Ladies and gentlemen, thank you very much for standing by and welcome to the CVS Caremark third quarter earnings conference call. [Operator instructions.] As a reminder, today’s conference is being recorded on Tuesday November 5, 2013. Is now my pleasure to turn the conference over to Nancy Christal, senior VP, investor relations. Please go ahead, Ms. Christal.

Thank you, operator. Good morning everyone, and thanks for joining us. I’m here this morning with Larry Merlo, president and CEO, who will provide a business update, and Dave Denton, executive vice president and CFO, who will review our third quarter results and guidance. John Roberts, president of PBM is also with us today and will participate in the question and answer session following our prepared remarks. Mark Cosby, president of the retail business, was planning to join us, but is under the weather and not able to be here today. During the Q&A, please limit yourself to no more than one question with a quick follow up so we can provide more callers with the chance to ask their questions. I have one important reminder today, on Wednesday, December 18, we’ll host our 2013 analyst day in New York City. At that time, we’ll provide 2014 guidance and some longer term financial targets as well as a comprehensive update on our strategies for achieving those growth targets. You’ll have the opportunity to hear from several members of our senior management team about our PBM, specialty, retail, and MinuteClinic businesses, along with numerous enterprise wide initiatives that will capitalize on the evolving healthcare landscape and drive future growth. If you didn’t reply to your invitation, please let us know if you plan to be there, as space is filing up quickly. The meeting will be webcast for those unable to attend in person, but we do hope to see many of you there on December 18. Turning to this morning’s news, we posted a slide presentation on our website just before this call which summarizes the information you will hear today, as well as some additional facts and figures regarding our operating performance and guidance. I encourage you to review…

Thanks, Nancy. Good morning everyone, and thanks for joining us today. Now, given that our analyst day is next month, our business update this morning will be brief. However, I do want to take some time to cover some of the topics that I know are top of mind in the marketplace, such as the impact of the Affordable Care Act. But before we get to that, let’s kick things off with today’s earnings, because we’re pleased to report that we posted solid third quarter results across the enterprise. Overall operating profit increased more than 15%, with the PBM and retail businesses growing approximately 28% and 8% respectively. And it’s important to note that excludes the benefit from a legal settlement that was finalized during the third quarter. That settlement related to a prescription drug antitrust lawsuit with a drug manufacturer. We recorded a $72 million gain within operating expenses, which equates to a $0.04 per share benefit in Q3. Now, that said, adjusted earnings per share excluding the legal settlement came in at $1.05 for the quarter, and that’s $0.02 above the high end of our guidance. We also generated a substantial amount of free cash and year to date the total now stands at $3.1 billion and consistent with our goal at the beginning of the year, we remain committed to returning about $5 billion to our shareholders this year through both dividends and share repurchases. Considering our strong operating results to date, along with our outlook for the remainder of the year, we are raising and narrowing our earnings guidance for full year ’13 to a range of $3.94 to $3.97, and that’s a change from our previous range of $3.90 to $3.96. And again, that’s excluding the $0.04 benefit from the legal settlement. Dave will discuss…

Thank you, Larry. Good morning everyone. Before turning to our results and our guidance, I want to highlight how our disciplined capital allocation program continues to enhance shareholder value. And during the third quarter, we paid approximately $276 million in dividends, bringing our year to date payout to $829 million. Additionally, we repurchased approximately 25.8 million shares for $1.5 billion in the quarter, at an average price of $58.98 per share. Year to date, we’ve repurchased 39.6 million shares for approximately $2.3 billion, again at an average price of $57.33. As you can see, the pace of buybacks accelerated throughout the third quarter, and we remain on track to complete approximately $4 billion of share repurchase in ’13, which is also included in our guidance. So between dividends and share repurchases, we have returned more than $3.1 billion to our shareholders through the first three quarters of this year alone and we continue to expect to return approximately $5 billion for the full year. We’ve also generated approximately $3.1 billion of free cash flow through September of this year. Improving our cash generation capabilities through improved working capital management remains an area of focus for us. And over the past several years, we’ve made excellent progress in reducing our cash cycle. As previously noted, we have some timing issues with respect to CMS payables and receivables that may affect our working capital and delivery of free cash flow for the year. Even so, we are maintaining our guidance of free cash flow of between $4.8 billion and $5.1 billion this year, while we work to offset this headwind to our target. As for the income statement, third quarter adjusted earnings per share from continuing operations of $1.05 per share was approximately $0.02 above the high end of our guidance, after…

Thanks, Dave. And just to sum things up, obviously we’re pleased with our strong third quarter results, and optimistic about the outlook for this year and next. We see the evolving healthcare environment as an opportunity for growth, and we believe we’re very well positioned to gain market share across the enterprise. So with that, let’s go ahead and open it up for your questions.

[Operator instructions.] Our first question comes from the line of Robert Jones from Goldman Sachs. Please proceed with your question.

A lot of good detail on the PBM side, so I thought maybe I’d start off on the front end. Same-store sales down again this quarter, and I know you’re citing softer traffic. I was wondering if you could just maybe share some color on whether you think this has been more macro-driven, or is there some competitive changes going on that are driving a little softness on the front end?

We have discussed in the past that we continue to see a cautious consumer. We did see some pullback in consumer spending that began in the spring timeframe. It’s manifesting itself in fewer trips. At the same time, we have seen the promotional environment intensify in both the drug and mass channels. At the same time, we have not made dramatic changes in our promotional strategy. As a matter of fact, if you look at our year over year promotional circular page count, in the third quarter it was actually down 12%. And we continue to use ExtraCare as our point of differentiation along with delivering a way to create value for consumers. And we have been able to drive the basket size of our customers. And as Dave mentioned in his remarks, it’s also important to point out that through these efforts we’ve been able to achieve margin expansion. So I think on the front store sales issue, it’s always a bit of art and science, trial and error. Mark and his retail team are certainly focused on it. We would like our front store comps to be better, but we’ll be very disciplined about not chasing empty sales.

That makes a lot of sense. And Larry, I know you talked about a lot of the major topics in the sector, specifically the exchanges. And obviously look forward to getting more detail on that at the analyst day, but one of the other major topics as of late has been agreements across the supply chain as far as consolidating generic purchasing. I’m just wondering if you could weigh in given some of the activity as of late, as far as your view of your current positioning in generic sourcing and whether or not you think in light of some of these moves that you would be interested in trying to garner more scale.

Our position has really not changed since we discussed this on our last call. A generic sourcing alliance could present an interesting opportunity. We’re certainly always open to learning and evaluating opportunities in the marketplace, and if we were to determine that an alliance could drive higher returns for us, we’d certainly consider that. And we believe that we could do that without expending significant capital. So we’ll continue to watch it, and there may be some incremental opportunities domestically, but we still see the global sourcing environment less clear, but again we’ll be open to opportunities.

Continuing on, our next question comes from the line of Bob Willoughby from Bank of America Merrill Lynch. Please proceed.

In light of how fast the CVS share of the Caremark accounts has grown over the past few years, does it make sense to offer any type of quarterly update where you think your share stands and to offer any targets where that could go over the next couple of years?

Good question. As you know, we have seen substantial growth in share within CVS, within the Caremark book. I think over the past few years we’ve moved from roughly 18% to in excess of 31% at this point in time. My guess is those are longer term movement trends. So probably quarter by quarter it might not make the most sense. Probably year over year is probably a more comparable perspective. So you’ll probably see a little bit of that as we cycle into analyst day coming up here.

It’s a great question. I think it does make sense to look at it on an annual basis. And to Dave’s point, keep in mind that that retail percent of the Caremark book of business, while it’s grown, the pie has also grown at the same time. There have been north of $25 billion worth of new business wins during that period of time.

Any three year target per chance?

Not at this point.

Continuing on, next question is from Eric Bosshard from Cleveland Research. Please proceed with your question.

Can you give us any color on the share in the retail business now that is transitioning from 30- to 90-day? Where you think that might go, and how you are running the business or managing capacity in the stores differently as that has taken place?

We have seen it grow for some time now. Acknowledging growth off of a smaller base, but it has been growing north of 20%. And I think that there are a lot of variables in play that are driving that growth. I’ll start with Maintenance Choice, but there are also more plan designs out there that have 90-day options at retail, and there’s been a lot of information out there that 90-day prescriptions also improve medication adherence. So I think that that we’ll continue to see a disproportionate growth and an acceleration from 30 to 90. Obviously, on the retail side, we have always done an effective job of managing SG&A at the store level. And the labor models that we have built, along with our workflow in the pharmacy, enable us to flex our labor according to those volumes. And there are some labor efficiencies to be picked up there.

And then secondly, you talked about restricted or preferred networks. Just curious what you’re seeing take place, and what you’re facilitating through Caremark, and what you’re seeing take place in the market in terms of the appetite and adoption and utilization of preferred or narrowed networks on the retail front as we move into 2014.

We’ve clearly seen the growth of preferred networks in Medicare. Got off to a slow start when Medicare was first implemented, but you’ve seen a lot of movement, particularly over the last couple of years. In Medicaid, we’re seeing restricted networks in the managed Medicaid space. We think that continues to be something that this segment will be interested in. And in the employer space, you’ve seen - and Dave talked about our growth of Maintenance Choice, which is a form of a narrow network - interest from employers. I would say this year probably less interest, because employers were more focused on healthcare reform changes they needed to make within their own book of business. But it’s interesting that health plans that historically have not been interested in narrow networks, we’re seeing a lot of interest, particularly around their exchange offerings. So we’ve had several health plans adopt narrow networks for their public exchange offerings. So we think it continues to be an opportunity for plans and clients to save money through either preferred or restricted networks. So we continue to see good growth opportunities in this area.

Continuing on, our next question comes from the line of John Heinbockel with Guggenheim Securities. Please proceed with your question.

First, on Maintenance Choice, any comment on the relative growth rates of 2.0 and 1.0? And how much time do you think it takes for 2.0 to start then customers migrating from 2.0 to 1.0? Will that be one full contract cycle? Or shorter? Longer? What are your thoughts on that?

We’ll touch on this more at analyst day, but we have seen some adoption on 2.0. I think certainly, as we’ve talked, we see an opportunity to, when you look at 1.0 and 2.0, the opportunity to cover more than 30 million lives over time, I think we see an adoption track where a client gets into 2.0 and then ultimately migrates in to 1.0 to maximize the savings. But we’ll hit more of the metrics in December.

And then secondly, thinking about the front end and My Weekly ad, if you could segment traffic by loyalty of customer - I don’t know if you would do a decile or a quartile or whatever - is traffic down among the most loyal customers? Or is it down more among the least loyal, so maybe some of that is by your design? And then over time, as My Weekly ad gets greater adoption, what does that do to traffic and is that a significant incremental positive to margin, as you’re maybe wasting less promotional dollars?

And by the way, the My Weekly circular just becomes one more tool. That’s not going to be the single conduit that drives that behavior. It will be that in addition to many of the other attributes that ExtraCare offers the consumer.

Well, when you did ExtraCare, that helped growth, right? Will My Weekly ad help to the same degree, or not as much?

It’s early. We’re experimenting with it now. And that’s something that we’ll be able to talk about over time.

Continuing on, our next question comes from the line of Meredith Adler from Barclays. Please proceed.

I’d like to just go back a little bit to the discussion about the private exchanges, and you talk about some being carve-in of pharmacy benefit and some being carve-out. Do you have any sense of kind of what percentage is going to be carve-in and what is going to be carve-out? And then also, related to that, is there a difference in profitability when it’s carve-out versus carve-in?

I’ll take the first part of that. Acknowledging that A) it’s early, B) it’s a small sample size. But you know, what we have seen is a trend that really looks at the historical preference of the clients. And by that I mean if the employer had pharmacy as a carve-out option, then they’re going onto a private exchange product that continues to carve out pharmacy, and vice versa. If they have pharmacy carved in with their health plan, then they’re migrating to a carve-in product. And again, it’s a limited sample, but that’s what we’ve seen to date.

And then on the profitability, it’s really a function of what programs they adopt that really drives profitability. So it lowers their cost, but drives our profitability. Programs like mail formulary, network programs, and others. And we think with the consumer making that choice, they’re going to be more likely to make those selections for themselves.

Right. And then switching gears, a question back to the discussion of the front end, I don’t think you’re ever going to eliminate the circular, the one that isn’t tied to the loyalty card or the individual, but can you conceive of it being much less promotional and more kind of like an EDLP circular? I mean, there are other retailers who highlight their good deals every day, but not necessarily being focused on promotional items.

I think that you are right. I don’t think any of us see the circular going completely away. And I think that it will evolve over the next few years. I can see it being smaller. I can see it being more focused. Exactly what shape and form that takes, I think, is probably still an open question. I mean, we know that just because of the viewership or the readership of the newspaper, circular distribution is down from what it was five years ago. And so I think directionally you’re correct with your hypothesis.

Continuing on, our next question comes from the line of Lisa Gill with JPMorgan. Please go ahead.

Larry, thank you very much for all the comments on the public and private exchanges, but I’m actually going to ask a question around Medicare Part D. When you look at your now guidance of roughly 3 million members versus 3.3 million before, is that roughly in line with the 350,000 that you talked about last time? And secondly, anything you’re seeing in the open enrollment period that would change any of your thoughts around that going into next year?

In response to your first question, it is consistent with what we talked about on our last call in terms of the attrition of about 350,000 lives. And it’s early in open enrollment, but we have not seen anything that is contradictory to what we’ve talked about.

And then secondly, can you maybe just give us an update on where you are on RDS and conversion from RDS? Clearly the tax benefit goes away in 2014. And based on the sanctions that you have, can you just remind us if there’s any impact at all of moving people potentially to an EGWP or any other programs as they shift away from RDS?

We saw most employers focused on healthcare reform this year, so most of the movement to EGWPs happened the year before. We think there will be a pickup in activity this year. Our plan would be out of sanction, so we believe that we’ll be able to implement anyone that wants to move into an EGWP product moving forward.

The other thing I would mention is that we have been operating under a waiver from CMS to continue to enroll EGWP members that we had commitments to prior to the sanction. So that has been ongoing. That waiver has been extended through January of ’14.

Continuing on, our next question comes from the line of Scott Mushkin from Wolfe Research. Please proceed with your question.

I had a quick housekeeping item, and then I wanted to get to my questions. Flu shots, is that in your script number or not? I can’t remember.

Flu shots we do treat as a prescription. And I’ll call it season to date… The season kicks off in the August timeframe, and what I’m going to share with you probably goes through near the end of October. But we’ve administered just over 3 million flu shots across our retail business and MinuteClinic. And that’s up from last year.

The second question I have really goes to the outlook for the PBM. You guys talked about market share and that you feel like you can kind of, with the new environment, gain market share. It seems to me, as we look at Medicaid, I think you’re 31% of that bus. It’s grown quite a bit, so I want to understand can that go higher? Also, you commented that you’re in 25 states with the exchanges. Can you get to more states? Can 70% become 90%? And then the final question about next year as we have some big contracts out, like Tricare, what’s your confidence that you’ll continue to gain share on the PBM side of the business in those three different buckets?

In terms of Medicaid, and I think specifically you’re talking about the managed Medicaid environment. And you’re right, we have about 30% share of the managed Medicaid market. We certainly see more room for growth there. We’re estimating that the managed Medicaid market is going to grow by about 40% between now and 2016. So we see that, again, as a driver for growth.

As far as we’re in 25 states with 70%, as we continue to win in the marketplace and win health plans, which we had some wins this year, we’ll continue to expand our footprint. And just as far as winning across all segments, as Larry mentioned earlier, for the 2014 selling season we got over $5 billion in gross wins with 96% retention. If you look back over the last several years, we’ve continued to be very successful selling. Our integrated model continues to resonate in the marketplace with Maintenance Choice, Pharmacy Advisor, our integrated specialty capabilities we’re launching, what we’re able to do for our clients with MinuteClinic. So we’re very bullish on our growth opportunities moving forward.

And then one final follow up is if you continue to gain share like you have been, which is driving a tremendous amount of traffic into your assets, particularly your retail assets, and I know you’re doing the promotional stuff, but Larry we’ve talked about how do you get the incremental sales in a profitable way? It seems like there’s a tremendous untapped opportunity to take that traffic and convert it to some front end sales. Any other color on how we get that done?

First of all, I agree with you, and as I mentioned earlier, I think it was the first question, that our retail team is working hard to improve our comp sales performance. And I think some of what you’re describing lies in innovation and trial and error, and we’ve got a talented team focused on it, and we’ll continue to work and ultimately crack the code on that.

Our next question comes from Mark Wiltamuth from Jefferies. Please proceed with your question.

Wanted to ask a little bit about the specialty pharma environment. And I know you have a pilot going there to kind of join the CVS brick and mortar stores with the mail operations on specialty. If you could give us an update on what’s going on there and how you think that will evolve as the specialty trends continue to grow.

If you think of specialty today, and you think about it from an access to a member perspective, it’s primarily a mail channel today. What we’ve been able to do is take all of our specialty capabilities and connect them to our retail stores. So now members that want to get access to specialty medications can go in any one of our 7,400 stores as we roll this program out next year. We’ll leverage all of the back-end clinical capabilities, the billing capabilities, the fulfillment capabilities, and then we’ll be able to deliver that prescription either to the member’s home, like happens today with specialty pharmacy, or deliver it to their local CVS Pharmacy. And it’s interesting, very similar to Maintenance Choice, half the people want to pick up their specialty prescription in their CVS local store, the other half want it mailed to their home. When you think about it from a pharma perspective, historically adherence levels for specialty medications have been lower in the retail channel than in the specialty channel. In our pilots, we’ve been able to achieve the same levels of adherence through the integrated specialty offering that we have in mail. So we think pharma’s going to be pretty bullish on this capability. So we’re improving access, we’re achieving very high adherence levels, and we’re delivering all the clinical capabilities that these patients need, with the convenience that we’re able to offer through an integrated offering.

And is the bigger win capturing more prescriptions at the local pharmacy, or is it just the convenience of delivery for the consumer?

Well, I think about it in probably two parts. One is we think because we’ll have a differentiated offering, again it adds to our value proposition as we’re out trying to win new clients. Secondly, there is a segment of the population that is open. Medicare is an example, where the patient has choice where they get their specialty prescription filled. So we think we have a better value proposition for those patients, so we think we will capture more share of that open business.

And I think the only other point that I would make is that we can make it a seamless experience across all of the stakeholders that are involved here, to include the physician.

Continuing on, our next question comes from the line of Ross Muken with ISI Group. Please proceed with your question.

Maybe first just going back to all the stuff you laid out re reform. Do you feel like the more you continue to dig into this, and obviously there’s a lot of things changing and a lot of unknowns, but do you feel like the integrated model, you continue to figure out sort of new services, new offerings, new potential profit drivers as things change, and you really sort of have a structural advantage there, having the full suite of capabilities versus maybe some of your peers?

I think you said it very well. I don’t know that there’s a whole lot I would add to that, other than agreeing with you. And I think it gets back to what we’ve talked about many, many times, that if you think about, from the PBM perspective, that it’s largely been a B2B bus, and if you think about the new world order adding B2C segment, we’ve got expertise in both.

I guess you guys have done a good job of educating us. Maybe just quickly on the selling season, if you look at some of the net losses, could you maybe just sort of tick through how much of that was sort of acquisition and if not, in terms of the update from Q2, what were the key reasons where you saw maybe the business move away from you?

The numbers that we gave, to include the retention, does reflect the net impact of acquisition activity. And recognizing that we pick up some from acquisitions and we lose some. But acquisition activity posed a headwind for us in terms of the impact of that. And I’ll let Jon talk about it from a client perspective.

It’s a very sticky business. We’ve got retention at 96%, you add on top of that the $5 billion in new wins. You’re always going to see some movement as people go out and evaluate the market, but we’ve been very happy with our ability to retain customers. And with that 96% retention, including some of the acquisitions that are moving away from us, like Amerigroup.

We’ll take two more questions please.

Certainly, sir. Our next question comes from the line of Ricky Goldwasser with Morgan Stanley. Zach [Sacheck] - Morgan Stanley: Hey, good morning. This is Zach [Sacheck] for Ricky. Just had a question on your Medicare Part D preferred network. We’ve seen a proliferation in the number of Part D networks. I was wondering if you could talk about your offering for 2014 and how it compares to some of your competitors in the preferred network area.

We have a preferred network. It’s very similar to what we had this year. It’s about 25,000 pharmacies where they’ll get advantages. The member will have a lower copay if they go to a preferred pharmacy. And then we wrap the balance of the network around that so that we have the full suite of 65,000 pharmacies participating in it. But it’s been very successful, and we’ve created enough copay differential to drive pretty good share into those preferred pharmacies, so we’re very happy with the performance of that preferred network. And it’s allowed us to offer a very competitive product in the marketplace that will help us continue to grow as we move forward.

Also keep in mind, if we use Aetna as the example, that we have an Aetna preferred Med D product out in the marketplace that we’re supporting them on as well. Zach [Sacheck] - Morgan Stanley: And then just a quick question on Minute Clinic. Of the 18% revenue growth you talked about, I was wondering if you would be willing to break down how much of that was organic versus new store growth? And then if you could talk at all about how the payer mix might have evolved over the course of the year?

I don’t know them off the top of my head, but we’ve been comping, if you look at it from a comp perspective, in the teens to low 20s most recently in MinuteClinic.

And your second question, in terms of payer mix, we have continued to see a high rate of adoption from health plans and even government sponsored programs. And if you look at MinuteClinic visits now that have some type of insurance copay tied to it, if you will, that number is now in the mid-80s.

And our last question comes from the line of David Magee from SunTrust. Please proceed with your question.

First question, just on the specialty pharma, you called out inflation as being a factor, and I was curious if you could quantify that and specify whether that’s sort of in line with the trend or are we seeing sort of a sustainable trend change there.

Especially inflation’s been pretty consistent over the last several years, so it’s generally 8% to 10%. You have to add on top of that mix, though, as new drugs come to the market they’re fairly expensive, and then utilization is the third component. So that translates into trend or cost increases that our clients are seeing that are in the high teens, low 20s, and clearly managing this area has become our clients’ top priority. And we’ll talk more about what we’re doing in this area on analyst day.

Do you have market share numbers on that bus year over year?

I don’t have that with me. We’ll probably touch a little bit on that at analyst day as well.

My last question has to do with the promotional environment that you anticipate on the front end. Have you sort of baked in a significantly more promotional environment this year relative to last year as it relates to the holidays? Or how do you view that at this time?

As Larry indicated before, we have seen the promotional environment increase over the last several months. I would say that while that has occurred in the marketplace, we have been pretty diligent in our approach to this. We have not really changed our promotional posture much. I’d say we continue to use our loyalty card program to drive performance for us and to make sure that there’s a good balance between what’s happening from a front store sales perspective, but also quite frankly what’s happening from a margin perspective. And we’ve been consistently kind of growing our front store margin rate. And again, there’s a balance there that we’ll watch closely.

So let me just thank everybody for joining us this morning, along with your interest in CVS Caremark. And we will look forward to seeing many of you next month at our analyst day in New York.