think it will probably begin in 2012. I can't really sort of give you any quantification of it, but we began that process earlier this year. And we've had a very sort of very productive collaboration with their customer-facing people over several months now to really put them in a strong position as possible to introduce these programs for the benefit of their customers and also for us.

Our next question comes from the line of Mark Miller with William Blair.

I have a multipart question on the reimbursement outlook at Retail. As we move into the generic wave, how much of the upside in Retail gross profits, Pharmacy profits do you expect to be able to hold on to and how much of that do you expect gets passed through or gets brought back to the payers?

Yes, Mark. I mean, that's a tough question to answer, okay. And I don't think we can put a number on that other than to say as we've talked that when you look at the generic wave and the benefits at Retail, we really maximize our opportunities when there are 3 or more suppliers out in the marketplace. And some of that reflects the decrease in the acquisition costs of the product. So that's how we look at it.

And I think the dynamics of the marketplace haven't changed substantially. If you look over the past, generics have historically been productive for the client, productive for the PBM and productive for the retailer. And I think those dynamics still play out in the marketplace today, and we see that continuing going forward.

With the present conflict between 2 other major players in the industry, obviously the longer that goes, the more things change. But what's the likelihood that, that benefits you think CVS stores not just in terms of potential sales gain, but in terms of more leverage in the negotiating process?

Well, John, it's hard for us and probably a little bit unfair to comment on something that is going on between 2 competitors that don't involve us. And obviously, if we get to a point where Walgreen stops filling those prescriptions then there's going to be a retail opportunity. And you can look at the numbers of scripts and use our market share to quantify what that opportunity potentially could be. And in terms of -- we have ongoing discussions with all the PBMs about a variety of issues. They're always focused in terms of how we can provide the best level of service to their patients, and I don't see that changing as a result of this.

And just last question on this. Assuming the combination of the 2 competitor PBMs is approved, does that change the -- I guess, with more consolidation, does that put pressure on the retail margins? Is that a significant change as you see it or not?

I don't see the environment, Mark, changing from what exist today. And there are ways puts and takes out in the marketplace. And as we've talked, we're always having discussions with PBMs in terms of how we can provide the best level of service for their members.

Our next question comes from the line of Steven Valiquette with UBS.

I had a couple of questions here in the PBM side. I think first, besides the big events here that obviously are impacting the landscape this year, people brought up the Express-Medco merger to Exprss-WAG situation. Just curious if you think your timing with Aetna has maybe helped you in a way in winning other customers in the selling season this year or is that been more of a neutral event? And then I have a follow-up question.

No, there have been a couple of renewals where we collaborate closely with Aetna.

Okay. So that's been synergistic in the selling season, okay. That's good. And then if somebody brought this up, I apologize. But one of the other byproducts obviously in the Express-Medco merger was the announcement that UNH is going to be try to become a major player. And just curious if you have any additional thoughts in their ability to do so, be a meaningful force? And then also do you see that as an opportunity to maybe gain some business with that shift and that large commercial book to a captive situation? Just curious to get your initial thoughts on that as well.

Well, I think it's pretty clear from our recent step that United is investing in their own PBM, and they certainly have been present in the marketplace over the past several months in the more prominent way than has been the case in the past. So my view is I take all competitors very seriously, and I certainly would count them as a very forceful company in terms of the resources they have and the expertise that they have and so on. Having said that, obviously, we're going to look at capturing whatever opportunity we can from the churn that is likely to come because of these changes.

Our next question comes from the line of Eric Bosshard, Cleveland Research Company.

I understand there's a couple of moving parts in Retail. Can you summarize or break out why the reduction in the full year comp estimate from the Retail business? What's different now versus 90 days ago to explain the reduced comp guidance for the year?

Yes. Eric, a lot of it has to do with the increased penetration in generics, the pressure that that's putting on the top line Pharmacy growth that we provided the numbers earlier in the prepared remarks. So that's the biggest driver of it.

So beyond that, I understand you're strategically saying you're trying to pursue lower margin sales less aggressively. I guess the generic penetration I wouldn't think it would change that much versus where you were 90 days ago. Again, can you allocate the shift of why you think the full year comp is whatever it is now, point or point half softer than what you had thought 90 days ago?

Well, Eric, maybe I'll start and Larry can tag on here. If you recall that 2011 we anticipated that to be kind of the low point from a generic implementation standpoint or introduction standpoint. And what we have seen is we've been a bit more successful being able to drive generics within the stores, #1 and 2, the market's been a little bit better than what we thought. So I think the combination of those 2 events have put pressure on the top line, but by the same token, have enhanced our outlook on the bottom line.

And Eric, I mean, when we talked about the impact on our comps as a result of generics, we're really focusing on the new generics that have been out in the marketplace for the last 12 months. And we are seeing, as Dave pointed out, uptake in some of the older generics migrating or the brands associated with those generics migrating to generics. And some of that reflects some programs that we have internally to drive that. And quite frankly, some of it reflects plan designs out in the marketplace promoting more generics.

In terms of the front end, is the front-end expectation any different than it was? I know you don't totally break it out, but is the front-end expectation any different than it was 90 days ago or is it a lower total comp, all explained by the Pharmacy?

Yes, it's a little lower than we had expected. If you said 90 days ago. That being said, it's certainly within our range, acknowledging the comments that I made earlier in terms of our philosophy in terms of driving front store growth.

Our last question comes from the line of David Magee, SunTrust Robinson Humphrey.

Two questions. One is, if you were to characterize the reimbursement environment right now in the Retail side versus last year, would you say it's about the same or has it escalated somewhat year-to-year? Just trying to understand how that process is looking right now.

Yes, I would characterize it, David, as comparable to what it was a year ago.

Okay. And then secondly, with regard to generics, I know there's a lot of uncertainty with timing and this and that, but generally speaking, would you expect the impact to be greater on the Retail side or on the PBM side from that conversion wave?

We're going to see benefits, David, across both segments of the business. And again, for the reasons that we've talked about many times, there are some variables in play in terms of the timing of those benefits, but we'll see the benefits both in the PBM, as well as Retail.

But no, adjusting for size, is there a one-sided benefit that's more than the other?

I guess we look at it a little bit in totality there, so no.

Okay. Thanks, everyone, for joining us. And I appreciate your time, and if you have any questions, you can follow up with Nancy.

Ladies and gentlemen, that does conclude the conference for call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day, everybody.