Ladies and gentlemen, good morning, and welcome to the CVS Health Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow CVS Health's prepared remarks at which point we will review instructions on how to ask your questions. As a reminder, today's conference is being recorded.

Thank you, and good morning, everyone. Welcome to the CVS Health second quarter 2020 earnings call. I am joined this morning by Larry Merlo, President and CEO; and Eva Boratto, Executive Vice President and CFO. Following our prepared remarks, we'll host a question-and-answer session that will include Jon Roberts, Executive Vice President and Chief Operating Officer; Karen Lynch, Executive Vice President and President of Aetna; and Alan Lotvin, Executive Vice President and President of Caremark. In order to provide more people with the chance to ask a question during the Q&A, please limit yourself to no more than one question with a quick follow-up. In addition to this call, our press release and Form 10-Q, we have posted a slide presentation to our website. Please note that during this call, we will make certain forward-looking statements that reflect our current views, including our financial projections and statements related to our future financial performance, future events, industry and market conditions, and the future impact of COVID-19 on our enterprise. Our forward-looking statements are based on management's estimates, assumptions and projections and are subject to significant uncertainties and other factors, many of which are beyond CVS Health's control, including the future impact of COVID-19 on our enterprise. We strongly encourage you to review the information we filed with the SEC regarding these risks and uncertainties, in particular those that are described in the Risk Factors section of our 2019 Annual Report on Form 10-K and the Cautionary Statement Concerning Forward-Looking Statements and risk factor disclosures in our quarterly report on Form 10-Q. You should also review the section entitled Cautionary Statements Concerning Forward-Looking Statements in this morning's earnings press release. During this call, we'll use non-GAAP financial measures when talking about the company's performance and financial conditions. In accordance with SEC regulations, you can find a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in this morning's earnings release and the reconciliation document posted on the Investor Relations portion of our website. And as always, today's call is being broadcast on our website where it will be archived for one year. Now, I'll turn the call over to Larry.

Thanks, Valerie. Good morning everyone and thank you for joining our second quarter earnings call. I don’t have to tell you that this past quarter is unparalleled and unprecedented as we navigate the health, social and economic impacts of COVID-19. Having said that, our earnings in this environment, demonstrate the strength in our strategy, and the power of our diversified business model. The environment surrounding COVID-19 is accelerating our transformation and it is providing new opportunities to demonstrate the power of our integrated offerings and the ability to deliver care to the consumer in the community, in the home, and in the palm of their hand. The pandemic has made it a necessity to contribute in ways that have called on the capabilities, expertise, and footprint of many of our assets in combination to rapidly deliver solutions at scale that meet client and consumer needs and preferences. Now those of you who been following us for some time, know that CVS health is much more than just your corner drugstore. And in this era of COVID our strategy of diverse assets across healthcare, this triad of care where connections are delivered in the community, at home and in the palm of your hand could not be more important. We have substantially expanded our community reach, which has proven to demonstrate the value of bringing differentiated assets and delivery mechanisms to bear, meeting consumer needs and delivering lower cost, high-value care and nationwide testing, which we'll talk about in depth in just a moment. Increasingly, the power of our assets is taking us into areas that provide greater choice, as well as new areas for growth, ranging from diagnostic testing to B2B solutions, to the potential of clinical trial, recruitment and enrollment. The results we share with you today underscores that our strategy is right, that it's working, and the COVID-19 is driving us to bend our innovation curve markedly and accelerate solutions that will have long-term sustainability. There are numerous interdependencies in our three core businesses that the pandemic has made more apparent, driving the strength in our diversification while bringing new solutions to market. So with that, let me summarize our second quarter results and the proactive steps we have taken in light of the pandemic as our team has shown great flexibility and responsiveness adapting quickly to our clients and consumers' evolving needs. For the second quarter, adjusted earnings per share increased to $2.64 with total revenues of $65.3 billion. Our consolidated enterprise core performance was in line with our expectations and our results reflect the very impacts of COVID-19 across our business.

Thanks, Larry, and good morning everyone. Echoing Larry, these are certainly unprecedented times for all. We have been on the frontline supporting our local communities while continuing to advance our key strategic priorities, including product and service innovation, the delivery of integration synergies and cost savings initiatives. Looking at our second quarter performance, the diversity of our portfolio of assets enabled our enterprise to exceed our expectations. During the quarter we generated $7.1 billion of cash from operations, reflecting the underlying performance, as well as the impact of the deferral of certain tax payments in connection with COVID-19 related extensions of payment deadlines. In July, we repaid $2.75 billion of scheduled debt principle and we remain committed to achieving our low three times target leverage ratio in 2022. We also returned approximately $660million to shareholders through cash dividends In the third quarter, we completed the sale of our workers compensation business for $850 million in gross proceeds in our Health Care Benefits segment. This divestiture is expected to be about a $0.02 drag on adjusted EPS in the remainder of 2020, which is included in the guidance we have provided this morning. As I've said previously, we remain laser focused on delivering long-term value. In support of that focus we are continuing to evaluate and assess all aspects of the Enterprise to identify areas that may not be consistent with our long-term strategic priorities. Moving to the P&L, consolidated revenues of $65.3 billion increased 3% year-over-year with growth primarily coming from the Health Care Benefits and Retail/Long-Term Care segments. Adjusted EPS grew to $2.64, with the majority of our growth attributable to the Health Care Benefits segment, which saw an unprecedented decline in utilization due to the pandemic. Our Retail/Long-Term Care segment was affected by substantial investments made at our…

We'll take our first question from George Hill with Deutsche Bank. Please go ahead.

Yes, good morning guys, and thanks for taking the question. I guess, Larry, the COVID crisis has kind of reshaped the care delivery model pretty dramatically in the last three to four months. You've talked about how it's impacted the HealthHUB strategy. I guess, can you talk a little bit about how you think about through the Aetna business, kind of engaging the care delivery model and to the change how do you think about the whitespace in what you want to own and what you don't want to own? And Eva alluded to that a little bit and kind of the portfolio process, but we'd just love to hear how the COVID crisis is changing how you think about the delivery model and what pieces you want to own? Thank you.

Yes, George good morning, thanks for the question. And George, maybe I'll start with I think all of what we're seeing is, I'll call it the acceleration of omnichannel for health. And I would describe that as speaking to care being delivered in multiple and nontraditional settings. And I think we're going to see a new value proposition emerged that is going to be based on the elements of convenience cost, quality and trust. So, George, I would say direct to your question, obviously there is a technology component to that and you've heard in our prepared remarks, care in the community, in the home, and the palm of your hand, obviously that speaks to what we've seen around the acceleration of virtual care and telemedicine. And I think it opens up the door for a greater acceptance of remote monitoring through technology and that speaks to care from the comfort of your home. Then there is care in the community and think about what we talked about this morning around, testing, the broader opportunity that that creates with diagnostics, vaccines, immunizations. You start thinking about the role of the pharmacist and nurse practitioner in what we have seen over the last several months with regulations being relaxed that has allowed them to perform to a higher level to the top of their license. So, you start thinking about, why go backwards, when it's more convenient, less costly and administered by someone that they know and trust and look it also speaks to why retail does matter and the importance of our strategy of pivoting, our retail asset in offering more health services at retail. And then so it is just related to that, it's a little indirect to your question, but I think we see some of the other changes on the horizon as we've got to have a more integrated approach to behavioral and physical health. And we're seeing way too many examples of people feeling the stress, the anxiety of everything going on, and this is an area of health that cannot be ignored and we have to do better. And finally, George, yes, we've talked a lot over the last several years about payment reform value based care. We see the challenges that providers are experiencing economically and will the pandemic be the spark that really accelerates more rapid growth of value based reimbursement and care.

Larry, that's great color. Thank you.

We will take our next question from Michael Cherny with Bank of America. Please go ahead.

Thank you so much for the question. I wanted to ask a question on the retail side. Clearly, there is a lot of moving pieces in this specific quarter extra normal I think wouldn't do the term justice. As you think about the incremental investments that you're making now, how much of the new procedures, new cleaning process, staffing dynamics that you have in place, are the type of investments that might continue on a long-term basis and how does that factor into the thought process and framework you had about where retail in particular should grow into 2021 and beyond?

Yes, Mike, this is Jon. So, we do expect these enhanced cleaning procedures to continue for the foreseeable future and I think that's until we get a vaccine and COVID essentially goes away. As Larry said, we're making a significant pivot to healthcare services, whether it be the COVID testing we're doing, we're gearing up for a pretty significant flu vaccine season, and the repositioning of our retail footprint in the HealthHUBs supports that healthcare services move. So we view it as evolving to higher margin health care services as we move forward.

Thanks.

We will take our next question from Ricky Goldwasser with Morgan Stanley. Please go ahead.

Yes, hi, good morning. Thank you for the comment on the testing in the vaccine. I just wanted to dig a little deeper into that. Can you give us a little bit of color on the revenue model that is associated with the testing, the turnaround time that you're seeing? And then on the vaccine side, when we talk about first in the flu early new season, are you - what type of magnitude are you expecting to see in terms of demand for flu vaccine? And if you can just share more on your role on the COVID-19 vaccine administration and what conversations you are having with manufacturers? We're getting a lot of questions from investors on the setting for vaccine administration. So I'd love to get your insights on that? Thank you.

Yes, Ricky, good morning. It's Larry and Ricky, I'll start and then ask - flip it over to Eva to take the economic side of your question. And Ricky, maybe I'll start with the seasonal flu and look, we expect to administer up to $18 million seasonal flu vaccines this fall, which is more than what we have administered in the last few years. We think that for obvious reasons, there is going to be an increased demand. You're going to see a lot of PSAs out there largely sponsored by the government at both the federal and state level. And Ricky, when you think about it, the symptoms of the seasonal flu mimic the symptoms of COVID-19. And the importance of the seasonal flu vaccine is never going to be more important this year than any other prior year because we've got to try to separate that dynamic in terms of what are we talking about. If I shift Ricky to the vaccine, we are having discussions with the administration in terms of the role that we can play and there is absolutely an important role for us to play. And Ricky, some of this goes back, I'll go back 10 plus years with H1N1 that pharmacy became the local solution to administer vaccines to millions of Americans across the country, that is not lost on the administration. And Ricky, I think what is unique for us is, this is where the intersection of testing in vaccine creates a sustainable business model, because I couldn't be prouder of the work of our CVS colleagues and standing up the testing business in 1800 drive-through locations in a matter of a few weeks, and we've also used our digital capabilities as you heard in our prepared remarks, where customers can actually schedule - are required to schedule an appointment to get the test. So you don't see six, eight hours of cars backed up trying to get a test in one of our drive-through sites and we can bring that same digital and technology capability to scheduling vaccines when they become available. So, I think we're in a great place there to be an important part of the solution and I'll flip it over to Eva on the testing economics.

Yes, good morning, Ricky. I would say, overall as you think about testing and our economics, think about it in the margin range of diagnostics and typical testing.

And Ricky, I think you had a question in there in terms of what the country has experienced around testing turnaround times and I'll just quickly comment on that. If you heard in our prepared remarks, we've administered about 2 million tests to date. The turnaround times through the months of May and June were in that three-day range and coming out of the July 4th holiday, we did see a spike in testing demand as well as a spike in the turnaround time. We took immediate actions. The first thing we did was actually reduce the number of tests we were doing on a daily basis by 25% in working with the labs as they were working to increase their capacity. We've also added two additional labs to our testing of back office if you will, okay, where they are producing the results. And as we sit today, we have seen a dramatic improvement from where we were coming out of that July holiday. There is still some additional improvement that needs to be made by one of the labs. Okay? And at the same time, Ricky, we talked about our Return Ready testing with our B2B clients. We're utilizing as you heard in our remarks, the point-of-care testing diagnostics and we're also working to pivot some of our retail sites to more point-of-care testing, and we're currently working with the administration in terms of creating the reimbursement codes that don't exist today for that type of retail testing. So, I think that's going to be important as a country where we're testing about 17 million people a month. If you look at the experts, they are saying there is going to be an increased need in the fall timeframe of the 26 million to 28 million tests per month range and more point-of-care testing is going to be an important part of that solution.

Thank you, very helpful.

Our next question is from Eric Percher with Nephron Research. Please go ahead.

Thank you, Eric Percher and Josh Raskin here. Can you quantify some of the impact of the $1.5 billion in investment for COVID in HCB? And I guess specifically I'd be interested in mandatory rebates and items like that versus voluntary investment?

Good morning, Eric. It's Eva and I'll take that question. First, let me define what's in that investment at the company level. Overall, as we look at the investments, $2 billion at the company level 1.5 for the year at HCB. These are items that are going to affect our earnings. Right? So, essentially they include operating expenses, refunds, rebates and credits to support our customers', members and clients. What I would say, we're not breaking out each of those, each of those individually, but all of those are contributing to the underlying $1.5 billion in HCB.

Okay. And just a follow up on something you mentioned Zinc Health, could you tell us what that is and are you partnering with others and are there any tax benefits there?

I'll start, this is Alan Lotvin, I'll start with what Zinc is and then I'll let Eva talk about the tax question. So the Zinc is an onshore entity that we created to essentially develop and extract more value out of the pharmaceutical manufacturers on behalf of our customers and clients as part of the purchasing economics that Eva has referenced a couple of times.

And as Eric just to perhaps state the obvious as Alan said, it's onshore. We did not design Zinc as a tax strategy, it's around the value that we can deliver from a business perspective to our customers and CVS.

Thank you for that.

Our next question is from Justin Lake of Wolfe Research. Please go ahead.

Thanks, good morning. I wanted to followup a lot of moving parts for 2020 obviously. So just wanted to get your view on kind of what the right kind of jump off number is for 2020 earnings and kind of some of the moving parts in your mind? And then thinking out to 2021 going back to Michael's question on part of the potential run rate costs in the retail business for instance, you talked about a mid-single-digit EPS growth rate. Is that still kind of - is that still the company's view and this sort of fits given everything going on any kind of color there would be helpful as well? Thanks.

Good morning, Justin. Thanks for the question. In terms of the right jump off, what I would say is the reason we provided all of the transparency around the COVID related effects was to help the investment community really understand outside of COVID, how the businesses are performing. I think if you look at how we've performed at the enterprise level, through the first half of the year normalizing for COVID, right, we've been performing in line with our expectations and there's nothing around our underlying fundamentals that have taken us all far our strategy and trajectory.

So that would indicate that's going to bridge the strategy trajectory is the same sort of 2021 trajectory will be similar as well versus ?

Yes, there's, as I said, underlying, you've got to think about how COVID is affecting, but our underlying core is in line with our expectations when we started the year, and we'll continue to work towards delivering on what we outlined at our Investor Day.

Great, thanks.

We'll take our next question from Bob Jones with Goldman Sachs. Please go ahead.

Great, thanks for the questions. I guess, maybe just a followup on that, on the last question from Justin. I mean, I know it's got to be extremely difficult to parse out, what's exactly COVID related versus what is not. But it does look like in the retail business, even excluding the amount that you highlighted, that margins are still down a few hundred basis points year-over-year. Is there anything else you can parse out as far as what you're seeing from mix dynamics and maybe other areas, traditional areas like procurement, anything around cost there? And then just how you're thinking about those factors as we think about your expectation Eva for gross margins to be in line in the second half of the year-to-date results?

Yes, thanks. Thanks for the question. So in terms of gross margin, let me go back a bit. In the segment margins declined about 240 basis points, as I said on my prepared remarks. About half of that, nearly half of that was what I'll call mix. So as you look at the purchasing patterns with pharmacy growing faster than front in the quarter, given the disruption by COVID, there's an impact there, as well as mix within the underlying front store basket as sales were lower in the consumer health and beauty categories, which carry a higher margin. And we also saw some drug mix impacts with new prescriptions depressed and the effects on the generic dispensing rate. I think if you look year-to-date at how retail long-term care is performing, it's performing well when you normalize for all of the different factors, obviously margins were stronger in the first quarter and we do expect them to improve in the back part of the year.

That's helpful and the Larry, if I could just follow up, I thought it was really interesting some of your comments on the care from the comfort of your home, and you talked about the new diabetes management program. I was wondering if maybe you could expand on that a little bit, just what the new diabetes program looks like, relative to the previous one? And then just any other comments on your digital solutions that you’re developing, do you think about the evolving landscape and some of these more differentiated offerings that you're bringing to the market?

Yes, Bob. Maybe just one other point just back on Avis, your question on retail that the other thing to keep in mind is, we shut off a lot of our extra care programs, as we went through the shelter in place orders. So those have been turned back on and that's another contributing factor in terms of why we would see a more normalized margin trajectory in the second half of the year. And then Bob, moving on to your question on the diabetes programs, a lot of it Bob is tied to managing the consumer, if you will, in a more holistic fashion. So, today we remotely manage their blood glucose levels with connected glucometers as one example, but we believe there's a much more broader opportunity recognizing it's just not about managing the diabetes condition, it is also managing the comorbidities that are associated with that. Okay? They go beyond diabetes is a chronic disease. And, those are things that we're going to be focused on that we believe at the end of the day are some of the real drivers in terms of bending the cost curve for those individuals and what we've seen with the pilot programs that we've done.

Make sense. Thank you.

We'll take our next question from Steven Valiquette with Barclays. Please go ahead.

Great, thanks. Good morning, everybody. So I guess with the commercial membership now only about 2% year-over-year in the second quarter, I guess I was curious to hear more about how that stacks up versus your expectations. And then are there any broad goal posts you can put around your commercial membership assumptions that are built into the guidance for the back half of 2020? Thanks.

Good morning Steve, it's Karen. Relative to commercial, we had anticipated more losses in commercial than we saw in the second quarter. We do think that's related to companies doing more furloughs and eliminating jobs. However, as we turn the corner for the rest of the year, we anticipate that we'll see continued commercial losses due to unemployment as the year emerges, although what we're seeing in July is similar to what we saw, in each month of the second quarter, but you can anticipate lower membership for commercial for the latter half of the year.

And Steve, obviously in terms of what actions the government could take that number could vary, right? There's uncertainty there.

Okay, just a quick follow-up just around Medicaid reimbursement adjustments. And there's some that could happen for 2020 and then some for next year. As far as the ones for 2020, any clawbacks et cetera, just curious if that's something that is material within any of your guidance assumptions for you guys or is that just kind of a rounding within the overall company as far as the guidance assumption through the 2020 in particular? Thanks.

Yes, relative to 2020 it's rounding and we have factored it into the numbers that Eva gave you relative to that $1.5 billion. What I would tell you on Medicaid is, every single state that we have has already built in mechanisms to return, any additional profits, so that's all been factored in but not material.

Okay, got it. Okay, thanks.

Steven it’s Alan. The one thing I would add is we have seen a reasonably significant uptick in membership within our Medicaid lives and the PBMs. So you're seeing that the shift in the demonstrated power of having a broadly diversified book.

So, we'll go ahead and operator we'll take two more questions. And we know that, many of you have another call at nine and we want to be respectful to that.

And we'll take our next question from Stephen Tanal with SVB Leerink. Please go ahead.

Good morning, guys. Thanks for the question. It sounds like you may have had some pretty solid wins in the National account part on the Aetna business. So I was hoping to just follow-up there and wondering how those that have contributed, if at all, and whether there's any self insured clients that have made them a central part of their network design at this stage?

We - relative to National accounts to clearly give you kind of a broad perspective, our National account customers are interested in, our integrated value and our integrated story. What I would tell you, if you look at our 2021, we have sold four times more pharmacy members this time compared to last year for 2021. And we've improved our pharmacy penetration from 34% to 39%. But as I, and we also are doing a lot to be in the market relative to the HealthHUBs, but relative to National accounts, it's been, a lumpy season for us. We did see a fair amount of our customers, and RFPs pull back and defer some of their decisions until 2022. We've had very solid retention. We've had some good sales, but generally speaking, if you look to 2021, I'd say that National account membership will be flat to down, really reflecting in Group attrition from unemployment. However, on the Group Medicare side, we've had very strong retention in the high 90s, very solid sales and you can expect growth in 2021 from Group Medicare.

And Steve, maybe I'll ask Alan to comment, similar question to the PBM in terms of selling season.

Yes, so on the on the selling season in general, we're about 90% through the sales season, we have a 98% retention rate as Eva said and we have $4.3 billion in gross new wins. We haven't, I'd say this season itself has been interesting and the lumpiness with COVID, but overall ending up about where we thought. The health, specifically on HealthHUBs we've seen a tremendous amount of interest in the HealthHUBs, not just from National accounts, but also from our health plan customers who want to understand how to better connect with their members in the community. So, very happy with where the sales season is right now. So and again, as I said a strong interest in the HealthHUBs.

Helpful, thank you.

And the next question comes from Lance Wilkes with Bernstein. Please go ahead.

Yes, just a question on your comment on looking at non-core assets and potential strategies related to them. I just wanted to understand the performance in the Long-Term Care business, the status of the turnaround there, and if there are any other assets that are particularly in focus as non-core?

Hi, Lance, it's, Eva. So let me take your second question first, right? I don't have any specific comments in terms of where we're, the things we continue to evaluate, but what you've seen us do is we divested our Brazilian operation that CVS now Workers' Comp. And, what I can tell you is, we continue to just thoroughly evaluate what's in our portfolio, how the dynamics in the marketplace are changing to make sure we're optimizing the business. In terms of Long-Term Care performance, obviously, it's been a segment that has been substantially affected by COVID. Right? As you look at the industry challenges, we've seen as an industry admissions down about 20% and facilities, some facilities continuing to not accept new patients, but not be shutdown per se. As you look at what Long-Term Care contributes to our overall bottom-line enterprise, right, it's, it's less than 2% of our overall enterprise profitability. As you look at what we're doing, we have made substantial improvements related to our service model over the last 12 months. And in Q1 of this year, we had the highest customer satisfaction score since we've been tracking this back to 2015. We're also, COVID and testing this vulnerable patient, right, we're continuing to drive opportunities there as Larry highlighted, and I would say we are aggressively managing our cost structure in this environment, and we have new leadership, leading the Long-Term Care business and we're really focused on driving improved performance here.

Okay, so, with that, let me just go ahead and wrap up before we sign off here. And a big thank you, and my sincere gratitude to, our 300,000 colleagues for all of their hard work across all parts of our organization, especially those that are working the front lines. And they have just displayed incredible commitment and effort during these unprecedented times. And all of that represents our best in terms of our commitment in helping people on their path to better health and we're proud to be able to serve our communities. It's such a crucial time in our nation's history. So with that, thanks again for joining us this morning and please stay safe and healthy.

And this will conclude today's CVS Health second quarter 2020 earnings call and webcast. You may now disconnect and have a great day.