Operator: Thank you. Our next question will come from Stephen Baxter with Wells Fargo. Your line is open.
Stephen Baxter: Hi. Thanks. I appreciate all the color on the Oak Street acquisition. I was hoping you could help us think a little bit about the timing you would expect to be required to realize both the greater than $2 billion of earnings power itself and also the $500 million of synergies and also maybe any insight into where both those figures might be on a reported basis over the next couple of years, would be great? Thank you.
Shawn Guertin: Yes. So, let me talk kind of about this in sort of a financial terms and try to get at some of those points. As I mentioned, right, this is a €“ we do think this is a deal that has an attractive long-term return on capital. And €“ but it also has the potential to move the needle from an earnings perspective in a company of this size and scale. Our strategy has been and will continue to be to deploy capital to improve the sustainable earnings growth rate of this company as a whole. When you look at this asset in concert with Signify, we project this could improve our overall long-term earnings company growth rate by at least 100 basis points a year as these investments mature. It’s important as you think about this, that the dilution, especially the dilution from financing, is temporal in short-term, but these sustainable improvements in growth rate are not.
From a return on capital standpoint, we think it earns double-digit returns on capital in year seven. And very importantly, because of the embedded value in that clinic infrastructure, that return on capital continues to grow on the order of 200 basis points a year thereafter. And I have mentioned in my remarks that at the current rate of expansion, we would expect to have 300 clinics by €“ in 2026 or by the end of 2026. And using the Oak Street convention around adjusted EBITDA at $7 million per clinic, we think the embedded EBITDA could cross the $2 billion threshold in the 2026 year. So, that’s an important sort of data point. But I think it’s important to recognize that the way that embedded EBITDA really manifests itself can be in these ongoing returns on capital.
I would comment that while the return profile might be longer than other deals you have seen in the past, I don’t think it’s atypical of deals that meaningfully improve your strategic positioning as a company. And I do think it’s important €“ in fact, I think being overly slavish to deals that only satisfy short-term returns are exactly what can lead to long-term growth problems. And I think we are €“ this is something that has a lot of long-term growth earnings power. And finally, you had asked about the synergies and some of the kind of accretion dilution. The synergies are powerful here, and I think it’s one of the things that we are uniquely positioned to deliver on. I have often €“ when I have talked to all of these companies, they have often said to me like, if I say what do you need to grow faster, and they say members and capital.
Well, that’s something we can bring to bear here. But most of the synergies, probably about 70% of what we talked about, are tied up really in that accelerated growth and the improved retention of MA members. And so when you think about the model here, the J-curve, if you will, this is about moving them along that curve faster. And in that trajectory, that generally gets closer to breakeven and positive in that year two to year three timeframe. So, that it’s after that, that a lot of these synergies mature. The way we see that playing out is, I think this would be roughly EPS-neutral probably in like year four of our ownership, thereabouts, and begin to be accretive on an EPS line for year five. But make no mistake, it is improving each year, which is going to help our growth rate between then and now.
And you are building substantial embedded long-term value in that footprint.
Operator: Thank you. Our next question will come from Ann Hynes with Mizuho Securities. Your line is open.
Ann Hynes: Hi. Good morning. Maybe we can shift to retail, our guidance for OP of $5.95 billion to $6 billion. Can you just let us know how much endemic COVID you have in that guidance? And for 2024 and 2025 expectations, are you assuming that stays flat, or is there any growth in that base business?
Shawn Guertin: No. So, Ann, for 2023, we have about $500 million to $600 million of what I will call the endemic COVID contribution from the three categories we have been talking about vaccines, diagnostic testing and over-the-counter testing. It’s important to recognize that, that is significantly down from the contribution that we experienced in 2022, nearly $1 billion down from that. So, we are targeting producing the $6 billion again despite kind of that headwind. In our forecasting, the general €“ I would tell you the general targeting as we continue to expect retail to be able to maintain flat. And it’s €“ we have a declining COVID contribution, and our thinking behind that, that obviously, there is other initiatives.
And I am going to let Michelle and Prem maybe talk about some of the other things that are going on in both the front of the store and the back of the store that are helping the business broadly, but also helping us sort of manage through the decline in COVID contribution.
Michelle Peluso: Hi Ann, it’s Michelle. So, while it’s easy to see we had a really strong financial year and gaining share in both front store and pharmacy, there is a lot of underlying trends that I think are driving the momentum even if COVID slows. So, if you think about 2022, we grew consumers, we experienced stronger household penetration, and we actually grew service levels and Net Promoter Scores to historically high levels. And so the foundation and momentum has been strong in the front door. This is coming about because of things like our investments in omnichannel, modernizing our store fleet, improving our merch mix, improving service and even our pricing and promotional strategy. So, this is a kind of underlying momentum and foundation that we think will help us continue our growth trajectory.
But at the same time, we absolutely recognize there is also opportunity to invest in cost structure and productivity improvements. So, we are investing in supply chain, for instance, to optimize, modernize and selectively automate. We believe that will bear a significant return. We are also finding lots of other opportunities to improve inventory turns and reduce overall product loss. So, it’s this combination of growth on site productivity improvements that we think will continue to fuel our performance not just in 2023, but beyond. So, let me turn it over to Prem.
Prem Shah: Yes. Just a couple of other points. Our Q4 market share in pharmacy is now approximately 27%. We grew share another 12 basis points, and we are about 117 basis points higher than the pre-pandemic share. And then secondly, I would say there is two areas we are really focused. One is on our digital approach and our pharmacies and how we continue to be the most convenient retail destinations for our patients and consumers and really connecting that with our digital strategies. And the second is really around our clinical programs. We are seeing continued strong adoption of those clinical programs that drive further adherence and retention for our patients. And we are starting to see new therapies also rise. So, continued strong momentum in retail from a pharmacy perspective, we continue to have extremely strong service levels in our business as well to drive the business forward.
Operator: Thank you. Our next question will come from Nathan Rich with Goldman Sachs. Your line is open.
Nathan Rich: Hi. Good morning. Thanks for taking the questions. Oak Street’s cohort data paints a pretty compelling path just in terms of the embedded EBITDA that is in the centers. I guess what do you see as the key variables to kind of achieving that kind of J-curve that they have laid out? And you have talked about some of this, but what can CVS do to potentially accelerate that? And then just as a quick follow-up, Shawn, I was wondering if you could just talk a little bit more €“ in more detail about capital deployment plans in €˜24 and €˜25. I think you said some modest level of share repurchases in €˜24 and more in €˜25. Can you also talk about maybe what you see as sort of deleveraging our debt pay-down across those years as well? Thank you.
