“These headwinds will be partially offset by our industry-leading specialty pharmacy business, which continues to benefit from strong execution and secular trends in the market, including a robust generic portfolio in 2027.”

In context

“Brian Newman (Chief Financial Officer): Thank you, David, and good morning. I will cover four key topics in my remarks this morning. First, an update on our second quarter results. Second, I'll discuss cash flow and the balance sheet. Third, I'll provide an updated financial outlook for 2026. And finally, I will share some early high-level commentary on 2027. As David just highlighted, our strong second quarter results demonstrate the discipline with which we are managing the enterprise and exemplify our say-do philosophy as we continue to execute our strategic priorities and deliver on our commitments. Let me start by highlighting some of our enterprise results in the quarter. We generated over $106 billion of revenue and delivered approximately $5.2 billion of adjusted operating income, increases of over 7% and 35%, respectively, from the prior year quarter. These increases were broad-based as we experienced growth across both the top and bottom line in all of our operating segments. We delivered adjusted EPS of $2.58, a significant increase of over 40% from the prior year quarter. And finally, we generated year-to-date cash flow from operations of approximately $10.6 billion. Turning now to each of our segments. In Health Care Benefits, we generated over $37 billion of revenue in the quarter, an increase of over 3% from the prior year. This increase was primarily driven by our government business, partially offset by our exit from the individual exchange business in 2026. Medical membership as of quarter end of approximately 26 million members remained consistent sequentially and declined approximately 700,000 members from the prior year quarter. The year-over-year decrease was primarily driven by our previously discussed exit from the individual exchange business, partially offset by growth in our commercial fee-based membership. Adjusted operating income in the quarter was approximately $2.4 billion, and our medical benefit ratio was 87.4%, both of which improved meaningfully from the prior year quarter as we continue to execute on our margin recovery. These results include the impact of changes in our individual exchange risk adjustment position associated with the 2025 plan year as well as the impact of favorable prior year development. Together, these items contributed approximately $500 million or 140 basis points to our MBR in the quarter. Excluding these items, our core performance in the quarter still exceeded our expectations. This core outperformance was largely concentrated in our Medicare business, where we continue to experience pockets of favorability as a result of strong medical cost management and disciplined pricing. Our Medicaid and Commercial businesses performed in line with our expectations during the quarter. We remain confident in the adequacy of our reserves. Shifting now to our Health Services segment. During the quarter, we generated revenues of nearly $52 billion, an increase of over 11% from the prior year quarter. This increase was primarily driven by pharmacy drug mix and brand inflation, partially offset by continued pharmacy client price improvements. We delivered adjusted operating income of over $1.7 billion, an increase of 10% from the prior year quarter, primarily driven by improved purchasing economics, pharmacy drug mix and modest improvement in our health care delivery business. These increases were partially offset by pharmacy client price improvements. At Caremark, we continue to make progress against our priorities. Within Caremark's results in the quarter, there are a few items to call out. We experienced some pressure in our 340B business as the environment for this program remains dynamic. We also experienced a pull forward of value previously expected to occur in the second half of the year. After adjusting for the pull forward, our underlying results were in line with our expectations as outperformance across the broader Caremark business, including higher specialty generic penetration rates, offset the pressure in 340B. We are encouraged by our continued progress in our health care delivery business, which performed in line with our expectations during the quarter. Total revenues grew nearly 23% compared to the same quarter last year, primarily driven by Oak Street Health. Our Pharmacy and Consumer Wellness segment delivered an exceptional quarter and continues to build momentum. We generated revenues of nearly $34 billion, a slight increase from the prior year quarter, primarily driven by pharmacy drug mix, increased prescription volume, including contributions from the Rite Aid transaction we completed last year and brand inflation. These increases were largely offset by regulatory-related price reductions on certain drugs, the impact of recent generic drug introductions and pharmacy reimbursement pressure. On a same-store basis, total revenues increased modestly in the quarter and same-store pharmacy sales grew approximately 3%. These increases were driven by the revenue drivers I previously mentioned, including a 7% increase in same-store prescription volumes. Same-store front store sales increased 100 basis points versus the prior year quarter. We delivered adjusted operating income of nearly $1.5 billion, an increase of over 10% from the prior year, primarily driven by core pharmacy strength and contributions from the Rite Aid transaction, partially offset by continued business investments and the impact of consumer dynamics. Turning now to cash flow and the balance sheet. In the first half of the year, we generated cash flow from operations of approximately $10.6 billion. This result reflects strong earnings year-to-date as well as the impact of improvements in working capital. We returned over $1.7 billion to our shareholders through our shareholder dividend year-to-date. We ended the quarter with approximately $2.7 billion of cash at the parent and unrestricted subsidiaries. Our leverage ratio at the end of the quarter was approximately 3.5x, and we expect to drive further improvement as we continue to execute against our 2026 outlook. Shifting now to our guidance for 2026. As David mentioned, we are increasing our full year 2026 guidance for adjusted EPS to a range of $7.90 to $8.10, an increase of $0.60 or 8% higher than our previous guidance. We now also expect our full year total revenues to be at least $414 billion. In our Health Care Benefits segment, we now expect full year adjusted operating income to be in a range of $5.03 billion to $5.37 billion, an increase of over $1 billion relative to our prior guidance. This increase reflects a portion of our strong underlying core performance in the first half of the year as well as the approximately $500 million cumulative impact of our net risk adjustment update and the prior year development experienced in the second quarter. We now expect a full year MBR of 89.75%, plus or minus 25 basis points. This outlook continues to maintain a respectful and prudent view of medical cost trends in the second half of the year. In our Pharmacy and Consumer Wellness segment, we now expect full year adjusted operating income of at least $6.4 billion, an increase of $220 million from our prior guidance. This reflects our strong performance in the quarter and our updated expectations for the remainder of the year, which includes the continuation of strong pharmacy performance. We are also pleased to reiterate our full year adjusted operating income outlook for our Health Services segment. This outlook reflects continued strong performance across our Pharmacy Services businesses, offset by our updated view of 340B. In aggregate, we now expect full year enterprise adjusted operating income to be in the range of $16.58 billion to $16.92 billion. We are also increasing our outlook for full year cash flow from operations to at least $11.5 billion, reflecting our updated earnings outlook as well as the impact of improvements in working capital. As a reminder, our current outlook does not assume any share repurchases this year. We will continue to evaluate capital deployment opportunities as our leverage position improves. We expect second half EPS to be more weighted to the third quarter, reflecting typical seasonality. We now expect the increase between our first quarter and fourth quarter MBR in our Health Care Benefits business to be slightly higher than 950 basis points after adjusting for the impact of prior year development in the first quarter. You can find additional details on the components of our updated 2026 guidance on our Investor Relations website. As you can see, we are making meaningful progress unlocking our embedded earnings power and continue to feel confident in the mid-teens adjusted EPS CAGR from 2025 through 2028 that we laid out at our recent Investor Day. Consistent with our historical approach, we intend to share 2027 headwinds and tailwinds on our third quarter call and detailed full year guidance on our fourth quarter call. As you know, David and I have emphasized the importance of being open and transparent with our shareholders. This year, in the spirit of this commitment, we are pulling forward our commentary on 2027 by a quarter as we wanted to discuss some dynamics in our businesses that we are aware of today. We are seeing significant momentum in Aetna's margin recovery, including the more than $2 billion of improvement in adjusted operating income that we've already delivered this year. The actions we have taken to strengthen our foundation and improve our performance are working, and we expect this momentum to continue on our pathway back to target margins over the next couple of years. In our Pharmacy Services business, we expect the previously discussed market dynamics in our 340B business to continue and result in a headwind in 2027. Additionally, we believe we will see membership declines in Caremark next year. There are two main reasons. First, while we are working through the transition to a pricing model grounded in the lowest net cost over the next few years, we need to make sure our current agreements reflect underwriting to appropriate risk and contracting structures, and we have taken a deliberate approach to our client renewals and the selling season. As you are aware, we are already managing through industry dynamics that are having an impact on our legacy contracts. Second, product actions and market exits by some of our health plan customers will result in a membership impact. These headwinds will be partially offset by our industry-leading specialty pharmacy business, which continues to benefit from strong execution and secular trends in the market, including a robust generic portfolio in 2027. Despite these near-term earnings pressures, we remain confident in the value our pharmacy services businesses deliver to clients and our ability to achieve fair margins consistent with historical levels in the industry over time. Elsewhere in Health Services, we remain on track, driving improved results in our health care delivery business. We are also building strong momentum in our Pharmacy and Consumer Wellness business. You can already see this in the second consecutive year of mid-single-digit growth reflected in our updated guidance. We continue to differentiate ourselves in the market through our deliberate actions and intentional investments and have established CVS Pharmacy as the best-run national pharmacy. These actions are what allowed us to change the trajectory of this business, and we are excited to carry that momentum into 2027. So putting the pieces together across the enterprise, we remain confident in the mid-teens adjusted EPS CAGR from 2025 through 2028 that we outlined at our Investor Day. While we would not normally comment on 2027 consensus this early in the year, an outlook of at least $8.44, consistent with current consensus appears reasonable at this juncture. This represents EPS growth of about 13% off an adjusted baseline of $7.46. This baseline reflects the midpoint of our updated EPS guidance and consistent with our guidance convention excludes prior year development and prior year items in our individual exchange business, which we have exited. Importantly, these expectations continue to be grounded in our guidance philosophy of establishing credible targets, delivering with disciplined execution and highlighting opportunities for outperformance. Before we open the call for questions, I want to reiterate how encouraged we are by our performance this quarter. We delivered year-over-year revenue and adjusted operating income growth across all our operating segments. Our performance so far in 2026 is a testament to our intense focus and disciplined execution as we continue to do what we said we would do and highlights our ability to unlock the significant earnings opportunity of CVS Health. With that, we will now open the call to your questions.”