Express Scripts' CEO Discusses Q1 2011 Results - Earnings Call Transcript

Apr.26.11 | About: Express Scripts, (ESRX)

Express Scripts (NASDAQ:ESRX)

Q1 2011 Earnings Call

April 26, 2011 8:30 am ET

Executives

David Myers - Vice President of Investor Relations

Jeffrey Hall - Chief Financial Officer and Executive Vice President

George Paz - Chairman, Chief Executive Officer and President

Analysts

George Hill - Citigroup Inc

Lisa Gill - JP Morgan Chase & Co

Ricky Goldwasser - Morgan Stanley

Ross Muken - Deutsche Bank AG

Steven Valiquette - UBS Investment Bank

Kemp Dolliver - Avondale Partners, LLC

Thomas Gallucci - Lazard Capital Markets LLC

Glen Santangelo - Crédit Suisse AG

Lawrence Marsh - Barclays Capital

Robert Willoughby

John Kreger - William Blair & Company L.L.C.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter 2011 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, Vice President of Investor Relations, Mr. David Myers. Please go ahead.

David Myers

Thank you, operator, and good morning, everyone. 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, but are not necessarily limited to, 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 that are discussed in detail in our SEC filings.

For clarity purposes, all numbers we talk about today will be on an adjusted basis. Please refer to the notes and 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'll discuss our first quarter results.

Jeffrey Hall

Thanks, David. This morning, we are reporting another quarter of strong growth, with EPS up 20% from the prior year despite the fact that volume came in below our expectations. Our Q1 results are in line with the guidance we gave on last quarter's call that EPS for the first quarter would be below the fourth quarter and that the year would be more back end loaded than normal. The lower-than-expected volume was the result of: Lower utilization across our book of business, lower-than-anticipated in group growth, higher than expected number attrition at some of our clients, and these drivers were partially offset by higher than expected prescriptions in Canada.

In the first quarter, we completed the integration of NextRx at the lower end of both our original timeframe and cost estimates. Our ability to successfully integrate acquisitions is a core competency and our execution was smooth and efficient with minimal disruption. We believe that operating on 1 platform is imperative in meeting the market challenges and opportunities presented by Health Care Reform and Medicare and Medicaid expansions. Our best in class offering also provides us unique opportunities to meet our growth initiatives.

Last night, we also announced our intention to raise funds through a debt offering. The proceeds are expected to be used to finance the share repurchases or for other general corporate purposes. The offering is expected to occur during the next few weeks. In addition, subject to the completion of the debt offering, our board has approved an increase in our share repurchase program. Given the pending offering, that is all we can discuss at this point about the proposed debt offering or the share repurchases.

We remain on track to achieve full year EPS in the range of $3.15 to $3.25, representing growth of 26% to 30%. This guidance range includes the expected impact from our debt offering and any share repurchases in the year. As we have said in the past 2 quarterly calls, we expect this EPS to be more back end loaded than historical trends. Since there still seems to be some confusion about what we mean by back end loaded, let me give a little more detail. EPS is expected to grow sequentially through the remainder of the year, and EPS in the second half will be a higher percentage of the total year EPS than it has been in the past several years. This back end loading of earnings is primarily driven by 4 factors. First, volume. Our guidance assumes Rx growth of flat to plus 4% while Q1 was flat. Our guidance also assumes that we will see utilization improvement, improvement in number growth and the implementation of a few known midyear starts. Second, timing of generic launches. As you know, 2010 and 2011 are light generic years. And as a result, most of the benefits in generic drugs is expected in the third and fourth quarters. Third, share repurchases. Since there were no repurchases in the fourth or first quarters as anticipated in our original guidance, share repurchases are now expected to mainly impact the remainder of the year. And fourth, now that integration is complete, we are pursuing several profitability and efficiency projects that will continue to improve financial performance in the latter part of the year.

As we have discussed in the past, we expect to significantly increased spending on projects in 2011 to support new products and services, long-term growth and profitability. As a result, we expect capital expenditures to increase year-over-year, and noncapital expenses during the remainder of the year will offset the reduction in first quarter implementation expenses.

Our Research & New Solutions Lab is an example of 1 of the many investments we are making. In this working lab, we are expanding the scope and value of Consumerology where insights lead to the development of innovation and effective solutions. Our differentiated approach creates value for our clients and their patients, and because we are aligned, creates superior value for our shareholders. And with that, I'll turn it over to George.

George Paz

Thank you, Jeff, and good morning, everyone. The economic climate in which our clients operate remains challenging. And now more than ever, plan sponsors need our proven tools for driving out waste and improving health outcomes. As a result, there was tremendous interest in our recent outcomes conference and our industry leading Drug Trend Report, which provided cost cutting edge solutions for more effectively managing the pharmacy benefit. The Drug Trend Report identified $403 billion of waste in the U.S. due to suboptimal pharmacy related behavior relating to drug mix, channel and nonadherence. Despite doctor's best efforts in diagnosing and treating diseases, what stands between healthcare providers and high quality health outcomes is consumer behavior.

Our research has found that there is a fundamental gap between how consumers intend to behave and what they actually do. We discovered that the majority of patients want to engage in the same behaviors plan sponsors seek. But patient desires often remain dormant. That is, there is a persistent intent behavior gap and the key to success in structuring interventions that close the gap between what patients really want and what they actually do. At Express Scripts Research & New Solutions Lab, we are turning data into insights and insights into proven solutions. We focus on applying the behavioral sciences to make it easy for patients to act on their own good intentions. It is possible to significantly narrow the intent behavior gap, which accounts for 33% or $134 billion of the nation's $403 billion in pharmacy waste, with proven solutions that will activate intentions and help patients do what they already want to do.

Our history is 1 of providing innovative solutions to lower cost and improve health outcomes. Because we preserve choice by aligning behavior with underlying intentions, these programs can be achieved with very little number noise. Moving forward, consumer behavior will continue to elevate the importance as plan sponsors strive to provide an affordable pharmacy benefit. Clearly, understanding and improving patient behavior will be crucial, as we help clients and members navigate the healthcare environment in the wake of Health Care Reform. Our strong relationships with our health plans clients, coupled with our deepening understanding of patient behaviors, will serve us well in meeting the needs of the new healthcare consumer.

As just discussed, the high end of our 2011 guidance anticipates an improving economy. During the first quarter, utilization fell short of our expectations. Also, we have yet to see in the aggregate our plan sponsors and health plan clients add net new members. As such, prescription growth fell short of our expectations. We mostly offset the shortfall in scripts through expense management and new margin initiatives. And as you know, when we drive down our clients costs, we improve our financial performance.

Our business remains strong, and we are bullish on the underlying trends and opportunities in our space. We continue to increase our spending including CapEx this year to position our company to be best-in-class in serving our clients in the Medicare and Medicaid marketplace, as well as preparing for the Healthcare Reform environment. Our ability to understand behavior, drive out waste and improve health outcomes should translate into continued superior returns for our stockholders. At this point, we are happy to answer any questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Ross Muken from Deutsche Bank.

Ross Muken - Deutsche Bank AG

So 2 questions. First on the business. We've heard a lot from consultants that recent sort of select offerings that you've brought to market have had really good reception from clients and customers broadly and also, that you've kind of been, I guess, more aggressive or more competitive with kind of the larger marquee clients. I mean, as you think about the upcoming selling season and kind of the momentum in your business relative to what we've seen maybe the last 1 or 2 years, I mean, do you feel as if I know top line growth necessarily isn't a key focus without profitability, but do you think we will see kind of maybe an improved outcome on the Script and share line based on some of those new products you brought?

George Paz

Thank you, and appreciate the question. Yes, when we look out to the year, you're right. I think our select offerings are being very well received in the marketplace, and it's what we were discussing on the prepared remarks, and that is clients want to manage costs. If you think about the situation on which the benefit managers sit, there's the CEO, CFO, looking for cost savings and expense reductions. At the same time, the benefit manager is working for the HR Director, who has a challenge of retaining key members of the staff, making the health plan attractive to all the membership inside the organization. And often in the past, those 2 things were not always lined up very well. Our select solutions programs allows the health that plan sponsor to be able to drive out cost while having minimal impact on the membership of the company. They have been very, very well received, and they're being received very, very much so, as you stated, by large employer groups. We're very early in the season. Keep in mind that in our business, there's still a 90 plus percent, closer to 95% retention rate. And our job is to try to find those clients who, where in the current provider is not providing innovative and creative solutions that meets their needs. I think being on 1 platform, I think being very innovative and creative in the way we address the health plan benefit for our plan sponsors, our passion behind member service and driving out the waste, I think all align well for those clients that are looking for someone that can provide timely solutions to their needs. So we're optimistic. Obviously, it's very early. I can't really give you an update on where we see new business heading for this year, but we are very encouraged and excited about the selling season. So we'll definitely keep you posted on that as the year rolls forward.

Ross Muken - Deutsche Bank AG

Thanks, George. And maybe 1 for Jeff. On the capital deployment, I won't obviously dig in to the debt offering or the share repurchase because I know you can't talk about it. But just more thematically, as we think about the balance sheet, what's sort of your view continues to be on sort of the targeted net debt to EBITDA ratio that you think is comfortable for the business. And structurally, it seems like with the announcement, you're kind of addressing some of the capital deployment questions people have had. I mean, is that sort of the right way to think about generally kind of what we're going to see in the next few weeks?

Jeffrey Hall

Yes, as much as I'd like to talk about that today, unfortunately, I just can't.

Ross Muken - Deutsche Bank AG

Okay. Thank you, guys.

George Paz

Thank you.

Operator

Your next question comes from the line of Lisa Gill from JPMorgan.

Lisa Gill - JP Morgan Chase & Co

Thanks very much. Jeff, when you laid out some of the things that will be back end loaded, you did talk about Rx growth and your expectations still being flat to roughly up 4%. Can you maybe walk us through some of the things that you're seeing? Did you see things get sequentially better? Or should we now be assuming that the lower end of that range is something that's more likely? And then secondly, when we think about -- 1 of the things that also surprised me that you didn't mention, when we think about select offerings, my expectation would be that if a plan implements 1 of these at the beginning of January, the impact will happen as you move throughout the year, not necessarily in the first quarter. So maybe you can talk about some of those programs and the impact that will have on earnings as well.

George Paz

Yes. I'll take a little quick stab at some of this, and then Jeff can certainly add, Lisa. You're absolutely right. When select programs come in, especially things like that are addressed towards adherence, then yes, we do see increases in Rx growth. During the first quarter, keep in mind what happens. During the January 1 timeframe, we do new client implementation. The client the company basically goes on hold. We don't roll out new IT solutions during that period. Our task is to really make sure that we perform well on our new client starts and just about every plan has some change, whether it's changing formulary [ph], whether it's changing copays, deductible levels, you name it, there's changes. We have to have '11 right. If '11 isn't right, then the rest of the year becomes very difficult. And quite frankly, if we don't provide top of class service, then trying to get clients that do put in select programs or anything else through the remainder of the year becomes very difficult. So during the fourth quarter first quarter, we did not see the uptick in some of those programs as we are focused on '11. Through the remainder of the year, we will see those programs kicking in, whether it's Select Home Delivery, whether it's Select Step Therapy, or even things around adherence and select narrowing networks. We have preferred networks, which leave out certain providers and high cost providers, which are proving to be very well received in the marketplace. Those pharmacies that don't want to meet the needs of the marketplace in driving down cost, the country today, through all the focus on healthcare, won't tolerate pharmacies that won't participate on a cost on a program of driving out cost. So those are so that's becoming more and more receptive, and we can do the same thing with select programs in narrowing a network. So all those things, whether it's shifting them between shifting the script from its channel to its -- from 1 pharmacy to another or from 1 drug to another, all can both improve utilization as well as enhance margins. As you know, Lisa, over the years, we've been very focused, not only on utilization. We don't want to be a one trick pony. When we have issues that hit any line item on our income statement, we work very hard to make sure we make up those differences in other areas. So although utilization came in lower than our expectations, we are very, very focused on making sure that we didn't adjust our range because we have confidence that we'll be able to continue to improve other areas of the income statement to improve financial performance. So we're very much focused on that. In addition on new scripts growth, keep in mind, as Jeff said in his prepared comments, we also have some midyear starts. We have several 71 clients that will be coming up. So all that goes into the Rx growth as well.

Lisa Gill - JP Morgan Chase & Co

So George, just so I understand this though, you are very comfortable with the base business, the growth in the base business around the select offerings and some of the other things. I think the concern by some investors is that the reason you're doing the incremental share repurchase is that you're less comfortable with the core base book of business. And I just really want to understand if that's the case, or if this is just more of the scripts didn't come in quite where you expected. You think that there's still lots of opportunities for you to be able to continue to improve the profitability of the existing book, as well as the NextRx book, et cetera, and that the stock looks reasonable at this point, and therefore, you want to do capital deployment, which is completely separate from what we're seeing on the earnings side. Is that, right?

George Paz

Well, I guess, Lisa, as you know, I don't want to misspeak here because we are in an offering, and you've got to be very guarded about what you say. I really do wish my hands weren't tied because I'd like to address that question more fully. But let me just say that I'm very comfortable with the base business. I really can't say anything. Hopefully, we can talk in the next couple of weeks after the offering gets completed, and I can give you my a more fuller discussion, but I just got to be careful what I say at this juncture.

Lisa Gill - JP Morgan Chase & Co

Okay. And then I guess just 1 last thing for either you or Jeff is that I feel that the first quarter was more of a communication issue than a fundamental issue. I just want to make sure that we're on the same page as we think about the second quarter. So George or Jeff, should we be thinking about the growth rate year-over-year being more similar to the first quarter? So you grew 20% year-over-year in the first quarter. Should we be thinking that the second quarter growth rate should look something more like that 20%, and then being very back end loaded?

George Paz

It probably is a miscommunication issue because I don't think we've ever guided to the quarters. I've been here over 14 years, and we give annual guidance every year. And we've often said in the fourth quarter that first quarter would be down when we gave that guidance over the previous fourth quarter. So that's not a new trend. It didn't happen last year because of the NextRx acquisition. But that's not unusual in our business. So I think we want to steer clear of giving too many too much guidance points. I just don't think that's the way we operate. But Jeff, I don't know. Do you want to talk about some of the sequential?

Jeffrey Hall

Yes. I think the best way to think about it based on what we're willing to do around quarterly guidance is what I said in my prepared remarks. And I think there are 2 hopefully data points that will help everybody, and one is that we do expect sequential increases not unlike prior years, but sequential increases as we move through the year here. But with the important caveat that, as I mentioned in the prepared remarks that when you think about EPS as a quarterly or half year EPS as a percent of the total year EPS, that the second half of the year is going to be a bigger percentage of total year EPS than it has been in the past, and you see a little bit of flavor of that in the first quarter. But we do expect sequential growth through.

Lisa Gill - JP Morgan Chase & Co

Okay, great. I appreciate all the comments.

Operator

The next question comes from Robert Willoughby of Bank of America.

Robert Willoughby

George or Jeff, is the WellPoint contribution from a claim standpoint in compliance with its guarantee to you on that metric?

Jeffrey Hall

We don't like to talk about individual clients, especially individual clients that would be other publicly traded companies. So I think we're not going to really discuss that at this point.

Robert Willoughby

If it's fallen short, can you just remind us what the metric I mean, how you guys get compensated, the timing and how the money flows in that respect?

Jeffrey Hall

Yes, I think, again, we've probably said all we're going to say and part of the contract that we're willing to talk about has been publicly disclosed. And beyond that, we're just not going to comment on a specific client contract.

Robert Willoughby

Okay. And if you look at the G&A run rate here, obviously, you've managed that line item down in a, kind of a leaner margin here, I guess, for you. Is this kind of a good run rate as a percent of revenues to hold that? Or are there real opportunities to really shrink that metric 20, 30 bps going forward?

Jeffrey Hall

Yes, I don't see SG&A as a percent of revenue as really being the way that we manage SG&A. I tend to think of those costs for the most part as fixed as most of them are people and buildings and other and the variable part of them is really the investments that we're making. So what I've said earlier was that as we move through the course of the year, we expect to see that level of investment increase as we move through the year. But at the end of the day, the core of that is really fixed. So if revenue comes up, the percentage could come down. But I think looking at percent of revenues is just the wrong way to look at it. We're always looking at ways to get more efficient, and we're balancing that with making investments so that we can deliver the products and services that our clients want and need to manage their trend and to give us the long-term growth and profitability that we're looking for.

Robert Willoughby

Okay. And probably no answer in this 1, but just the timing and size of the share repurchase program, I mean, the press release reads as if there's no real change. This is just a change in how you may fund the repurchase. But is there any thoughts that you could do more near term, less longer term or rate of equal over the 3 quarters? Any change in the -- your sense on timing on these repurchases?

George Paz

Bob, I'm sorry, we just really cannot speak to that as we're in the middle of an offering period right now.

Robert Willoughby

Okay. I will think of a different way to ask and then jump back in. Thanks.

Operator

Next up, we have Larry Marsh of Barclays Capital.

Lawrence Marsh - Barclays Capital

Thanks. I'll try Bob's follow up on the repurchase authorization, just to make sure we're clear here. Your current share repurchase authorization is for 15.1 million shares. And George and Jeff, you're communicating today that your board has increased that authorization. So when are we going to find out how much that authorization has been expanded? And wouldn't we define that authorization expansion as material information?

George Paz

That is why we can't speak about it because we didn't disclose it. So you're absolutely right. If I provided the information, I can't speak to that until we do something. The board hasn't increased the share repurchase program, but all that is contingent upon and tied to the bond offering. So that's where it's all linked together.

Just keep in mind, too, that maybe to answer a little bit more of Bob's question, we don't typically, we would have bought shares in the fourth and first quarter of last year. As we were anticipating this opportunity, we changed the timing of those share repurchases. And that's what Jeff said in his comments, is that this first quarter's financials weren't beneficially impacted by the share repurchase that would otherwise have occurred. But now those will occur at a later date and have a more impact, a larger impact on the second half of the year or the well, from this point forward, I should say.

Lawrence Marsh - Barclays Capital

Right. So just so it sounds like the share repurchase authorization may be contingent on how much money you're raising. And I know you're hampered, George. It just would be good for the board to try to be as open as possible about that, so you're not having to not be able to answer the question. So appreciate that. Second follow up, George, it's interesting in your Drug Trend Report this year, I know you discussed this drug mix complexity issue. I know you've talked about this in the past. In the past, the idea is you want to maximize generic fill rates to drive down trend. I think you addressed the idea in some cases, some branded manufacturers may be willing to be so aggressive on rebates that the value proposition for the customer may not be maximized on maximizing generic fill rates. And I know you're generic fill rate this quarter was down sequentially, slightly. So could you elaborate on that and how you're thinking about selling to clients that way?

George Paz

You raise a critically important point. I do believe that certain brand manufacturers are seeing opportunities to grow their share or to maintain their share as their drugs lose patent protection. As they're looking at their pipeline of new products and there may be a reason to have capacity to idle a factory or to idle a production line or to use at a very low percentage of previous levels can have a very adverse effect on cost, as you know. And so I think they are looking at ways. The point you're raising, Larry, is right on. Historically, generic fill rate was critically important to determine how well we were pulling through. But we also don't want to be our motto has never been maximize generics. Our motto has always been drive out cost and waste. And so if there's a brand new product that actually costs less than a generic, we have no problem utilizing that brand because at the end of the day, it's going to be the best answer for our clients and our patients. So we are absolutely focused on that, and when those opportunities occur, we will absolutely take advantage of them.

Lawrence Marsh - Barclays Capital

Okay. And then the final question just briefly. I know you're not talking specifically about clients, but mail penetration rates, I know, you discussed that you anticipate seeing that improve. I know you've talked in the past about wanting to drive up the WellPoint mail penetration book. I'm assuming you're not in the position to talk about how that's going versus trend. But can you address at least the feeling as to whether that's going as you expect it to go in terms of that communication, education and results, as you think about this year?

George Paz

Yes, a couple positive things occurred. Last year, we did a pilot with the managed care plan that put in Select Home Delivery. And the numbers that came through weren't as great as you would normally get on a commercial book, but they were quite compelling. In other words, you're dealing with most managed care plans, you're dealing with a lot of small, very small employers to medium size employer groups. Some have large employers, but it's a different mix than going into a Fortune 500 company with the program. And so to be able to reach out and touch each of those members is a little tougher. Having said all that, the increase in mail penetration rate was rather significant. And I think both the client and us are very pleased with the outcomes of that, and we're preparing to roll that out in a bigger way. One of the things you got to be careful with, Larry, as you know, is that '11 always ushers in a new mix of clients. So we lose some, we gain some. We lost a couple of plans that had very high mail penetration that were previously discussed during the course of the last year. So 1 of those rolled off on '11, which had a heavy mail penetration use. So that brings down the mail penetration level. The other clients put in Select Home Delivery. Some of that gets stalled beyond '11, so we can be more effective and roll it out after the '11 implementation date. This may start a little after that date, a little later, so that we don't go off on top of the implementation programs and so all those things will come to fruition this year. With respect to the client you're referring to, I think that is a focus of ours, that client and all of our managed care clients as they are trying to compete more effectively and to bring down their cost so they have a better offering. The Select Home Delivery, as well as other select programs are being very well received, and we hope to implement many of those through the course of this year.

Lawrence Marsh - Barclays Capital

Very good. Thank you.

Operator

Next question comes from Glen Santangelo of Crédit Suisse.

Glen Santangelo - Crédit Suisse AG

George, could I just clarify something you said to a previous question regarding share repurchase? You sort of suggested that the company typically would have purchased shares in Q4 and Q1, but based on your knowledge of a potential offering, as you kind of described that, that you've altered the traditional timing of your purchases. Is that kind of what you were implying?

George Paz

Yes.

Glen Santangelo - Crédit Suisse AG

Okay, perfect. All right. And then, could we just talk about the claims forecast of $750 million to $780 million that you're maintaining? Clearly, you're trending a little bit below that right now and you're expecting some improvement in the back half of the year. How much of that improvement is macroeconomic driven versus what you already know about your customer base or kind of midyear starts? Trying to gauge how much of that improvement do you need help from the overall macroeconomy versus what you already know about your book of business.

Jeffrey Hall

Yes, this is Jeff. As we think about you know how much I dislike getting into really fine details of different guidance ranges. So as we look forward, certainly, macroeconomics is 1 of the factors. We do have some known new clients for midyear. And of course, we're always optimistic that there'll be other midyear start as we win other pieces of business. Certainly, as George alluded to, we're very excited about our opportunity in the selling season, so there's probably additional upside beyond the known. But really, it comes down to the known new and the improving economy. And the improving economy really hits us in 2 ways, and 1 is from increased utilization, as people get more confident about their personal situations. And as a result, start taking their maintenance medications again or start going back to the doctor's office and et cetera. And the other is as our clients begin to grow their member base, either through hiring new people or bringing on new people onto their staff. So really, it's all those factors, and I don't really want to break out the impact between the 3.

George Paz

But you know, Glenn, just don't lose sight of the fact that we take our jobs very seriously here. And if in fact, we see that the economy isn't performing to where we thought it would be or we're falling short of utilization trends or whatever, we don't just say, okay. We work very, very hard to hit our expectations for the year and drive performance for our company. So I don't want you to think that just because 1 trend although we only like to give earnings guidance, internally, we've got tons and tons of different metrics by which we manage and make sure that we stay on track and that we get the best outcomes for our clients and our patients. And so we're absolutely focused on driving performance for you and all of our shareholders.

Glen Santangelo - Crédit Suisse AG

Can I just ask 1 follow up question on margins and then I'll hop off? Basically, the way we calculated your gross margin, it came in a little bit north of 7% this quarter, which is kind of roughly in line with what we're looking. Is there anything to kind of say about that level of gross margin in the context of kind of where we may be sitting in the selling season in terms of what you may be seeing out there and how you're feeling about that? And then, my second point was more on your operating margin. Jeff, could you just maybe give us a sense for any potential costs that might have been embedded in Q1 that may ultimately go away? For example, you talked in the past about investing in some call centers. Ultimately, there's some NextRx integration costs that may ultimately go away. So was there anything embedded in 1Q that we should be thinking about as we model the remaining 3 quarters?

George Paz

Well, I'll take part of this and Jeff can take part. From a margin perspective, our issue wasn't -- or the question isn't that we fell short of margin expectation. As we said earlier, it was the volumes. So we didn't see the in group growth and utilization trends that we anticipated. So that's -- you're right about that. And then as far as costs are concerned, I'll let Jeff talk about that.

Jeffrey Hall

Yes. So as we said in our press release and we've been talking about for a few months now that in Q4 and in Q1, we saw increased spending around implementations. In a normal seasonal normally, in Q4 and Q1, we see our costs come up as we implement new clients. Obviously, we had a large implementation for some of the final WellPoint lives [ph] in Q4, so those people were in Q4 and Q1. And the other thing we saw was an increase in call volumes around Health Care Reform, that the level of calls and the amount of time that people wanted to talk about potential changes to their benefit plans was higher than it has been in the past. So we definitely saw that cost. What I said earlier was as those costs roll off, we do expect, as anticipated, that our spending on projects is going to increase through the course of the year, really offsetting that decline in cost. But as George said, we do expect kind of a normal seasonal growth in margins as we move forward through the course of the year.

Glen Santangelo - Crédit Suisse AG

Okay. Thank you.

Operator

Your next question comes from the line of Steven Valiquette from UBS.

Steven Valiquette - UBS Investment Bank

Thanks. So there's going to be a bunch of big, exclusive generics like Aricept, the Effexor XR, Ambien CR with high mail penetration rates that are all going to go multi source in 2Q, which I would think would definitely help you in the back half of the year. So I guess, I'm just curious, is that something that you typically think about and budget for and account for in your financial planning? So how material is that, a shift in a lot of big generics, the multi source in terms of your sort of financial planning for the year?

George Paz

Well, obviously, that's key. We look at client by client. We look drug by drug. And we take our best guesstimates. We try not to anticipate pre-patent expiration launches by generic manufactures. So if somebody is going to come out ahead of time before the patent actually runs, we don't bake those typically into our numbers. So it's just a question of timing. And we do a fairly detailed model, and we look at upside and downside, and that's why when we give guidance ranges, it's a range and not a number because a lot of things can happen. But that's what goes into the formulation of our guidance.

Steven Valiquette - UBS Investment Bank

Okay. So we can definitely count that as well then, in things that would certainly sort of help you in the back half of the year versus the first half in addition to the others things you mentioned?

George Paz

Absolutely.

Steven Valiquette - UBS Investment Bank

Okay. All right. Thanks.

George Paz

Thank you.

Operator

Your next question comes from the line of Tom Galluci with Lazard Capital Markets.

Thomas Gallucci - Lazard Capital Markets LLC

Thanks a lot. Just a couple of follow ups. I guess, Jeff, you'd mentioned in terms of some of your four factors that improve EPS over the course of the year, some profitability and efficiency projects. I know everyone's been so focused on SG&A versus the cost of goods sold. Are those projects skewed in 1 direction or the other?

Jeffrey Hall

No. I mean, at the end of the day, we're focused on improving profitability. And I look at cost as cost, no matter where it gets bucketed it up from the accounting standpoint. So we're looking at certainly, we've got a bunch of exciting new products out there that we think help us grow margin. We've got costs and efficiency efforts that are in SG&A, but we've also got costs and efficiency efforts in cost of goods sold as we I think a lot of you have been out here and have seen the exciting new facility we have, the state of the art filler and front end here in St. Louis. We're excited about that. We're excited about the efficiency that can drive for us. And as George alluded to, we are a management team that absolutely never rests. Every time we see an opportunity to go get cost out to improve margins, we're going after it. And I think you're going to keep seeing more and more of that as we move through the years here in the future.

Thomas Gallucci - Lazard Capital Markets LLC

Were there any unusual costs in the quarter, like I know you closed your Pennsylvania mail facility. That was sort of a contentious situation there. Were there unusual costs there that we should be thinking about that go away over time?

Jeffrey Hall

Yes, that the facility closing, it's a partial closing, actually, that you're talking about, occurred later than we expected it to, so there were some additional costs in Q4 and then some into Q1. For the most part, we have now rationalized that footprint and got where we want. But we're always looking for new opportunities, as I said a minute ago.

George Paz

And I think that's the important point, is that just we've reached, I believe, steady state from a integration perspective, but now it's time to sit back and look at where are our opportunities throughout the organization. And that's we have a group of people that that's their only job is to go through the operations and look for opportunities to become more efficient. As you know, when you remove efficiencies inefficiencies out of an operating platform, you increase quality and productivity, which all those things then add up to less cost and better outcome, safety improves as well. So that's a continued focus of ours, and that will stay a focus of ours as we go forward.

Thomas Gallucci - Lazard Capital Markets LLC

Okay. Last one. George, a lot of talk about buybacks and things. But with levering up a bit, any comments you have on the acquisition landscape and the opportunities or lack thereof that you might have out there?

George Paz

Well, that's always 1 of our primary opportunities is to look at opportunities in the marketplace. So that will we won't lose sight of that, I promise you.

Thomas Gallucci - Lazard Capital Markets LLC

Okay. Thank you.

Operator

Your next question comes from the line of John Kreger from William Blair.

John Kreger - William Blair & Company L.L.C.

Thanks very much. Can you give us a sense about what you're seeing from the manufacturers that you're working with in terms of inflation or deflation and how that might be trending versus prior years?

George Paz

I haven't seen deflation from the manufacturers on the brand side. I mean, that's been just the opposite. As I think you can see in our Drug Trend Report, especially in key classes, especially on the specialty side, we've seen some significant increases. And I think that's part of the outcome of not having a robust pipeline and new product coming to market. So as you want to grow earnings, as 1 wants to grow earnings and utilization trends remain somewhat low as compared to recent history, the answer is to raise prices. So that's why I think our tools and what we do is needed now more than ever. Clearly, many, many drugs out there are life sustaining and reduce other impacts on the medical side. So keeping numbers adherent to the right drug at the right time at the right price is, is still critically important. So it's something we look at, look for opportunities to help to manage.

John Kreger - William Blair & Company L.L.C.

And George, how about on the generic side? Are you seeing any change in the are you seeing deflation there?

George Paz

Yes. We still see opportunities in that space. There's still a lot of manufacturers that are making products. So it depends on the class, obviously. And those classes where it's single source or very little competition, drugs tend to increase prices. Where there's a tremendous amount of competition, we see price deflation occurring.

John Kreger - William Blair & Company L.L.C.

Okay, great. And then just 1 other follow up. Can you refresh our memory on your select price? How many different offerings do you have at this point and beyond home delivery? Which are the ones that seem to be gaining the most traction with your clients?

George Paz

There's a lot there's quite a few different Select Home products, but they can be categorized into basically 4 different classes. The ones that are growing the fastest, obviously, are Select Home Delivery and Select Step Therapy. Those are very important as they take a tremendous amount of cost out of the system. The one that's relatively new and that's being gaining quite a bit of attention is the whole thing around Select Networks, where we can go to a client with a narrow network and have a broader so we're effectively giving them 2 network offerings, 1 broad and 1 narrow, and let the members choose. And typically, when you can show a member that there is a drugstore in very close proximity of a very expensive drugstore that they're currently using, and so the member is not put out, there isn't any change, then, in effect, they can help reduce their costs. The way it works is there's a penalty after they get a couple of fills. They get a couple of fills at the old drugstore, and then when they don't if they don't switch, then they pay a higher price to go to the higher cost drugstore. And the idea is if the plan sponsor has to pay a higher cost, the member should share in that cost savings. This way, they could keep their cost the same if they move to a lower cost pharmacy. And that's being met with a lot of very well.

John Kreger - William Blair & Company L.L.C.

Great. Thanks very much.

Operator

Your next question comes from the line of Kemp Dolliver from Avondale Partners.

Kemp Dolliver - Avondale Partners, LLC

Great. Thanks. Question regarding your commentary around renewal pricing. Your book of or a smaller percentage of your book of business should be renewing in any given year given a couple of your significant clients. And I'm wondering, what is changing with regard to the impact of renewal pricing? Is there, say, more back end loading of profitability in years 2 and 3 given that the nature of drug spending over the next couple of years is a higher generic mix? Or are there other factors going on that would have made the impact of renewals this year more significant than we had seen in other years? Thank you.

George Paz

That's a great question. From a clearly, when you look at years, when you're talking about a 3 year period and their significant changes in the mix of drugs with the big generic waves coming, and if you try to hold margins, then what ends up happening by definition and when you're giving pricing over that 3 year period is pricing points are going to change because the drug mix is different in each of those years. So yes, you're exactly right. I mean, I think what you see is clients that renewed at '11 of this year, were in a little bit of a different situation because they're going to have 2 years with very high of higher generic utilization trends than they had in the first year. And so to get standard pricing across that mix does have some impact. But that's just part of the equation, the way it works.

Kemp Dolliver - Avondale Partners, LLC

That's very helpful. Thank you.

Operator

Your next question comes from the line of Ricky Goldwasser from Morgan Stanley.

Ricky Goldwasser - Morgan Stanley

Jeff, just a point of clarification on the progression between first half and second half. Just to clarify, if we look back historically, I think in the past, 55% of earnings came through in the second half of the year. Obviously, you're telling us it's going to be even a greater portion this year. So is 60% more in the ballpark?

Jeffrey Hall

60% would be on the high side, and that's probably as much detail as I'm going to give you.

Ricky Goldwasser - Morgan Stanley

Okay. So based on that, we're just it seems like and just to make sure that we're getting it right, for next time, it seems like there's around, could be a $0.40 to $0.50 delta between first half and the second half. So given that, can you just rank order for us in level of contribution to profitability the 4 drivers that you talked about early on, i.e. volume, generics, the buybacks and the profitability products, so what's going to contribute more to that bridge between first half to second half?

George Paz

Let me chime in here just a little bit, and then Jeff can certainly add whatever he'd like to, but I don't all those things contribute, but there's a lot of other things that contribute. Our IT people are constantly looking for ways to provide efficiencies throughout our organization and give better health outcomes for our members by implementing the annual processes today, taking out inefficiencies. Our operations people are focused on 0 defects. And although we can hit 6 sigma qualities in the back end and even greater, any defect is not acceptable. So we strive hard to take all those out. Looking at better ways to handle call centers, we can go on and on that these are all things we are focused on. And from our perspective, the idea here is to take out as much cost and inefficiency as we can possibly get our arms around and then figure out how much of that should go into rewarding our shareholders versus how much should go into providing growth opportunities into the future. And that's management. That's what we get paid to do, and we work very hard to try to make sure we don't disappoint our shareholders and give them the returns that they're looking for, and at the same time, make sure we invest enough money in the ongoing business that it provides returns in the future years. And so to the extent, some of these things drive better or worse than we anticipate, we anticipate taking that money and either enhancing it through other initiatives or plowing some of it back into the business. Jeff?

Jeffrey Hall

No, I think...

Ricky Goldwasser - Morgan Stanley

So just to clarify, should we look for again, I understand that all of these drivers are going to have an impact in the second half of the year. But just to get a sense, as we work through the model, should we just assume that buybacks are going to be the biggest contributor to the difference between the first half and second half? Is it kind of like the profitability project and the IT improvement? Or is it the volume uptick?

George Paz

We prefer not to get into that.

Jeffrey Hall

Yes, I think, as George said, we're probably not going to get into that. Not probably, we aren't going to get into that. But all those things that I talked about are going to be drivers, and those are the biggest 4 drivers. But as George said, there are lots of others, too. And as I alluded too, in my earlier remarks, this is the management team that never rests and is always looking for things. So there maybe 5, 6 and 7 that we come through later in the year, too. So we certainly don't want to place any limitations on what we can achieve, and want to remain our retain our ability to be nimble and react to a changing environment. We're comfortable with the guidance range we've given. We've been pretty open about the fact that it's more back end loaded, that second half is going to be a bigger percentage than it has been historically. And I think that's about the extent of what we're going to talk about.

Operator

That question comes from the line of George Hill from Citigroup.

George Hill - Citigroup Inc

And thanks for taking the question. Most of my questions have been answered. I guess, Jeff, as we think about "back half of the year" starts, is there anything different with respect to the profitability, the costs for the "back half of the year" starts that would make the more profitable or less profitable than January starts?

George Paz

No.

George Hill - Citigroup Inc

Okay. So there's no cost that you guys can absorb maybe in the first quarter that helps you to leverage the back half?

Jeffrey Hall

No. Every year we have midyear starts. This year is no different than any other year.

George Hill - Citigroup Inc

Okay. All right. I'll jump out. Thank you.

David Myers

Thank you very much. We really appreciate your time and attention this morning, and have a great week. Thank you.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.

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