Good morning. My name is Cynthia, and I will be your conference operator today. At this time, I would like to welcome everyone to the CVS Caremark Third Quarter 2010 Earnings Conference Call. [Operator Instructions] I would now like to turn today's call over to Nancy Christal, Senior Vice President of Investor Relations. Please go ahead, ma'am.

Thanks, Cynthia. Good morning, everyone, and thanks for joining us today. I'm here with our senior management team, Tom Ryan, Chairman and CEO of CVS Caremark, who will provide a brief business update; Dave Denton, Executive Vice President and CFO, who will provide the financial review; and Larry Merlo, President and COO; and Per Lofberg, President of our PBM business, both of whom will participate in the question-and-answer session that follows our prepared remarks. During the question-and-answer session, please limit your questions to no more than two, including follow-up so we can provide more analysts and investors the chance to ask their questions. This morning, we'll discuss some non-GAAP financial measures in talking about our company's performance, namely free cash flow, EBITDA and adjusted EPS. In accordance with SEC regulations, you can find the definitions of the non-GAAP items I mentioned, as well as the reconciliations to comparable GAAP measures on the Investor Relations portion of our website at info.cvscaremark.com/investors. As always, today's call is being simulcast on our IR website. It will also be archived there following the call to make it easy for all investors to access it. Please note that we expect to file our 10-Q by end of day today and will be available through the website at that time. Now before continue, our attorneys have asked me to read the Safe Harbor statement. During this presentation, we will make certain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. Accordingly, for these forward-looking statements, we claim the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. We strongly recommend that you become familiar with the specific risks and uncertainties that are described in the Risk Factors section of our most recently filed annual report on Form 10-K and that you review the section entitled Cautionary Statement Concerning Forward-looking Statements in our most recently filed quarterly report on Form 10-Q. And now I'll turn this over to our CEO, Tom Ryan.

Thanks, Nancy, and good morning, everyone. Today, we reported adjusted earnings per share from continuing operations of $0.65, which was at the high end of our expectation, and we generated $1.7 billion in free cash flow year-to-date, so we are well on track to meet our $2.5 billion target for the year. Obviously, we are very pleased with our third quarter result. I thought I'd keep my prepared remarks a bit shorter than usual today. Since we provided a fairly in-depth update of our business at the recent Analyst Day. For anyone who missed that, the slides and the video are still available on our website, so let me just jump right in. I'll start with our Retail business, which produced industry-leading same-store sales growth, improved margin and solid expense control, all of which led to a significant improvement in our Retail operating margin. As Larry mentioned at our Analyst Day, same-store sales increased 2.5%, with Pharmacy comps up 3% and front comps of 1.4%. This is especially strong, obviously, given this economic environment. We continue to gain share in Pharmacy with our market share up 22 basis points nationally versus the same quarter last year. And according to IMS, our growth has outpaced the chain drug industry by almost 170 basis points through September year-to-date. Our adherence admission is that Retail continue to drive industry-leading results. We are now best in class retailer on adherence in key therapeutic classes such as diabetes, hypertension and depression. As you know, in October, we completed the rollout of our Consumer Engagement Engine to our stores providing our pharmacy team's with unmatched capabilities to communicate with patients at the right time, with the right messages and in a personal and confidential manner. In the third quarter, our pharmacy comps were negatively impacted by about 280 basis points from new generics, a greater impact than the 180 we saw in the second quarter. Now on the flip side, pharmacy comps were positively impacted by about 310 basis points on a gross basis or 240 basis points on a net basis due to continued growth of Maintenance Choice. So for the first time this quarter, we are providing the impact for Maintenance Choice on both a gross and net basis because what we are seeing now is a greater conversion of existing 30-day scripts to 90-day scripts under Maintenance Choice. As we expected, this is happening more as voluntary mail clients adopt Maintenance Choice. As you know, the early adopters of Maintenance Choice were really mandatory mail programs so there were, obviously, fewer 30-day scripts at our stores that were really impacted. In 2010, nearly 50% of the clients adopting Maintenance Choice previously had voluntary mail programs. As more voluntary mail clients choose Maintenance Choice as a way to lower cost and improve outcomes, this will be a better measure looking forward. We are also beginning to reap the benefits of our front store initiatives. We completed 2,800 consumable store conversions and are in the process of completing about 200 urban remodels for 2010. Both of these initiatives are driving trips, improving sales and margin and enhancing inventory productivity. Now some of you have asked us what we're seeing in terms of the consumer sentiment. We really haven't seen a pickup in confidence yet. Consumers remain value conscious and cautious. Maybe the election results will change that last night. But we think it's a pretty cautious consumer out there, and in fact, it's one of the reasons that's driving our private label and proprietary products, as well as our proximity to their home and the value proposition overall. Speaking of private label business, our Private Label business continues to grow with a penetration of front store sales up 40 basis points to 17.4%. Penetration across the enterprise is 17%. Our ExtraCare loyalty card program continues to grow also. We now have 66 million active cardholders, including about 5 million loyal Longs customers using the card. Our data shows that our best customers are spending slightly more this year than last year. So we're getting more from our best customers, which is exactly what we were aiming for. With respects to Longs stores, they are progressing nicely, both traffic and ticket ring is up significantly from the second quarter. Average weekly front store customers and rings improved in Longs stores by 260 and 215 basis points, respectively. Both our front and pharmacy comps at Longs were slightly accretive to overall comps this quarter as we expected, and we continue to see steady improvement in margin and SG&A productivity in the converted stores. So overall, I'm very pleased with our progress. With regards to new stores, we're right on track to meet our 2% to 3% square footage growth. We opened up 67 new and relocated stores in the quarter, closed six and we resulted in a 43 net new stores for the quarter. MinuteClinic continue to post impressive growth this quarter. Non-flu vaccination visits are up 27% in the quarter. We reached 8 million patient milestone this quarter, and we really believe MinuteClinic's continued strong growth reflects our expansion of services, our improved awareness around the high quality cost care that we provide. And as we said at Analyst Day, next year we intend to add about 100 clinics, and we'll do about 100 clinics annually. We've begun planning the logistics, construction, recruitment and professional support that we need to expand. We are excited obviously about this growth as we think MinuteClinic will play an important role in providing coverage to those 32 million that will be insured in 2014, especially in light of the shortage of primary care physician. So we want to be well positioned by 2014 for the influx of these 32 million folks. Let me turn to the PBM. Our 2011 PBM selling season continues to go very well. We've picked up 600 million in new business since our Analyst Meeting, largely from Med D. To date, we have won $10.7 billion of gross new business and $9.3 billion of net new business, which is including the $8.2 million from Aetna as we reported. As I said The change from our last meeting is mostly in Med D win. We will gain about 200,000 new auto enrollees for 2011. Obviously, slightly lower margin business but good business overall. We've completed 70% of our 2011 renewals to date, and the retention is about 97%. We are extremely pleased with our success this selling season with still more prospects in the pipeline. I believe this new momentum should continue in the future as we maintain our focus on customer service and as more prospective clients take advantage of our unique breath of clinical capabilities. While pricing is always important and will continue to be important, but it's more than pricing. It's about service, it's about lowering overall health care costs and improving outcomes. That really makes the difference in the long run. That's what we provide our clients. We continue to be focused on clinical programs that lower overall health care costs. Our unique Pharmacy Advisor program for diabetes will launch in 2011 in January. The program is attracting significant interest from our clients. We currently have 550 clients representing 10 million lives committed to the program. We expect to expand Pharmacy Advisor to other conditions in the short period of time. Since our recent Analyst Meeting, we signed up additional clients for Maintenance Choice now totaling 7 million lives and 550 plans, and we have a growing pipeline for 2011. I'm also happy to report that we reached our target pilot population for our Genetic Benefit Management program. We have 1 million lives enrolled by September. This program will be available broadly in January of next year. We believe our investment in Generation Health will be a valuable asset to our clients and our company in the years ahead. Finally, I'll remind you that we launched our PBM streamlining initiative that we talked about, which is expected to deliver over $1 billion in savings in the next four to five years. We're streamlining operations. We're rationalizing capacity. We're enhancing technology to improve productivity and efficiently grow our PBM business in the coming years. So in summary, our selling season's going great with strong retention and significant new business wins, and we continue to see acceptance of our unmatched clinical programs. The Retail business continues to lead the industry as we continue to innovate and maintain our edge. MinuteClinic is growing significantly and we'll have exciting plans to restart the rollout in January. And we are focused on improving efficiency and productivity across our company. And lastly, we generated significant free cash flow and are on track to hit our target of $2.5 billion. As Dave laid out for you on the Analyst Day, we continue to exercise discipline around our capital allocation practices and return value to our shareholders through increased dividends and share repurchases. So now I'll turn it over to Dave for our financial review.

Thank you, Tom, and good morning, everyone. Today I'll provide a detailed review of our third quarter financial results and then update our 2010 guidance for the full year. I appreciate many of you taking the time to attend our 2010 Analyst Day. At that time, I've laid out the significant cash generation capabilities of the company over the next five years and the discipline we will utilize when deploying the substantial cash we generate to achieve the highest possible return for our shareholders. We set a targeted dividend payout ratio of approximately 25% to 30% by 2015 versus our current level of about 13%. This implies a compounded dividend growth rate of nearly 25%. We will use the additional cash to invest in high ROIC efforts and absent internal projects, perhaps $3 billion to $4 billion of annual value enhancing share repurchases could be executed under normal conditions over the five-year time period. During the third quarter, we generated approximately $900 million in free cash, which compares to approximately $490 million in last year's third quarter. The increase in free cash flow generation year-over-year was driven primarily by the reduction in the use of cash for inventory. We did not repurchase shares this past quarter as we are very mindful of our balance sheet and still focused on maintaining a high BBB credit rating. As most of you know, to do so, we are targeting an adjusted debt to EBITDA ratio of approximately 2.7x. Enhancing shareholder returns remains a high priority for us. Year-to-date, we've repurchased about $1.5 billion of our stock. Combined with our dividend, we've returned more than $1.8 billion to our shareholders, thus far, in 2010. Gross capital spending during the quarter was approximately $515 million, down from $660 million last year, mostly due to the absence of integration expenses associated with the Longs acquisition. Given sale-leaseback activity of approximately $125 million in the third quarter, our net capital spending was about $390 million. Now turning to the income statement. As Tom said, we delivered adjusted earnings per share from continuing operations of $0.65 for the quarter. GAAP diluted EPS from continuing ops came in at $0.60. From a revenues perspective, our enterprise-wide net revenues decreased in the third quarter by 3% to $23.9 billion. Drilling down by segment, net revenues dropped 9% in the PBM to $11.9 billion, a slightly larger decline than expected. The decrease from last year was, of course, driven by the impact of previously announced client terminations, as well as the decrease in Med D lives resulting from the 2010 Med D bidding process. In both male and the retail networks, soft prescription utilization trends throughout the industry were the primary drivers behind the variance versus expectations. PBM's Pharmacy network revenues in the quarter decreased 13% from 2009 levels to $7.6 billion, while Pharmacy network claims also declined 13%. Total mail choice revenues increased by 1% to $4.2 billion, while mail choice claims declined by 1%. In addition to client terminations and utilization trends that were a bit softer than expected, the decline in network claims also reflect the growth in mail choice penetration. As claims continue to move from network to mail choice, our overall mail choice penetration rate increased 250 basis points to 26.3% versus LY. This is driven by the success of our Maintenance Choice program, which gives our client the ability to drive the savings provided by 90-day prescriptions without denying their members the choice and access to retail. In our Retail business, we saw revenues increase by 4% to $14.2 billion in the quarter, as expected. This increase was primarily driven by our same-store sales increase of 2.5%, as well as net revenues from new stores and relocations, which accounted for approximately 150 basis points of the increase. Pharmacy revenues continue to benefit from incremental prescription volumes associated with our Maintenance Choice program. As Tom explained, Maintenance Choice had a positive impact of 240 basis points from our Pharmacy comps this quarter. A weaker flu season, the H1N1 outbreak in last year's third quarter and a higher generic dispensing rate negatively impacted pharmacy revenue growth, all of which were somewhat offset by a stronger allergy season compared to last year. Turning to gross margin. Compared to the third quarter of '09, we saw enterprise-wide margin expand by approximately 70 basis points to 21%, in line with our expectations. Within the PBM segment, gross margin was down about 50 basis points, again, as expected. This mainly reflects the elimination of retail differential within the Med D business that began on January 1 of this year, as well as pricing compression associated with the one-year extension of the FEP contract, which we announced last year and became effective this September. Partially offsetting this was the positive margin impact from the 370 basis point increase in the PBM's generic dispensing rate, which grew from 68.3% to 72%. Gross margin was up 50 basis points sequentially from the second quarter. Our EBITDA per adjusted claim was $4.31 in the quarter, down 7% versus third quarter last year, but up 9% sequentially from the second quarter. Gross margin in the Retail segment increased by approximately 15 basis points in the third quarter to 29.5%, within expectations. This increase was due to several factors, including the impact of an increased generic dispensing rate with our GDR increasing by 340 basis points to 73.5%. The benefits we are seeing from various front store initiatives and increased private label penetration. These positive factors were partially offset by continued pressure on Pharmacy reimbursement rates; the growth in Maintenance Choice, which compresses retail gross margin but helps the overall enterprise; and the continued shift in the mix of our business towards pharmacy. Overall, operating expenses as a percent of revenues increased by approximately 85 basis points over last year's third quarter, again, within expectations. The PBM segments rate increased by 15 basis points to 1.9%, primarily due to the costs related to the streamlining initiative, which amounted to more than 20% this quarter to about $20 million this quarter. These expenses were not included in our guidance we provided back in August since we did not have a final streamlining plan in place. SG&A leverage was also affected by PBM revenues that were a bit lower than expected in the quarter. The Retail segment saw improvement in SG&A leverage of approximately 50 basis points to 22.2%, surpassing our expectations. Retail benefited from the absence of Longs integration expenses and disciplined expense control throughout this segment. Within the Corporate segment, expenses were $168 million or less than 1% of consolidated revenues, with growth of 50% year-to-date. There were several puts and takes, but the primary driver of growth was the increase in professional fees. So with the change in SG&A as a percent of sales more than offsetting the improvement in gross margin, operating margin for the total enterprise declined by approximately 15 basis points to 6.2% within our expectations. Operating margin of PBM was 5.5%, down about 65 basis points, while operating margin at Retail was a very healthy 7.3%, up about 65 basis points. PBM profits declined by 18% below our guidance. If adjusted for the streamlining expense, PBM profit growth was close to the low end of our guidance, while Retail profits improved by 14%, well above our guidance. Going below the line on a consolidated income statement, we saw net interest expense in the quarter increase by $14 million to $137 million, slightly below our expectations, while our effective income tax rate was 39.2%, and our weighted average share count was just under 1.4 billion shares. So now let me turn to our guidance for the fourth quarter and full year 2010. We are narrowing our 2010 guidance for adjusted EPS from continuing operations to a range of $2.68 to $2.70 from our previous range of $2.68 to $2.73. The $2.68 to $2.70 guidance for 2010 compares to the $2.62 we earned last year, adjusting for the onetime benefit of $0.12 per share in 2009 for the tax benefit. GAAP diluted EPS from continuing operations is now expected to be in the range of $2.49 to $2.51 this year. Please note that this guidance does not assume any additional share repurchases for the balance of this year. In the fourth quarter, we expect adjusted EPS from continuing operations to be between $0.78 and $0.80 per diluted share compared to last year's $0.78 per share. GAAP EPS from continuing operation is expected to be in the range of $0.73 to $0.75 per diluted share. We expect the PBM segment operating profit to decrease 25% to 27% in the fourth quarter, impacted by the price compression from the FEP extension for the full quarter, as well as the Aetna integration and PBM streamlining cost. We expect to spend an additional $35 million to $40 million in the fourth quarter on the PBM streamlining. For the year, we expect the PBM's operating profit to decrease 16% to 17%, which now includes both the Aetna dilution and the PBM streamlining initiative costs. And as we said on Analyst Day, we will spend approximately another $200 million on the PBM streamlining initiative over 2011 and 2012 with the majority of which will be spent in 2011. We expect the Retail segment operating profit to grow 12% to 14% in the fourth quarter and to grow 9% to 10% for the year. For the PBM segment, we expect revenue to decline by $8.5 million to $9.5 million for the quarter. For the Retail segment, we took revenues to increase by 3% to 4% and same-store sales to increase 1.5% to 2.5%. As a result for the total enterprise in the quarter, we expect revenues to be down 3% to 4% from 2009 levels. That is after intercompany eliminations, which are projected to equal about 8.5% of combined segment revenues. For the total company, gross profit margins are expected to notably improve relative to last year's fourth quarter as the higher margin Retail segment becomes a larger piece of our total company's business. Expectations are that gross margin in the Retail segment will be modestly up, while gross margin in the PBM segment will be notably down. For the total company, operating expenses now are expected to be approximately 15% of consolidated revenues in the fourth quarter, with the PBM modestly down and the Retail segment improving notably. As we expect, operating expenses in the corporate segment to be in the range of $155 million to $165 million, modestly delevering as a percent of consolidated revenues compared with 2009 levels. As a result, we expect operating margin for the total company in the quarter to be modestly down from last year's fourth quarter. The rest of this guidance I'm going to give is for the full year, so please keep that in mind. We expect net interest expense of $540 million to $545 million. We are forecasting a tax rate of approximately 39.5%. We anticipate that we will have approximately 1.375 billion weighted average shares for the year. We expect total consolidated amortization to be roughly equivalent to a level in 2009 combined with estimated depreciation, we still project approximately $1.4 billion in D&A in 2010. As for capital spending this year, we now expect gross capital expenditures of between $2.1 billion and $2.3 billion and proceeds from sale-leaseback of approximately $500 million to $600 million for the year, a reduction of about $200 million in our expectations for net capital expenditures. We still expect to generate approximately $2.5 billion in free cash this year, and we continue to expect free cash flow to accelerate in 2011 and beyond. And with that, I will turn it back over to Tom.

Okay. Thanks, Dave. As Nancy said, Larry and Per are with us today. So we are going to open it up for questions.

[Operator Instructions] The first line of Lisa Gill with JP Morgan.

I was wondering if you could just dig in a little deeper. I know you talked about the profitability on Maintenance Choice having an impact negatively on the gross margin for retail, but good overall for the company. Can you help us to understand the magnitude of what you mean by good overall?

Well, Lisa, I guess, in total what you need to think about is what is happening here is your adjudicating essentially a mail order claim in the retail location which carries a higher discount rate. But with that, the enterprise in total captures more volume associated with that transaction as a percent of the members spend. So net-net, at the end of the day, the economics prove out that the flow through to the enterprise is very productive.

Yes, and Lisa, to the point were obviously, the plan has to have a benefit program that drives to mail and we also save on the mailing cost at the PBM side.

Lisa, the other thing that happens too keep in mind that over time as the mail centers have the cost associated with the mail centers are quite variable in the sense that technicians and pharmacists in those centers, when a script moves from mail to retail, we can leverage the capacity that we have in our retail locations so we can fill that incremental script without flexing up cost in the retail setting.

And then my second question is really about the next big generic wave is what that will start in 2012. Yesterday one of the PBM competitors talked about Lipitor and what a great opportunity this is because in their book of business it's 60% mail penetration. Are you comfortable at all giving us any kind of metric to think about how big the next generic wave will be, given especially your combination of having Maintenance Choice and thinking about big drug like Lipitor and what the potential impacts could be as we started thinking about that next big generic wave?

To give you more clarity around that in the fourth quarter call as we talked about 2011 and 2012. But in general, we've spoken about this at our Analyst Meeting. 2011 is clearly, the weakest of the years we've seen for generic introductions. Obviously albeit, Lipitor will hit in the last quarter, in the last two months of the year, and 2012 conversely is going to be the top of the year that we've seen in recent history. I think there's a little bit of maybe undue concern in the marketplace that, what do we do after 2012 and 2013? We've done analysis. We've looked at the mix, and we see it as a significant opportunity going forward with generics, both in our Mail business and in our Retail business. And as you indicated, Lisa, in the mail choice. So we won't get into specifics, but directionally we are in pretty good shape and feel very optimistic about. And I'll just ask Per to comment on it.

Yes, I guess I'm going to add one other dimension and it has to do with plan design. That's, obviously, main driver of the generic opportunity counts for the task of expiration, but in addition to that, we now have the opportunity to design benefit plans where there is much greater emphasis on generics and much more restrictions on the remaining branded prescriptions. So when you have, except through the categories like cholesterol or the hypertension category and PTIs and so on, those types of categories can now really be very well supplied with only generics over with generic source. So that really creates an opportunity beyond just, that said, is provided by the task of expiration themselves.

Per, can you put any kind of number, we're analysts, right? We just want to try understand numbers, so can you just help us at all to think about programs that are going to go into place for '11 and will, obviously, also benefit '12. What kind of uptick are you seeing in those kind of programs? And do they dovetail into Maintenance Choice? Is it that you're getting the Maintenance Choice and then you are offering these kind of step therapy programs with Maintenance Choice or they're independent of each other?

Very independent of each other, and it really depends on the plans and what they're able to do. There are many plans that are very actively focusing on the generic opportunity even if because the geography or whatever they can't be as aggressive with respect to 90-day supplies. So there are two parallel opportunities for us. They work sometimes in tandem and many times independent of each other.

Is there any percentage or a number that you can give us to say, "we have penetrated this number of accounts today" and just to give us what would we believe the continuing opportunity is and then I'll stop.

We did show a slide at the Analyst Day, which showed the current penetration of what we call the high performance generic formulas, that's about the exact number there but we know we can't...

What is 43%? Was that the right number?

No. It's maybe boarding of that 10% range today. But they also have in it what we thought were the opportunities in our customer base, which is multiple of that just like a four-fold multiple of where we are today. So over the next couple of years, we do believe that, that's a real win-win for us and our customers as they modify that enzyme.

There's a leverage opportunity here, right? We're going to have more drugs coming off patent in generic form especially in 2012 and beyond, and we have an opportunity to have higher penetration for existing customers. So it's a double win here.

The next question comes from the line of Meredith Adler with Barclays Capital.

I was wondering maybe, which is follow-up a little bit on that question about Maintenance Choice and Dave, you were talking about the overall benefit of Maintenance Choice even if the individual scripts produce a lower margin for the store. Can you just talk, maybe update us a little bit on to what extent you're seeing patients move all of their scripts, their acute scripts, when they move to Maintenance Choice and is there any way of tracking whether you're seeing an improvement in front-end sales from those customers that move to Maintenance Choice?

As you know, when a client signs up for Maintenance Choice, the client obviously the payor, chooses the program and they're choosing the program because, obviously, there's some options and convenience and ease for their members or their employees so they get the benefit of mail and the cost savings and then their members and employees have the ease of 90-day at the store. It just stands to reason as if a patient is taking the medication up in the store and they have multiple, they use multiple pharmacies, we do get a lift. It's really driven by the patient, not our stores, right? The patient decides that they would like to move their medication whether it's acute medication or other maintenance medication that they have to our stores. So we do see a pickup. We do get a bigger share of that patients' pharmacy spend. But once again, the first part, Maintenance Choice, that idea of Maintenance Choice, is driven by the client and second, the decision to move that medication to one of our stores is really a patient decision. And then we know there's a correlation between spend, the front store customer visits our store more than the pharmacy customers, so we get a fair amount of our front-end spend without a pharmacy transaction. But once again, if they decided that the store is close enough for their maintenance medication, then there are customers now that are, obviously, making the decision to shop the front end of our store. So it is a total benefit.

And, Meredith, just to be clear, we do not attribute any incremental profit associated with any front store transactions to the Maintenance Choice program that we just talked about. It is quite productive just on a pharmacy only basis, and that's how we think about it.

And is it possible to quantify the benefits because without people shifting the rest of their scripts to the store, then you won the risk that a person who is already filling 33s and goes to 190, it's actually negative for the profits at the store, unless you get something else.

Yes. That's right and you have to move them -- that's why it's all about the plan design also. I mean, you have to have a client that's moving to a plan design that's going to drive 50% to 60% mail penetration. So it's a benefit overall for the company.

I now have a totally unrelated question, when you talked at your analyst meeting about reductions in inventory, you focused considerably on the benefits to cash flow. But there wasn't really any conversation at all, any mention of what might happen to labor costs, maybe even on the gross margin but mostly labor cost, from reducing inventory at the stores and presumably at the distribution centers. Other companies who've gone through a similar process had seen a meaningful benefit in cuts in SG&A. Is that something you guys have thought about? Is it in your guidance at all? Or is that just sort of an opportunity?

Yes, Meredith, it's Larry. And we think that there is some opportunity when you think about as you mentioned, the distribution cost as well as the backroom management in our stores. But as we stated at the, or at least alluded to at the Analyst Meeting, we think that we have opportunities around some of our processes, and we're not looking at our goals around inventory reduction to be largely through SKU rationalization or SKU elimination. And we'll pick up some efficiencies in labor as a result of our clustering efforts, which streamlined some of the SKU rationalization but that's going to be a small incremental piece.

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

First, I just wanted to make sure, Dave, I understood the streamlining cost. So you're saying at Investor Day that you're going to spend about $200 million over the next couple of years and now that number overall has gone up by $50 million or $60 million for spending in the third and fourth quarters?

No, that's not exactly how we tried to characterize it. We were planning to spend about $200 million in 2011 and 2012. There's going to be about $60 million spent this year. So in total, we'd always expect to spend roughly that amount.

And the near-term cost, I guess, what sorts of things are they being invested in?

The kind of runs the gamut of investments that we're making at this point in time from an expense perspective. I guess first and foremost, as we go through this process, we are consolidating some facilities, so there's some asset impairment and write-offs that occur. We're also ensuring that we have the right resources against all these initiatives, so we're incurring some professional services fees to support that. We're also supporting, I guess, the realignment of some of the staff and some of the staff expenses associated with those movements.

You mentioned some write-offs, possibly, is all that $50 million or $60 million this year cash or is it material portion of it non-cash?

Some of it is non-cash, but I would say the majority of it, a high percentage of it, is cash.

And then just shifting gears, Per, I was wondering if you've obviously been through sort bulk load selling season at this point. It went a lot better than last year at this stage. Can you maybe talk a little bit about how the sales pitch or the conversation with the customer has changed? And also as a part of that, to what extent does the CVS retail piece of the equation come into play as a benefit or sort of neutral or detriment to those conversations?

Yes. Well, I should say first it certainly is not a detriment at all. In fact, it's just the opposite. I think I've said many times during the course of this year when customers go up for bids and they go through the orders and the new approach for sale, as sort of first and foremost focus on improving the economics of the drug plan. So that is on the top of the agenda. We are also getting, as you heard, a very nice traction from the sector of our most clinical programs that have been built here and have continued to be built -- a large part as a result of the combination between CVS retail and Caremark CDM. So those programs I think resonates, and we have a growing amount of evidence to show people about how they work in practice and what kind of benefits they can expect to see, both clinically and economically. So they're very attractive feature on the dialogue with our customers.

And just to clarify, those aren't really new programs, I don't think in many instances, so are you pitching them differently or more pronounced in your discussions or what's changed versus the last year or two?

No. I think some of them are quite new. I mean, their Pharmacy Advisor programs was featured at the Analyst Day and as you had mentioned here a few minutes ago, that program was really kind of entitled during latter part of last year and the early part of this year. So we now have a very compelling evidence in terms of how it improves the behavior and the decision-making process regarding adherence and filling gaps in care and so forth for the participants in the program, and that I think is an important component of making companies prepare to sign onto a program. As you heard, we have about 10 million lives that are ready to go with this program in January. The other area we focused on, that we also highlighted this year, is the whole specialty part of the business. This is an incredibly important aspect of the sort of the drugs spend for our customers. And the programs there are just increasingly visible in the decision-making process in terms of both controlling drugs spend through utilization programs and improving the outcomes for the plan members to compliance-driven initiatives. So that's a very hot topic today when we and other PBMs talk about customers.

Your next question comes from the line of Mark Wiltamuth with Morgan Stanley.

Could you give us some update on what's happening in the flu season and how the consumer uptake has been on flu shots this year and what you're expecting as we roll into December, January when the year-ago comparisons on flu really collapse?

Yes, Mark. In terms of the flu program we have across our Retail business, which includes MinuteClinic today, we have about 13,000. That's more than double a year ago. And as of last week, we've administered about 1.7 million shots well ahead of last year, slightly behind where we thought we'd be at this point in time. We see that the -- I'll call it the inoculation season, probably continuing through the balance of the year and perhaps even into January. I think as you alluded to, we all recognize that we're comping up against the H1N1 at its peak period, probably now through the middle of December. And then I think once we hit January, we're looking at much more normalized comps, recognizing that we really did not have much of a flu season at all in 2010, both of the seasonal variety and the H1N1. And I think the impact to flu shots on our comps will probably be negligible as we go through the fourth quarter.

And maybe I can also ask on the Pharmacy side of the house. Any changes in the macking trends out there? Because we did see a pretty sequential improvement at the Walgreens pharmacy margins just from an easing of macking.

I said that we have seen the year-over-year rate compression has softened from early in the year. That being said, I don't think that margin compression has abated, and we continue to work with both private payers, as well as state Medicaid groups on ways that we can lower overall cost without just a rate reduction.

Any update on AMP implementation?

I think we're still waiting for some of the rules in terms of how CMS will administer. I don't think -- based on where we're at, I don't think we believe we're going to see anything much before the first quarter of next year. But again, I want to emphasize that I think that we have seen going back to September of last year, the state Medicaid, as they were reducing reimbursement, I think that throughout the course of this year we have seen some of the margin compression that I think we expect to see as a result of that. So we think we've been incurring that throughout 2010.

Your next question comes from the line of Larry Marsh with Barclays Capital.

Just kind of longer-term trends, I think on the Pharmacy Services business, going back to I think the outlook you gave at the analyst meeting, I think Per and Tom, which top line growth of PBM and that sort of 10% to 12% range including Aetna with some margin decline, it seems like your peers are seeing less top line growth but margin expansion. So I guess I want to sort of think about how do we reconcile those two in that context. And then in the environment of what you're going through with the streamlining and some of the other initiatives, Per, how do we think about customer retention and growing share in this kind of marketplace especially since we're a little bit behind the curve already?

Larry, yes, you have a point. Obviously, I can't speak on half behalf of Michael Bephetus [ph] but certainly the way we look at it, if you take Aetna alone, that represents about a 20 percentage point increments to our book of business. And obviously, it's a lower margin business, reflecting the size of that kind of an account. So that's one factor. Likewise, as you know, we focus very much on the Medicare growth opportunities that we see in the market, both in terms of the PDP programs and the so-called egrich [ph] programs where employers are shifting their retirees into costly government-funded programs. And those are good programs for us. They are slightly lower margin than the kind of traditional PBM business, but they're still very worthwhile and very productive for us from an overall standpoint, so those are two of the drivers.

And a follow-up on the Aetna dilution for this year, I think you gave a $35 million to $40 million incremental cost with the streamlining program. What sort of Aetna dilution are you assuming for Q4?

$0.01 to $0.02.

Your question comes from the line of Ed Kelly with Credit Suisse.

I'm still just a little confused about the streamlining guidance, but it sounds like the $50 million that you're talking about this year is different than $200 million laid out at the Analyst Meeting. Is that right? And if so, why not just highlight it then and adjust guidance at that time?

Yes, let me just be clear. We expect to spend $200 million between 2011 and 2012 with the majority of that spend happening in 2011. The spend for this year, which is about $60 million in the PBM for 2010 that I referenced earlier, we did not as of a few weeks ago, have a detailed plan on how that was going to occur, what the exact actions were going to be. And so we're unable to quantify that specifically. So now that we've been able to quantify it, we've laid it out. I'm sorry for any confusion there.

Second question really is on inflation in the front end in 2011. We're hearing a lot of CPG companies talking about raising prices. I was curious as to whether you've seen some of this yet. Do you anticipate being able to pass these price increases through if the consumer remains weak and I guess if you could, if it would be incremental to the front-end comps. I would just love your comments there.

Yes. We have not seen at this point, anything out of the ordinary. Obviously, we regularly review our pricing and make adjustments, always with the goal of ensuring that our customers receive the best value for our selection and convenience and access our stores provide.

I think some of the increase that you might be seeing is some of the new products that our company -- enhanced products that are getting some premium pricing. But to Larry's point, there's not a lot of pure inflation, yet. And I think if CPG companies, obviously, have to be careful, it's a balance because they're, obviously, losing some share to store brands.

Your next question comes from the line of Helene Wolk with Sanford Bernstein.

First, on the guidance for same-store sales in the fourth quarter, it looks like at midpoint, it's a sequential deceleration. Can you just give us the sort of puts and takes into how to think about same-store sales in the fourth quarter?

Yes, Helene, I think the biggest impact is the fact that we're comping up against the spike of H1N1, largely through the fourth quarter last year.

Any Longs or Maintenance Choice comp changes?

No. I mean, Longs, as I think as Tom mentioned, continues to perform well and was actually accretive to our third quarter comps, and we expect that trend will continue through the fourth quarter.

And then lastly, on the working capital front, I know you had mentioned about $1 billion out of inventories sort of going forward goal. Is this quarter, should we think about the change in inventory as being sort of part way toward that goal? Or how should we think about it?

No, I think we're making some progress in inventory. But I wouldn't say that this is a substantial delivery against that $1 billion. I think we still have a lot of opportunity against that $1 billion next year and going forward after that.

Your next question comes from the line of John Heinbockel with Guggenheim.

Tom, I wanted to drill down profit margin for the two divisions. If you look at retail you obviously have done a very good job maximizing profit margins with the Retail business, you're close to 8% now. How much more is there? I know generic will be a help in the next 18 months, 2012. But are we getting close to a comp in retail margin or you don't see that?

We keep improving it, John. Obviously, the generics, to your point, it helps on both sides of our business, Pharmacy Services and the Retail side. Then our proprietary work, our private label work, it's obviously helping. We continue to do a really great job around shrink control, when you think about margin in our store. And then we work with ExtraCare, right? We continue to tweak that as I said, 66 million customers, I mean, ExtraCare has really been beneficial to us when you think about productivity, when you think about focusing on our best customers and spending our margin dollars wisely. So over the course of the next few years, we will be looking at how we go to market and what we do with our circulars, what we do with that spend on those circulars and the margin associated with that. So I wouldn't say it's not going to ramp up significantly, but I wouldn't say it's over yet.

And, John, the only other element that I'd allude to is the growth that we still have in terms of improving the profitability of the recent acquisition, and we touched on that a little bit at the analyst meeting, and we've made some very nice improvements. But there's still more opportunity there.

And, John, I'll also go back to some of the things that both Larry and Tom and I referenced a bit at the analyst day around the fact that over the next several years, there is going to be increase in utilization of price of prescription utilization across the U.S. That increase in utilization will drive volume through our outlets that will increase our productivity. Combine that with many of the initiatives that we have underway today and our plan for the future that also provide additional service and value to our consumers that will allow them to choose our stores more and more and we'll gain share over time. So I think we have for a start nicely for that over long.

Conversely, obviously the PBM is under earning. You think that there's -- from the bottom that we hit in 2011, you would think that there's 100, 150 basis point opportunity in the PBM profitability. What do you think will happen with companies investing the generic benefit, in pricing, in renewals? How much of that will take place? And how do think that compares to what happened in 2006? Will there be more investment of that generic benefit away, less, the same, what do you think?

This is Per. I think the PBM business shows no signs of abating in terms of its kind of competitiveness. It is a very competitive business. There are big contracts that turn on relatively small differentials. So I do think that the generic opportunity that we see and that we're focused on from our own kind of internal standpoint, that's also on the radar of our customers and our consultants. So it certainly will be a part of that negotiating process as we go forward. And we have to be realistic and assume that some of that opportunity will have to be shared with customers in the competitive bidding process.

To that point, customers will, obviously, want alignment, and they see that generics have always been good for the payor and good for the patient, and obviously, it'll be good for us. So there is alignment around it. And, John, I also think we have opportunities. Just like we continue to tweak the Retail side, we look for opportunities, we have opportunities on the Pharmacy Services side. We're improving our mail penetration, improving generic penetration, Specialty business and some other service businesses that we're looking at. So I think it's right looking at all the little pieces of every business and see where we can drive more margin opportunity and at the same time, balancing the safe we have for our clients.

Your next version comes from the line of Bob Willoughby with Bank of America.

It looks like Aetna's guiding to about 500,000 less ASO lives next year was that part of your opportunity or were they ASO lives never part of the deal?

Well we picked up some of those that were basically negotiated earlier in the year. And some of those ASO lives were lost by Aetna to other PBM competitors. So some of it we have and some of it they lost through their normal competitive process.

And is your question where we're factoring that in?

Yes, that was a new data point for me.

Yes. Obviously, due diligence we had some discussions on which contracts were questionable and where they were, they thought they might lose. So that was part of the contraction relationship. You're going to have some puts and takes. We expect to have some, obviously, going the other way. But yes, it was all factored in.

$1.1 million net new business is a good number?

Yes.

The next question comes from the line of Scott Mushkin with Jefferies & Company.

I just wanted to get back to what ever you're saying, so the reduction guidance, not reduction but the global low-end, is the incremental streamlining cost, is that correct interpretation just or...

Essentially that is the driver, yes.

Then I wanted to go back to what Merideth and Lisa started off the call with and I'm just trying to understand maybe choice is a little bit better. It seems like the marginal cost of dispensing retailers is about zero close to zero, the marginal cost to dispensing mail I think you said it's actually higher. So if I take a non-CVS, non-mandatory retail customer and convert them to Maintenance Choice, it seems that contribution margin should be really high, unless Caremark is using some of that money to encourage adoptions. I'm just trying to understand if I'm wrong in that type of thinking or where I may be off.

Well, we're investing, obviously, some of that with the client. But it's also offset by the point that was raised earlier of the existing -- you're referring to the new customer to CVS Caremark. But it's also offset by the 30-day customer at Retail that goes to 90, right? You take a little bit of a hit there. So it's a wash. It really is important to understand that the plan design, you have to have a plan design. If you have a situation where a client has 10% mail penetration, it's tough for the economics to work. I don't care how much additional business you pull in. It's when you get a higher mail penetration that drives the economics here. So it's back-and-forth, but you're right on around the variable cost in the Mail business, not only payroll but also the mailing costs.

Tom, as a follow-up, the mix shifts in Maintenance Choice to new wins to maybe people that weren't part of the Caremark network or didn't do a mandatory mail program, that should improve profitability as we move into '11 and '12? Or is that not a good way to look at it?

That is absolutely the way to look at it.

And typically the Maintenance Choice business, something that customers put in after they have selected a PBM. So it's sort of an upsell opportunity margin, a margin improvement opportunity for us vis-à-vis our existing book of business.

Maybe there should be a decent amount of pressure put on the pharmacies since you roll out some of these Pharmacy Advisor program, maybe if you could just give me 30 seconds on how we get comfort around that the pharmacists will be able to execute adequately for Caremark.

Scott, thanks for asking that question because I absolutely love answering that because I think we have a great solution. And as we talked at the Analyst Day, we have invested in technology in the form of both our RxConnect and the Engagement Engine, which we're branding internally as PCI Connect. And this allows us to integrate the realtime clinical messaging as part of the workflow for pharmacists. And that, to me, is the absolute key to this because we're delivering an intervention that is intended to last for a couple of minutes, the fact that we've been able to build it as part of the workflow, I think is the key. I think there are some of our higher volume stores where we're working on an additional solution. We talked about the work that we're doing with the call centers because there is not as much capacity in those stores, and that's work in progress. But we are very confident in our ability to deliver the promise, so to speak.

Your next question comes from the line of John Ransom with Raymond James.

This question is for Dave. As we think about the PBM cost saves in the out years, let's say, '12, '13, '14 what are the alliance costs where the cost that you're incurring are outweighed by the cost savings that you realized?

Really probably some of that still a little bit work in progress from a timing perspective and we'll update you specifically as we get there. But I would say it's probably sometime in '12, would be my guess at this point in time, as the plan currently lays today.

It would not definitely be in '12, right? I mean, you got to think about facility consolidations and moving people. You want to make sure that this is not disruptive to the clients. And we have a plan for that. So it's laid out across '11 and there's some cost to David's point, the $200 million that we layout is more in '11 than '12. So the benefit well see is more in '12.

And my second question is on the Part D business that you picked back up, is that material from an earnings standpoint as we think about our 2011 numbers?

It is definitely a good guide for us. It's a benefit, and I don't have right in front of me sort of the increments it represents per se, but it's about $600 million of additional revenue that we expect from that on assignment below.

And I think the question is -- it's lower margin business, but it's still positive for us.

And then I guess, Tom, just the Caremark deal was announced in 2007. It looks kind of like 2012 might be the year where you get your revenue synergies and maybe some positive year-over-year EBIT growth. I mean, I have to think that when you were thinking about that deal in 2007, you probably would have been surprised it took five years. Can you give us some perspective on maybe some of the positive and negative things that you've experienced since you've moved through this process?

We don't have enough time on this call. But yes, I would say, and I talked a little bit about this, the lead time. There was obviously, a longer lead time we gotten a whole right away with a loss of a big client, actually two big clients, within the first year. And then the work that we did was really around getting the synergies, getting the back-end systems hooked up, the HR side, the financials and that was the work. We didn't really spend a lot of time initially on the new products. And then we worked on the new products and the end of '08 and into '09, you're just selling those for the '10 season. So it's got a lead time. Listen, I'm sure if we look back on any deal that we've done, we've made some mistakes. I will say this, but we don't make multiple mistakes. And we look at it, we've corrected it and we moved on and you can see the changes that we've made in the PBM side of the business across the business. And so, yes, I'm a little taken by the speed. I think there was, as I've mentioned this, there were some benefit managers that maybe a little more risk adverse than that than I anticipated because some of the products took a little longer in the uptake. But as Per indicated, you can see people are reaching out for this. There is no question, you can talk about some of the external issues that's out there in the marketplace. But from a client standpoint, there is no question that they see the benefit of this combined offering. It saves money. It's easier for their members, and it produces better outcomes. I mean, at the end of the day, that's what this is about. So you're right. We will see it obviously in '11 and more certainly so in '12. But I could go on obviously.

Your next question comes from the line of Deborah Weinswig with Citigroup.

Just to follow on some of the questions earlier with regards to a generic dispensing rate, et cetera. One, what do you think is the potential longer term? And how do specialty generics figure into that?

We haven't made any real kind of quantification on specialty generics. That's out there. I mean, I think we have to look at our normal PBM book of business. We see opportunities to continue to drive that up there certainly into the high 70s and maybe even across 80% over the next several years.

And then with Pharmacy Advisor rolling out in 2011, how does that fit into Accordant or is that two separate offerings and maybe if you can just talk about where Accordant is since everything at this point in the game?

It's two separate offerings really.

Can you just talk about Accordant at this point in the game?

Accordant is a sort of a disease management approach focused on rare diseases. Up until now, it's pretty much sold quite independently of the PBM sales in health plans. It tends to be bought by different parts of the company and different schedules than the PBM business is contracted. So they run as pretty independent entities.

Is there any opportunities to bring up more since you and the company has done an amazing job in terms of cross fertilizing is there any opportunity to bring out more into or integrate that more into everything else?

It's possible. Quite candidly this year, we haven't focused heavily on that. We've had so many other important priorities to try to move into. So it's on the list. But it's not something that we've kind of given a tremendous amount of attention to in the near term'

A valid question that we need to answer because obviously, it's a profitable business. Accordant Care does a great job. It's a unique business offering in the marketplace. The question is, what's the synergy for us around PBM side and the specialty side of our business? And is there a way that we can look at that to enhance our offering in a better way to Per's point, but it's a valid question, one we are working on.

Your final question today comes from the line of Steve Halper with Stifel, Nicolaus.

One more clarification on the streamlining costs, the $60 million for 2010, is that part of the $200 million or is it incremental?

It is incremental.

Thank you, and as always, if you have any questions and clarifications, management is available and so is Dave. Thanks.

Ladies and gentlemen, this concludes today's conference. You may now disconnect.