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CVS Health Corp CVS
Q4 2009 Earnings Call Transcript

Transcript Call Date 02/08/2010

Operator: Good morning. My name is Celeste and I will be your conference operator today. At this time, I would like to welcome everyone to the CVS Caremark Corporation Fourth Quarter 2009 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions).

At this time, I would like to turn the call over to Ms. Nancy Christal, Senior Vice President of Investor Relations. Please go ahead, ma’am.

Nancy Christal - SVP, IR: Thank you, Celeste. Good morning, everyone, and thanks for joining us today for our fourth quarter earnings call. I’m here with Tom Ryan, Chairman, President and CEO of CVS Caremark, who’ll provide a business update, and Dave Denton, Executive Vice President and CFO, who’ll provide a financial review of the fourth quarter and guidance for the first quarter and full-year 2010. Larry Merlo, President of our Retail Business and Per Lofberg, President of our PBM Business are also here with us today, and both of them will participate in the question-and-answer session that follows our prepared remarks.

During the Q&A session, we ask that you limit yourself to one to two questions, including follow ups, so we can get to as many analysts and investors as possible.

This morning, we’ll 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 at info.cvscaremark.com/investor.

As always, today’s call is being simulcast on our IR website and will also be archived there for one-month period following the call to make it easy for all investors to access it.

Now I want to quickly let you know about an important upcoming event. Please save the date for our 2010 Analysts Day which will be held in the fall this year as opposed to the spring. We think that will be a better time of year to provide a more meaningful update on our progress in the PBM selling season. Our Analysts Day will be held on the morning of Friday, October 8th in New York City. We’ll provide more specific details in the coming months, but please mark your calendars. Again, that’s the morning of October 8th.

Also please note that we expect to file our Annual Report on Form 10-K by February 26 and it will be available through our website.

Now, before we continue, our attorneys have asked me to read the following 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, for 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 most recently filed Quarterly Report on Form 10-Q.

And now I’ll turn this over to our CEO, Tom Ryan.

Thomas M. Ryan - Chairman, President and CEO: Thanks, Nancy, and good morning, everyone. While we reported another solid quarter this morning, rounding out 2009 ahead of our initial plan, we did accomplish a lot last year and while we were not happy with our overall PBM selling season, our enterprise-wide financial performance was very good.

For the full year, net revenues increased 13% to a record $98.7 billion, adjusted EPS from continuing operations, excluding the tax benefit, increased 7.3% and we generated more than $3 billion in free cash flow. Lastly, we completed one $2 billion share repurchase program and then also began another.

Throughout 2009, we continued to enhance our position as the largest pharmacy healthcare provider in the nation. Highlights of our progress include, improved performance on key PBM metrics, our mail choice penetration was up 290 basis points, our generic dispensing rates up 200 basis points, and sizable growth within our specialty pharmacy, which was up 14%. We had a successful repositioning of our sales message to focus on our leading PBM capabilities first, and we’re seeing a positive response from the consultant community, as well as clients as we head into the 2011 selling season.

We made investments in technology that will position us well in the evolving healthcare environment. We began the roll out of our new pharmacy retail system, RxConnect, which will be the enabler to roll out the consumer engagement engine in our stores. We achieved industry-leading results, again, in our retail business, with total comps for the year up 5% and pharmacy comps up 6.9%.

The integration of Longs was successfully completed and will drive improved profitability in 2010 and the years ahead. We opened up one retail call center that will eliminate 85% of the call volume in our busiest stores. We announced a strategic alliance with Inverness Medical Innovations through its Alere management business. This alliance with Alere further enhances our industry-leading accordant disease management capabilities, strengthening the clinical options we have for our PBM clients.

As you know, we also increased our investment in Generation Health that accelerates our commitment to personalized medicine and will make genomic benefit management an integral part of our PBM offering.

We also strengthened our senior management team bringing in Dr. Andy Sussman to head up MinuteClinic. We hired Len Greer as the new Senior VP of Head of PBM Marketing. And of course as you all know, we hired Per Lofberg as President of our PBM.

Let me talk a little bit about the trends in our business and I’ll in fact start with our PBM. Here are some of the highlights. We have net revenues up 14.5%. Our pharmacy revenues are up 19.1% and mail choice revenues up 6.3%. Our generic dispensing rate, as I said, is up 220 basis points versus last year to a record 68.9%. And our EBITDA per adjusted claim is up 7%, which was up $4.89, and this is on an apples-to-apples basis excluding RxAmerica.

Here’s a brief wrap up on last year’s selling season for 2010. Last quarter, I said we had about 1.5 billion remaining to be renewed in 2010. As you know, we successfully renewed the Teacher’s Texas Retirement System contract as well as some others. So now we have about 500 million and 550 million remaining for renewal in 2010.

These contracts start at various points through 2010 but mostly in the last quarter, so they won’t be decided for a while. We are obviously well underway working on opportunities in 2011. There are significant large number of prospects out to bid. I’m optimistic about the selling season and I can tell you at our National Sales Meeting last week, our sales force was equally excited and energized about the selling season.

We’re talking to clients now about how we can lower their costs and improve the member experience. We’ve had a long history of top notch customer service at Caremark and our latest surveys show service metrics are better than ever and that last year’s isolated service issues are definitely behind us. We also have data that show we have best-in-class generic dispensing rate, the best specialty trend, the best clinical outcomes as evidenced by our industry-leading adherence stats.

They also show that we can achieve channel optimization and savings for our clients because we have more effective ways to drive 90-day utilization, especially with Maintenance Choice.

Let me give you an update on Maintenance Choice. We have 412 clients represent about 5.1 million lives already implemented on Maintenance Choice with an additional 70 clients and over 400,000 lives in the process of being implemented. So now, we’ll have over 470 clients and almost 5.5 million lives on Maintenance Choice. That’s up from 130 clients at the beginning of 2009. We expect that number to grow even more.

You should know that 10% of our clients on Maintenance Choice are new to CVS Caremark. Clients switching from voluntary mail to Maintenance Choice see a significant increase in 90-day utilization with a substantial savings for the client and their members. It’s important to note that our GDR and adherence measures also improve with Maintenance Choice, so it’s really a win-win.

While 17% of the lives adopting Maintenance Choice in 2009 came from voluntary mail plans, about 41% of the lives adopting it in 2010 came from these voluntary mail plans, so clients will see some significant savings.

We’re also seeing increasing adoption of our high-performance formulary and step therapy plans, as clients continue to look for creative ways to save money. Clients are increasingly concerned about controlling specialty spend. We have long been the clinical leader in specialty, providing programs that improve patient engagement and better manage cost and health. Our care team approach leverages the expertise of our clinical pharmacy staff that specializes in managing the needs of patients taking specialty medications.

Through proactive outreach and communications to patients at mail and retail, we identify potential clinical and compliance issues before they become a problem, both prior to treatment initiation and throughout the treatment. Our latest data shows that on an annual basis, our specialty guideline management program has saved clients over $200 million in avoided drug costs.

We currently have about a 60% penetration in our PBM book, so we see an opportunity to increase PBM client pull through. We are also seeing an increased interest in the marketplace in our high-performance specialty formulary, which includes step edits and obviously our specialty guideline management program.

Clients are slowly beginning to discuss genetic testing, both pharmacogenomics, which is the right drug to the right patient, and medical genomics, which is patients with genetic predisposition to certain diseases, such as breast cancer. We believe our investment in Generation Health positions us to take a leadership role in the utilization management of genomic testing.

Another tool that will help broaden our clinical capabilities across our asset base is what we’re calling Consumer Engagement Engine or CEE, which provides us with a single view of the patient. The CEE started rolling out in the fourth quarter of last year where we implemented it first in our PBM customer care center. When members call in, we are able to message them on some important opportunities for health improvement or cost savings, whether it’s a savings from preferred formularies, generic savings or gaps in care. The CEE will be across all our channels, that is, it will be live at retail in mid 2010.

Moving on to the retail side of our business, I’m very happy to report that we continue to lead the industry. Our retail team continues to do a terrific job in merchandising, marketing in a core store-level execution. This quarter, our retail business delivered significant margin improvement, driven by pharmacy in front, store margin increases and disciplined expense control. We continue to gain pharmacy share. Our retail share, excluding Longs, grew 68 basis points nationally versus last year’s fourth quarter, and our retail share in markets in which we operate grew 85.

Recall that Longs stores are included in our comps for the first time in this quarter, beginning in November. And as we expected, the inclusion of Longs had a slightly dilutive impact on our fourth quarter comp performance. We expect that to continue through the first half of 2010 and it should turn positive in the second half. Note the impact on our comps from Longs for the full year 2010 should be neutral to slightly negative.

Keep in mind that we don’t expect Longs to provide a major boost in comps in the back half. The Longs story, like the Sav-On/Osco acquisition, is more about driving improvements in margin and profitability than it is about driving dramatic top line improvements.

For the fourth quarter, total same-store sales increased 4.9% and the Longs stores had a 66 basis point negative impact on comps in the quarter. Pharmacy comps increased a solid 7.3% and that was despite 34 basis point impact from the inclusion of Longs. Our pharmacy comps saw a 290 basis point negative impact from generic introductions. Our generic dispensing rate rose to an all time high of 70.6 in the fourth quarter. Our pharmacy comps saw a positive impact of 270 basis points from Maintenance Choice. That’s up from 250 in the third quarter, 190 in the second and 120 in the first, so we continue to drive Maintenance Choice throughout the Company.

(indiscernible) increased 5.4% in the quarter. We saw a significant growth in flu-related prescriptions in October and November and which then fell off significantly in December. And flu indications have dropped even more sharply throughout the country in January, which you should keep in mind as you model the quarter. Now having said that, our comps have led the industry for the past couple of years and January was no exception.

Turning back to the fourth quarter, front store comps increased 0.3%, but note the inclusion of Longs had a 104 basis points negative impact on comps. We had good growth in most of our core categories across the chain. In light of the high incidence of H1N1 virus, we had especially strong growth in the cough and cold category in October and November. We had a very successful Christmas selling season with sales, margin and sell-throughs up versus last year. Our merchants really did a great job placing a heavier emphasis on the value of traditional gift giving products with less emphasis on light sets and gift wrap.

Like last quarter, our average front store transaction on a comp basis grew slightly in the fourth quarter despite the fact that customers are seeking to buy more on promotion. And like the third quarter, we saw comp traffic up slightly again.

Private label accounted for 17.6% of front store sales in the quarter. We introduced 108 private label items in the fourth quarter and added 913 items throughout 2009. In the Longs mainland stores, private label increased to nearly 16% of front-end sales. That’s up over 1,000 basis points from last year’s quarter.

Let me update you a little bit on Longs. We introduced the newly renovated re-merchandised stores in the marketplace in November and the response has been excellent. We’re basically changing the way customers are using our stores. We’re focusing more on healthcare and core offerings and store brands and less on low margin consumables. Front store traffic and average ring improved 178 basis points and 137 basis points respectively compared to the fourth quarter.

We’re already exceeding our profitability targets at Longs, driven by strong margin performance as well as solid expense management. As I mentioned, the introduction of private label products has been very successful and will help drive margin improvement at Longs.

Our ExtraCare program continues to increase – usage continues to increase in the Longs stores and were basically almost at the same levels of core CVS stores. So the Longs acquisitions add over 4 million ExtraCare cardholders and our active card base is now 64 million people. I’m extremely pleased with our progress at Longs and I fully expect the acquisition to benefit us in 2010 and beyond.

Let me update you on some real estate. We opened 31 new or relocated stores in the quarter, closed six, resulting in 17 net new. For the full year, we opened up 287 stores, resulting in 102 net new stores or 3% square footage growth. That equates to about 2% retail square footage growth when you include the Longs in the store base. So this once again is consistent with our past plans of steady and profitable growth.

We completed 200 file buys for 2009 and expect to do the same number in 2010. We’ll open about 250 to 300 new stores, 100 of these will be relocations in 2010; once again, 2,000 square feet – or 2% square footage growth.

We entered some new markets, St. Louis in January, Memphis in late January. We’ll open up four stores in Puerto Rico with our first stores in mid February.

Let me provide a quick review of MinuteClinic, which has now surpassed 6.2 million patients since its inception. We opened seven clinics during the fourth quarter and now have 570 clinics in 56 markets. Traffic was up 50% versus last year’s quarter for acute visits. We continued to expand our third-party coverage, adding about 9.9 million lives and now over 80% of the business in the quarter are third-party paid.

The team – Andy Sussman and our team continue to add new products and services. For example, we rolled out asthma monitoring and screening on a national basis in the fourth quarter, (filing) the diabetes monitoring service for patients already diagnosed with diabetes. In 2010, a key focus will be adding protocol driven monitoring services for common chronic illnesses, such as hypertension and high cholesterol. This will be done in coordination with a patient’s medical home and is designed to improve adherence and outcomes.

So we remain enthusiastic about the long-term prospects of MinuteClinic. As you know, we invested $0.05 to $0.06 in MinuteClinic last year and this year, we expect to invest a little less, to dilute about $0.04 to $0.05 a share, including the $0.01 per share we related to the move for MinuteClinic’s offices in Minneapolis to Rhode Island. We believe the move will facilitate sharing and will improve the speed to market for our new products. We still expect MinuteClinic to breakeven by the end of 2011 on all in basis.

Now let me turn it over to Dave Denton, our new CFO, who I’m pleased to have with me today. And this is Dave’s first earnings call, so go easy on him. David?

David M. Denton - EVP and CFO: Thank you, Tom, and good morning, everyone. While I’ve had the pleasure of meeting some of you, I look forward to working with all of you in the coming weeks. I’m happy to be here today to provide a detailed review of our fourth quarter financial results. I’ll also provide guidance for 2010 on a full year and first quarter basis.

Before I begin to review our financial performance, I thought I might touch upon our approach to capital allocation. As Tom stated at a conference last month, we have modest financial leverage and we’re comfortable with our current credit ratios. We expect to generate significantly more free cash flow over the next five years than we generated in the past five years. And we expect to use the majority of our free cash flow in the near term to enhance shareholder returns.

As you know, in January we announced a 15% increase in our dividend. This is seventh consecutive year of dividend increases and it’s been growing at a compounded annual growth rate of 18%. We intend to continue to review the dividend annually and to do share repurchases that are value enhancing.

During the quarter, we began our new $2 billion share repurchase program, which our Board authorized in November, and we repurchased about $500 million worth of our stock. While this authorization extends through 2011, given our current share price, we think it’s a great investment to complete the remaining $1.5 billion of our current authorization in the first half of this year, and we plan to do so.

Turning to the income statement, adjusted earnings per share was $0.79, an increase of 14%. Excluding the tax benefit, which amounted to about $0.01, it was $0.78, an increase of 13%. GAAP diluted EPS came in at $0.74 for the quarter. Keep in mind that the fourth quarter of 2009 had three fewer days than the fourth quarter of 2008, which I’ll refer to throughout my financial review as the calendar impact.

On a consolidated basis, revenues in the fourth quarter increased 7% to $25.8 billion. Revenue growth was muted by the calendar impact but it benefited from a full quarter of sales in 2009 for both Longs and RxAmerica versus the partial quarter last year. These two factors more or less offset each other.

In our PBM segment, fourth quarter net revenues increased 14.5% to $13.5 billion. RxAmerica contributed approximately $1 billion of that growth, largely due to the change in revenue recognition method from net to gross, a change that began in the second quarter of 2009. Adjusting for the calendar impact and RxAmerica, our underlying revenue growth in our core PBM was 8.6%.

Drilling down a little deeper, PBM Pharmacy network revenues in the quarter rose 19.1% to $9.1 billion. Pharmacy network claims were down 5.6%. This decline was driven again by the calendar impact, the net impact of new business and terminations, and importantly the increase in mail choice penetration as we saw claims move from network to mail. Offsetting these, of course, was the addition of RxAmerica.

Total mail choice revenues grew by 6.3% to $4.3 billion. Our overall mail choice penetration rate of 23.6% was up 190 basis points from the rate in the fourth quarter of 2008 on a reported basis. However, RxAmerica’s claims mix, which as you know is heavily weighted towards retail network claims, diluted the mail choice penetration rate. So without RxAmerica, our core PBM mail choice penetration rate grew from 23.2% to 26.1%.

In our Retail business, we saw revenues increase 4.5% to $14.5 billion in the quarter. A full quarter of Longs versus a partial quarter last year was responsible for about one-third of that growth. By excluding Longs and adjusting for the calendar impact, the underlying growth rate of the core retail business was 7.4%.

Turning to gross profit, the overall dollars for the Company improved by 7% despite (percentage) margin dropping by 8 basis points. Within the PBM segment, gross profit margin was down 69 basis points. That was expected due to the change in the revenue recognition method for RxAmerica, as well as pricing decisions we made during the 2009 selling season. These were offset to some degree by an increase in GDR, as well as growth in the Medicare Part D business year-over-year. The gross profit margin in the Retail segment improved by 81 basis points in the quarter to 31.2%. This largely reflects the positive impact of new generics, as well as increased private label penetration, especially in the Longs stores, offset by continued pressure on pharmacy reimbursement rates, especially those associated with state Medicaid programs.

Our overall operating expenses as a percentage of revenue improved by 24 basis points, but PBM’s segment’s percentage was flat at 1.8% despite the impact of the elimination of the Universal American joint venture and the additional expenses incurred for the RxAmerica integration effort. So the PBM turned in some excellent expense control.

The Retail segment held steady with last year’s fourth quarter, even though we invested in name change events associated with the Longs acquisition. So we saw good spending discipline at the store level as well. Within the Corporate segment, expenses were $140 million, less than 1% of consolidated sales.

So with improvements in SG&A as a percent of sales outpacing the slight decline in gross margin, operating margins for the total enterprise improved as expected. It was up 17 basis points to 7.3%.

Moving to the consolidated income statement, we saw net interest expense for the quarter decline by $18 million to $133 million, largely reflecting lower interest rate on our floating rate notes as well as the retirement of the bridge loan associated with the Longs acquisition. Our effective income tax rate was 40.3% in the fourth quarter. As we did in the third quarter, we again recorded previously unrecognized tax benefits related to the expiration of various statutes of limitations with tax authorities. The benefit this quarter was approximately $7 million, significantly smaller than the previous quarter.

Turning to the balance sheet and cash flows, we generated over $1.8 billion in free cash flow in the fourth quarter. That compares to $1.1 billion in the prior-year period. That was, of course, driven by the large increase in proceeds from sale leasebacks year-over-year. We successfully executed $814 million worth of properties in the fourth quarter of 2009 versus only $7 million in the prior-year period.

Given this, we saw an inflow of net capital expenditures during the quarter of $18 million. This was the result of offsetting $796 million of gross capital expenditures with the sale leaseback proceeds. For the full year, we generated free cash flows in excess of $3 billion, lower than we had forecasted. We missed our working capital targets specifically within inventory and accounts payable. This reflected in part from pharmacy pre-buys, as well as our decision to build up inventory for the flu and cough, cold categories. The severity of the flu has been lower than anyone had predicted. Having said that, we view working capital management as an area of opportunity for us going forward.

Let me now turn to our guidance for 2010. We expect to deliver adjusted EPS from continuing operations in the range of $2.74 to $2.84 and GAAP diluted EPS of $2.56 to $2.65. That includes our expectations that we’ll complete the remaining $1.5 billion in authorized share repurchases by the end of the second quarter. It also includes our expectations that Longs will add about $0.10 per share versus last year.

For the PBM segment, we expect operating profits to decline by 10 to 12%, while we expect operating profit to grow from 13% to 16% in the Retail segment. We expect operating margins for the total Company to be modestly up from 2009 levels.

For the PBM segment, we expect revenue to decline 4% to 6% for the year. For the Retail segment, we expect revenue to increase 5.5% to 7.5% and same-store sales to increase 4% to 6% for the year. For the total enterprise, we expect revenue to be roughly flat to 2% up from 2009 levels. That is after intercompany eliminations, which are projected to equal about 7% to 7.5% of combined segment revenues.

For the total Company, gross profit margins are expected to moderately improve relative to 2009 levels, with the PBM segment modestly down and retail flat to down. To be clear, total Company margin will moderately improve due to segment mix. We forecast the total Company operating expense as a percent of revenue will moderately decline with retail moderately improving and PBM modestly declining. The Corporate segment will grow more or less in line with the blended rate of the other two segments.

We forecast net interest of about $590 million to $620 million at tax rate of 40% and approximately 1.39 billion weighted average shares for the year. We expect total consolidated amortization for 2010 to be roughly equivalent to the levels in 2009. Combined with estimated appreciation, we project approximately $1.4 billion in D&A. We expect gross capital expenditures to be in the range of $2.4 billion to $2.7 billion, essentially flat to 2009. However, our net capital expenditures are expected to be higher than 2009 due to our expectations for lower proceeds from sale leasebacks in 2010.

As you know, during 2009, we completed nearly $1.6 billion in sale leaseback transactions. That was significantly higher than a typical year, given that we carried some over from 2008’s pipeline as we waited for the financial markets to improve. For 2010, we estimate that we will return to a more normal, pre-acquisition level of sale leaseback transactions, which is about $500 million to $600 million annually. In light of the lower amount of sale leasebacks, we expect free cash flow to be in the range of $2 billion to $2.5 billion in 2010. I expect free cash flow to accelerate in 2011 and beyond.

Turning to the first quarter, we expect revenue growth for the total Company to be in the range of 3% to 4%. In the Retail segment, we expect total same-store sales growth to be between 3% and 5%. We expect adjusted EPS from continuing operations to be between $0.57 and $0.59 per diluted share compared to last year’s $0.55 per share. GAAP EPS is expected to be in the range of $0.53 to $0.55 per diluted share. We project that retail operating profit will be up mid to high single-digits in the first quarter, but that will quickly improve as we move through the year as easier comparisons occur and our initiatives kick in.

More specifically, there are a few things you need to keep in mind when modeling our quarterly results for the Retail segment. First, most of the integration costs associated with Longs occurred in the second half of 2009. The comparison this year to last year then is more difficult in the first half. Second, we expect the Longs stores to see an improving profitability, weighted towards the second half of 2010. As Tom said, Longs will likely cause a drag on total comps in the first half of 2010.

Finally, the timing and mix of new generics is also a factor in the first quarter. Note that full year generics are less helpful in 2010 versus last year, due to the timing of the generic pipeline. From an earnings growth perspective, all the other quarters this year will show good progress versus last year.

I also want to note that PBM operating profit is expected to be about flat to slightly down in the first quarter as we have an easy comparison to last year’s first quarter due to the litigation reserve recorded in 2009. I hope that helps you with your models and provides a comprehensive picture of our forecasted performance.

With that, let me turn it back to Tom.

Thomas M. Ryan - Chairman, President and CEO: Thanks, Dave. As Nancy said, we have Larry Merlo and Per Lofberg with us today, and we’ll ask them to participate in the Q&A discussion on each of the earnings calls going forward. I thought, though, however, given the fact that Per has just joined the team, I’d like to ask him just to say a few words on his early days at CVS Caremark before we open it up for questions. Per?

Per Lofberg - EVP and President - Caremark Pharmacy Services: Thanks, Tom, and good morning, everyone. I’m very glad to be here at CVS Caremark and I look forward to talking with all of you in the investment community from time to time throughout the year.

I will focus my brief comments here on some introductory remarks about the upcoming 2011 selling season, since that seems to be a topic of great interest to many of you out there. The bottom line is that I’m very encouraged and confident about everything I’ve seen so far in the month since I joined the Company. I don’t see any important barriers to our ability to participate proactively and successfully in the competitive bidding process that we have ahead of us.

As I think many of you are aware, the season is just getting started, with a large number of plans expected to go through an RFP process this year. This will play out over the next six to nine months and I look forward to giving all of you an in-depth briefing on our business later on in the year, including a summary of progress on both renewals and new business.

Since I started the job a month ago, I have looked carefully around the Company for any signs of serious client dissatisfaction or service problems, which could hold us back in the upcoming selling season. So far, I’m glad to say, I’ve not come up with anything of concern and the customers I’ve met personally have not expressed anything but satisfaction with the work done by the Company.

Also, the January installation process, which is always a sensitive time in this industry, when new clients are installed beginning on January 1, has gone very well for us. If you stumble in this process, as can happen from time to time, it certainly can cloud the outlook for the upcoming season. I view the problems, which clearly caused some setbacks for the Company last year, as isolated issues which have been corrected and I don’t see any systemic issues that could hold the Company back this coming year.

As I’ve traveled around the Company this past month, I continued to be impressed by the breadth and depth of talent in the organization and the number of innovative programs underway, which can offer new improved solutions to customers. These include, among other things, programs which integrate both benefit design and member and physician interaction across Caremark’s mail service platform and CVS retail stores. And Tom alluded to some of them in his presentation a few minutes ago, and they can deliver greater savings to customers and better experience for consumers. The early results here are extremely intriguing and encouraging. When scaled out across the enterprise, they could offer compensative advantages which cannot easily be replicated by others.

I plan to be partially – heavily engaged with our organization in the business development activities this year and as I said earlier, I look forward to giving all of you an update on our progress later on in the season. Thank you very much.

Thomas M. Ryan - Chairman, President and CEO: Thanks, Per. Okay, now we’ll open it up for questions.

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