CVS Corporation Q2 2005 Earnings Conference Call Summary

The following is excerpted from the question-and-answer section of the transcript.

Question: John Heinbockel - Goldman Sachs - Analyst : Hey, Dave, I want to drill down on Eckerd just a little bit. What color can you give us on Eckerd's profit contribution for the quarter? As I recall in the first quarter it was about half a cent, split adjusted. And secondly, what is the most recent shrink experience? At the analyst meeting you talked about the stores you'd surveyed, I think, had shown improvement of 150 basis points or so. What is the most recent experience now that you've got three more months under your belt?

Question: John Heinbockel - Goldman Sachs - Analyst : What's your level of comfort with the guidance you'd originally given for Eckerd when you first did the deal? It would strike me that the level of comfort ought to be pretty high and maybe even, you know, high toward the high end of those ranges given where sales are tracking and where shrink is tracking. What's your thought on that?

Question: John Heinbockel - Goldman Sachs - Analyst : All right. And then finally, if you look at PharmaCare in total, what percent or what number of their accounts have 90-day retail now and how do you gauge the degree to which that's gaining traction?

Question: John Heinbockel - Goldman Sachs - Analyst : Okay. Thanks.

Question: Eric Bosshard - FTN Midwest Research - Analyst : Good morning. Can you talk a little bit about the progress you're making within the gross margin in the Eckerd business outside of shrink? And I guess I'm specifically interested in what you're accomplishing with merchandise mix. You talked about private label, and you talked about health and beauty, but can you give just us a little a little more color on what you're accomplishing with merchandise mix and ultimately what you think that can help the margin of that business look like relative to your core business.

Question: Eric Bosshard - FTN Midwest Research - Analyst : Great. And then secondly, the guidance I understand you've raised the full-year guidance by a penny and you shook out a little bit better in the second quarter do it seems like the second half guidance is somewhat conservative which is typically the position you take with guidance. Is there anything within your thinking or within the second half outlook that is a concern or that you're focused on or that you're scratching your head about that helps us understand a little bit more perhaps behind the thinking within the guidance beyond just your traditional conservatism?

Question: Eric Bosshard - FTN Midwest Research - Analyst : Great. That's helpful. Thank you. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Mark Husson - HSBC Securities - Analyst : Good morning. I just wanted to turn attention a bit to Medicare. You've partnered up with Universal American and Aetna and United, and Aetna and United have both said that they expect to be represented in all 50 contiguous United States. Has Universal American and CVS made a similar kind of statement once the contracts get doled out, I guess, in October time frame?

Question: Mark Husson - HSBC Securities - Analyst : And then just as you've gone through this process in a lot more detail than we can at this stage, can you just talk through a typical uncovered Medicare patient who now signs up for coverage? Presumably there's some kind of deductible then a copay, then a doughnut hole. And in the doughnut hole what do they pay? Do they pay the CVS cash price or the plan price or do they go back to Wal-Mart?

Question: Mark Husson - HSBC Securities - Analyst : First couple hundred or something.

Question: Mark Husson - HSBC Securities - Analyst : But do they get the plan price for the doughnut hole drugs or are they just completely on their own paying cash at the best price they can achieve? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Mark Husson - HSBC Securities - Analyst : Okay. And then finally, just on, when you look at that sort of 10 to 15 million people that you think do sign up, conservatively in 2006, presumably these are automatic enrollees and folks that are largely uncovered right now. When you look at the geographies that you're in, these kind of uncovered poor people, my guess would be Texas and Florida would see a heavy over indexation of that kind of population. Is that right?

Question: Mark Husson - HSBC Securities - Analyst : So actually Eckerd was a future Medicare play.

Question: Mark Husson - HSBC Securities - Analyst : Don't tell me you're not. All right. Thank you very much.

Question: Mark Wiltamuth - Morgan Stanley - Analyst : Hi. Good morning. I wanted to ask a little bit more about the generic drug trends. If you look at Walgreens numbers they've posted 75 to 100 basis points in gross margin lift over the last four quarters. Obviously some of your gross margin lift was masked by the integration of the lower margin Eckerd. Could you give us a sense where gross margins were outside of the Eckerd regions? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Mark Wiltamuth - Morgan Stanley - Analyst : And up higher than the overall average?

Question: Mark Wiltamuth - Morgan Stanley - Analyst : Okay. And also on Eckerd, are you still holding at that 9% front-end comp lift that you talked about for all the remodeled stores when you talked to us at the analyst meeting?

Question: Mark Wiltamuth - Morgan Stanley - Analyst : Okay. But it's generally in that range?

Question: Mark Wiltamuth - Morgan Stanley - Analyst : Okay. Thank you.

Question: Paula - Lehman Brothers - Analyst : Hi. This is Paula actually sitting in for Meredith who's enjoying Greece at the moment. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Paula - Lehman Brothers - Analyst : Could you give us some understanding of the magnitude of the benefits you're seeing from the systems and work flow enhancements at the core business versus Eckerd?

Question: Paula - Lehman Brothers - Analyst : Okay. And then moving back to the Medicare discussion. Could you just give us some idea of what's happening in your, I know that you're working with the trade association in Washington, et cetera, but just what's happening there? Any color at all?

Question: Paula - Lehman Brothers - Analyst : That's very helpful. Thank you very much.

Question: Tom Thompson - Thompson Siegel - Analyst : Thank you. Dave, I have a question about the third quarter guidance. And I wonder if you could give us a little help on your expectations for total sales in the quarter since we're lapping the quarter where we only had Eckerd for part of the quarter. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies. I'm having trouble getting to your EPS guidance based on what I thought I heard you say back on the first quarter call about the operating profit margin for third quarter. I thought you said it should be flat compared to last year. That doesn't seem to reconcile with your EPS guidance.

Question: Tom Thompson - Thompson Siegel - Analyst : Okay. Well, can you give us some help on the total sales increase you expect for the third quarter? You said comps of 5 to 7%.

Question: Tom Thompson - Thompson Siegel - Analyst : It sounds a bit low. I mean consensus is indicating about a 20% increase for total sales.

Question: Tom Thompson - Thompson Siegel - Analyst : And with respect to what I thought I heard about operating margin comparisons in the third quarter, you think I misheard that in the first quarter call?

Question: Tom Thompson - Thompson Siegel - Analyst : Great. Thanks very much.

Question: David Magee - SunTrust Robinson Humphrey - Analyst : Good morning.

Question: David Magee - SunTrust Robinson Humphrey - Analyst : Just a couple of questions. One, can you comment on the, I guess, directionally, the gross margin for the front-end of the store

Question: David Magee - SunTrust Robinson Humphrey - Analyst : But that would more than offset maybe some incremental price competition this year in certain markets.

Question: David Magee - SunTrust Robinson Humphrey - Analyst : Also, could you comment on what you're seeing with regard to profit margins on generics that maybe two or three years old? Are you seeing them retain the profitability or is there compression taking place?

Question: David Magee - SunTrust Robinson Humphrey - Analyst : But no change there in terms of the timetable? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: David Magee - SunTrust Robinson Humphrey - Analyst : And lastly, Dave, as some business moves from Medicaid to Medicare, any sense for what the profitability of that business might be like?

Question: David Magee - SunTrust Robinson Humphrey - Analyst : So that's not set by any means in stone?

Question: David Magee - SunTrust Robinson Humphrey - Analyst : Thanks, Dave.

Question: Michael McEllison - McKai Shield Investment Management - Analyst : Good morning, David.

Question: Michael McEllison - McKai Shield Investment Management - Analyst : Can you talk to us about working capital a little bit and is that part of your guidance for free cash flow what's happening on the working capital line? It looks like inventories came down a little bit in the quarter.

Question: Michael McEllison - McKai Shield Investment Management - Analyst : Great. Thank you.