Q3 2021 Rite Aid Corp Earnings Call
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I would now like to hand, the conference over to your Speaker today, Trinet Crazy Senior Vice President of Investor Relations and Treasury. Please go ahead.
All right. Thank you Carol and good morning, everyone. We welcome you to our fiscal 2021 third quarter earnings Conference call on the call with me. This morning are Hayward on again, Dan Robson, Jim Peters and Matt Schroeder.
As we mentioned in our release, we are providing slides related to the material we will be addressing today. These slides are provided on our website www dot rite aid dot com under the Investor Relations information debt, while management will not be speaking directly to the slides. These slides are meant to facilitate your review of the company's results and to be used as a reference document following the call before.
We start I'd like to remind you that today's conference call includes certain forward looking statements. These forward looking statements are presented in the context of certain risks and uncertainties that can cause actual results to differ these risks and uncertainties are described in our press release in item one day of our most recent annual report on form 10-K and in other documents that we.
Filed or furnished to the SEC.
Also we will be using certain non-GAAP measures in our release and in the accompanying slides the definition of the non-GAAP measures along with the reconciliation to the related GAAP measure are described in our press release and slides and with that let me turn the call over to Hayward They were.
Hey, Thanks, Trevor and good morning, everyone. We're really pleased with the results for the quarter, we continue to grow our business and achieved major milestones in our transformation on through the Rx evolution strategy, all the while demonstrating the essential role we play in our communities during the day.
Unprecedented global endemic.
Q3, we drove a 12% increase in total revenue growth.
Growth was strong at ILEC, there, which saw a revenue increase of 29% and Medicare part D membership.
Our retail pharmacy segment, we delivered another quarter of comp sales increases and continued growing market share in both the front end and pharmacy we.
We also delivered a 28% increase in flu shot from prior years third quarter. This.
This growth occurred even as we face expected headwinds from a soft cough cold and flu season since no. One is out and about continued pressure on acute script volume.
Our teams continue to work tirelessly as you can imagine to serve our customers during the war on out pandemic and I remain very proud of how together we're navigating this crisis and at the same time delivering growth and our key areas of our business.
I'm also proud that our teams are not only simultaneously executing on our quarterly goals, but also on the strategic plan to revolutionize our industry and elevate our role as an indispensable health care provider at.
At our analyst day in March we told you that would be a demonstrably different company within the next year.
And does nine short months, we have delivered meaningfully on that promise, making substantial changes to position our company for profitable growth.
We define the role customer expectations and even the daily workflows of our pharmacists.
We rebranded our pharmacy services segment elixir the signals from the crafted our solution for our target customer.
We're launching the first phase of our exciting new member portal for elixir customers on January Onest.
And we're well on our way with the integration of the two legacy PBM solution and upgrading our specialty medications solutions for our customers.
We also successfully introduced our new Rite aid brand the showcase our focus on delivering the perfect fusion of traditional medicine and alternative remedies.
Every day, we're introducing new products to our stores that are on trend and reinforce our commitment to whole health.
We chased out for replay for thousands of products over the last nine months.
And adjusted our merchandising presentation standard in the store, so hey, these new product and provide customer education on their ingredient benefit.
We're actively refreshing the exteriors.
All of our Rite aid stores and have completed more than 730 day and expect to complete all stores next year.
The third quarter, we opened our first three stores for the future, which completely reimagine the drug for various and position our pharmacists for an even higher level of customer engagement, Jim will talk more about these stores, but we're encouraged by the early results.
We're also laser and on strategic market and doubling down in markets, where we want to strengthen our position as exemplified by the acquisition on parts health in Seattle, which we identified as a key market for Rite aid.
With these key initiatives well underway, we're becoming increasingly focused on elevating our already expanding role on health care and as I've said before we're health care company and going forward, we're going to be demonstrating that in new ways.
In addition to their clinical training, our enhanced pharmacists training and certification.
It's been expanded to now include holistic care and our pharmacists are now actively engaging customers in key topics for their whole health like sleep anxiety strength and immunity, which are highly rather relative, especially during a pandemic and also to our new growth target customer.
This engagement with our customers is already paying dividends as we saw a lift in add on sales in these important health category.
In addition, the co that crisis is a great example of how we're providing additional health care services in the communities we serve through.
Through our partnership with the US Department of Health and Human services, we have conducted more than 1 million Covance test with quick turnaround tab times, averaging less than seen day for result.
PCR test the most reliable and there is no charge for our customer.
Although there are many details still to be worked out we're partnering with the CDC to health and minister coded vaccine once they're made available for the second phase of the rollout which is the general population.
We expect to play a significant role in providing vaccines for the public in those communities we serve.
Providing coven vaccine could be the most important public health initiative of our lifetime.
We're looking forward for this opportunity to help our community for such a meaningful way that also showcases our central role in health care.
Let me now talk about elixir.
I recently took part in multiple executive briefings with National pharmacy benefit consulting from there.
They in many ways validated our go forward strategy.
As we bring together and leverage Elixir health dialog and our network of retail pharmacies were able to craft and deliver differentiated solutions for employers and health plans that both lower cost and improve health outcomes.
Speaking of health dialog, we have an untapped asset here with strong capabilities in population health management and data analytics to support the Rite aid and Elixir strategy, we look forward to sharing more on our vision for health dialog at a later day.
So as a team we're accelerating the key initiatives that will drive our transformation through the Rx evolution strategy, which focuses on establishing a lift there as a clearly differentiated market leader in managing pharmacy spend and total cost of care for health plan and employer KLH.
Line as well as omni channel member engagement that drive better health outcomes.
Andrew on retail, we're unlocking the value of our pharmacists and revitalizing our retail and digital experiences.
And we'll continue working together to deliver the operational excellence needed to achieve strong results as we generate free cash flow reduce our debt and improve our leverage ratio.
While important work lies ahead of us I'm inspired by the significant progress, we're making as a team and optimistic that we will achieve our goal through the Rx evolution and.
And so I'll turn it over to Dan for an update on the list there Dan.
Thanks Robert.
I like to provide an update on the meaningful progress, we're making on our core objectives operational integration and modernization within our pharmacy services segment is going well and we will continue to make progress as we move into next year clinics.
Clinically we are focused on consolidating our formulary offerings for our current employer clients and driving members to the most clinically effective and low cost options.
This is a big undertaking and will provide enhanced value for both elixir NR clients moving forward.
In addition to improving the economics of managing overall client drug spend we continue to drive towards intentional member focused clinical interventions.
To this end we have recently reorganized integrated on clinical solutions team within our sister company Health dialog. There are numerous benefits for elixir, our clients and their members to a tighter alignment with health dialog by.
By combining more focused drug spend management from elixir with an analytically driven omnichannel member engagement via L. dialogue, we see substantial opportunity to engage consumers on ways not foreseen in the PBM space.
We also have big plans in calendar year 2021 for specialty pharmacy, managing specialty is particularly important to our clients as a dredge significant spend.
By offering a new approach using our own specialty pharmacy and other best in class specialty pharmacies, we will deliver even more value for our clients and members through solution that provides optionality on.
Also focusing on the fastest growing area of drug spend.
Stuart mentioned, we recently wrapped up a productive series of briefings with large pharmacy benefit consulting firms. During these briefings, we share our vision for an elixir and have useful conversations as to how we might exceed expectations for our target customers numerous things came to light throughout these briefings. For example, we received very positive.
Response to our near term strategy, particularly our soon to launch member portal.
Which offers a distinct and improved user experience and our realignment with our client services team to better support and advised on our health plan and employer clients and.
And we validated our longer term vision for innovation, including our plans for a far more robust clinical solutions portfolio and our commitment to analytics and on more structured data driven consultations.
We also learned pharmacy benefit consultants want to build stronger relationships with the lecture they want elixir to succeed and they want us to be a competitive force in the marketplace.
As we come out of coverage, we expect a solid business development pipeline with many regional health plan on employer opportunities.
So look for we will deliver it competitively priced offerings.
Meets client and member needs and the more that we leverage all the assets from synergies offered by Rite aid and health dialog on the more competitive elixir will be.
We absolutely believe we are well positioned heading into 2022 selling season, and we are highly focused on capitalizing on the opportunity to win new business with mid size employers as well as regional health plans with that I'll now turn it over to Jim for some additional comments on our overall strategic progress on the retail pharmacy segment Jim.
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Thanks, Dan and.
In the third quarter, our teams once again delivered growing our business and increasing share while also taking critical steps to advance our strategy and redefine our role in the broader healthcare ecosystem.
As you know a key pillar of the Rx evolution strategy is to unlock the value of our pharmacists and position them as the ultimate last mile connectors to the healthcare delivery system.
We continue to move the needle in this area with encouraging early results as we look to aggressively accelerate these efforts heading forward.
Our pharmacists engage more deeply with customers around key focused areas of immunity sleep stress and anxiety.
Educated customers on a broad suite of holistic products for.
Early results from these efforts are positive we posted strong growth in these areas and we've only just begun to focus on delivering the perfect fusion of traditional medicines and alternative remedies.
Heading into Q for our pharmacists are trained and prepared to expand to other targeted areas of engagement around healthy eating cardiovascular health aroma therapy and Holby apathy.
Our neighborhood pharmacists continue to establish ourselves as the most trusted and accessible clinical touch points in their communities. They are embracing opportunities to further expand the scope for services. They can provide as evidenced by cold the testing and shortly administration of the cobot vaccine.
As our strategy begins to take hold our teams continue to drive growth in prescriptions with Q3 same store prescription count increasing 3.1% when adjusted for 30 day equivalents.
This growth came despite ongoing headwinds in acute prescription sales, which had started trending upward before added pressure from the song cough cold and flu season, and the recent uptick from cold cases, which as you know put pressure on acute scripts.
A key driver of our results has been our teams focused on emphasizing with customers the importance of getting a flu shot this year as the COVID-19 pandemic continues.
As a result flu shots are trending well above last year as we begin Q4.
Ancillary immunizations are also continuing their rebound just being reinstated by the CDC. Following the early days of coated and were up 28% in the third quarter.
The net result of these efforts led to us increasing our pharmacy market share in our operating area as measured by Q via.
On the front end, we continue to revitalize our front end to deliver on fresh holistic and relevant experience for our new target growth consumer we.
We achieved a key milestone in November as we officially launched our new brand media campaign, which allows consumers to see rite aid's, new commitment to delivering whole helps hope.
Post campaign quantitative research has shown on our new brand messaging is resonating strongly with consumers.
Our fleet of stores is increasingly reflective of our bold new brand.
As Howard mentioned earlier more than 700 stores have been refreshed with updated exterior signage and pylons featuring our new branding with hundreds more slated for completion by the end of the fiscal year.
For our Remerchandising initiatives about 75% of our categories have been reset to our new elevated merchandising standards, which support full health and reflect on trend products.
We've added more than 2400 items that meet these new brand standards and the categories, we've enhanced and expanded to our whole health focus in particular vitamins first aid CBD are seeing strong growth.
And we took significant steps forward by launching our first three stores of the future located in Edrs, Pennsylvania, Little to New Hampshire, and Moscow, Pennsylvania.
These stores are the ultimate physical embodiment of our new brand with a fresh and inviting look and feel curated assortment of health and wellness products and beauty ambassadors to educate consumers of the latest trends than offer personalized guidance on beauty products.
Pharmacists are front and center and not walled off from their customers for unprecedented on demand access.
And we have our first deployment of virtual care rooms that connect our customers via Tele health to physicians behavioral health councilors sleep specialist and a wide spectrum of other clinicians.
To make sure customers don't fall through the cracks between physician visits we're providing an easy frictionless way to refer them back to their care teams and care systems, when our pharmacists see trouble.
Customer feedback to our pilot stores has been outstanding and we are pleased with the early initial results both in terms of sales and margin performance.
We plan to rollout our next wave of pilot stores in Q4.
More broadly we will continue to upgrade our entire fleet using an analytical approach that guides the type of investment the level of investment and the timing of investment on a market by market and store by store basis.
As you know industry wide, we are experiencing a very soft cough cold and flu season due to ongoing social distancing and mass requirements in terms of the quarterly results. This soft cough cold and flu season impacted our front end comps on.
The other hand, we did see an increase in stock up behavior related to COVID-19 toward the end of the quarter as well as growth in vitamins first day of household chemicals, and Bath, which have all been influenced by Coca dynamics.
While we have seen some of that uptick in stock up the dynamic is more muted on what we saw in the early part of depend on.
Thanks of course of the extraordinary efforts of our team. We once again grew front end market share as measured by our eyes and for the third consecutive quarter grew debt market share in both dollars and units.
Beyond the walls of our brick and mortar stores, we continued to push forward with initiatives to enhance the digital experience in ways never before offered were seen at Rite aid.
In Q3, we saw strong sales growth across our digital channels with digital revenue up 225% compared to the prior year period. This.
This reflects sales not only from our elevated redesigned website and mobile app, which now reflect our new branding and deliver an enhanced user experience, but also our growing partnerships with Amazon for owned brand sales and Instacart for home delivery.
With Instacart, we added alcohol delivery in eight states and topical CBD delivery in 14.
Customers are responding positively to these additions and we look forward to continuing to expand on these programs.
These efforts are critical as we continue to enhance our capabilities to deliver a unified experience that leverages, our retail stores and digital channels to meet our customers whenever wherever and however, she needs us.
As we approach the holidays I'd like to thank our associates they have embodied in a brace the hustle purpose and nimbleness that have become the defining trademarks of the new Rite aid.
And while we have a ways to go before we can claim victory. These factors have been critical drivers of our strong execution and performance over the past several quarters.
And this bodes well as Rite aid continues to emerge as a bright turnaround story in a very unusual calendar 2012 on it.
Together, we are taking critical for steps in growing with existing customers, attracting new consumers and setting the stage for a seismic shift in how neighbor pharmacy serve their local communities and for broader healthcare system.
I look forward to delivering a strong finish for the fiscal year and continuing to drive progress on our key strategic initiatives with that I'll now turn it over to Matt for some comments on our Q3 financial performance Matt.
Well.
Thanks, Jim.
Good morning, everyone.
Revenues for the quarter were up $655 million or 12% from the prior year third quarter to $6.12 billion.
We generated revenue growth in both our pharmacy services and retail pharmacy segments.
Net income for the quarter was $4.3 million or eight cents per diluted share compared.
Compared to net income of $52.3 million or 98 cents per diluted share in last year's third quarter.
The difference is primarily due to a 55.7 million dollar gain on debt retirements that we recorded in the prior years third quarter.
Adjusted net income was $21.6 million or 40 cents per diluted share.
Compared to adjusted net income of $29.1 million or 54 cents per diluted share in the prior year quarter.
The decrease in our adjusted net income was due to lower adjusted EBITDA, an increase lease termination and impairment charges pardon.
Pardon.
By lower interest expense and an increase in gain on sale of assets.
The net improvement in gain on sale of assets was driven by a $33 million gain resulting from the sale leaseback of our paradigm in Maryland distribution Center.
Partially offset by a loss of $19.2 million recognized in connection with the sale of a portion of our calendar year 2020 CMS receivable.
Adjusted EBITDA was $137.4 million in the current quarter coming.
Compared to $158.1 million in the prior quarter.
Now I'll discuss the key drivers of operating results in our business segments.
Retail pharmacy segment revenue for the quarter was $4.1 billion.
Which was $200 million higher than last year's third quarter, driven by an increase in same store sales of 4.3%.
Pharmacy same store sales increased by 6.1% same store prescription count of 3.1%.
Due to a 4.4% increase in maintenance prescriptions.
Offset by a reduction in the queue prescriptions of 1.9%.
Flu immunizations increased by 28% over the prior year quarter, which offset a 19% decline in acute scripts related to cough cold and flu.
We will continue to focus on driving script growth through our broad immunization initiatives and medication adherence interventions as well as continuing to pursue prescription file buys and working to gain further access to new networks in our markets.
Front end same store sales were up 30 basis points after excluding cigarette and tobacco sales.
We continued to see good results and immunity paper and household care products, but our front end sales were negatively impacted by a decline in sales of cough cold and flu products and in sales of Halloween candy due.
Due to the impact of social distancing requirements on that holiday.
Retail pharmacy segment gross profit dollars increased $8.9 million over the prior year third quarter.
Adjusted EBITDA gross profit was favorable to last year's third quarter by $7 billion, but 115 basis points worse than prior year as a percentage of revenues.
These results were driven by incremental gross profit, resulting from the increased sales volume.
Partially offset by pharmacy reimbursement rate pressure and the impact of reductions in over the counter front end product sales on.
On our front end margins.
Retail pharmacy segment SGN expense for the quarter was $22.8 million higher, but 75 basis points lower as a percentage of revenues to last years third quarter.
Our adjusted EBITDA, SGN aid was $27 million higher, but 53 basis points lower than last year's third quarter, given the revenue growth.
We incurred $16.5 million and incremental costs associated with cobot, which included pandemic pay.
Incremental cleaning costs and increases in pharmacy delivery expense.
We also recorded $7.9 million of transition services income from Walgreens in the prior year quarter that did not recur as.
As services under that agreement have been completed.
After adjusting for these items adjusted EBITDA SGN, a would have been $2.6 million higher than prior year, but 113 basis points favorable as a percent of sales.
As we have used the cost reduction initiatives that we launched earlier this year to help us leverage our revenue improvements.
As announced earlier this year, we continue to expect to achieve an incremental $40 million in cost savings in fiscal 2021 across both retail pharmacy and pharmacy services segments.
For reductions to payroll.
Advertising Brent traps.
Travel and call Center expenses.
I will now shift to our pharmacy services segment elixir.
At least for saw revenue increases of $471 million or 29% $2.1 billion due to an increase in revenues from Medicare part D membership growth.
Adjusted EBITDA was $48.8 million or 2.3% of revenues for the third quarter compare.
Compared to last year's third quarter, adjusted EBITDA of $49.5 million or 3.1% of revenues.
The reduction in adjusted EBITDA is due to increases in drug costs and SGN expense.
Related to our Medicare part D business, partially offset by reductions in payroll and indirect spend in other parts of elixir.
For calendar year 2021, we are restructuring the elixir insurance business to focus on more profitable Medicare part D members, which we expect to result in a reduction in the number of Medicare part D members, but improve the profitability of this business in fiscal 2022.
I'll now turn on our cash flows and balance sheet.
Our cash flow statement for the quarter shows a source of cash from operating activities of two point of $223 million.
We generated positive cash flow from the sale of a portion of our calendar 2020 CMS receivable.
This was partially offset by a build on the remainder of the CMS receivable a.
A build in retail inventory levels in advance for the holiday season and changes in other operating assets and liabilities.
We have sold the CMS receivable generated from January one 2020 through September Thirtyth, 2020, and received proceeds of $413 million on that sale.
We recognized a loss on the sale of $19.2 million, which is our cost of funding and financing fees.
We expect to sell a portion of the CMS receivable that builds between October one and December 30, Onest from 2020 prior to the end of fiscal 2021.
In addition, we completed the sale leaseback of our pyramid Merrell on distribution center as well as a few additional store sale leaseback transactions that generated total proceeds from $80.6 million.
We continue to explore additional sale leaseback options on owned distribution centers and stores.
Where we see attractive cost of funds to generate cash to pay down debt.
Our debt balance is approximately $3.2 billion at the end of our third quarter and our adjusted leverage ratio at the end of the quarter was 5.97 times adjusted EBITDA.
We expect our leverage ratio to improve by the end of the year due to sit due to the sales the remainder of our CMS receivable and declines in retail inventory levels from the current pre holiday builds.
During the quarter, we repaid over $300 million on our revolver and our quarter end liquidity was $1.6 billion, which gives us ample flexibility and runway to execute our strategic initiatives.
Now, let's turn to our fiscal 2021 guidance, which we narrowed this morning.
Key guidance assumptions, our expectations to benefit from our initiatives to drive retail sales growth.
Benefit in increase Medicare part D membership at all like sort of through the end of December.
Continued improvement in pharmacy network management at Elixir and good expense control.
We expect these benefits will be offset by continued reimbursement rate pressure.
The impact of a less severe cough cold and flu season on over the counter products and related prescriptions.
On an additional retail operating expenses.
Caused by the recent increase in COVID-19, and koby cases on many of our markets.
We expect total revenues to be between 23.9 billion and $24.2 billion and same store sales increases in the range of three and a half to for and a half percent.
We expect net loss to be between $114 million and $89 million.
Adjusted EBITDA is expected to be between 490 in $520 million and we expect adjusted net income per share to be between 45 and 85 cents per share.
Our fiscal 2021 capital expenditures are estimated to be $325 million, which includes our previously announced acquisition of Barr tell drugs and.
And we expect to generate between 50 and $100 million in free cash flow.
And finally, we expect our year end leverage ratio to be approximately 5.3 times adjusted EBITDA.
This completes our prepared remarks.
Please open the phone lines for questions.
As a reminder, try asking question you will need to press star one on your telephone.
On your question. Please press the pound sales.
Your first question on incomes from lease accounts from JP Morgan. Please go ahead.
Good morning, Thank you and thanks for all the detail. So let me just start for secure role and net Colgate.
19 vaccine.
I think I heard you say that you're expected to be part of the second rollout, which will start hopefully in February but I, just really want to understand a couple of things I know we have another have written about this but line.
How many vaccines do you think that that you continue on.
How do we think about the profitability to be kind of similar to on to.
The flu shot and then thirdly did you have to hire any incremental pharmacy tax on.
Our personnel in anticipation net of this vaccine.
Hey, Lisa for.
For the question.
Although we're not a player on the very first sales due to our not being on national chain and the fact that we do not have existing partners with long term care facility. So we are among others and.
Major player on the phase two part of this through our partnership with CDC. As you said hopefully in February actually we are going to potentially be working with one or two states earlier than that.
Help them out as they are rolling out there one for the phase two people 65, and over who are in vulnerable demographics or community and.
We're really more than ready to play our role as Weve been working on this for quite some time, we've learned a lot about how to how to prepare for how to adapt quickly.
Going through this with flu before in the early days and then we were sort of an early adopter on the Codell test day side and have.
Then a big part of that solution of.
Of course, we also have a long history of administrative activities in our pharmacy.
We will hire any additional resources, we need to make the successful we're talking about hiring retired.
On this we're talking about interest we have also freed up and we'll continue to free up a significant amount of capacity for our pharmacists and our tech through our lean initiatives that we've been working on for over a year.
Our pharmacists will be paid in administrative fee to cover the cost of dispensing and we're still working through the economics that effect on net EBITDA benefit from the administering the vaccine.
Really pleased with the potential value of this will create for writing and we anticipate there is going to be a co that vaccine forever probably.
Because if not this mutation, possibly more mutation. So we look at this is both a short term opportunity to help.
You know help the country, but a longer term opportunity for rite aid.
And and Matt if interest comment on the number.
Numbers, if you would.
Sure. Thanks Hayward.
As as Hayward said, we certainly expect it to be profitable for US I think we're still working through the you know the.
The final qualification the economics, which we would.
Provided a later day, probably want to provide guidance for fiscal 2002.
I think kind of looking at flu immunization volume plus and flew gross profit per script is not a bad proxy on used for modeling at this point, though.
Well, we're still obviously working through the final numbers.
Matt can can you give us the total number of flu vaccines that that you did for for 2020 to fit to give us kind of a baseline.
Yes, I don't think we thrown that number out there probably the least this I want to be a little careful but I think for expecting something in the range for three and a half million.
Okay great.
To put it out there publicly but but anyway, yes, that's the number.
Okay, Great and then if I can just ask a quick question to Dan on on the PBM side.
And just when you get that first PBM opportunity that Weve had since redlands versus PCM A. I'm, just curious as to your overall thoughts as to how this could potentially on teams things from a from a PBM contracting perspective, and and you know your actual thoughts on what this guy's.
On.
Specifically with the relationships around around spread and I know you have a number of different models on your PBM, but any thoughts you could give us there would be helpful.
Yes, we've been watching this case with interest and the result is not surprised I believe Hayward you would like to take a stab at this and when you take a stab will take over as well.
This is an interesting and I'll hand, it back to you to answer the question about price Dan but this is this is this is one it's nice to have a dual portfolio of a retail pharmacy and the PBM because you know any if there's any price thing floors that are established as a result of this rule similar.
Fleet to what might be going on in Arkansas that actually is a benefit for the retail pharmacy side of the business.
Also we're very familiar on me and I come from the Health plan business has as many of the members of our team do were very familiar with state regulation have dealt with state by state regulation my whole career, and we will adapt as required to.
To work in that environment, specifically, though Dan you can answer the question about for us.
Yes, absolutely. So currently leased over 30 states have some iteration of a of a Mac law.
Completely dissimilar to the last question in the release case, and we believe that we set on.
Our price that elixir for Mac prices and equitable manner in a way that correlates to wholesale prices.
Total in the market and which fairly reimbursed pharmacies.
Well, so incentivizing them to continuously and effectively managing their acquisition of prescription drugs, we have standard processes leases in place to address pharmacy, Mac Appeals and will review these processes Reformasi pharmacy.
Pharmacies in Arkansas in light of the Retweets decision.
Okay, great. Thanks, I appreciate on the comment.
Thank you for data.
Your next question comes from Robert Jones from Goldman Sachs. Please go ahead.
Great. Thanks for the questions I guess, maybe just to look at the implied for Q Guide I know you guys pointed out some of the cross currents there, but it looks like it's expected to be down 20% year over year, just wanted to get a little bit of a better sense of what's driving that and then you mentioned on the on the Covance vaccine that you do anticipate.
Debate play.
Playing a role in the second rollout of this which would be in February which would be captured somewhat at least in your for Q on your fiscal for Q is there anything factored in there and beyond that again just to push a little bit more in any order of magnitude. Matt I know you mentioned that you expected to be profitable, but theres, some some wide ranging expert.
Patients out there around the vaccine just just curious if you could give us any any guide rails guardrails around around expectations are on the vaccine.
That you take that.
Sure. So thanks, Bob I'll go through Q4 for US I think as you think about Q4 compared to last year's fourth quarter and the guidance. We gave there's really three for.
A couple of factors that weigh on.
The quarter, one is the soft cough cold and flu season.
Yes last year's fourth quarter, we actually benefited from a pretty robust cough cold and flu season, we're seeing exactly opposite no debt.
This year as we talked about in the third quarter results and I think we expect those trends to continue into Q4 and the other thing is that's going to weigh on the quarter performance compared to last year is.
I think there's some great light at the end of the tunnel with the vaccine, but we see pretty rough quarter from the standpoint of the.
Koby conditions in the markets that we're in and the related expense that we're going to have to incur.
Take care of our associates and our stores I think those two things are really the main things that dragged the numbers down from what we saw last year. It was.
As far as the vaccine quantification, besides giving out kind of the proxy to the flu shots in the last questions is right on more we can talk about this point Bob interest too many moving parts. So.
Certainly.
Understand.
The need to want to get more there, but we you know there's there's just too many unknowns to really give a good guard rail there.
I think your question you asked is there any vaccine benefit in our Q4 guidance from the answer is no.
Okay. No thats helpful. On I appreciate it and I guess, just maybe to ask a follow up on on Lisa's question around the Rutledge ruling from the Supreme Court.
Again, some some widely varying views on on what this could mean I mean can you maybe just share a little bit more on both sides of the house.
How much does this change the landscape is in fact, a similar law is uptake.
Taken by more states nationally.
How does that affect the TBM his ability to.
To make profit and then Hey would you commented on the on the retail side, which I think is interesting that does this shift the tides at all as far as you know the ever present reimbursement rate pressure does this help come.
Combat that to some degree.
Well I think.
It's very early so we've been watching this case with interest of course and in others.
Theres really two areas that we think about that.
PBM is being regulated on state by state basis by the state as health plans are and then the second area is this whole.
Math law.
And as Dan said over 30 states already have some iteration of that.
We believe that we set on that price is an equitable manner and in a way that correlates to the whole fare sale price is available on the market and.
You know we have historically had two sides of our business one that has spread and one that doesn't so we're probably as prepared to deal with ever which way. This goes as anybody.
Because of that.
And.
And also.
If there were no pressure to limit how much you can push down pharmacy pricing.
That would obviously benefit us so I see it as sort of net net.
Net neutral in terms of our competitive positioning with the PBM, because everybody is going to be dealing with us and.
Yes, you know you could you could argue that maybe there will be some.
Longer term.
Potential on you know issue on the spread but we don't we don't see that because we're dealing with us already and.
We don't see we're not anticipating that thats, a big problem for us.
But I think it's also too early to tell.
Okay, great. Thank you.
Our next question comes from Glen Santangelo from Guggenheim Securities. Please go ahead.
Hi, yes, thanks for taking my questions, Hey would I just wanted to also follow up on on the Cove dynamics, a little bit I think with a lot of investing he trying to assess hears it tend to pull all the pieces related to cove. It apart and try to understand how that may be impacting your near term results.
Discuss is clearly some underlying benefits from all the testing you're doing potentially ultimately the vaccine, but as Matt laid out there is lot of incremental cost as well and so how do you assess the positives and negatives here in aggregate and how do you think about that impact and the transient nature of that impact on your business.
Yes.
Yeah, we think about this on a lot you know a lot of the cost impact was upfront and has tapered off during.
During the course of the year.
Until recently actually now because we're in the hot spot, we've got koby cases ramping up in there for our cleaning costs are ramping up again, but.
It does kind of ebb and flow on.
We also were going to talk about this later, but we have to.
Announced another round of here. Okay. So those are the those are examples of the car.
The cost issues with co, but then there's the other transitory nature, which I don't know truthfully, whether this is long standing or whether this is short term, but the pressure on cough and cold and the soft flu season. This year. So obviously, we did extremely well on flu shots.
Everybody knew the importance of getting flu shots however, when the.
When the doctor's offices on elective surgery shut down that really put a lot of pressure.
Pressure on us from an acute script perspective on we've seen that dissipate a bit but the stark reality for the short term is that no. One is getting really sick I mean people aren't getting cough cold, they're not getting the flu as much as as normally although we do have some cases.
So they're not buying as many of the over the counter products and aren't getting tamiflu.
So on and are even getting some of the regular infections that one would one would have now this is mostly due to school thing closed on people not being together, which after a vaccine one would argue that everyone's rushing back out to have parties and does the schools and and be together and then from then at that happens.
The cough cold stuff comes back with event.
So that that that's kind of my current thinking right now.
And so then once you get the vaccine out you're going to have less stress on the system with regard to the cost of quarantining on.
Pandemic pay and all of that so but it is so dynamic right now I mean, I don't know whether people are going to permanently changed their hygiene habit, where math all the time and wash their hands continuously so.
Theres a couple of scenarios that we don't have clear visibility into and then of course, you've got the benefit of of the testing on the vaccine.
You know in the sense out overcoming maybe not overcoming but at least offsetting some of these other pressures so Matt anything else you want to add.
Yes, I think just maybe to put you know to.
To emphasize some of the things that are kind of a near term impact obviously, we quantified the cobra related cost this quarter I I expect a similar type of drag in the fourth quarter.
Based upon the things they were talked about and I expect that to continue probably ins into fiscal 2002 to some point until the vaccine really gets kind of a pretty heavy adoption.
Exactly when that stops us a little hard to tell but.
I think it goes someone in that in those cost increases go somewhat into into two into fiscal 22 and then.
I do think hey were pointed out but I think you got to think about the impact. This has had on our acute scripts or for the full year.
Our scripts have definitely been softer one day, where last year and it's related to the impact of total bid on deferrals elective procedure shutdown, a doctor's office and soft cough cold and flu and so while it's hard to predict exactly what's going to happen next year, you think that comes back at some point I.
I think the timing and the amount of the comeback still.
To be determined.
Yes.
I appreciate all the comments and clearly those loans loans cross currents here, but I am I on the follow up would be on I know you don't want to give any guidance on on fiscal 22 at this point, but.
When you put all those elements for the mixing Bowl I mean do you view this as a positive tailwind for fiscal 22 War for you view it more as a headwind.
Yes, Glen Great question, and a very fair loans, I think we need to be answering that in the context of given fiscal 22 guidance as opposed to try to.
Its price hard to answer now without giving 22 guidance. So I think we're just kind of the way till then.
Okay. Thank you very much.
Your next question comes from George Hill from Deutsche Bank. Please go ahead.
Yeah. Good morning, guys and thanks for taking the question I have two I guess the first from is for Matt Matt. The Q4, EBITDA guidance range is still pretty wide.
And I guess could you talk about or maybe even a rank order both the puts and takes as you think about them initially as you've laid them out.
And then maybe a follow up for.
For Hayward is just kind of strategically Hayward, we saw on kind of Amazon rollout a larger pharmacy offering.
During the quarter with coincident with the new drug benefit card and stuff like that I guess, just how are you thinking I know that you guys have relationship with Amazon, but just kind of how are you thinking about them as kind of.
Premier from versus from our competitor.
I appreciate that.
Sure I'll jump.
Yeah I'll jump in first one George I think we talked about in one of the earlier questions. What I think some of the the weights are on Q for from the standpoint of comparison to last year I think the biggest variability in my mind is what happens on the top line.
You know I think theres, just with that with the pressure on cough cold flu at the pressure on acute with you.
You know some uncertainty about what happens with koby cases here over the next few months, while we wait for a more full.
Fulsome rollout of the vaccine I think there's just a lot of.
Variability on about what can happen on on the top line here and I think thats something that probably drives.
The biggest.
As we look at internally what the biggest factor is to kind of a low end to the high end of the guidance range and really the reason why we've got a $30 million.
Range on the EBITDA guidance.
Yes, and on day Amazon.
We recognize Amazon as a formidable competitor and they lost sales tax over two years ago.
And an interesting my first reaction was well Amazon is doing it really validates the continued growth opportunity on the pharmacy space. So that was my first reaction and then the.
There is a connection between the pharmacist on the customer that more than a transaction by mail and.
Hi day product as their trusted accessible on.
On store via the phone.
And other omni channel types of engagement on.
Currently mail order and the industry has plateaued. This is really more about flow pack opportunity to an estimated 10% to 15% of prescriptions filled Amazon from new focus is on the cash market, which is about.
About 5% of the total market and the discount card market I.E., the good Rx and elixir offer both mail order and on that how card program and this will continue to evolve as we evolve our strategy with the line there and in the retail space I mean, we order same day.
Delivery from all of our stores and two day delivery of mail order. So we really feel that we have that delivery and engagement capabilities that are beyond what an Amazon can do and now that we're improving our digital capabilities. We think it's just going to continue to get better and better and more easy.
On convenient for our customers, but you know.
We never never take your eye off Amazon.
Yes, Matt maybe a quick follow up a quick housekeeping question did you guys detailed the percentage of sales in pharmacy that came from the back of the store I didn't see that net presentation.
So.
So you say a percentage of sales and pharmacy came from the back. This for you mean, just a prescription count increase noted the price per cent of revenue that's pharmacy versus from story.
I don't know, if we detailed or not I think it's.
Drinking give yet it probably give an exact number but it's in the same ZIP code. It normally is like close to 70%.
Great. Thank you.
Your next question comes from Ben Andrew from Evercore. Please go ahead.
Hi, Thanks, so much for the questions guys and I had two questions specifically around on the sort of continuation.
As.
As impacts from some of the more recent care initiatives, including net testing and some of the Tele health benefits are you seeing any early indication that that's changing people's perception about the type of care that can be provided at.
Rite aid stores and then secondly on.
Hi in terms of on.
The store Remodels that you mentioned I know, it's still early in the process, but if there is any details you could give us about that balance and performance of those stores post the remodel, especially for the rest of the store base that would be very helpful. Thanks, Yes.
Yes, hi, Thanks, and I'll, let Jim answer both of those questions.
Thanks, They were thanks Elizabeth yes.
Yes, the perception it continues to evolve and I think it evolves not simply from a consumer perspective, but also from a health system perspective. So you think about large organizations that represent physician groups on health systems. They are increasingly embracing pharmacies rule in the frontlines of healthcare because.
Their own front doors.
Have lines going outside of debt during coded.
Sales and like Rick peaks that we're seeing now so.
We've proven that we can beat that trust and accessible touch point within the everyday work flow and journey of consumers' lives and that really does I think it is becoming a hallmark of the pharmacy industry and I think rite aid Rite aid is taking the forefront roll in in continuing to push that boundary.
The.
The second question around store of the future. We do have three up as I mentioned earlier and we're really we're thrilled about the early read is that we're getting both from a consumer experience perspective, where we have markedly improved.
ICSC consumer experience scores from those stores, but also from a performance perspective, so very early days, but when we look at year over year performance and do our best to tease out through modeling the impact of Cove. It.
On the and give ourselves the most fair look at year over year performance.
We're doing very well from both a front end and pharmacy perspective from both a sales and a margin perspective. So we're beginning to see the intended effect of not only the physical design, which is really the physical embodiment of our brands at the whole brand relaunch in merchandising overhaul come to full there within these early.
The numbers of stores of the future.
That's perfect and when does the one quick question on higher I Miss It did you give any updates in terms of the timing on that our tell close.
Matt why don't you get from an update.
We did not give an update on that.
We did not give an update we still expect the transaction to close by the end of our fiscal year. Okay.
Okay perfect. Thank you.
Your next question comes from volume writer from Bank of America. Please go ahead.
Good morning.
In terms of.
Reduction in acute prescription can you remind us what percentage of your prescriptions are acute and then trying to think about how much pent up demand there may be valid these deferred procedures.
I guess what types of increases do you expect to see once we get through coated.
Matt for us to answer our.
Yes Bill.
The split between maintenance and acute is about 75% maintenance, 25% acute.
In any kind of a broad brush.
And then I'm sorry, your second question was I apologize.
It was on the map.
Demand for yes, and I think I.
Let me just start and then you can follow up.
I think the debt.
This is obviously anyone's best debt because I don't think anyone has a crystal ball on net.
I personally think and there's been several articles about the debt.
Whatever.
Well first of all some of the demand was on you know is on pent up some on the demand was related to the fact that people to for getting sick because they weren't out in about that won't come back and so people are out and about again anything related to like elective surgeries on dental care and stuff like that we'll we'll certainly come back to normal.
I believe and there will be a pent up demand actually in Virginia Beach, where I live which is the rite aid market.
The doctor's offices are chock full of patient trying to get back.
So to all of the services that they were received during co that I.
I think you know I don't think we know how to quantify that yet because it's still early and we know that you know a lot of a lot of people just didnt get care and and some died from net but.
Matt unless you have a.
A better crystal ball.
I do not Hayward I think that is exactly right at Hayward touched on all the factors that could drive.
Demand for next year, Bill, but it's it's too early to try to quantify those.
Okay, and then just one follow up after the sale of the DC do you have an estimate of what the market value of the remaining real estate. You have you mentioned you may continue to pursue additional sale leaseback from the future.
Hi, Bill I don't have that number off top of my head. It's something we can look to potentially disclosed, but I don't have that number.
For all right I'll pass on others. Thank you.
Your next question comes from Karru Martinson from Jefferies. Please go ahead.
Good morning.
We look at the 700 store external remodels, the new store the futures.
When do we start kind of communicating the new rite aid to the.
To the customer and.
What's the timeframe for for getting that that growth back in your mind.
Tim can you handle that.
Sure well, we've just begun our formal communication.
The customer we officially launched our new brand on November Eightth in a in a media campaign was kind of surround sound and had a very strong resonance with our consumer base.
Remember you know the physical remodel is very important because we have a number of stores in our fleet adjusted as needed.
But then you know the reality is that.
We're in the early phase of all of these next generation Remodels and we're evaluating in a test and learn way, what's working with our remodel on what is and were module on Modularizing industry model. So if you look at our stores for the future.
They are actually broken down in our own playbook into various modules that we will plug and play.
Depending on the specific needs of a particular community and.
So this is going to be an evolving process of value engineering and analysis and.
Early indications are that are testing model that is not coded testing, but the way we're testing and learning with fees. They are really giving us the rite insights to be able to roll out our remodel plan in a way that isn't what size fits all.
But rather very much tailored and personalized to a local community to make sure that we get it right not only from a consumer perspective, but from a return perspective.
And when you when you approach those remodels I mean, I realize it's early days, but as you look at what's what's kind of the average cost of doing that and how much of your store fleet do you feel that needs to be refreshed that needs.
Remodel.
Matt.
Yes.
Your your answer on the cost side and then.
Tim can after on the.
These.
Well I think on the cost side crew, it's still too early to give a number with the first three that we did were.
I had a great result from the standpoint of how they look and the results are giving but.
You kind of hone in on some of the specifics around the design and and scale that designs on multiple amount of stores that you do you really don't have.
The rite type or read on the cost side I think more to come from us on on the cost net returns of these remodels as we get more of them.
Don and start to scale this.
The only thing on that Matt is that again, because we're not taking a copy and paste approach, where we're developing a prototype and then just pacing it across our fleet.
There won't be a single point of cost there will be an average cost obviously across the portfolio, but there won't be a single point of cost because the cost that we deploy in a particular store in one market, maybe very will be very different from the cost of the store that we deployed in another market. So we'll be looking at return not not only from a for for.
Portfolio standpoint, but but again modulating the investment according to the consumer localized demand.
Okay, and just lastly, when we look at the year on 5.3 times leverage guidance on pipe.
Basically round numbers here 2.7 billion of debt net debt at the year on it I mean that is the difference from where we stand today that CMS receivable remainder and on the inventory or is there another puts and takes to that.
Accrues, Matt those are those are the two biggest it for says.
All right. Thank you very much appreciate it.
We have time for one final question.
It comes from Carla Casella from Jpmorgan. Please go ahead.
Hi on that question certainly this stores as well as year on sale lease back on.
You mentioned the sales in the second acquire and looking at additional opportunities. So how many owned Bdcs in stores do you have at this point.
And are you seeing any.
On.
Changes in rent negotiations on or are there other reasons that are making the sale leaseback smarttrack now as interest rates in the market.
And what kind of opportunities you see there.
Hey, we're trying to take this one have yep yep. So.
And from an own DC morning, Carla from it on DC standpoint, we've got.
For more facilities that are on for five more facilities that around in it from a store standpoint on I.
I think the numbers around 120 fives I not all of them are going to be the rite communities for sale leasebacks I think we do need to be selective.
About which ones we would do over time.
We're getting good.
Execution from a cost of fund standpoint on these and I think a lot of it is market demand I think just given the low rate environment.
This is a very attractive form of others of investment for.
For folks and we're taking advantage of that environment.
Okay, great on.
And then.
On the reimbursement rate.
Rate pressure on you talked about I know youve answered some questions on it already but.
How can you attribute how much of that is it relate into net growth in that Medicare part D and is that any part of your assumption that you.
You will add more profitable Medicare part D customers is there anything to do with the reimbursement rate on different plans.
It's really kind of apples wells Carla I think from the standpoint of lease reimbursement rate pressure on retail business versus the impact of thinking about how we do things differently in the med D from the elixir business, which is really where that has an impact.
Okay, great and that the Medicare on.
Lets the Medicare part D business or were you asking on the retail pharmacy side.
Well I guess on trying to understand that and forgive me for not me I'm not on the expert on the PBM side and the business but.
The net growth you talked about in Medicare part D. EBIT mentioned that you're expecting growth profitably going forward I'm wondering if you know that the pressure we've seen on that elixir margin year over year in that from.
Yes, the net impact can part D growth or does that have to do with the reimbursement rate pressure on.
Around net comes with the Medicare part D.
Yes, thanks for the repairs on especially on different yeah.
In Medicare part D business is.
It's a complicated one for us because it provides more benefit to us then.
Then just the actual membership and drug costs associated with the membership so.
Medicare part B has been a very low.
Significant growth engine for elixir. However, the mix of membership has been ideal and it has generated a higher CMS.
CMS receivable than we'd like and Fortunately, we've been able to securitize that so it hasn't really affected us from a leverage ratio.
As much as it is to is there. It also provides the growth in the membership provides a benefit in the sense that these are heavy users of our mail order facility and so we get really good mail order volume.
From these members.
However.
The mix of the membership right now it is causing us.
Medical loss ratio or the MLL R. On this business to.
To be higher than we would like and it's really about the mix of members on also the distribution channel is it.
Spencer for us so when we read that for.
For the January one new year, we specifically focused on change.
Changing the benefit plan design, increasing the premium as well.
Leveraging on more efficient distribution channel and so that has and will result in lower membership, but we believe it will be a more profitable book of business for us going forward, while simultaneously yielding.
Continued good results on mail order.
Does that get at your question.
Hello.
Sorry that was great but on on side, just one clarification on the CMS receivable due to all of the proceeds coming in fourth quarter versus how.
How much for certain how much it for if I may have missed on.
So Karl we had we had about $413 million of proceeds come in this in the in the third quarter the quarter just ended.
And that was from selling the receivable that had built up between the beginning of the of the calendar year on September Thirtyth, there will be another tranche of proceeds that come in in the fourth quarter, we were able to sell basically the last three months of the receivable build.
Okay, great. Thanks.
This concludes the Q and a portion of our call I'd like to turn it back to him right on income for final comments.
Thanks, everyone for your question on it and before we end the call I do want to once again recognized are on the front line.
As you know we operate in many of the hotspot that are seeing a significant recent increasing coda cases, and our associates continue to rise to the talent on.
Frontline associates have than both the faith and the heart of our Rx evolution transformation and we served on our business our customers and our communities with great time net passion under on Imaginably challenging circumstances, but.
Because of their tireless efforts with truly demonstrated the essential role Rite aid placed in the communities we serve.
On top of their for ROIC every day effort, we completed well over a million co. The test and are preparing for play a significant role on administering the vaccines in the communities. We serve to thank our teams as I mentioned earlier, we're pleased to announce that our front line associates will receive at year end appreciate.
Jason Bona.
Our customers and communities depend on us just as we in turn depend on our front line associates and we've been able to do a lot of good for a lot of people and our store our mail order facility and distribution Center associates from really helped drive the effort for us So were really great.
For them and for them and we could not be more proud of their performance. So with that I want to say happy holidays to everyone. Here for 2021 like no. Other here for 2021 that I've ever been excited about and unless the.
Net this vaccine out and have everybody.
Hi, everybody get back out and about so thanks for joining us and we'll talk again in January one we participate in the virtual JP Morgan Healthcare conference.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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