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Express Scripts Holding (NASDAQ:ESRX)

Q4 2012 Earnings Call

February 19, 2013 9:00 am ET

Executives

David Myers - Vice President of Investor Relations

Jeffrey L. Hall - Chief Financial Officer and Executive Vice President

George Paz - Chairman, Chief Executive Officer and President

Analysts

Lisa C. Gill - JP Morgan Chase & Co, Research Division

Glen J. Santangelo - Crédit Suisse AG, Research Division

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

Robert P. Jones - Goldman Sachs Group Inc., Research Division

Robert M. Willoughby - BofA Merrill Lynch, Research Division

John Kreger - William Blair & Company L.L.C., Research Division

George Hill - Citigroup Inc, Research Division

Ricky Goldwasser - Morgan Stanley, Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, VP of Investor Relations, Mr. David Myers. Please go ahead, sir.

David Myers

Thank you, operator, and welcome to our fourth quarter earnings call. With me today are George Paz, Chairman and CEO, and Jeff Hall, our CFO.

Before we begin, I need to read the following Safe Harbor statement. Statements or comments made on this conference call may be forward-looking statements and may include financial projections or other statements of the company's plans, objectives, expectations or intentions. These matters involve certain risks and uncertainties. The company's actual results may differ significantly from those projected or suggested in any forward-looking statement due to a variety of factors which are discussed in detail in the company's filings with the SEC.

For clarity purposes, all numbers we talk about today will be on an adjusted basis. Please refer to the tables in our press release for reconciliation of GAAP to the adjusted numbers we will be discussing. The reconciliation of EBITDA to net income can also be found in our earnings release. The earnings release is posted on our website.

At this point. I'll turn the call over to Jeff who will discuss our fourth quarter results and our guidance for 2013.

Jeffrey L. Hall

Thank you, David. Our fourth quarter results concluded a very strong 2012. We finished the year reporting earnings per share of $3.74, up 26% over 2011. The year benefited from strong integration execution, the accelerated realization of synergies and increased generic and home delivery utilization, which helped drive our clients' trends to record loads [ph].

For the fourth quarter, earnings per share were $1.05, up 28% over the same quarter last year. Gross profit margin was 8.6%, up 120 basis points from last year and 50 basis points sequentially as a result of higher generic utilization, supply chain efficiencies and the realization of synergies. SG&A was $785 million, up from $651 million last quarter, reflecting increased IT spending on several corporate initiatives, increased management incentive compensation commensurate with overall performance and the normal seasonal ramp in expenses to prepare for 1/1. EBITDA was $1.6 billion, up 131% from last year, and EBITDA per adjusted script was $4.01, up 10% from last year.

Cash flow for the quarter was $2.6 billion and for the year, was $4.8 billion. Cash flow was positively impacted by timing and other factors around year-end, which pulled approximately $500 million of cash into 2012.

This strong year positions us well for 2013. We expect to achieve 2013 earnings per share in the range of $4.20 to $4.30, which represents growth of 12% to 15% over 2012. Adjusted claims are expected to increase approximately 5% to 7% over 2012. This increase in claims reflects the additional quarter of claims from Medco, new business wins, utilization of 0% to 1%, and these increases are partially offset by the roll-off of approximately half of the United claims during 2013.

SG&A in the year is expected to decline approximately 8% to 10%, resulting from the realization of additional synergies, lower management incentive compensation and the sale of our Liberty business in December of 2012. Both gross profit and SG&A for Liberty were approximately $135 million in 2012.

These decreases were partially offset by adding an additional quarter of Medco. EBITDA per Rx will increase 15% to 18% over 2012. We expect that noncontrolling interest will be approximately $20 million and depreciation is expected to be $385 million to $400 million.

Interest expense will be reduced by the planned redemption of the $1 billion of 6 1/4% senior notes in the first half of 2013. Cash flow from operations is expected to be $4.5 billion to $5 billion in the year.

Including estimates for the exercise of options and share repurchases, we expect fully diluted shares outstanding for the year to be between 825 million and 835 million. As in prior years, our focus remains on achieving our guidance for the year and positioning the company for longer-term growth. As a result, we do not guide individual quarters.

We had an outstanding year in 2012, closing the transaction with Medco, making considerable progress with integration, generating 26% earnings growth and setting up for 12% to 15% growth in 2013, while continuing to make investments to prepare for Health Care Reform and to extend our differentiated offering.

At this point, I'll turn the call over to George.

George Paz

Thank you, Jeff, and good morning, everyone. We've closed the books on one of the most successful and transformative years in our company's history. And we're starting a new chapter. We are bullish on the PBM industry and, in particular, our strategic positioning. Making use of prescription drugs safer and more affordable has been our mission for the past 25 years. We've built Express Scripts in a thoughtful, strategic way with acquisitions, helping to build scale and create an industry-leading suite of clinical tools to address the needs of plan sponsors and patients. We've always anticipated changes and challenges in the healthcare marketplace, and found ways to help clients adapt and safely navigate through the environment. This track record of success has benefited clients, patients and stockholders. Many of you have asked for clarity around the future of the PBM industry and our long-term earnings growth outlook. As you know, we do not provide multiyear guidance. However, now that we are nearly 1 year into the integration, I want to take this opportunity to share our thoughts on the future of the PBM industry and Express Scripts in particular.

Since our founding, our commitment to innovation has allowed us to create better healthcare delivery for America. We created world-class tools designed to increase generic utilization, develop superior clinical programs to improve health outcomes, drove lower-cost home delivery and improved the cost and quality of specialty pharmacy. More recently, we have combined our research regarding behavioral sciences and the expertise of specialized pharmacists to further improve health outcomes and lower costs. The feedback from our clients has been overwhelmingly positive regarding our extended product portfolio. Our focus on delivering superior value to our clients, patients and stockholders has never wavered.

As we head towards 2014 and the introduction of insurance exchanges, additional costly regulations, escalation of brand drug prices and specialty drug utilization, our clients face unprecedented challenges to control the pharmacy benefit. Today, we are better positioned than ever to help clients and members navigate the landscape on the eve of Health Care Reform. Approximately 80% of the new lives that will obtain coverage beginning in 2014 are concentrated in 25 states. Our managed care partners have solid market positions in virtually every one of these states.

As a result, we are confident of our positioning in the rapidly changing healthcare environment. Our positive outlook is reinforced by several key drivers impacting the PBM industry overall. These include an aging population, Health Care Reform that will result in new participants in the insured marketplace, the anticipated introduction of new specialty drugs, the continued exploration of patents on branded drugs and the continued increase in the use of more efficient distribution channels such as home delivery and narrow networks.

Although all PBMs will benefit from this industry growth drivers, each individual year has a potential to be influenced by a variety of headwinds and tailwinds such as the economic environment, client retention, new product introduction and the dynamics of the pricing environment. Based on the PBM trends, our strategic positioning, client mix and our differentiated and informative platform, we are excited about our future.

Before I close, I would like to take a second to recognize the tremendous effort of our more than 30,000 employees. Our employees have worked untold hours in combining clinical programs, IT systems, operating platforms and back-office functions to seamlessly provide best-in-class services to our clients and patients. Their dedication and passion is second to none.

At this point, we will be happy to answer any questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] We'll go to the line of Lisa Gill.

Lisa C. Gill - JP Morgan Chase & Co, Research Division

I had just 2 questions. One would be, for near-term, can you give us an idea of what the size of this year's selling season looks like compared to other years? I know that it's a new year with a combined offering, and can you also just give us an idea of what customers are looking for, what the early feedback has been from customers as we think about this? I think investors are focused on this 2014 selling season. And then secondly, you talked about a lot of the positive factors going into the longer-term outlook for the PBM industry. And I know you want to stay away from giving guidance, but can we think about the industry being a double-digit grower given the amount of cash flow that yourself and the rest of the industry will produce over the next several years?

George Paz

Well, yes. Let me talk about the selling season first of all. This is very early on, as you might suspect. But I think this is going to be a different selling season than most. When you look at -- we're on the verge of 2014, which is the introduction of the exchanges. Many states have opted in. Some states have opted out. There's just a tremendous amount of uncertainty surrounding how this is all going to roll out. For companies that are large in nature, spanning many, many states, there's a lot of process that has to go on here. And since the exchanges don't even exist for the most part today, people don't want to take their employees, which is their most important asset, and just throw them at something that's unproven at this point. So I think this coming year is going to be probably not a big impact from employers. There's a lot of rumors out there about employers dropping coverage and moving on. Clearly, some employers that are in deep financial stress that have no other choice to survive, will make decisions such as that. But I think there's going to be a lot of wait and let's see. Let's figure out what happens. At the end of day, again, your workforce is your most important asset. And if those -- if your people aren't happy and they're not getting the coverage they need, and people are spending all their time on the phone trying to navigate whatever the world's going to look like at that point, that's going to be tough. And I don't know what that does to productivity and other items, but it can't be good. So I don't think you're going to see this rush of people dropping. Nothing we see shows that evidence or shows those numbers. At the same time, managed-care companies I think are going to be probably not as quick to change PBMs this year as they do in the past. It's not to say if you don't have a bad service issue or you don't have an account manager that leaves and they were the person that was closest to the client and therefore you have some disruption, that there won't be some changes. But I think it's going to be a little different. As companies -- the managed-care industry really has to brace itself -- how often does an industry get the chance to welcome so many new participants into the field? And changing over a lot of your processes while you're trying to win share is often not an easy task. So I think this is going to be a bit of a stable year in that regard, managed-care company turnover. I do think that Express Scripts is ideally positioned though, with what we do, our ability to reach out to individual patients, our behavioral science coupled with the specialized pharmacists we were fortunate enough to gain from the Medco acquisition. It has really positioned us well to be a leader in this space. And as I said in my prepared comments, when you look at the distribution of uninsured coming to the market, we feel great about our representation. Our job now is to help our clients position themselves well for that -- for the market that's about to unfold. When you think about guidance beyond 2013, we don't give numbers. Think about where we're at today. Our clinical pharmacists are out talking with our clients on a daily basis, looking at their needs and their demands on -- that they have, and trying to sell them new products that will help them drive down their costs. When they save money, we make money, which is a great combination. Our people are focused on that. So between our account managers, our clinical pharmacists, we are constantly in front of our clients and we're selling to them. We're selling them options to help them improve their health outcomes, while driving down those costs and improving our shareholder value proposition. That goes on throughout the year. In addition to that, when we look at the renewal season, new client wins don't have much of an impact on first year. So if we sell something in 2014, although I know a lot of people like to make banner news out of these things, if it's a large enough client to warrant discussion, the profitability of those clients usually aren't that great. And it may make for big headline news, but at the end of the day it has very little impact, if any, on earnings. But the other side to that is retaining clients where you have relationships and you've got all of your infrastructure already established and it's an ongoing annuity stream where you're helping that client continue to save money while you -- while we make money for our shareholders, that's a very important part of our business and we don't have great clarity around that today. Although I do think it's going to be a lighter-than-normal season, there's still roughly 25% of the book, although again, I think this will be a bit lighter this year, is up for renewals. So we have to work our way through that process but we just don't like to go out on that limb and talk about the future. I think if you look at us historically, every year we've grown in excess of double-digits, so we feel great about this industry but we're not going to comment on 2014 or out years.

Operator

We will now go to the line of Glen Santangelo with Credit Suisse.

Glen J. Santangelo - Crédit Suisse AG, Research Division

George, I was just wondering if I could get some of your updated thoughts on the competitive landscape. You're facing a bunch of different competitors that all have sort of different financial motivations and metrics that may be driving their respective decision-making processes. And so I'm kind of curious as to are you seeing any change in that competitive landscape as a result of that or is it kind of more business as usual?

George Paz

Well, again, I was asked that question in 1998, and the marketplace was incredibly competitive and I don't think it's changed one bit since. Everybody is constantly trying to figure out new ways to gain clients and retain clients. And I think the best way you do that is having top-of-notch, best in -- world-class service offerings and at the same time, bringing them clinical programs, which drive down costs. If you're forced to compete because you don't have a broad spectrum of products and offerings, and all you have to compete on is price, then you're at a tremendous disadvantage because you can drop your prices low enough that somebody may choose your services, but the other side of that equation is at the end of the day, it doesn't matter. Nobody cares about our profit or my competitors' profits. What they care about is their overall drug cost. The amount that the head of HR has to bring to the CFO during the budget process is the most important aspect of their job. And so to the extent that I can take out 3%, 5%, 6%, 8%, 10% out of their drug cost, in any given year, I have a variety of ways to do it. I can do it through clinical programs, I can do it through benefit offerings or I can do it through pure price changes. And just to be totally frank, if I'm doing it through price changes, then we don't need marketing departments and we don't need product departments, and that's not where we put our time. We put our time behind those things that are going to make our clients happy. By the way, when all you do is compete on price, that's a vicious cycle that you're in because you're not bringing the client anything new but further reductions in price, which ultimately erodes shareholder value. We would rather take our money, invest it in clinical programs and new products that allow us to sell items to our clients, which allow us to drive down their costs to even lower rates than pure discounts, increase shareholder value. That's been our focus since our inception and we'll continue to focus on that.

Glen J. Santangelo - Crédit Suisse AG, Research Division

Maybe if I can just ask one follow up to Jeff. Jeff, can you give us a sense for what level of capital deployment may be embedded within the guidance? And I think if I go back to what you said last year, ultimately, that the deal you had worked out with the rating agencies was to get that leverage back to 1 to 2x, is that still the case? Are you anticipating on getting there by the end of this year? And how should we think about the timing of more accelerated capital deployment?

Jeffrey L. Hall

We're real happy with how our capital structure has played out. We were able to accelerate some cash flow into '12. We ended with a nice strong cash balance in '12. We guided to $4.5 billion to $5 billion of cash from ops this year, which is great. So we're certainly ahead of our plans on cash flow. We announced that we are repaying -- or repurchasing $1 billion of bonds. We were ahead of schedule last year. We're moving forward with more repurchases this year. We're not being specific about how much we plan to repurchase. It's difficult to do. You have to estimate prices and everything else. But we're certainly ahead of schedule with where we want to be. We're excited about our execution here and think that we'll be in the market buying back stock midyear, plus or minus.

Operator

We will now go to the line of Tom Gallucci with Lazard.

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

Two questions. Maybe, first for Jeff, just wondering if you could tell us where you sort of are in that ramp of synergies? I'm assuming you're still sort of comfortable with that $1 billion. Any color on where you've been and sort of what do you expect this year or into '14? Maybe some of the major activities that are behind us and are still in process?

George Paz

Before I give it -- turn it over to Jeff, Tom, let me just address the $1 billion. When we go do due diligence, we can see the differentials in pricing between the 2 companies. And by that, I mean discounts at given retailers and rebate levels and operational efficiencies across sites and cost to -- back-office costs and what have you decided what things can be eliminated. And we put our best guess at that number. Once we close, we don't really spend a whole lot of time and effort because we don't really think it provides much value in trying to determine how much of the value that's being created out of our growth is coming out of synergies versus just business as usual. And when you think about it, our supply-chain people are constantly out there consulting with big pharma and trying to get better discounts. At the same time, our account management team is trying to narrow both networks and narrow formulary offerings, and so they work together. So once you get past point zero and you combine offerings, you get a kick as you bring them in and get the best of both worlds. But you also get kicks because we are bigger now and have more leverage. In addition to that, we get value because we are pretty effective at narrowing networks and driving tighter formularies and eliminating inefficiencies. And so, we give those numbers but I think as we said on the first quarter call after the close, going beyond that, we really can't provide updates any longer on synergies just that you see the growth coming out of the overall business. And if you reflect back on 2012, we had an incredible year. I think our original guidance came out at $3.51, and we ended up at $3.74. We were able to gain a lot of value in that first year, and so I think we are very far ahead. Our cash flow execution has been very strong and this really positions us well for capital deployment. So I feel that we've positioned ourselves well. I don't know, Jeff, if you want to...

Jeffrey L. Hall

I think that's exactly right. I mean we've, obviously had a great year in '12 on synergy execution. I think the team here has done a great job across, basically, everything we've put them out there to accomplish. We're achieving the integration goals on a timely basis. As you can see from the 26% growth last year, 12% to 15% growth into '13 with 15% to 18% EBITDA per Rx growth. Obviously, the team is doing a nice job getting expenses down, getting efficiencies and we think we're executing well and expect to continue to execute and keep driving earnings through 2013.

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

Okay. Just as a follow-up, George on sort of your longer-term commentary. I was wondering about 2 areas. What are your expectations over the longer-term for the growth of home delivery? And then the other area is just sort of medical management. Do you think it's important? And if it is, do you think there's a big opportunity there for you to increasingly, as a PBM, impact the medical benefit over and above the drug benefit where you've been historically?

George Paz

Great questions. I would tell you when you think about the overall of medical benefit, there's an awful lot of inefficiencies that exist. On our commercial book of business, we have some different programs that we use where we actually consult with the rest of the advisers. We kind of know our position in the equation. So we're not trying to circumvent what our clients are actually doing, or duplicate, which is the worst of anything in the healthcare industry where you have ever-increasing cost. So what we try to do is complement what our clients do, but at the same time, try to get the best out of it. I think when you look at medical -- managed-care industry, they're often looking for gaps in care and whether or not people are getting their tests and their checkups and doing the things they should be doing based upon their disease state and age and what have you. When you think about the drug side, there's an awful lot that goes into that as well as far as follow-up lab work and make sure the medications are working properly, people are taking their medications and working through. I think that when you look at the industry overall, there's still so much inefficiency and so much that's not being done. I think there's enough we can grow on by staying focused on what we do, at least for the shorter-term. As we look out to the future, I do believe that the sky's the limit, quite frankly. I think that there is a tremendous opportunity for us to continue to look for opportunities to see where we can add our tools, our expertise and help either our -- help our clients or expand into ancillary areas that can help our clients. So we're excited about the healthcare industry. Any other?

Jeffrey L. Hall

I would add to that, I guess, just as background facts. We have seen -- there's obviously some noise with clients moving out in integration here, but we do see home delivery kind of on the same basis, up about 3% year-to-date. So we're happy with that. And despite all the noise on home delivery and other things out there in the market, we strongly believe that home delivery is the best option. The peer-reviewed studies that we point to here clearly show that people that get their prescriptions in home delivery have higher adherence, lower overall cost, better outcomes kind of across-the-board. So it continues to be our goal to continue to drive that where it make sense.

George Paz

Just to follow-up on that point, the other piece is when it's -- today our environment, the employer pays 70% to 80% of the cost of healthcare. So it's not really the patients' dollars. What we do see is areas like Medicare, Medicaid -- well, especially Medicare, where you're paying a higher portion. There's a lot of generic utilization in those areas. And I believe when it's your dollars, you're going to be taking a lot more care of how you spend those dollars. I think when we move into healthcare exchanges and you've got individuals buying policies and they can take their policies so far to get better benefits by managing their expenses smartly, I think you're going to see more use of lower-cost channels and more uses of lower-cost drugs because it's going to benefit them directly. So I do believe this is very promising for us into the future.

Operator

We will now go to the line of Robert Jones with Goldman Sachs.

Robert P. Jones - Goldman Sachs Group Inc., Research Division

Just wanted to follow up on a couple of the components of guidance, specifically in relation to the last call. It looks you guys are saying 5% to 7% Rx growth. I was just wondering what you're assuming on the core utilization behind that? I know George, last time, you were thinking about scripts as kind of flat to slightly down year-over-year. And then just along those same lines, as far as the components of guidance, looks like EBITDA per script, 15%, 18%, a little bit better than the mid-teens outlook you guys shared with us last time. Sounds like maybe a little bit improvement on the cost side. But just broadly wondering what got you a little bit more incrementally positive there as well?

George Paz

Well, as we said back on the last quarterly call, there was a lot of uncertainty we were facing, and we were hearing a lot of negativism from our clients. And, in fact, many of our managed care clients have seen declines in membership -- we wanted to wait until we got into January so we could see the eligibility files and understand exactly what this impact was going to be. We have -- we have assumed in our book of business that the weak economic situation we're facing continues. Historically, as you know, we used to budget at 3% utilization trends and we usually come in at 5%, which causes us to increase earnings over the course of any given year. We haven't seen that since 2007. And the numbers have been running down in the low single-digits to actually negative in some given quarters. We plan, going out into the future, at between 0% and 1%, again as we do it by client, we don't do it in aggregate. But the overall impact of that is 0% to 1% utilization, which we think is about where the market is. We'll see how things unfold over the course of the quarter. The other side, when you talk about EBITDA per script, that conversation we're having earlier about -- there's a lot of things that go into that, but one of the things, of course, is synergy acquisition. As we gain our synergies, that drives up EBITDA, which gives us increases in EBITDA per script. So that's clearly a focus. Operating improvements also continues to drive it. And of course, product design works in that favor. Keep in mind that we've been fortunate now. We've taken all the Medco expertise we've acquired and coupled it with the Express Scripts expertise. And so those clients that were Medco clients are getting the benefit of what we were doing at Express Scripts and vice versa for the Medco clients -- and Express Scripts clients. And they're all getting new opportunities to have new products and share in value, and those things equate to better savings for the client and higher EBITDA for us.

Robert P. Jones - Goldman Sachs Group Inc., Research Division

It actually leads into my follow-up just around retention. If you're willing to share a little bit on the Medco legacy clients. As we think about last year's selling season and as you think about this year's selling season, did you see or are you expecting to see a disproportional amount of these customers going through the RFP process relative to your own legacy sponsors? And I guess just if so, should we be thinking about more RFPs as a percent of your total book relative to the kind of the pre-Medco years?

George Paz

No. I think it's the other way around. The problem we had, which any acquisition faces, is that we were tied up to the FTC for 1 year. We announced the deal, and then we had to wait almost 1 year to close. And there's a lot of uncertainty. Keep in mind, as we talked earlier, roughly 25% of your book, for any given client -- some companies it's higher, some are lower I guess -- but it comes up for renewal in a year. And there's an awful lot of uncertainty, both from personnel. Our business is no different than any other business. The account management team, the people that are facing that client everyday are our tentacles out to that client and that's our touch points. And if those people leave, if we give bad service, if there's not great relationships, that can cause us to lose a client. If they've got great relationships and they're -- and when we do hit a little bit of a service issue, they can quickly help recover from that. Those people are very important to us. And so when you think about all the uncertainty around an acquisition, so we announce something, we can't really do much because we are barred by the FTC. And so the employees have a tremendous amount of uncertainty overhanging them, thinking about where their future is going to be and what's going to happen to them, and if they have children in school and on and on and on. And that just -- that hurts. In any business, it hurts. And that's what you see -- saw come through last year's results. But having said all that, keep in mind, we usually set our retention targets at 95%. We're at 94%. I think that's a pretty damn good year, just in my opinion. We worked very hard at that. We brought clients new product. But there's still that period of uncertainty, and I think we got beyond that. And I think we feel very good about where we sit and the tools we brought forward. And we feel good that going into 2013, we have the right tools, the right people. We've settled on what our management team looks like. We've assigned our client managers to our clients. We are in a much better position today than we were 1 year ago today. So I like where we're at.

Operator

We will now go to the line of Robert Willoughby with Bank of America.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

George or Jeff, we had the United business rolling off ratably over the next 5 quarters absent any other assumption, but you indicated you do expect to keep 50% of it in '13, did I hear that correct? And is that a new assumption for your or was this generally your expectation all along for that book of business?

Jeffrey L. Hall

No, nothing's changed. Basically, our expectation is that by the end of this year, all of the scripts will be gone. But when you think about what that means from a financial standpoint is that we had 100% of the net claims in '12, we're going to have half of them in '13 and 0 then in '14. So it looks like it rolls of half and half.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Okay. And you were calling the $1 billion in notes due 2014, there's another $303 million in notes that come due this year. Would you seek to wipe out the term loan as well this year? Or is that where we'll get some balance between share repurchase and further reductions in the term loan?

Jeffrey L. Hall

Look, I can't talk about things that we haven't announced at this point. But your premise is right. We are bringing in the $1 billion of 6 1/4% notes. We do have $300 million of other maturities this year. And as we move through the rest of the year, it will be the same as we've said previously. We'll pay down the bank loan when that makes sense and if other of our bonds become net present value positive to redeem, we'll go look at those options, too.

George Paz

And we'll pay it -- we'll lay it out again, share repurchase, to make sure we maximize or optimize, in our opinion, our capital structure.

Jeffrey L. Hall

Absolutely.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

And just a -- do you have a CapEx forecast for this year? And then maybe for George, have you had any interaction as yet with the new WellPoint CEO?

Jeffrey L. Hall

Well, I mean nothing's really changed with CapEx. This is not a capital-intensive business and the CapEx we have forecasted doesn't meaningfully move the needle. Not really relevant for guidance.

George Paz

As far as the new CEO, I have not spoke with him yet. I look forward to that opportunity, and starting a new page in our book with WellPoint. Should be exciting.

Operator

We will now go to the line of John Kreger with the William Blair.

John Kreger - William Blair & Company L.L.C., Research Division

George or Jeff, could you give us an update on where you stand with the Medco integration process, perhaps where you are in the systems crossover, where you are with divestitures and any other key updates? Curious as you watch your kind of service metrics, how those have trended during the systems crossover?

George Paz

I'll start, if you want, and you chime in, Jeff. We are -- so if you think about the way a system process has to work, you have to build the benefits on the new system we're going to. There's a lot of things that the Express Scripts system did and does that the Medco system didn't do. And since we're moving to the Medco system, all that has to be built out. Moving the very first live, which, of course, was the Express Scripts lives, they're our guinea pigs, if you will, we had to build a tremendous amount of the architecture around the system and the different programs that we needed to make it work. So the upfront piece is very intense. We also have some very complex clients that build off of those different attributes that we have in the system. And so as we build out, that's a process we're on. So although we've moved, as a percentage basis, a smaller percentage of the total lives, we've built out a tremendous amount of the requirements of the destination system to handle the Express Scripts lives. Now every month, as we proceed, we are moving more and more of the lives into the system. We monitor very closely. 1/1 is quite a day here. We set up what we call a war room. We have everybody from operations to systems people to the account managers and there's thousands of people that participate in our daily calls and monitor service levels and what's going on in any given 1/1. What we've done is we replicated that so that every month, when a new wave of lives move, we put those same processes in place. Our goal is that if, just to be totally frank, you're always going to have a little bit of a hiccup. Anytime you do something, something is different. So when those hiccups occur, the idea is could we find them and correct them before the client notices them. And that's our mission. That's what we try to accomplish. And I think we're doing a very good job when you think about the complexity and size of this integration. And, quite frankly, how quickly we're able to do them. So I feel good about it. We're along our path. The systems integration side will be done by -- our target is the end of this year. And I think we're on path to accomplish that.

John Kreger - William Blair & Company L.L.C., Research Division

Great. One quick follow-up for Jeff. In the guidance, I think you talked about 5% to 7% for overall claims growth in '13. What do you think about home delivery? Would you expect that to be faster or slower than the 5% to 7%?

Jeffrey L. Hall

We haven't broken out the guidance in that level of detail. I mean, obviously, we're trying to grow home delivery as fast as we can. Because as I said earlier, we can just absolutely prove that it is better for clients and better for members and it improves health outcomes, and keeping with our model of alignment is better for us. We've got some great new programs. We've got a great team of people executing on it, so we're optimistic here. But as you've seen before, it's affected by other things outside of our control. So certainly, we're targeting to keep growing it but not breaking out kind of individual estimates. Just to close off on your previous question, too, I'm also happy with the progress we are making on divestitures. Obviously, if you have a chance to read our K, you'll see that Liberty and some of the other smaller subsidiaries have been effectively sold at this point, and others are in-flight. So we're happy with the progress we're making there as well.

Operator

Hello, Mr. Hill, your line is open.

George Hill - Citigroup Inc, Research Division

Jeff, I guess just a quick accounting question or a bookkeeping question. Is there any chance you would quantify for us the fixed cost that remain as part of serving the United business and the fixed cost with respect to technology with the 2 platforms that we should look forward as falling off as the year goes on?

Jeffrey L. Hall

No, is the simple answer. Look, we just don't think it's meaningful to building models to get tied up in small little details and we certainly don't like to comment about individual clients. I think, we did give more lines of guidance this year than we normally do, we think. The thing to focus on is 15% to 18% EBITDA per Rx growth, the 5% to 7% script growth, and all that pulling through to a 12% to 15% EPS growth. And the small little things just kind of get you into places you don't need to be.

George Hill - Citigroup Inc, Research Division

Okay. And maybe then a quick follow-up. George, you had highlighted that on the third quarter call, a lot of your customers felt very cautious. Maybe with respect to how your customers feel looking into '13? From what you've heard from the sales force and the account executives, do the customers generally feel better looking forward with more certainty postelection, post-budget resolution? Just from your perspective, what's the sense of how the client base feels such that it gives you guys some more comfort now?

George Paz

Well, I still think that the economy is still a drag on all of corporate America. There's just a tremendous amount of uncertainty. We see spikes. Certain -- I think housing starts are starting to pick up some, which is a very good sign. Sale of existing homes has picked up some. Unemployment kind of surprises us both good and bad at times. So I think there's an awful lot of -- the economy feels like it wants to get going but there's also still a tremendous amount of uncertainty out there. And quite frankly, we're still facing a sequestration at some point if our elected officials don't do something. So I do really believe that all those things play -- put a sense of uncertainty around an economy. That's hard to plan for as a CEO. You want to deploy capital, you want to build. But you also don't want to have idle capacity or idle capital sitting out there. So these aren't easy times for business. We need some certainty around overall tax rates and what we're going to do with foreign dollars overseas and there's just so many questions that overhang the economy today. We really need some certainty around this stuff. So I do think that, that's going to still play heavily throughout '13 until we finally -- unless Congress can get their act together and get some certainty around it. So I'm hopeful that will happen at some point.

Operator

We will now go to the line of Ricky Goldwasser with Morgan Stanley.

Ricky Goldwasser - Morgan Stanley, Research Division

Just focusing on potential future opportunities around Part D and the Medicaid expansion, it seems like the data from CMS just came out earlier in the week showed some very nice growth in your PDP plan. So George, can you give us some color about how you think about part D and Medicaid expansion as growth drivers for your business in the out years?

George Paz

Yes, Medicaid expansion is, I think, is a real opportunity for us. When you think about many of our managed care plans, without getting into names, have openly stated that they're very interested in expanding their Medicaid opportunities. It's a logical extension for a lot of these companies. Our job is to make sure, as you know, there, it's all about cost efficiencies. And so it's very important that they have the right formularies, the right tools, the ability to try to impact those patients' lives. So again, our account teams work very closely with our managed care clients in order to make sure that we are well-positioned to gain our share of that as well. I think there's -- between that and the exchanges, I think there's some very strong opportunities for us in the future.

Well, thank you all. Thank you, everyone, for participating in the call this morning. We look forward to talking with you again in just a couple of months while -- after we release our first quarter results and we'll catch up with you then. Thank you. Bye-bye.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and using the AT&T Executive Teleconference. You may now disconnect.

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Source: Express Scripts Holding Management Discusses Q4 2012 Results - Earnings Call Transcript

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