I would like to welcome everyone to the CVS/Caremark Corporation's first quarter 2007 earnings conference call. (Operator Instructions) I would now like to turn today's call over to Nancy Christal, VP Investor Relations for CVS/Caremark Corporation. Please go ahead, ma'am.

Thank you, Cynthia. Good morning, everyone and thanks for joining us today for our first quarterly earnings call for CVS/Caremark Corporation. I'm happy to say that we have an excellent group assembled here to update you. I'm here with Tom Ryan, President and CEO of CVS/Caremark; Dave Rickard, Executive Vice President and CFO of CVS/Caremark; and Pete Clemens, CFO of Caremark Pharmacy Services. Here is our agenda for today's call. With the goal of being responsive to the many questions we've received, I'd like to take a couple of minutes to discuss some disclosure practices for the new company; then, I'll provide some color on our April monthly sales which were also announced this morning in a separate press release. Tom will then update you on our business unit results in the quarter and the terrific opportunities we're seeing from the merger of CVS and Caremark. Dave will provide a first quarter financial review and our initial guidance for the combined company for the second quarter and full year 2007. Following our remarks, we'd be happy to take your questions. During the Q&A session, we ask that you limit yourself to one or two questions including follow-up, as we have a large constituency of healthcare and retail analysts and investors to accommodate. Now as you know, the merger closed on March 22 so our GAAP results include ten days of Caremark's results, but our goal today is to help you understand the underlying performance of both CVS and Caremark in the first quarter. We will provide that information throughout today's call. Per FAS 141, our 10-Q will provide pro forma revenues, earnings and EPS as if the companies were combined at the beginning of the period. Let me note that our 10-Q will be filed today and going forward we expect to file our 10-Q normally on or about the day we report earnings each quarter, in order to provide you with full and timely disclosure. As for other disclosure practices, I'd like to update you on some new financial reporting plans for CVS/Caremark. First with respect to monthly sales, we intend to continue to report our retail same-store sales for CVS Pharmacy on a monthly basis throughout the remainder of 2007. That should give you good visibility to the health of our retail business and the progress we make in the Osco SavOn business when those stores enter our comps in July of this year, as well as time to get used to the change. Since our total revenues now reflect significant PBM as well as retail businesses, we won't be giving total revenues on a monthly basis starting with the May release. In 2008 we'll begin reporting same-store sales on a quarterly basis only, along with our quarterly earnings report. This approach better reflects the new company and is more consistent with our new industry peer. In addition, note that CVS historically has been reporting its financial results on a 4-4-5 retail calendar. Other retailers and healthcare providers, including our primary peers, report on a calendar year basis, as did Caremark. We obviously want the two segments of our business on the same fiscal period, so our end goal is to report the combined company on a calendar year basis. This will take some time; as you might imagine, there are enormous systems and business process changes required. So for 2007 and the first three quarters of 2008, we'll continue to report on a 4-4-5 calendar and Caremark will move to our retail calendar, but by the end of 2008 we plan to begin to report the combined company on a calendar year. As always, today's call is being simulcast on our IR website. It will also be archived there for a one-month period following the call to make it easy for all investors to access the call. I will discuss some non-GAAP financial measures in talking about our company's performance during this call, mainly free cash flow and cash EPS. Free cash flow is defined as earnings after taxes plus non-cash charges, plus changes in working capital, less net capital expenditures; so free cash flow excludes acquisitions and dividends. Cash EPS is defined as EPS eliminating the effect of depreciation and amortization. In accordance with SEC regulations, you can find the reconciliation of these items to comparable GAAP measures on the Investor Relations portion of our website at investor.cvs.com. Now, before we continue, our attorneys have asked me to read the Safe Harbor statement: During this presentation we'll make certain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties relate to, among other things: general industry conditions such as the competitive environment for retail pharmacy and pharmacy benefit management companies, regulatory and litigation matters, legislative developments, changes in tax laws, and the effective changes in general economic conditions. 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 we've outlined for you under the captions Risk Factors and Cautionary Statements Concerning Forward-Looking Statements in our annual report on Form 10-K for the 2006 fiscal year ending December 30, 2006 and under the caption, Cautionary Statement Concerning Forward-Looking Statements in our quarterly report on Form 10-Q for the quarter ended March 31, 2007. Finally, let me review April sales for CVS excluding Caremark. Total revenue increased 21.4%. Total comps were up 6.1% with pharmacy comps up 7%, despite being negatively impacted by approximately 580 basis points due to recent generic introductions. Front store comps were up 3.9%. Our two-year stack comps look very strong for the month in both the front end and the pharmacy, with front store two-year stack comps up 17.3% and pharmacy two-year stack comps of 15.1%. We experienced solid growth across our core front end categories in April, so we had a very solid start to the second quarter. Now I will turn this over to our President and CEO, Tom Ryan.

Thanks, Nancy and good morning, everyone. Well, as you know, I typically leave the quarterly earnings calls in Dave and Nancy's good hands and join you for the annual call, but given that this was our first call for our new company, I wanted to update you on our business unit results, talk to you about the progress of the merger since we closed, and also address any questions that you may have specifically for me. This quarter's financial results obviously have a lot of noise in them due to the timing of the merger, and Dave will walk you through all of that. Let me just say I am very pleased with our first quarter results. As you will see, we have definitely been running the business and not the merger, and our results show it. Sales were strong across our business units, both in the retail and the PBM side. Margins improved and net earnings for the combined company grew 24%, even with merger-related expenses. We have two very healthy businesses here. Let me talk a little bit about CVS' front-end business. Our front-end comps were 6.6% in the first quarter. Key drivers of the front store business include gains in health and beauty, digital photo, and our private label and proprietary brands. In fact, private label now represents 14% of our front-end sales. All around, our front-end business remains extremely healthy. In the retail side of pharmacy, our pharmacy comps for the first quarter were up 7.8%. We continue to take share both in new and existing markets, as well as gaining share in seniors on the Medicare Part D population. Let me provide a quick update on Osco SavOn. These are the stores obviously that we acquired last year. All the integration activities are completed, including all store conversions and market relaunches. The big story at Osco Sav-On is the profitability of the sales. We've changed product mix. we've added more private label SKUs and we've eliminated some of the food items. We've also implemented Extra Care promotional approach. As a result, we've achieved higher margin sales in the front end and expect further improvements over time as we build our brand. We continue to focus on retaining, existing and gaining new pharmacy customers in the market. I am confident sales and profits will continue to improve in these stores and in these markets. Let me talk a little bit about MinuteClinic. As you know, we purchased MinuteClinic in '06. We currently have 180 MinuteClinics in 20 states and 162 of them are located within CVS stores. The rest are in other retail stores and also corporate settings. The next three top competitors combined only have 130 clinics. MinuteClinic is a core offering in our healthcare platform. The results we have seen to date only strengthen our belief that this is the right concept for consumers, payors and providers. I must say it doesn't hurt that about 25% of the people who use MinuteClinic have never been in a CVS pharmacy and we have the chance to convert those customers. There's also a significant opportunity to build MinuteClinics in corporate settings, realizing all the associated returns. We're seeing high levels of interest from Caremark's existing and perspective clients. As we said on the last call, we'll add about 300 clinics this year. On the real estate side in the CVS pharmacy side of our business, in the first quarter we opened up 72 stores, including 21 new and 51 relocations and we closed 15 others. Our plan for '07 is to open approximately 275 new stores, 140 of which will be new, while 135 will be relocations. With closings, we expect net unit growth of about 100 stores, or approximately 3% square footage growth. We continue to expand our presence in the high growth markets of Florida, Texas, California and Arizona. At the end of the first quarter, we will have over 1,000 24-hour stores and we will have over 4,300 stores that are either 24 hours or operating extended hours. So that's about 70% of our store base ready to serve customers when needed, at almost any hour of the day or night. Now let me talk briefly about Caremark. Remember that only ten days of Caremark's results are included in our reported numbers, however, I wanted to give you some color around the very solid first quarter Caremark turned in. As you can see from the supplemental table in the earnings release, Caremark's results for the quarter were quite strong and in fact in line with quarterly guidance that Mac and Peter gave you in February. Remember, Caremark had guided to earnings per share of $0.68 for the quarter, which was 33% increase over last year. Net revenue reached a record high $9.4 billion for the first quarter, which is up 6%. The top line performance was driven by growth in both mail and retail revenues, including strong growth in our specialty mail business. As in the past, higher generic dispensing rates dampened the top line which is analogous to the phenomena that CVS has been experiencing over the last few years. Caremark's overall generic dispensing rate for the quarter grew to 58.2%, an increase of 450 basis points over last year's first quarter. The overall mail penetration for the quarter was 27.9%, up 40 basis points from the first quarter of last year. Mail revenues for the quarter were $3.3 billion, up 7.5%, while the mail generic dispensing rate rose to 45.5%, which is up from roughly 40% a year ago. Specialty mail revenues, as I said, really were solid in the first quarter and increased by a very healthy 29% over the first quarter of '06. We were back in MedImmune's Synagis network for the first time after being out of it last year. If Synagis revenues were excluded from the first quarter of '06 and '07, specialty revenues would have still grown by 24%. Retail revenues were $5.7 billion in the first quarter, up 5.3% from last year, while retail generic dispensing rate increased to a record 59.8% compared to 55% last year. Gross margin for the quarter was 6.7, improving by 70 basis points, primarily driven by the increase in generic dispensing rate. All of this led to operating profit growth of 25% to $460 million. The operating margin improved by 75 basis points. EBITDA per adjusted claim, which continues to lead the industry, increased to $3.14 in the quarter, 26% over last year. So in summary, CVS and Caremark had a very solid first quarter, as expected, with terrific growth across our business units. Now, let me give you a little update on the merger. Since the deal closed about seven weeks ago, we've made a lot of progress. We've announced our new organizational structure. We further confirmed the expected synergies that we announced. We're finalizing our go-to-market strategy and just over the last six weeks alone, I've visited with probably 3,000 Caremark colleagues. I've also had the opportunity meet with many of our clients either in a group setting or one on one, and I can tell you they're all excited about the prospects of our new company. Let me talk a little bit about the integration plan. It's being led by three different teams. The first team is focused on the integration of PharmaCare into Caremark, which is well under way. As I've said, while no integration is easy, keep in mind that is far smaller than Caremark's successful integration of Advanced PCS so I'm very pleased with the progress we've made to-date. The second team is focused on synergies. And as you know, we've identified $500 million of cost savings, the majority of which is purchasing and the rest are overhead. The work we've done to-date confirms that we will achieve a minimum of $500 million in cost synergies. I am very pleased with how the synergy work is unfolding and very confident in our projections. The third and last group on the integration is the go-to-market team. This is comprised of a large cross-functional group of key people from CVS and Caremark. They are focused on finalizing the work on new products and services for '07 renewals, as well as the '08 selling season. Now while it's premature to layout in detail for you, and it would certainly not be in our best interest competitively, I will say that our team has confirmed a large number of potential new opportunities. The team will soon narrow the list of opportunities that we can offer and execute in the near term. We will not offer programs or services that we cannot execute in our PBM business and in our retail business. Remember that these are three-year contracts and the product offerings will evolve during the contract period. Our clients understand that and they are enthusiastic about working with us to develop unique programs that will help lower their overall healthcare costs. All three integration teams are charging ahead. I couldn't be happier with the progress we've made in a relatively short period of time. More importantly, I couldn't be happier with the future opportunities I see. Let me just quickly comment on the '08 selling season, which we are basically in the midst of now. We have a lot of potential new business for '08. The level is commensurate with previous years, about $4 billion to $5 billion excluding renewals. We should have a decision on the FEP contract either in late May or early June. As you know, Caremark has had an outstanding history of customer service and so I'm confident that the renewals will continue to come in. I should also note that JD Powers Survey named Caremark the number one mail-order pharmacy in the country for customer service. I would also point out that the number two mail-order pharmacy was PharmaCare. So clearly, both companies have customer service in their DNA. It's recognition like this from our clients that makes me confident that our reputation and track record will serve us well this season and beyond. By next quarter's call, we'll obviously have a lot more to report on how the '08 selling season is going, but it likely won't wrap up until late in the third quarter, which is typical. Now, I'll turn this over to Dave.

Thanks, Tom. Good morning, everyone. I'll review our financial results for the combined company for the first quarter, walking through the various elements of our financial statements. You've already heard from Tom on how Caremark performed in the first quarter, so as I review our reported results, which include Caremark for only ten days, I'll highlight some of the performance of the standalone CVS business. Then, I'll provide initial guidance for the combined companies second quarter and full year 2007. Looking at our first quarter income statement, total revenues increased 32% to a record $13.2 billion. Net of eliminations, the merger accounted for about $900 million of revenue. Consequently, the CVS business grew nearly 23% to $12.3 billion, just above the top end of our guidance range. Please note that the total revenue number is slightly different than what we reported in our unaudited March sales release a few weeks ago. Sales figures were off by an insignificant amount. Today's release has the final total revenue figures. Same-store sales rose 7.5%. This was near the high end of our expectations. Pharmacy comps were up 7.8% and front store comps were up 6.6%. Total revenues at the CVS PBM, PharmaCare, were up 19% versus the first quarter last year, while operating profit was up 50%, largely driven by gains in our Medicare Part D business. Our reported overall gross margin decreased by approximately 115 basis points in the quarter to 25.4%. Within that, Caremark had a dilutive effect on overall gross margin of 137 basis points. Gross margin for standalone CVS benefited mainly from the increase in the amount of generic drugs dispensed, with 62% of scripts dispensed as generics, up over 400 basis points from the first quarter of 2006. This was offset to some degree by continued pressure on generic reimbursement rates in light of the significantly increased utilization of generic drugs and an increase in the percentage of pharmacy sales handled by third-party insurance. But what about expenses? As a percentage of revenues, our total operating expenses, which include depreciation and amortization, decreased by about 110 basis points in the quarter compared to the first quarter of last year to 19.8%. This was driven almost entirely by the inclusion of Caremark. Caremark had a beneficial effect of 110 basis points. After all this then, reported operating margin was virtually unchanged, holding even at 5.6% of revenues in the first quarter. Caremark had a negative impact on CVS standalone overall operating margin of 25 basis points. Also note that this quarter included the last of the Osco SavOn integration expenses, so we continued to make excellent underlying progress on operating margins. Net interest expense was $64 million in the quarter, including $2 million attributable to the impact of Caremark. Versus last year's first quarter, the adjusted net interest increased $39 million. This was driven primarily by the increase in debt used to finance the SavOn/Osco acquisition. This also represents a reduction of interest expense from the fourth quarter of about $20 million. That primarily reflects the retirement of the borrowings against the bridge facility we used in connection with the SavOn/Osco properties that were sold during the fourth quarter. Our tax rate was 39.2% in the quarter. Our weighted average diluted share count was 940 million shares. The growth over the fourth quarter coming, of course, from the merger with Caremark and the issuance of new shares to their shareholders as the first quarter came to a close. Reported diluted earnings per share were $0.43. The merger-related dilution in the quarter amounted to $0.03 per share, without which earnings per share for standalone CVS increased 20% over the first quarter of last year. That was driven by our healthy sales growth and continued margin strength. Going forward, results for the total PBM business will be reported as a separate segment. That will, of course, include Caremark and PharmaCare. Now let's touch on our first quarter balance sheet. Our balance sheet reflects the merger and a preliminary purchase price allocation, which will be disclosed in the 10-Q. I would also highlight that inventory related to our retail stores has stabilized, following the reset activity for the Albertsons stores, Osco and SavOn, and we continue to see improvement on inventory turnover, which reached just over five times in the first quarter. Net capital expenditures amounted to $302 million in the first quarter. Gross capital expenditures of $312 million were offset by approximately $10 million in proceeds from sale leaseback activity during the quarter. $60 million was related to the integration of the SavOn and Osco stores. With the integration of the SavOn and Osco stores behind us, capital spending at CVS pharmacy should return to roughly normal levels. Given all this, we generated $406 million in free cash flow for the first quarter. Not so long ago that would have been a year's worth of free cash flow for CVS standalone. Finally, as you know, we've done a number of large acquisitions that have added significant amounts of intangible asset amortization to our books. Several investors have asked us if we were going to report our results on a cash EPS basis; that is, EPS with depreciation and amortization added back. We've carefully evaluated the question and have come to the view that providing our results and guidance to you on a cash EPS basis would be a meaningful measure of our operating performance and one that would enhance our comparability with healthcare peers who may be non-acquisitive and non-capital intensive. So of course, we'll continue to provide GAAP EPS as well. So for the first quarter reported today, our EPS was $0.57 on a cash EPS basis compared to $0.43 on a GAAP basis. We think your understanding of our performance will be enhanced by disclosing this measure and we will provide guidance going forward on a cash EPS basis as well. Well, that was the first quarter. Now let's talk about what's to come. But before I go through our guidance for the second quarter and year, I want to share with you our thoughts on capital structure. As you know, we had a tender offer out to repurchase up to 150 million shares of our stock at $35. That expired on April 24. Given our strong stock performance, only 10.3 million shares were tendered. When we announced the tender offer results we noted that we would continue to evaluate alternatives for optimizing our capital structure. We were unable to be more specific because a decision of that nature must be made at the board level, and our board meets tomorrow. So I'm not in the position today to give you an authoritative estimate of the number of shares we'll have outstanding for this year. But I do think it would be reasonable to assume that our board will continue to have an interest in accomplishing the primary objective we had when we initially did the tender offer, which was to restructure or our balance sheet to get it closer to an appropriate level of debt in view of the substantial cash generating capacity of this new entity. So it is likely that some type of share repurchase is on the table at our board meeting tomorrow. Believe me, we'll get the information out to you as soon as it's been approved. So when I give you guidance, I cannot give you my underlying shares assumptions until our board meets and we announce something tomorrow. Now for our guidance. The underlying dynamics of both parts of the company remain robust and the healthy trends we've been experiencing recently should broadly continue. Obviously our projections for 2007 as compared with 2006 will be significantly affected by combining two businesses with different relationships between sales, gross margin and operating expenses. So to large extent, comparing numbers to a year ago will not be as meaningful as it usually is, but we have to start somewhere. So for the full year, total revenues are expected to increase by about 70% to 75% over CVS' 2006 results. Within the retail pharmacy segment, we anticipate between 12% and 15% growth over last year's sales of $40.3 billion. The remaining growth comes, of course, from the PBM segment, less intercompany eliminations. I'm not going to guide you to a specific amount for intercompany eliminations. To help put it in perspective, though, note that the first quarter pro forma intercompany revenue elimination was $941 million. We are not including any of the merger-related revenue synergies in our 2007 revenue growth projections, as we do not expect to see much of those benefits until 2008. However, included in our guidance is the expectation of sustained strength in the sales turnaround at the former Eckerd’s stores, as well as the benefit from sales growth at the former SavOn and Osco stores. At the same time, we expect new generic drugs to continue to reduce top line growth at both the stores and the PBM, albeit with higher margins. Given all of this, we expect total comp store sales of 6 to 8%. As you know, the PBM segment carries lower gross margins and lower SG&A expenses than the retail segment. So the mix effect of combining the businesses is expected to lead to a decline in gross margin rates of approximately 600 to 650 basis points from 2006 CVS standalone levels. Within this, we expect continued benefits from generic conversions across the retail and PBM businesses, an improved front-end mix, use of Extra Care to improve promotional margins, and continued improvement in shrink. We've already begun to see some purchasing synergies from the merger, as we are now buying as one company instead of two. Items having a negative impact on gross margin include the expected reductions in Medicaid reimbursement in the second half of the year and continued pressure on reimbursement rates generally. As for total SG&A, including depreciation and amortization as a percentage of sales, we anticipate an improvement of approximately 6 to 7 percentage points over 2006 CVS levels due to the mix effect of combining the PBM and retail businesses and underlying improvement trends. These improvement trends include the absence of Osco SavOn integration expenses, improving ongoing efficiencies also at Osco SavOn and increased sales leverage reflecting organic and acquisition-based sales growth. Partly offsetting these SG&A positives we'll have integration and other one-time CVS/Caremark merger-related expenses totaling up to about $150 million over this year and beyond. Approximately 80% of this will occur in 2007, while the rest will happen thereafter. The main reason a portion falls into future years is that some is due to the retention program for Caremark management and that is expensed over the retention period. We'll also see the addition of amortization expense related to intangible assets acquired in the merger, estimated to total approximately $57 million on an annualized basis. So given that the drop in gross margin is offset by the improvement in operating expenses as a percentage of sales, full-year 2007 operating margins should show solid improvement from the 2006 operating margin level at CVS. Net interest is expected to increase in 2007 to approximately $400 million to $425 million. This reflects the full-year impact of the debt issued as part of our Osco SavOn acquisition, as well as the additional debt we have and will continue to take on as part of our merger with Caremark, including some form of share buyback program. Our effective tax rate is expected to approach 40%. Capital expenditures, net of sale leaseback transactions are projected to be approximately $1.3 billion in 2007. This includes additional capital required at Caremark of around $150 million. Free cash flow in 2007 is expected to be in the neighborhood of $2 billion, reflecting the strong performance of the combined company in spite of some noise from the merger. So where does all this take us for EPS? We expect 2007 GAAP diluted earnings per share in the range of $1.86 to $1.91. This is higher than the guidance we've previously provided for standalone CVS plus standalone Caremark on an apples-to-apples basis. It now reflects the negative impact from the dilution from the merger of approximately $0.07 per share, plus the delayed timing of the share repurchase, which will cost several cents per share, depending on the board's decision on the buyback. If those were the only changes we were seeing, I would be taking our prior numbers down by at least 9 to $0.10, but I'm not. Fortunately, we have strong underlying trends for both business units. Strong sales growth on both sides of the business, continued strength in generic conversions, improving front-end margins, and solid overall expense control are the major contributors to these gains. Cash EPS is expected to be in the range of $2.29 to $2.34. In the second quarter of 2007, we expect total revenue growth to be in the range of 90% to 95% and second quarter same-store sales growth to be in the range of 5% to 7%. We expect second quarter GAAP EPS to be in the range of $0.44 to $0.47 per diluted share, up from last year's $0.40 a share. Cash EPS is expected to be between $0.54 and $0.57 per diluted share. Although it is too early to provide full-year guidance for 2008 and 2009, let me reiterate the accretion guidance we provided almost two months ago. We continue to expect accretion to diluted EPS in 2008 of $0.08 to $0.10 and of 14% to 18% in 2009 on a GAAP basis. As Tom said, we still expect to see at least $500 million in net cost synergies in 2008. The number also includes some other cost efficiencies beyond purchasing derived from the integration of PharmaCare into Caremark and the combination of Caremark and CVS. As for the incremental revenue opportunities in 2008, our guidance of $800 million to $1 billion continues to reflect a conservative estimate of the opportunities we foresee as we begin only the eighth week as one company. So in summary, the quarter reflects very solid financial performance across our business units and our outlook for the remainder of the year on an operating basis is better than the combined previous guidance for CVS and Caremark adjusted for merger impacts, largely due to the favorable impact of generics and continued strong execution across our businesses. Now I'll turn this back over to Tom.

Thanks, Dave. Thanks for bearing with us. I know we had a lot to cover, but as I said, this was a very good quarter for our company, both in our retail and our PBM business units. I know we're confident that we're well positioned with the best platform in the industry to address the needs of payors and consumers, now and especially into the future. We continue to focus on the integration, but we continue to focus on execution at our PBM and retail business units with a focus on our customers. So with that, I will open it up for questions. As Nancy said earlier, we probably will have a lot, so can you limit your questions, as hard as it will be, to one or two, please? Thanks.

(Operator Instructions) Your first question comes from Neil Currie with UBS.

I just wanted to ask about Medco's comments the other day that in the second half they expected to see a slower performance as they look to spend a bit more money on retaining contracts. Do you think that is something which makes you less confident about PBM profitability going forward, or gives you some confidence that the rest of the industry is worried about your combination?

Depending on how many contracts were pulled forward, typically renewals in this business will typically have lower margin at the beginning of a contract. That's normal, contracts are three or four years old and you look at what's happening in the marketplace four years later from the original signing of the contract. We're at a point where we have about 90% client retention for '07, so we feel we're in pretty good shape. I think there's probably some reaction in the marketplace to our new combination. I can't speak for what competitors have done or what they haven't done, but I know there's certainly a lot of noise in the marketplace. I will say this. We have not lost any contracts since the merger was announced.

How confident do you feel about going into the FEP negotiations?

I think Caremark has done just a great job with that contract, both on the mail and the retail side, I've spent some time visiting with the FEP folks. I think our sales team and our operations team and our call center team have just done an outstanding job and it's all about service. I think they're excited about it. I can't obviously comment too much on it, but we should know something at the end of this month or the beginning of June.

My last one is about SavOn and Osco on the pharmacy side. You talked about the front-end mix, but how have pharmacy scripts gone over the conversion period and since you've come out in the conversion period?

Our script business continues to hold. There's obviously some noise in the marketplace, as I've mentioned, when we announced this deal that this was one of the few acquisitions that we'd have where the brand would still remain on the market because have you Albertsons, SavOn and you have Jewel-Osco so there's some transfer of prescriptions back and forth. Interestingly enough, there's a lot of transfer between core CVS stores back and forth where now we have one CVS brand in the marketplace, so when a consumer finds out that there's a CVS store closer to their home or closer to work so there's some shifting. But overall, if you combine all the core stores and the acquired stores, our business remains pretty strong in the pharmacy side of the business. I won't penalize you, Neil, for three questions.

Your next question comes from Matt Perry - Wachovia Securities.

I'm a little bit confused on the share count and the share buyback. Does the newly issued GAAP EPS guidance include anything incremental related to a share buyback? Can you at least give us some indication there?

It does include an assumption of some form of share buyback. What we don't know is what the board will decide to do specifically, so there's no point in giving you a lot of details around that. But I do assume that the board will take some related action, therefore, I've reflected what I believe is a reasonable estimate of what that could be in the guidance.

On' 08 renewals, obviously it's pretty early, but can you comment qualitatively on whether or not the merger is delaying the renewal process at all or perhaps speeding it up? Can you tie that into PharmaCare? I mean I think the focus seems to be a lot on Caremark renewals, but how are you making sure that all the PharmaCare renewals get done?

Yes, that's a great question because most of the comments have been around Caremark but we have not lost focus on the PharmaCare renewals or the PharmaCare clients. Listen, at the end of the day, what the clients want is to make sure that we have continued high level of service; that they have the same clients, that they have the same client service group, that they have the same customer contact, that the call center continues to respond, that there's not a lot of changes in their technology. So they want very little disruption of service and that's what we're focused on. All the discussions that we've had with clients on both sides of our PBM business and Caremark and in PharmaCare have been the best discussions we've had in some time. I know that's the case on the PharmaCare side and I know talking with our sales folks and seeing some of our clients that discussions are more focused around, how can you help us lower our healthcare costs, how can you get the consumer and our employees more involved? So from the renewal standpoint, we feel pretty good about that, in addition to obviously the opportunity around new clients. So we're in pretty good shape, we feel.

Your next question comes from Mark Husson - HSBC.

You've given some guidance on what's going happen to the gross margin and SG&A mix, so 600 to 650 basis points on the gross and 600 to 700 on the SG&A. Is that for what the full year GAAP will look like or just for the next three quarters worth of GAAP?

No, that's the full year estimate, and it includes the mix impact and the other elements that I described, so it's not totally mix impact.

And Q1 already released?

Yes.

On the PharmaCare business, if you compare the PharmaCare business now that you've got inside the Caremark business on similar kinds of metrics in terms of profitability per script, EBITDA per transaction and so on, how does it look? What can you learn quickly about the business that you already had?

If you look at the fundamental profitability of the business, it is quite similar. However, as you know, most of the business in PharmaCare is reported on a net sales recognition basis and most of the business in Caremark is on a gross sales recognition basis. The relationships that we have reported are not very comparable at all. But if you go below that and convert it, the profitability is quite similar.

I will say this though, that on an apples-to-apples basis I know that Caremark has some more arrows in their quiver to actually sell more specialty business or disease management, so some additional products that are higher margin products.

So will your existing PharmaCare customers get a net lower cost as a result of this?

Well, we try to lower the costs for all our clients. I mean it's around cost savings, it's around transparency, it's around generic dispensing rates, it's around formulary control and compliance, and at the end of the day we think we're going to be doing a better job because of the face-to-face interaction that we have and because of the programs that we're going to put in place. So not only PharmaCare clients, but Caremark clients also.

Dave, finally, will you change any of the accounting that you've seen at Caremark as a result of the way you used to do things?

We are probably going to convert the underlying contracts in PharmaCare to be the kind of contracts that conform to the gross sales recognition basis. Beyond that, there aren't any very obvious differences, however, we're doing a formal review of that which we hope to have completed by the end of the second quarter or early in the third quarter, at which point if there are any additional things that need to be conformed, we'll be in a position to do that.

Your next question comes from Mike Maguire - FTN Midwest.

Just a follow-up on the $500 million synergy number, you refer to that on a net basis. Does that reflect some loss of contracts going forward?

No, that's independent of contract wins and losses.

As you look at that number, the purchasing leverage, as you address the generic and the branded manufacturers, I think you've mentioned in the past that that's strictly on a best price basis. Could you just speak to that process? Is there a contract renewal period and when will you start to see incremental purchasing leverage beyond the best price piece?

There are various types of agreements in place, both at Caremark and at CVS, some of which have time durations that are a little longer some are a little shorter. I wouldn't refer to it as a season, I'd just say that there are day-to-day negotiations that go on. When will we see full realization? We've said by 2008. We are already seeing a little bit in 2007 and would expect that as we exit this year we'll be pretty close to the sustaining rate that we're going to hit in '08.

Your earlier commentary with regards to the confidence in that $500 million number, where is that coming from? Is it from the early negotiations with the manufacturers?

Coming from discussions with the manufacturers that our trade and purchasing folks are having.

Your next question comes from Meredith Adler - Lehman Brothers.

Maybe you could talk a little bit about what you're seeing in terms of generic procurement. I think Express Scripts said something about it, I'm not sure, I thought they were a little vague. If you could maybe comment on generally what you're seeing, aside from the synergy opportunity just in the marketplace itself. I have a question about generic reimbursements as well.

I'm not clear on the question, Meredith, around generic procurement. I don't know what someone else said.

Are you seeing any improvement in the ability to buy, perhaps because of new competition or any other opportunities?

I think both companies, as we peel back the onion here, have done a great job around generic purchasing and have some sound programs in place that we're only going to expand on. We've actually had some opportunities and discussions with generic manufacturers about doing something overseas directly. So we'll continue to have those kinds of conversations and the conversations now are at a different level than they were before for a variety of reasons, most of which is because of the scale we can provide. So we feel pretty good about our generic discussions and our ability to leverage our size and scale there.

In terms of generic reimbursement, you did comment that it had come down. Maybe just talk a little bit about, what are the drivers of the generic reimbursement reduction?

Well, a lot of the drivers are after six-month exclusivity, there are drugs that are [maxed]. Obviously we've seen some benefit with early introductions around Norvask and we've seen the net effect of Plavix or Albuterol offsetting some of that. But overall there's some pressure on generic margins, but there continues to be pressure on margins. There have been pressures in the years past. I mean people keep talking about AMP and AMP will obviously have some impact on margins for our industry, more on the retail side of our business than perhaps the PBM side of our business. We're waiting, we're obviously, having discussions with the government and waiting for them to publish some guidelines around AMP. People keep looking at it, but at the end of the day, the payor and the patient knows that generics are good and we don't want to flip the system around where there's less incentive for pharmacies to dispense generics and I don't think we'll get to that point. We feel pretty good about the profitability of generics going forward, especially with the introduction of new ones.

There is very, very strong cash flow at both companies. So far you're still talking about modest square footage growth. Is there any intention to use the strong free cash flow to invest more rapidly in the business?

We'll use the free cash flow to enhance shareholder value, whether that's investments in the business or stock buybacks or debt repayment. We'll look at all the options that we have, but we're pretty comfortable with the rate of square footage growth that we have as a company. I don't think you'll see anything where all of a sudden we're going to start doubling our retail square footage growth.

Your next question comes from John Ransom - Raymond James.

Just doing some quick math, it looks like your gross margins on a comparable basis at CVS actually declined nearly 20 bips year over year. Can we blame all that on generic reimbursement?

I disagree with the premise.

I took the reported number and backed out the effect that you had put in there and we actually had it declining. That doesn't seem right, so I just wanted to double-check our math here.

I got it going up a similar magnitude to what you have postulated it going down. So there's something in the numbers there, John, but it's definitely in a positive direction for CVS standalone.

So up about 20 bips?

Something in that territory. We don't disclose it specifically.

Is the pressure in the back half of the year just the assumption of AMP or is there anything in there for AWP changes as well when you talk about greater reimbursement pressure in the back half of the year?

AMP is certainly included. We don't expect AWP to have any effect on our margins for all the reasons we've discussed in the past. It's just an index. When an index changes, you adjust another part of the formula and you get to the same place and by now, we've had those discussions with any number of clients and providers and payors and everyone seems to understand that. So I'm not planning on any impact from AWP whatsoever. I think the other thing I was referring to, though, beyond AMP is simply the negotiating environment, which as Tom said, we're always looking to provide a better price, a better deal for our customers and that implies some reduction in rate over time.

I've got your interest expense number, which was lower than where we were. What is your average debt assumption underlying that interest expense number?

Average debt assumption. You mean average balance?

Yes, average balance.

Right now we're a little over $6 billion and we're potentially going to have a share repurchase program which will increase that number fairly meaningfully. Had we done the full tender as set up, it was $5.25 billion. And it will be, I imagine, something not very different from that.

Your next question comes from Ed Kelly - Credit Suisse.

Tom, you had mentioned in the past that one of the competitive strengths of PharmaCare was the transparency of its model. Now, how does this compare to Caremark? What happens here as the businesses get folded together and is there any risk on the customer side just simply because of the models themselves?

No, there isn't. Actually, Caremark is also transparent and was recently approved by the Human Resource Service Group, the buying group, the purchasing group for healthcare. So similar businesses. PharmaCare was really focused on small to mid-size companies and TPA programs. Caremark was focused more on larger corporate clients and health plans. So we don't see any big change or any dramatic issues combining the two companies because both are, as I said, both are focused on customer service and both are fairly transparent.

Just to confirm, because the first paragraph in the press release was a little confusing, but if the deal had never happened, you would have earned $0.46, which was at the high end of your guidance.

That's my belief, yes.

That's correct. I would also point out to the earlier question around AWP, we never included any changes in our guidance due to AWP so there had to be no adjustments. We never thought it was going to be an issue for a variety of reasons, and if it was, it was going to be much later in the year. So that's why we never made any changes either up or down due to AWP. I just wanted to clarify that.

Dave, how much of the $500 million in synergies do you have in your '07 guidance?

We haven't broken that out, but it would be limited by both the time to negotiate and the fact of when the transaction took place. We obviously did not have the ability to get at it in the first quarter.

Your next question comes from Mark Wiltamuth - Morgan Stanley.

I wonder if you could give us some idea of when the consumer is going to be presented with the 90-day prescription at retail option? If you could talk a little bit about what happens to your costs under that 90-day retail prescription? How do you really keep your mail-order population protected and how do you keep them from switching to competitors?

Well, there's a number of questions there. The real issue is to have the consumer be able to get product when and how they want it, and there's certainly some economics around that. But what we're looking for now is to see how we can look at fulfillment, make it easier for the consumer, whether it's refill a mail prescription and send it to the retail store or perhaps modify some of the retail prescriptions to the mail facility. So it's not just about 90-day prescriptions at retail. I mean, I think we have to look at prescriptions now as how we provide prescriptions to the customer separate from mail, separate from retail. It's providing prescriptions to the customer, which is one of the reasons that we're going to move away from these comp sales in the month because, you know, what happens if a retail script is filled at mail and sent to the customer or a mail prescription's picked up at retail store? There starts to be a blend, so our issue is make sure the customer gets it how and when they want it and at the same time, obviously save the payor some money. So there will be some programs, some clients will see it sooner than later in a variety of ways. Some of it 90 days, some of it emergency, some of it just pick up in the store. So it's not all about the 90 days. There are obviously some economic issues around both of those.

How do you protect customers from shifting out of mail into retail since that was traditionally a protected population?

Well, interestingly enough, if you look at the survey data, a lot of the customers who get mail prescriptions are very happy with mail so they'll continue to get the mail prescriptions. There's not going to be a huge exodus from mail into retail. We've had $1 billion mail business. We understand the mail business and a lot of customers like it. What they will be able to get now is face-to-face contact with pharmacists in addition to the mail business. What they will be able to get is emergency prescriptions, so we don't see a big exodus. Having said that, there are a percentage of customers who would rather get it at retail and we'll be able to do that. Now whether it's filled at mailed and picked up at retail or filled at retail and given a 30 or 90-day, that's still to be determined, but we're going to do what's right for the customer and then obviously what's right for the payor.

Your next question comes from Eric Lessard - Cleveland Research.

Dave, when you gave out '07 guidance, can you just walk us from the old guidance to the new guidance? Because you seem to intimate that there was some dilution that you were experiencing yet you were still raising the guidance for '07. Can you just explain that a little bit, please?

We had original guidance for CVS on standalone basis of $1.87 to $1.93. We then have identified $0.07 of dilution from the acquisition with an assumption of an April 1 close and an ASR for the complete share buyback. We transformed that to a tender offer and the timing shifted to a later repurchase timing. You put that together, that's another few cents, let's say $0.03. So we had $0.07 of dilution anticipated when we first announced the deal, add $0.03 for the number of shares affected by timing. You got about a dime. So that would take $1.87 to $1.93 down to $1.77 to $1.83. Now what I've given you is a higher number in total and that reflects the operating characteristics of the business. They're outperforming what we thought they would do, both on the CVS side and on the Caremark side.

Does that imply that the outperformance of the business is a dime? What's driving that?

Yes, I guess you could say that.

The second part of that question is what's driving the business to do that much better than you thought so quickly?

Sales trends on both sides of the business, cost trends. We're starting to achieve some of the synergies that we talked about in terms of the '08, $500 million. SG&A is favorable. Generics are coming at a faster rate than we had planned. I think that's also true in the Caremark side. Pete is nodding yes. Front store gross margin is well up versus what we expected. So we're really sitting on a whole host of things, a real bed of roses when it comes to the operating characteristic of the underlying businesses.

Just to clarify, you just restated what the '08 guidance was, because all this would imply that the accretion contribution in '08 would potentially be ahead of what had you previously stated. This morning you didn't update, you just said this is what we had said previously.

You're exactly right and if the underlying trends in the business continue to be as favorable as they are and that extends into '08, we're going to be looking at very nice numbers in '08, no question.

Your next question comes from John Heinbockel - Goldman Sachs.

Two things. Tom, in your discussions with clients, what are you hearing from them as the thing they're most excited about with respect to the combination? What are they most wary about and does it give you more confidence in the $800 million to $1 billion next year, these conversations?

The two things that they're most concerned about, one is that there's no degradation of service. That's the first thing. They want to get calmed down that, as I said earlier, that we're still going to focus on execution and service and we're confident that we are. The second is they want to find ways to help lower their healthcare costs. I mean that's long term. The basics of the PBM business, making sure we have the right generic substitution rates, making sure we have the right formulary compliance, making sure that we have the right service levels at mail and retail, those are the kind of blocking and tackling that we're going to continue to do. What they want to us do is help them lower their overall healthcare costs and that's what we plan on doing. The pharmaceutical costs may in fact go up, but they look at it and they say it’s only 15% of their total healthcare costs. How can we help them lower their healthcare costs either with compliance or adherence programs, et cetera? The other question they have and they're somewhat concerned about, is the limited network. Are you going to direct everything to CVS? When we sit down and talk to them about the reality, they understand that. They just feel like they have to ask it. The fact that PharmaCare had 55,000 pharmacies in it, the fact that CVS participates in WHI's program, PBM program, we're never going to have limited networks where we just have CVS Pharmacy and exclude all other pharmacies. That's not what this is about. That's never been what this is about. So once you get them comfortable with that, they're really excited about what it means for their employees, what it means for their clients, and how it will make life easier for them and also lower their costs. So it's been relatively positive, John.

Do they yet appreciate what MinuteClinic can do?

We talk about MinuteClinic all the time. I mean there's been a fair amount of pull from the clients about putting MinuteClinic in. We have two clients, one client in the Midwest who's already putting it in; another client in the Southeast that's just about to put it in. So they're looking at how we can integrate those with our mail, retail offering and also our specialty business and then our disease management business. Don't forget, we'll employ more pharmacists and nurse practitioners than anybody in the county and we have these nurse practitioners in our stores that there is some down time and we can use them differently. And that's what they're excited about. When they see that the MinuteClinic can actually help lower their healthcare costs and improve outcomes.

The outperformance on the operating business, the $0.09 or $0.10, is that pretty equally split between CVS and Caremark and is it mostly gross?

It is in both sides of the business, It is a little more on the CVS side. You would expect that because CVS is a little bigger. It is in gross margin, but it's also in SG&A. It also reflects some synergies between the two companies that wouldn't be there for either company alone.

So it does include some element of the $500 million?

Yes, it does.

Your next question comes from David Magee - SunTrust Robinson Humphrey.

A follow-up to John's question about perception of the complete offering with clients. Are you seeing any difference or effectiveness in areas that you don't have as many stores or have less CVS stores as you go out and market the offering?

No, that hasn't come up. That really hasn't come up. I guess there was one particular state that we weren't in, but interestingly enough, Caremark secured that client even without having the CVS store. So the real issue has been around, you know, the MinuteClinics, the fact that we have more than most, but we still only have 164 in our stores, and we're going to add, obviously, 300 more this year, but they're looking for more MinuteClinics. You know, we have a fairly deep penetration around the country of our stores and we'll continue to inch up there, so that has not been much of an issue.

Your next question comes from Scott Mushkin - Banc of America.

I was wondering if you could talk about your view on splitting contracts, whether that goes against the merger in general and how you view that? The FEP contract, there's been some noise in the marketplace that FEP's going to be split retail to mail?

Well, as you know, that was split for a number of years. Listen, it's what's in the best interest of the payor and that's what this is all about. If we can bring some synergies because it's a combined contract, and we can look at it overall in totality and lower the cost for the payor and improve outcomes here, that's what they want. So obviously it is better, we believe, to have one entire contract, but at the end of the day we have a fair amount of contracts that some are for just retail and some for mail, but we have programs for mail shifting. The benefits of combining these, you can have shifting from retail to mail, you can have prior authorizations, you can do a better job around disease management. So we think there are advantages to combining it, but once again, it's at the discretion of the payor and we think we can make a case for it, but it's not the end of the world if we don't get it.

I know the Detroit market share data came out which was really nice, you guys gained a lot of share and actually had a little fewer stores. As you look at the productivity, the labor assets and the physical assets, I mean how do you guys think about spend as you go forward, both from a CapEx standpoint and maybe from an SG&A standpoint? Do you have an estimate of what your productivity is or your capacity utilization is right now? Have you got into that depth of how many scripts you think you can do with the assets you have?

Across our stores, Scott?

Stores and the mail order facility, and the central fill facilities, the combined.

The mail order facilities, I mean we still have 30% plus capacity across all our units and some is obviously more and some less, but overall, from a capacity standpoint, we don't have an issue on the mail side. Obviously on the retail side of the business, we only have maybe 20% of our stores that have third pharmacists in those stores and so we have enormous opportunity to add more volume. You know in the retail side of the business, your next prescription is your most profitable subscription. I think one of the drivers of our success the last few years and the share that we're taking in these markets that you alluded to, some of it obviously from competitors and some of it just new growth in utilization growth. So we don't have an issue where we're short of capacity. Our productivity continues to improve and we are focused on that on a store-by-store basis.

The MinuteClinics, are there certain markets you've been targeting a little bit more than others? I mean it seems like we've come across a number of stores in the Washington, DC area that have MinuteClinics. I know they're going into California later this year, I believe. Are there any targets as you look at this?

Yes, there are. We have certain demographics that we know we do better in than others. We also target it based on the regulatory environment and the legislative environment in the marketplace. Some markets are more receptive and more open to this than others. We're already in 20 states, as you know, across so now it's a situation where once we enter a state and we go through the regulatory process of new store openings and approval by the agencies, then we continue to just dense up, but we'll continue to add MinuteClinics where appropriate. So I think we have a pretty good handle on where they work and where they're the most productive.

Will any of it be contract-dependent, or is that not a factor?

We try to do that ahead of time. Most of the 75% of our services now are third-party paid roughly. So we're in a fair amount of the national contracts. We're in discussion with others now, people starting to reach out for us. So it's more just an education. It's a little disruptive healthcare in some ways to certain select groups, so it's an educational process for the healthcare community.

Our final question comes from Deborah Weinswig - Citigroup.

You provided a lot of details on the call on MinuteClinic. Can you talk about what you're seeing in terms of traffic and ticket differences between stores that have them and those that don't? Also, do you feel that there's a first mover advantage here as well?

We don't disclose the differences in traffic. Once again, I want to make this clear, that we do not put MinuteClinics in our stores to drive prescriptions to our stores. That's not the intention here. Do we pick up some prescription business? Yes. Do we pick up some OTC business? Absolutely. 25% of the people have never been into a CVS store, so that's obviously a benefit, but the real win here is it rounds us out as a healthcare provider. We are the only ones in the retail side and the PBM side of the business that actually own these clinics. We decided rather than make a 20% or a 30% investment, or in fact just subcontract it, we wanted to be able to control the brand, control the hours, the staffing and then, in fact, when we put into a corporate setting, we get the full benefit of that. We realize the full return on that. So it's part and parcel, it's integrated into our whole healthcare offering and it's obviously beneficial in more ways than just store traffic. But certainly store traffic is helpful.

You had mentioned earlier that you're seeing kind of a pull from clients to put MinuteClinic into their offices. Do you think that this is also an additional advantage as you're coming to market in terms of winning contracts as well?

Absolutely. Anything that you can do, I've said this before, that there are very few, if any, that are going to out cost this combined company. At the end of the day, it's about service. It's about what products and services that you can offer the payor and the client that others can't and then how well you execute those. So it's no different than any other business, right? It's execution, execution, execution and both these companies have it in spades, in each of the companies and we're going to continue to do that. But we do have a pretty broad offering on our platform that I think clients are reaching out for. Thank you all for your patience. I know this was a long call. The calls in the future won't be this long, hopefully, but we needed to get all this out and walk you through this in our prepared remarks. Obviously if you have any questions, you can call Nancy Christal in Investor Relations. Thanks a lot.