Q3 2022 Rite Aid Corp Earnings Call

December 21, 2021

At this time all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance press star zero. I would now like to hand, the conference over to your speaker today Trent Kruse. Please go ahead, sir.

At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded.

If you require any further assistance press star zero. I would now like to hand, the conference over to your speaker today Trent Kruse. Please go ahead, sir.

Alright, thank you. And good morning, everyone. We welcome you to our fiscal 2022 third-quarter earnings conference call. On the call with me this morning are Heyward Donigan, Jim Peters and Matt Schroeder. As we mentioned in our release, we're providing slides related to the material we will be discussing today.

As we mentioned in our release, we're providing slides related to the material we will be discussing today.

These slides are provided on our website investors.riteaid.com, 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 risk and uncertainties that can cause actual results to differ. These risks and uncertainties are described in our press release in item <unk> 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 a reconciliation to the related GAAP measure are described in our press release and slides. And with that, let me turn the call over to Heyward.

uncertainties that can cause actual results to differ. These risks and uncertainties are described in our press release in item <unk> 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 a reconciliation to the related GAAP measure are described in our press release and slides. And with that, let me turn the call over to Heyward.

Thanks, and good morning, everyone. I'm pleased with our third-quarter performance. As we grew our revenue and increased adjusted EBITDA by nearly 13%. Now before I turn the call over to Jim and Matt talked through our quarterly results and updated guidance. I wanted to spend some time discussing the very bright future will see ahead for Rite Aid.

Now before I turn the call over to Jim and Matt talked through our quarterly results and updated guidance.

I wanted to spend some time discussing the very bright future will see ahead for rite aid.

As we move forward, we are unleashing the next evolution of our strategy and we are laser-focused on and involved view of the pharmacy of the future. What that really means is a pharmacy business, it's not limited to what we usually think about a traditional in-store definition of pharmacy. Rather our efforts and we've been talking about this for a couple of years have centered on an expanded view of pharmacy and what we've been calling internally, [an omni-pharmacy] strategy.

What that really means is our pharmacy business, it's not limited to what we usually think about a traditional in store definition of pharmacy.

Rather our efforts and we've been talking about this for a couple of years have centered on an expanded view of pharmacy and what we've been calling internally.

The pharmacy strategy.

That is our RxEvolution is driving our transition from a company with numerous tide to an omni-pharmacy part to an omni pharmacy business, whose value and relevant as a whole is far greater than the sum of the individual part. To be clear, we are going after the digital retail PBM specialty and mail order pharmacy market. It will allow us also to expand beyond our 17 state footprint to be a national provider of pharmacy in an omnichannel way not in a brick and mortar way the way we are today.

<unk> pharmacy part to an omni pharmacy business, whose value and relevant as a whole is far greater than the sum of the individual part.

To be clear, we are going after the digital retail P. D M specialty and mail order pharmacy market.

It will allow us also to expand beyond our 17 state footprint to be a national provider of pharmacy in an omnichannel way not in a brick and mortar way the way we are today.

Rite aid is in a really strong position to be a pure play omni pharmacy company that serves consumer and enterprise customers utilizing our full suite of pharmacy services. Including thousands of retail pharmacies with hundreds of millions of trusted customer touchpoints, engaging with consumers in their whole health and wellbeing as no one else can. Our own specialty pharmacy through which we currently distribute and manage pharmacy and medical benefit for specialty pharmaceuticals, which is core to our growth strategy.

Really strong position and be a pure play omni pharmacy company that serves consumer and enterprise customer utilizing our full suite of pharmacy services.

Including thousands of retail pharmacies with hundreds of millions of trusted customer touch points and engaging with consumers in their whole health and wellbeing as no one else can.

Specialty pharmacy through which we currently distribute and manage pharmacy and medical benefit for specialty pharmaceuticals, which is core to our growth strategy.

Our own mail order pharmacy with a 50 state license and leading NPS scores, which position us well for traditional PVM clients and other fulfillment opportunities. On pharmacy benefit management company Elixir that is large enough [inaudible] and small enough to be nimble more on that in a little while. A modernized laker platform. Our best in class claims adjudication platform that powers PBMs across the country.

On pharmacy benefit management company Elixir that is large enough.

And small enough to be nimble more on that in a little while a modernized laker platform. Our best in class claims adjudication platform that powers P dams across the country.

Our virtual pharmacy chat capabilities that connect to consumers. Connect consumers to pharmacies online as they seek to get more than just in person pharmacy touchpoint. And our central fill operations that offer compliance packaging solutions that help individuals receive personalized weekly packages of their medications that are neatly organized and by time of day. And an exciting soon to be announced direct to consumer digital offerings. We look forward to sharing more about this initiative in the near future. Our strategy also continues to focus on utilizing pharmacists to engage is every daycare connectors to ensure our customers get and stay on the traditional medication and alternative remedies that they need to stay healthy.

And that's one thing worth to pharmacies online.

Hey.

Seek to get more than just in person pharmacy touch point.

And our central fill operations that offer compliance packaging solutions that help individuals receive personalized weekly pack packages of their medications that are neatly organized and by time of day.

And an exciting soon to be announced direct to consumer and digital offerings. We look forward to sharing more about this initiative in the near future.

Our strategy also continues to focus on utilizing pharmacist.

Engage is every day care connectors to ensure our customers get and stay on the traditional medication and alternative remedies that they need to stay healthy.

And we can deliver these medications to our customers in ways that to come back through the mail same day courier, in-store via your smartphone and as I just mentioned, yeah, modern direct to consumer digital offering in the near future. That's what we mean by omni pharmacy, and we are energized by the potential of the omni pharmacy market, which is significant in size with a total addressable market of approximately one trillion, yes, that's with a T and growing.

That's what we mean by omni pharmacy, and we are energized by the potential of the army pharmacy market, which is significant in size with a total addressable market of approximately one trillion, yes, that's with a T and growing.

And while there is much more to do to advance our omni pharmacy strategy. We're also focused on using the power of our pharmacists to help our health plan partners achieve superior member health outcomes, lower overall health care costs and maximize health plan revenue. When we launched our RXEvolution strategy back in March of last year. It was worth a conviction that pharmacy has a critical role to play in health care. And so we all see that today as recently as in yesterday's Wall Street Journal hardly events of the last almost two years have highlighted and stressed the pharmacy system, but highlight the role that pharmacists play and one that we probably couldn't have even imagined when we first started talking about this.

When we launched our evolution strategy back in March of last year. It was worth a conviction that pharmacy has a critical role to play in health care.

And so we.

We all see that today as recently as in yesterday's Wall Street Journal hardly events of the last almost two years have highlighted and stressed the pharmacy system, but highlight the role that pharmacists play and why.

One that we probably couldn't have even imagined when we first started talking about this.

We're really excited now even more so than we were about the future of the Rite Aid enterprise as we further leverage all of our strategic pharmacy assets to be a leader in omni channel in America. Now, let me provide an update on Elixir. Wanted to acknowledge that we have not yet made the progress on the PV of membership growth in the timeframe we previously expected. Even though we have strong network economics and robust clinical offerings, we were unable to be competitive on rebates.

Now, let me provide an update on elixir.

Wanted to acknowledge that we have not yet made the progress on the PV of membership growth in the timeframe. We previously expected.

Even though we have strong network economics and robust clinical offerings, we were unable to be competitive on rebates.

As announced today, we've taken steps to address our revert economics by partnering with clients therapeutics, who will be able to help us significantly increase our rebate value given their membership and the GPO. This new rebate aggregation agreement will deliver significant value through Elixir and to our clients as well as make us more price-competitive in the market now.

This new rebate aggregation agreement will deliver significant value through elixir and to our clients as well as make us more price competitive in the market now.

Now with our strong rebate and network economics, we can point to recent signs of success that lead us to be optimistic about the upcoming selling season will be telling. So far in the last couple of months, we think 10 new customer wins and recent. I'm, sorry, 10 new customer wins, and we're getting to the final round, 20% more often than last year and we're close to a 50% of the business when we get to the final lap.

So far in the last couple of months.

Think 10, new customer wins and recent.

I'm, sorry, 10, new customer wins, and we're getting to the final round, 20% more often than last year and we're close to a 50% of the business when we get to the final lap.

This shows that when we have the economics to get to the final stage, our suite of assets provides a very compelling value proposition. In addition, we have received 80% more [RFPs] in the last few months than we received during the same period last year. So there will be no shortage of opportunities for us to win. On the Elixir insurance side of the business, our part D business that we own, our results have been disappointing. Primarily due to the deterioration of the medical loss ratio.

In addition, we have received 80% more rfps in the last few months than we received during the same period last year.

So there will be no shortage of opportunities for us to win.

On the elixir insurance side of the business, our part D business that we own our results have been disappointing.

Primarily due to the deterioration of the medical loss ratio.

We continue to look to ways to reduce our exposure to our Medicare part D business, Elixir insurance, and look forward to sharing more on our go-forward plans here in the coming months as well. As we move forward, we're focusing on optimizing the many assets we have. Modernizing Laker, which is our adjudication platform, leveraging our mail order and specialty pharmacy and continuing the strong growth of our cash card business.

As we move forward, we're focusing on optimizing the many assets we have.

Modernizing Laker, which is our adjudication platform, leveraging our mail order and specialty pharmacy and continuing the strong growth of our cash card business.

All of which produced economics and growth in way beyond pure play membership increases. In addition to this growth, Elixir continues to build on its PBM operational capabilities to drive improved efficiencies. Great service and analytics to our customers. On the leadership front, we continue to bring in top talent. Last quarter, we know that Lance [inaudible] and joined the team as chief operating officer. For personal reasons, Lance was with us only briefly. We were able to quickly move forward and I'm happy to announce that [inaudible] Paul has joined our team as our new COO.

In addition to this growth elixir continues to build on its PGM operational capabilities to drive improved efficiencies.

Great service and analytics to our customers.

On the leadership front, we continue to bring in top talent last quarter, we know that that landscape and joined the team as chief operating officer for personal reasons Lance was with US only briefly we were able to quickly move forward and I'm happy to announce that Paul has joined our team as our new.

C O L.

And Chris is on the phone with us today. Chris comes to us with many years of experience, particularly at [CVS], where he led the $4.5 billion clinical products and services business. He also led the development and management of healthcare products and services across the [CVS] retail pharmacy emptied the EMS business unit were very excited to add Chris to the Elixir team. In addition to Chris, we recently recruited a seasoned healthcare executive across key functional areas within Elixir and brought on a new CFO, who has significant healthcare experience.

Chris comes to us with many years of experience, particularly at Cvs, where he led the $4 $5 billion clinical products and services business.

He also led the development and management of healthcare products and services across the Cvs retail pharmacy emptied the EMS business unit were very.

Very excited to add Chris to deal with <unk> and.

In addition to Chris.

Recently recruited a seasoned healthcare executive across key functional areas within I'll, let Sarah and brought on a new CFO, who has significant health care experience.

And we have recently assembled a very strong season sales team aligned to all of our key target market segments. These new hires are critical to Elixir. However, we are maintaining our synergies across the organization. On our prior integrations in HR, IT, legal and within our finance organization.

New hires are critical to elixir. However, we are maintaining our synergies across the organization.

Our prior integrations and HR, it legal and within our finance organization.

And we are continuing our focus on driving lean processed synergy and principles across the enterprise. We have seen measurable results in several areas, including implementations and customer care and we are now institutionalizing our lean efforts as we continue to focus on expense management.

<unk> processed synergy and principles across the enterprise.

We have seen measurable results in several areas, including implementations and customer care and we are now institutionalizing our lean efforts as we continue to focus on expense management.

Lastly, we have a formal rollout of a more targeted go to market strategy for market segments where we have a right to win. Particularly in the health plans, health systems, employer groups over a thousand lives, labor, and public sector lines of business. We're encouraged by our recent momentum and believes Elixir can win its fair share of business during the 2023 selling season, and then the years to come. But the proof will be in the pudding so to speak. I remain optimistic.

We're encouraged by our recent momentum and believes elixir can win its fair share of business. During the 2023 selling season, and then the years to come.

But the proof will be in the pudding so to speak I remain optimistic.

So overall for our business, we are relentlessly focused on three things. Growing our business, reducing cost and improving our leverage ratio all of which we believe will drive shareholder value. To that end, as we announced this morning, we are rigorously assessing our store base and executing our store closure plan to reduce costs, drive improved profitability and sure. We have a healthy foundation to grow our omni pharmacy including the right stores and the right location for the communities we serve and for our businesses.

Growing our business, reducing cost and improving our leverage ratio all of which we believe will drive shareholder value.

To that end as we announced this morning, we are rigorously assessing our store base and executing our store closure plan to reduce costs drive improved profitability and sure. We have a healthy foundation to grow our army pharmacy farm.

Including the right stores and the right location for that.

Communities, we serve and for our businesses.

We've identified 63 stores for closure that we expect to provide an annual EBITDA benefit of approximately $25 million. This review will continue and we would anticipate this closure number and related EBITDA benefit to grow as we finalize these efforts over the next several months. The decision to close our stores is one we take very seriously as we evaluate the impact on our associates, our customers and our communities.

This review will continue and we would anticipate this closure number and related EBITDA benefit to grow as we finalize these efforts over the next several months.

The decision to close our stores one we take very seriously as we evaluate the impact on our associates, our customers and our community first.

First and foremost, we work hard to ensure the transfer of prescriptions is automatic and seamless for our customers and that all of their prescription needs are met. Importantly associates impacted by these store closures are being offered the opportunity to transfer to another store. These tough decisions allow us to ensure our company continues to thrive and provides us the opportunity to continue to invest in and drive omni pharmacy strategy. And now I'll turn it over to Jim for some comments on our retail pharmacy segment.

These tough decisions allow us to ensure our company continues to thrive and provides us the opportunity to continue to invest in and drive omni pharmacy strategy.

And now I'll turn it over to Jim for some comments on our retail pharmacy segment Tim.

Thank you and good morning, everyone. As Heyward noted, we are driving the next evolution of our strategy to truly bring our omni pharmacy capabilities to life. We also continue to prepare and adapt to the changing needs of our customers and communities and at the same time focus on delivering strong results for our shareholders.

As noted we are driving the next evolution of our strategy to truly bring our omni pharmacy capabilities to life.

We also continue to prepare and adapt to the changing needs of our customers and communities and at the same time focus on delivering strong results for our shareholders.

And before I jump into our quarterly results, I'd like to also recognize the incredible and tireless work of all our associates and in particular, our frontline teams and pharmacists, who are working around the clock to provide the care and support our communities desperately need. Now, let me talk through our solid third-quarter results. We grew our business, including 7.9% growth at retail and increased our adjusted EBITDA by 12.7%.

I'd like to also recognize the incredible and tireless work of all our associates and in particular, our frontline teams and pharmacists, who are working around the clock to provide the care and support our communities desperately need.

Now, let me talk through our solid third quarter results, we grew our business, including seven 9% growth at retail and increased our adjusted EBITDA by 12, 7%.

During the quarter, we administered nearly 4 million COVID vaccines, and we conducted over 1.1 million COVID tests. This brings our total vaccines delivered since we began administering COVID-19 vaccines to nearly 11.6 million and the total test administered to over 4.5 million as of the end of the third quarter. As a result of our COVID vaccine program, we have successfully converted nearly 300,000 new customers who are now filling approximately 800,000 new prescriptions at Rite Aid.

This brings our total vaccines delivered since we began administering COVID-19 vaccines to nearly $11 $6 million and the total test administered to over $4 5 million as of the end of the third quarter.

As a result of our Covid vaccine program, we have successfully converted nearly 300000, new customers who are now filling approximately 800000, new prescriptions at Rite aid.

As we look at our pharmacy results overall. We grew our 30 day adjusted comp scripts by 7.9% in the quarter. In addition, maintenance scripts grew approximately 1.7% for the quarter. And when excluding vaccines, we saw acute scripts increased 3.9%. During the quarter, we administered 2.1 million flu shots. In addition, we administered nearly 278,000 ancillary vaccines for 43% sequential increase versus our last quarter.

We grew our 30 day adjusted comp scripts by seven 9% in the quarter.

In addition, maintenance scripts grew approximately one 7% for the quarter.

And when excluding vaccines, we saw acute scripts increased three 9%.

During the quarter, we administered $2 1 million flu shots. In addition, we administered nearly 278000 ancillary vaccines for 43% sequential increase versus our last quarter.

Our pharmacists and store teams did an incredible job in meeting an over 40% increase in pharmacy services this quarter due to the unprecedented demand for all vaccines and COVID testing. The ability to meet this incredible surge in pharmacy services in such a challenging labor market clearly demonstrates our work in lean principles to free up their time is paying off.

The ability to meet this incredible surge in pharmacy services in such a challenging labor market clearly demonstrates our work in lean principles to free up their time is paying off.

Looking ahead, we will continue to enhance our efforts around adherence through programs like first Phil, courtesy Refills 90-day conversion and compliance packaging. Each of these programs have historically shown the potential to deliver meaningful improvement in adherence rates with increases ranging from 9% to over 24%. We have an opportunity to improve our overall levels of adherence and this is particularly exciting as a 1% overall improvement in our adherence rates is worth over $20 million in pharmacy gross profit. We are excited to continue our efforts to truly unlock our pharmacist full potential to drive increased productivity and meaningfully improve the profitability of our stores.

Each of these programs have historically shown the potential to deliver meaningful improvement in adherence rates with increases ranging from 9% to over 24%.

We have an opportunity to improve our overall levels of adherence and this is particularly exciting as a 1% overall improvement in our adherence rates is worth over $20 million in pharmacy gross profit.

We are excited to continue our efforts to truly unlock our pharmacist full potential to drive increased productivity and meaningfully improve the profitability of our stores.

Now, let me turn to our retail and digital results. For the quarter, our front end comps, excluding tobacco were up 1%. We saw continued strength in our health categories, including upper respiratory pain care vitamins and diagnostics driven by take home COVID tests. We also experienced growth in the beauty departments in particular makeup and cosmetics as well as personal care. As we all know, we are operating in a high inflation environment. As we've seen, a number of our manufacturing partners increased their cost of goods to us, we strategically adjusted our pricing applying learnings from our partnership with dunnhumby to identify which products and price points are crucial to driving customer loyalty and profitable growth. And always with a focus on ensuring that we maintain the competitive position in the marketplace.

For the quarter, our front end comps, excluding tobacco were up 1%.

We saw continued strength in our health categories, including upper respiratory pain care vitamins and diagnostics driven by take home Covid tests.

We also experienced growth in the beauty departments in particular makeup and cosmetics as well as personal care.

As we all know we are operating in a high inflation environment.

We've seen.

A number of our manufacturing partners increased their cost of goods to us we strategically adjusted our pricing applying learnings from our partnership with <unk> to identify which products and price points are crucial to driving customer loyalty and profitable growth.

And always with a focus on ensuring that we maintain the competitive position in the marketplace.

We continue to experience ongoing supply challenges that are impacting our in-stock rates and we are working to adjust as needed to mitigate any meaningful risks. In addition, the labor market continues to be pressured as well. As we have stated previously we are addressing these challenges by investing in wages for associates, while also launching a new digitally-enabled recruiting platform. But important to note it's more than just wages, we're also providing enhanced training and differentiated career development opportunities for our associates.

In addition, the labor market continues to be pressured as well.

As we have stated previously we are addressing these challenges by investing in wages for associates, while also launching a new digitally enabled recruiting platform.

But important to note it's more than just wages, we're also providing enhanced training and differentiated career development opportunities for our associates.

Finally, on the front end, we continue to see improvement in our inventory turns with another quarter of 7% growth. We are also continuing to make exciting progress on our digital initiatives with total digital revenue growing 75% versus last year, including 253% growth in our marketplace and delivery businesses. We expanded with Uber eats and post made this quarter and saw express delivery transactions grow nearly 900%.

We are also continuing to make exciting progress on our digital initiatives with total digital revenue growing 75% versus last year, including 253% growth in our marketplace and delivery businesses.

We expanded with Uber eats and post made this quarter and saw express delivery transactions grow nearly 900%.

In addition, the team has completed our national rollout of buy online pickup at store in October as part of our plan to evolve the digital channel to meet our customers' ever-changing needs through enhanced convenience. Collectively, this has led to a 10% quarter over quarter increase in the number of known customers, who interact with us digitally in the quarter.

Collectively this has led to a 10% quarter over quarter increase in the number of known customers, who interact with us digitally in the quarter.

We continue to expect our digital enhancements to have a halo effect across the rest of our business. Attracting new customers, driving bigger basket sizes, increasing product availability, enhancing overall consumer experience and improving sales across our chain. In closing, we delivered a strong quarter and increased profitability that beat expectations. Thanks to the energy, passion, and commitment of our teams. We are confident that we can continue to deliver on our strategy build relevance and gain market share both today and in the future. Thank you. And with that, I'd like to turn it over to Matt for some comments on our financial performance.

Attracting new customers driving bigger basket sizes, increasing product availability.

Enhancing overall consumer experience and improving sales across our chain.

In closing, we delivered a strong quarter and increased profitability that beat expectations.

Thanks to the energy passion and commitment of our teams. We are confident that we can continue to deliver on our strategy build relevance and gain market share both today and in the future.

Thank you. And with that, I'd like to turn it over to Matt for some comments on our financial performance.

I'd like to turn it over to Matt for some comments on our financial performance.

Thanks, Jim and good morning, everyone. Looking at our quarterly results, revenues were up $111.8 million or 1.8% from the prior year's third quarter. Driven by growth at the retail pharmacy segment, partially offset by a decline at the pharmacy services segment. Third-quarter net loss was $36.1 million or 67 cents per share. Compared to last year's third quarter, net income of $4.3 million or 8 cents per share.

Looking at our quarterly results revenues were up $111 $8 million or one 8% from the prior year's third quarter.

Driven by growth at the retail pharmacy segment, partially offset by a decline at the pharmacy services segment.

Third quarter net loss was $36 $1 million or <unk> 67 per share.

Compared to last year's third quarter, net income of $4 3 million or <unk> <unk> per share.

Current year's net loss was significantly impacted by a noncash facility exited an impairment charge of $47.5 million driven primarily by our store closure decisions. Adjusted net income was $8.2 million or 15 cents per share versus an adjusted net income of $21.6 million or 40 cents per share for the prior year's quarter.

Adjusted net income was $8 $2 million or <unk> 15 per share versus an adjusted net income of $21 $6 million or <unk> 40 per share for the prior year's quarter.

Adjusted EBITDA for the quarter was $154.8 million, an increase of $17.4 million or 12.7% over the prior year's results of $137.4 million. Retail EBITDA increased $37.3 million due to increased script count. Offset somewhat by increases in SG&A to support that script count growth. Pharmacy services segment adjusted EBITDA decreased $19.9 million due to a reduction in revenues and gross margin rate.

Retail EBITDA increased $37 $3 million due to increased script count.

Offset somewhat by increases in SG&A to support that script count growth.

Pharmacy services segment, adjusted EBITDA decreased $19 $9 million due to a reduction in revenues and gross margin rate.

Now, let's discuss the key drivers of operating results and our business segments. Retail pharmacy segment revenue for the quarter was $4.4 billion. Which was $322.9 million higher or an increase of 7.9% over last year's third quarter. Due to an increase in same-store sales and the inclusion of the newly acquired [Martel] stores. Retail pharmacy same-store sales increased 4.4%. With same-store prescription count of 7.9%.

Retail pharmacy segment revenue for the quarter was $4 4 billion.

Which was $322 $9 million higher or an increase of seven 9% over last year's third quarter.

Due to an increase in same store sales and the inclusion of the newly acquired <unk> stores.

Retail pharmacy same store sales increased four 4%.

With same store prescription count of seven 9%.

Our prescription count increase was driven by the administration of 4 million COVID vaccines slightly offset by a reduction in flu immunizations. Front end same-store sales, excluding cigarettes, and tobacco products increased 1%. The increase in front end same-store sales was driven by good performance in our health categories, including upper respiratory take home COVID test and vitamins somewhat offset by a reduction in alcohol sales during the quarter.

Front end same store sales, excluding cigarettes, and tobacco products increased 1%.

The increase in front end same store sales was driven by good performance in our health categories, including upper respiratory take home Covid test and vitamins somewhat offset by a reduction in alcohol sales during the quarter.

Third-quarter retail pharmacy segment, adjusted EBITDA was $125.9 million or 2.8% of revenues compared to last year's third quarter, adjusted EBITDA of $88.6 million or 2.2% of revenues. Retail gross profit and an adjusted EBITDA basis was $172 million higher and 190 basis points better as a percent of sales. COVID vaccination in testing demand was the main driver of the variance aided by an improvement in front end margin due to good markdown management.

Retail gross profit and an adjusted EBITDA basis was $172 million higher and 190 basis points better as a percent of sales.

Covid vaccination in testing demand was the main driver of the variance aided by an improvement in front end margin due to good markdown management.

This increase was partially offset by reimbursement rate pressure. Retail pharmacy expense and adjusted EBITDA, SG&A basis was $134.8 million higher than 130 basis points higher than last year's third quarter. The increase in SG&A dollars was primarily due to incremental payroll costs to support COVID immunization, increases and bonus expense for store field and corporate associates, increases in workers compensation cost, slightly in the benefit from the prior year change to modernize our associate PTO plans in the inclusion of the [Martel] related expenses.

Retail pharmacy expense and adjusted EBITDA.

SG&A basis was $134 $8 million higher than 130 basis points higher than last year's third quarter. The.

The increase in SG&A dollars was primarily due to incremental payroll costs to support Covid immunization increases and bonus expense for store field and corporate associates increases in workers compensation cost slightly.

benefit from the prior year change to modernize our associate PTO plans in the

inclusion of the [Martel] related expenses.

I'll now shift to our pharmacy services segment, Elixir. For the third quarter, Elixir saw revenues declined $226 million or 10.8% to $1.9 billion due to a planned reduction in our Elixir insurance membership. A decline in member utilization in the Elixir insurance business and a previously announced client loss.

For the third quarter Elixir saw revenues declined $226 million or 10, 8% to $1 9 billion due to a planned reduction in our elixir insurance membership decline.

A decline in member utilization in the Elixir insurance business and a previously announced client loss.

Elixir's third quarter, adjusted EBITDA was $28.9 million or 1.6% of revenues the decrease over last year's third quarter, adjusted EBITDA of $48.8 million or 2.3% of revenues. The decreases in adjusted EBITDA as a result of the loss in lives and related earn rebates and an increase in the medical loss ratio. G&A expense improved a reduction due to a reduction in payroll costs.

The decreases in adjusted EBITDA as a result of the loss in lives and related earn rebates and an increase in the medical loss ratio.

G&A expense improved a reduction due to a reduction in payroll costs.

I'll now turn to our cash flows. Our cash flow statement for the quarter shows a use of cash from operating activities of $3 million compared to a source of $223 million last year. The difference is primarily due to an increase in our CMS receivable of $168 million over the last year's third quarter and added $140 million increase in receivables related to COVID vaccines and testing. We've had some differences in the timing of our CMS receivable sales program in the current year, but expect to sell the remainder of the 2021 CMS receivable before the end of our fiscal year.

Our cash flow statement for the quarter shows a use of cash from operating activities of $3 million compared to a source of $223 million last year.

The difference is primarily due to an increase in our CMS receivable of $168 million over the last year's third quarter and added $140 million increase in receivables related to Covid vaccines and testing we've had some differences in the timing of our CMS receivable sales program in the current year, but expect to sell the remainder.

Of the 2021 CMS receivable before the end of our fiscal year.

In addition, we still expect to generate approximately $80 million of working capital benefit in fiscal 2022 from continued inventory reduction initiatives. We are tracking ahead of our initiatives to reduce front end in inventory, but has seen a slight pickup in pharmacy inventory and a slight increase in pharmacy inventory as prescription demand has picked up. Cash used in investing activities was $27 million for the quarter. We completed nine store sale leaseback transactions that generated total proceeds of $25.6 million in the quarter.

We are tracking ahead of our initiatives to reduce front end in inventory, but has seen a slight pickup in pharmacy inventory and a slight increase in pharmacy inventory is prescription demand has picked up.

Cash used in investing activities was $27 million for the quarter. We completed nine store sale leaseback transactions that generated total proceeds of $25 $6 million in the quarter.

We currently own 111 of our stores. Some of which are candidates for additional sale-leaseback transactions. Our net debt balance was $3 billion at the end of the quarter and we had $1.6 billion in liquidity. We expect our leverage ratio to be around 5.5 times at fiscal year-end when we cycled the impact of prior year's fourth quarter on the leverage ratio calculation.

Our net debt balance was $3 billion at the end of the quarter and we had $1 6 billion in liquidity.

We expect our leverage ratio to be around five five times at fiscal year end, when we cycled the impact of prior year's fourth quarter on the leverage ratio calculation.

Now before turning to our updated guidance, I'll quickly comment on the universal shelf filing that we made during the quarter. We filed a new shelf registration statement with the SEC to provide us with the flexibility to access the capital markets, if and when we desire. Most public companies have an effective shelf registration statement for this very purpose. In our previous shelf registration statement had expired. If we were to conduct an offering pursuant to the registration statement, we will file a prospectus supplement for that transaction.

We filed a new shelf registration statement with the SEC to provide us with the flexibility to access the capital markets, if and when we desire.

Most public companies have an effective shelf registration statement for this very purpose.

In our previous shelf registration statement had expired.

If we were to conduct an offering pursuant to the registration statement, we will file a prospectus supplement for that transaction.

Now, let's turn to our updated guidance for fiscal 2022. As a result of the momentum we're seeing in our third quarter and our expectation for an increase in demand for COVID-19 vaccines and testing versus our prior expectations. We are raising our adjusted EBITDA guidance. Adjusted EBITDA is expected to be between $500 million and $520 million for fiscal 2022 compared to our previous guidance of between $460 million and $500 million.

As a result of the momentum we're seeing in our third quarter and our expectation for an increase in demand for COVID-19 vaccines and testing versus our prior expectations. We are raising our adjusted EBITDA guidance.

Adjusted EBITDA is expected to be between $500 million and $520 million for fiscal 2022 compared to our previous guidance of between $460 million and $500 million.

We are lowering our revenue guidance driven by expected results in our pharmacy services segment. This guidance change is driven by reductions in our part D revenues for calendar 2022, and the loss of a health plan client effective January one 2022. Total revenues are expected to be between $24.4 billion and $24.7 billion in fiscal 2022. Pharmacy services segment revenue is expected to be between 7.1 and $7.2 billion.

This guidance change is driven by reductions in our part D revenues for calendar 2022, and the loss of a health plan client effective January one 2022.

Total revenues are expected to be between $24 4 billion and $24 $7 billion in fiscal 2022.

Pharmacy services segment revenue is expected to be between seven one and $7 2 billion.

Net loss is expected to be between $189 million and $230 million. And capital expenditures are expected to be approximately $275 million. With a focus on investments in our store base, followed by purchases digital and technology initiatives at both Rite Aid and Elixir. Finally, while we plan to share more details with you during our fourth-quarter earnings call, I want to provide some initial thoughts regarding fiscal 2023.

And capital expenditures are expected to be approximately $275 million.

With a focus on investments in our store base, followed by purchases digital and technology initiatives at both Rite aid and elixir.

Finally, while we plan to share more details with you during our fourth quarter earnings call I want to provide some initial thoughts regarding fiscal 2023.

Currently, we expect benefits from COVID vaccines next year, however, at a reduced level of about 40% of current year levels. We also expect some moderate modest benefited from COVID testing but less than what we've seen in the current year. We recognize the headwind that the expected reduction in COVID-19 related benefits is the fiscal 2023. We expect benefits from several areas to offset this gap, including cost reductions from our store closure program, which we expect to contribute benefits in excess of the $25 million run rate benefit that we will get from the 63 closures already approved. Improvements in front end margin from the launch of a new loyalty program and expansion of our own brands.

We also expect some moderate modest benefited from Covid testing the <unk>.

And what we've seen in the current year.

We recognize the headwind that the expected reduction in COVID-19 related benefits as the fiscal 2023.

We expect benefits from several areas to offset this gap, including <unk>.

reductions from our store closure program, which we expect to contribute benefits in excess of the $25 million run rate benefit that we will get from the 63 closures already approved. Improvements in front end margin from the launch of a new loyalty program and expansion of our own brands.

Improvements in front end margin from the launch of a new loyalty program and expansion of our own brands.

Improved PBM margins from our new rebate aggregation agreement. Progression toward more normalized levels of acute script activity in the pharmacy. And operating expense efficiencies from further back-office consolidation in our retail and pharmacy businesses and continuing to leverage lean. While we are still in the process of finalizing our detailed fiscal 2023 plan. We expect these initiatives result in fiscal 2023, adjusted EBITDA that is significantly above current analysts' average estimates of $430 million. We will provide further details and formal fiscal 2023 guidance during our fourth-quarter earnings call in April. This completes our prepared remarks. [DeShandra], could you please open the phone lines for questions?

Progression toward more normalized levels of acute script activity in the pharmacy.

And operating expense efficiencies from further back office consolidation, and our retail and pharmacy businesses and continuing to leverage lean.

While we are while we are still in the process of finalizing our detailed fiscal 2023 plan. We expect these initiatives result in fiscal 2023, adjusted EBITDA that is significantly above current analysts' average estimates of $430 million.

We will provide further details and formal fiscal 2023 guidance during our fourth-quarter earnings call in April. This completes our prepared remarks. [DeShandra], could you please open the phone lines for questions?

This completes our prepared remarks, the Shandra could you. Please open the phone lines for questions.

Thank you, sir. As a reminder, if you would like to ask a question simply press star then the number one in order to ask a question. Your first question comes from the line of George Hill of Deutsche Bank. Yes. Good morning, guys. Thanks for taking the question and Matt, I am probably going to pepper you with a couple. I guess the first one is you talked about the store closures which seem to be an immediate near term opportunity to improve [inaudible] for financial performance. I guess can you talk about what other stuff that you see this as really kind of is really able to be pulled forward, especially as we think about fiscal '23 as it relates to improving the company's near term financial performance?

Your first question comes from the line of George Hill of Deutsche Bank.

Yes. Good morning, guys. Thanks for taking the question and Matt I am probably going to Pepper, you with a couple I.

I guess the first one is you talked about the store closures which seem to be an immediate near term opportunity to improve [inaudible] for financial performance. I guess can you talk about what other stuff that you see this as really kind of is really able to be pulled forward, especially as we think about fiscal '23 as it relates to improving the company's near term financial performance?

Seem to be an immediate near term opportunity to improve <unk> financial performance I guess can you talk about what other stuff that you see this as really kind of is really able to be pulled forward, especially as we think about fiscal 'twenty three.

As it relates to improving the Companys near term financial performance.

Matt, I'll let you take that. Yeah, sure. I appreciate the question and touch on some of these in the script I will just kind of, repeat them again for emphasis. But certainly, the store closure program is a big is one of the drivers and 63 is the number we've agreed on. We've announced so far. I still don't have a full number that will result from the program. But we do expect probably more some more closures to come and some more benefit from that. On the PBM side. The rebate agreement that we've got with Prime is really going to enable us to not only deliver more value to our clients, which is the most important thing, but it is going to enable us to expand our margins at the PBM. We do with our omni, with, in the front end really have I think some really good opportunities in the front end margin on the front end margin side, as well as the front end sales, increased side around. With the changes are going to make to our loyalty program. As well as continue to own brand penetration and then. The final thing I would highlight is just really going be taking a hard look at some of our back-office expenses. And continue to drive some additional operational efficiencies. And I think all of that kind of sets us up for additional value drivers in 2023 and kind of in addition to some of the omnichannel pharmacy initiatives that Hayward talked about in her opening.

Yeah.

Repeat them again for emphasis but certainly the store closure program is a big is one of the drivers and 60.

63 is the number we've agreed on we've announced so far I still don't have a full number that will result from the program. We do expect probably more some more closures to come and some more benefit from that. <unk>. On the Pbms side. The rebate agreement that we've got with. Prime is really going to enable us to do. Not only deliver more value to our clients, which is the most important thing, but it is going to enable us to expand our margins at the PVM.

<unk>.

On the Pbms side.

The rebate agreement that we've got with.

Prime is really going to enable us to do.

Not only deliver more value to our clients, which is the most important thing, but it is going to enable us to expand our margins at the PVM.

We do with our omni.

With.

In the front end really have I think some really good opportunities in the front end margin on the front end margin side as well as the front end sales increased side around.

Continue.

The changes are going to make to our loyalty program.

As well as continue to own brand penetration and then.

Final thing I would highlight is just really going be taking a hard look at some of our back office expenses.

And continue to drive some additional operational efficiencies. And I think all of that kind of sets us up for additional value drivers in 2023 and kind of in addition to some of the omnichannel pharmacy initiatives that Hayward talked about in her opening.

Additional value drivers in 2023 and kind of in.

In addition to some of the Omnichannel pharmacy initiatives in Hayward talked about in her opening.

Okay, and then I guess a couple more quickly. I guess number one is can you talk about what is in the assumptions as it relates to closing for fiscal Q4? And then my follow on for that would be it looks like if you back out the kind of the COVID contribution for calendar '21. It looks like the companies that run rate of the core business. Is call it 2.75 to 3.25 ish. Would love it if you could kind of outline in broad strokes kind of you. <unk> laid out the pieces, but would love you to kind of rank order, where if you can kind of broad stroke kind of that 325 ish number to the 430ish number would be super helpful.

Couple more quickly I guess number one is can you talk about what is in the assumptions as it relates to closing.

Fiscal Q4, and then my follow on for that would be it looks like if you back out the.

Kind of the Kobe contribution for calendar 'twenty one.

It looks like the companies that run rate of the core business.

Is call it.

Two $2 75 to $3 25 ish would love it.

If you could kind of outline in broad strokes kind of you.

<unk> laid out the pieces, but would love you to kind of rank order, where if you can kind of broad stroke kind of that 325 ish number to the $4 30 ish number would be super helpful.

Well, let me kind of I guess start with your second question and I'll get to the Q4 assumptions. First all off. The math you're doing I think the one thing you've got to keep in mind, there is that and as we said this before, the COVID vaccine has clearly been a benefit we're still not seeing acute scripts at the level that we saw pre-pandemic. And so when I think about the run rate of the business I think about needing to kind of getting back to a level, where we're really getting acute to where they were pre-pandemic. I think the second thing is I don't think we see a world without COVID vaccines. This is going to become another immunization and other clinical support function in our farming give and so as we said and I said in the comments, that's why we would expect the COVID vaccines next year to be at a 40% level of this year and not go into like a zero level.

The math, you're doing I think the one thing you've got to keep in mind, there is that and as we said this before the Covid vaccine.

That's clearly been a benefit we're still not seeing acute scripts at the level that we saw pre pandemic and so when I think about the run rate of the business I think about.

to kind of getting back to a level, where we're really getting acute to where they were pre-pandemic. I think the second thing is I don't think we see a world without COVID vaccines. This is going to become another immunization and other clinical support function in our farming give and so as we said and I said in the comments, that's why we would expect the COVID vaccines next year to be at a 40% level of this year and not go into like a zero level.

Immunization and other clinical support function in our farming give and so as we said and I said in.

In the comments, that's why we would expect the Covid vaccines next year to be at a 40% level of this year and not go into like a zero level.

So I think that's another really important thing to think about, George. Far as kind of ranking the items for 2023, I think more to come on that with the guidance in April I don't want to get too far ahead of getting our formal guidance out there. The other thing just to clarify as you mentioned the $4 30 number and That's where analysts' estimates are today just to be clear, we expect our numbers next year to be significantly above that 430 number for fiscal '23. The last question I'll get to is you asked about COVID-19 assumptions for the fourth quarter. We are expecting continued demand for booster shots, but I would say at a level that is less than what we saw in Q3.

Far as kind of ranking the items for 2023, I think more to come on that with the guidance in April I don't want to get too far ahead of.

Getting our formal guidance out there the other thing just to clarify as you mentioned the $4 30 number and Thats, where analysts' estimates are today just to be clear, we expect our numbers next year to be significantly above that $4 30 number for fiscal 'twenty three.

The last question I'll get to is you asked about COVID-19 assumptions for the fourth quarter. We are expecting continued demand for booster shots, but I would say at a level that is less than what we saw in Q3.

That's super helpful. Thank you. The one thing I will comment on is. And thanks George is that as a reminder, we were in the market shut down in the early days of COVID and that's when we saw the significant courting front end and that's when we saw the drop to zero on acute. And it's also when we started very impactful and on the forefront of most of the country doing vaccines. And what we're spending right now in New York City is all of the above. People are still going to the doctor. They are now running to get booster shot. And they are getting tested. So the scenario, where this really does go on for quite a long period of time. There are things that we are encouraged about is that we don't think the people will stop going to the doctor or stop going to school at least on a regular basis, especially for the younger kids, who really are [inaudible]. And we are seeing so much activity around the [inaudible] going on as well.

The one thing I will comment on his tender.

And thanks George is that.

As a reminder, where we were in the market shut down in the early days of Covid and that's when we saw the significant courting.

Front end and that's when we.

Got it.

The drop to zero on acute.

And it's also when we started very impactful and on the forefront.

The country doing vaccines.

At what we're spending right now in New York City is all of the above.

Going to the Doctor.

They are now.

Booster shot.

They are getting tested.

So there.

Yes.

A scenario, where this really does go on for quite a long period of time.

There are things that we are.

Are encouraged about that.

The people.

Doctor or stop going to school at least on a regular basis, especially for the younger kids, who really are super spec.

And we are seeing so much activity around the [inaudible] going on as well.

And we are seeing so much activity around the nonsense.

Going on as well.

That's super helpful. Thank you. Your next question comes from the line of Lisa Gill of JPMorgan. Hi. Thank, very much, good morning. Just to go back to that comment around our acute prescriptions and your thoughts. You and Matt kind of highlighted that we're not back to pre-pandemic levels, how do we think about profitability for an acute script first is a COVID-19 vaccine? I mean, just based on the numbers that you've talked about, it seems that the COVID vaccines are actually more profitable than the acute script count will it really be a one for one offset if we do see scripts come back in 2022?

Okay.

Factory.

Your next question comes from the line of Lisa Gill of Jpmorgan.

Hi, Thanks, very much good morning.

Just to go back to that comment around our key prescriptions and your thoughts that.

That sounds kind of highlighted that we're not back to pre pandemic levels, how do we think about profitability for.

And acute script first is a COVID-19 vaccine I mean, just based on the numbers that you've talked about it seems that the current vaccines are actually more profitable than the acute script count will it really be a one for one offset if we do see scripts come back and 2022.

Yes, Lisa, I'll jump in and start. And thanks for the question. No, I don't think it's a one for one offset and I apologize if my answer implied that. The reason I bring up that acute stricture still kind of depressed level was just the idea of when people try to do their math around whatever our pre-COVID-19 run rate. Or without COVID run rate ends up being which again, I think the math really needs to be around what do things look like when you get more of an endemic level. As opposed to thinking kind of a with and without COVID altogether. Now what I would say about acute scripts is that their profitability is lesson immunizations.

For the question no I don't think its a one for one offset and I apologize if my answer implied that.

The reason I bring up that acute stricture still kind of depressed level was just the idea of when people try to do their math around whatever our pre COVID-19 run rate.

Or without Covid run rate ends up being which again.

I think the math really needs to be around what does what do things look like when you get more of an endemic level.

As opposed to thinking kind of a with and without Covid altogether now what I would say about acute scripts is that their profitability is as lesson immunizations.

But it's better than maintenance scripts, because acute scripts typically tend to track more generic which are more profitable as well. So there is a, when you have to kind of pull out all the immunization activity and look at the business from maintenance versus acute scripts. The more you skew maintenance typically the less you get less profitability you yet because the maintenance scripts tend to skew a little bit more brand and the COVID-19 skew a little bit more generic.

When you have to kind of pull out all the immunization activity and look at the business from a from a maintenance from a maintenance versus acute scripts. The more you skew maintenance typically the less you get less.

A less profitability you yet because the maintenance scripts.

Tend to skew a little bit more brand and the COVID-19 skew a little bit more generic.

I think that's very likely forever in our lifetime [inaudible] COVID vaccine. So I think that in the future. That's a future where we go on [inaudible] will probably going to get one or two, I think two a year. [inaudible] on a normal basis, which helps us with a balance of profitability on the medication side of the business. And just what I would call a much more enhanced awareness around the testing and prevention now I just don't think that it will ever go back to the way it was. So that's the [inaudible].

I think that's fair.

Very likely forever in our lifetime.

Once or twice a year.

So I think that in the future.

Our future where we go on.

<unk>.

Okay.

And you are correct.

One or two.

As the market.

Right now the government funding now.

Got it.

Great.

Okay.

No.

Normal basis, which helps us with a balance of profitability on the medication side of the business.

And just what I would call a much more enhanced awareness around that.

I just don't think that it will ever go back to the way it was. So that's the [inaudible].

Prevention now I, just don't think that.

Paul.

Okay.

With that modeling.

Okay.

Sadly, Hayward, I think you're probably right. There has been talk about some kind of combination vaccine right. So maybe it's not two COVID vaccines, plus a flu vaccine, but maybe something more along the lines of combining them. So we'll have to watch and see what happens there. But I really want to ask a question around the PBM side, you talked about the new relationship with prime and you talked about the rebate aggregation. Just really a couple of questions for me one would be why not go to express scripts directly why go through Prime? And then secondly, when we think about the relationship with Prime, do you see incremental opportunities to work together beyond what you were doing on rebate aggregation? Well, first we actually put the entire book of business out to bid for all of their rebate aggregators that are in the market. So that included ESI included others that you would expect to be included. So the fulsome RFP and prime was the most competitive of all. That's why we chose Prime. We also I also really did. And we have a great relationship with ESI and others as well, but this was a competitive environment and Prime has the most fulsome deal for us. And I do think that there are some very interesting opportunities. The CEO and I have discussed this to further partner in some very interesting ways, which I can't get into now, but I do think when we look at all of the PBM relationship.

There has been talk about.

Some kind of combination.

Vaccine right. So maybe it's not Q combo vaccines, plus a flu vaccine, but maybe something more along the lines of combining them. So we'll have to watch and see what happens there.

But I really want to ask a question around the Pbms side, you talked about the new relationship with prime and he talked about.

The rebate aggregation just really a couple of questions for me one would be why not go to express scripts directly why go through Prime and then secondly, when we think about the relationship with Prime do you see incremental opportunities to work together beyond what were Youre Julien.

Aggregations.

Well first we actually put the entire book of business out to bid for all of their rebate aggregator.

That are in the market. So that included that included ESI included.

that you would expect to be included. So the fulsome RFP and prime was the most competitive of all. That's why we chose Prime. We also I also really did. And we have a great relationship with ESI and others as well, but this was a competitive environment and Prime has the most fulsome deal for us. And I do think that there are some very interesting opportunities. The CEO and I have discussed this to further partner in some very interesting ways, which I can't get into now, but I do think when

RFP and prime was the most competitive of all.

That's why we chose crime. We also we're also really did we.

We have great relationship with ESI and others as well, but this was.

The competitive environment.

I'm half full.

<unk> deal for Us and I do think that there are some very interesting opportunities.

And I have discussed.

Two to further partner with some very interesting ways, which I can't get into now, but I do think.

welook at all of the PBM relationship.

They are complicated and they are off to a fulsome and I do think that there. We continue to have opportunities to partner with other PBMs and I think we also would love to have an expanded relationship with [inaudible]. Great. And then my last question just on the PJM would be can you give us any indication as we think about calendar '22 around membership, whether additional Medicare part D lives. I know you've talked about shedding some membership, but how do we think about how you did and this year's selling season for Medicare part D?

Hi.

And then my last question just on the PJM would be can you give us any indication as we think about calendar 'twenty two around membership leather. Additionally.

additional Medicare part D lives. I know you've talked about shedding some membership, but how do we think about how you did and this year's selling season for Medicare part D?

For Medicare part D.

Well, are you talking about [inaudible]? Yes, yes. Yes, well, we purposefully shrunk that business, the medical loss ratio issues that we're having. So Matt you can comment on the specifics because they are included for one one resolve. We see the expectation for next year is that our revenues and lives are going to be down from this year. It's a combination of as Heyward said, bidding in a different way for '22 and really trying to continue to hone our focus on med D lives, where we think we can be most profitable.

So Matt you can comment on the specifics because they are included for one one resolve.

See the expectation for next year is that our our revenues and lives are going to be down from this year. It's a combination of as Heyward said.

Bidding in a different way for 'twenty, two and really trying to.

Continuing to hone our focus on med D lives, where we think we can be most profitable and.

I think we did we are. Now, let me go jump in for a second. It's possible. [inaudible] probably not the term that we should use. We are running so hot on the medical loss ratio. This is a very tough business, if you aren't in this business as in Medicare advantage player or MATV player the economics of this business are very constraining. The government is hardly even funding Premiums anymore. Someone wanted to ask why is it even called a government program anymore. So it is not a good business for us. We've learned a lot from actually managing that business and we've been able to really support our health plan clients who have Medicare programs become five-star programs.

We did we are.

Now let me go sampling for a second.

It's possible.

Probably not but the term.

Sure.

We are running so hot on the medical loss ratio.

Very tough business, if you aren't in this business as in Medicare advantage.

Player or M ATV player the economics.

Business. They are very constraining the government is hardly even funding.

Premiums anymore.

Wanted to ask what you can call the government program anymore.

So.

It is not a good business for US we are.

We've learned a lot from actually managing that business and we've been able to really support our health plan clients, who have Medicare programs that come five star program.

Excellent job of managing costs and clinical for our part D customers. The one insurance business, where we are taking a risk is the one that we're struggling with elixir and Sean and we are purposefully shrinking.

And the membership.

To try to see if we can get into a cycle, where we're not running so hot on MLR, but I am I remain optimistic about that.

So we are looking at some alternatives.

<unk> 2003 cycle.

That's helpful. Thank you very much.

Okay.

Your next question and we wanted to grow our core.

Our core business.

Sorry go ahead okay.

Your next question comes from the line of Atwater Ron of Evercore.

Hey, how are you guys.

Thanks for taking the questions.

I guess, maybe if you could just speak a little bit too.

The full year guide the reduced <unk> revenue.

Clearly indicate about a step down of 300, maybe $400 million into Q4.

And unless you have January and February now so maybe just how we should think about.

The loss of this health plan contract and maybe should we run rate that into 'twenty three.

And then also how you would think about.

I guess, the EBITDA contribution as we think about the benefit of our clients, our Phoenix relationship and how that ramps from Q4 and full year 2014.

Well, let me just start by saying that we have as I mentioned earlier, we are purposefully shrinking our.

Elixir and shop.

Medicare part D. Membership. Therefore, we also purposefully shrinking that resonate because that revenue is not adding to our bottom line in a meaningful way.

The second thing and this is unfortunately that is the.

One of our.

One of our health plan clients.

Who was growing very rapidly got merged with another health plan and they did a rollout RFP that we went with the other incumbent which is one of the risks that we have when we get these health plan clients because so many of these health plans are getting rolled out right now.

And especially in the government programs business.

So.

We are the rebate.

Rebate contract.

He's going to help us offset the economics from that loss contract, but I wouldn't really so much that I can let Matt comment focus on the rest of the revenue loss because thats tied to a piece of business that is.

Essentially lana.

Hi medical loss ratio.

Clarify anywhere and I think you touched on all the all the key points. There I think when we get to the fourth quarter guidance, we'll give some more specifics about the puts and takes in kind of some more specific numbers around the PVM, but I do expect the.

We do expect to improve margin from.

The additional rebate contract to largely offset the impact of.

The loss of lives in the Med D and with the health plan planned client.

And then the focus of course is now the business that we're quoting on that I mentioned, where we've got 80% more rfps in the last few months and we got in the last two months of last year.

That's the business that we are starting to see success.

Successful way.

That business will largely be coming onboard during calendar year 2003, or four January one 2024.

So youre going to see the depth and then we are we.

We are hoping that we will continue to see strong momentum and start to see the business growing again outside of the part D business.

The elixir insurance business.

So I would really.

These two in your mind, because one is one that were shrinking and one side of the business is one that we're hoping but later in the year.

Perfect. That's helpful. And then maybe everything about the store closures and the $25 million of the annualized benefit.

I mean, I'm, assuming that 25 million doesn't benefit all of 'twenty three it would be more staggered.

It's going to be largely in 'twenty three I mean, we're actually.

These 63 stores or stores that we've made the decision on the process that actually started and we will and will be completed over the next several months so that that benefits should largely be all of it in 2023.

Is that what's driving the reduction in your Capex.

Yes, that's amazing amongst the 275, no I don't think Theres a correlation there theres plenty of stores left that we have to do capex work on and I think more to come in our 'twenty three guidance about how we're going to think about.

Staggering out remodels to the rest of the fleet.

That's not really the reason I think the reduction in Capex is more just around kind of timing of some of our technology spend and.

If I had my way, we'd be spending more money on file buys just very competitive kind of fall by market out there right now.

Thank you I appreciate it.

Your next question comes from the line of Gena Giannelli of Goldman Sachs.

Hi, there thanks for taking my question.

When you talked about some of the puts and takes as we look into 2023 I didn't hear much mention of that.

Attention mixed benefit I'm.

Im just temporary and cough cold and flu and higher elective procedure. It is the right way to think about it that.

I'll come back and kind of plus keeping some vaccine.

The question is really in good shape.

Yes.

Can we get back to peak EBITDA ex Colgate and why do we need to see to get there.

Well I think the first thing.

As I really really strongly believes that there's no ex COVID-19.

<unk>.

So yes.

<unk>.

Yes.

We can all debate that but there's no short time.

I don't think Theres any.

Any timing on that three to four years, if we're lucky that there is no COVID-19. So that's number one so the question is what what what do we think what do you think in terms of how you model that because at least skillset.

Even if there is not three COVID-19 shots a year.

So at least going to be one and so that's number one and I think COVID-19 testing is here to stay as well.

We're having very strong results on our health side of our business, whether it be OTC and the testing itself and.

And we are seeing a nice ramp back up in terms of the acute.

So I'll, let Jim and that talk about the specifics in terms of how you.

Model that out.

Yes, I'll, just add a little bit to what Heyward, you said, thanks, gena on the cold cough and flu.

Within health.

We just look at upper respiratory which includes that analogies were up 34% Q3 year over year, which I think signals are strong.

Pathway back to levels that we saw pre COVID-19 and 2020.

That correlates that's over the counter that correlates as well on the script side for cough cold and flu, where we've also seen a strong REIT.

Turn not all the way back, but a strong trend to get us much closer to where we had been in 2020 fiscal year 'twenty. So I think that's that's all positive signs that give us comfort that what we expect in the.

The guidance range it Matt provided for earlier is.

Certainly achievable, we also have diagnostics, which is an emerging category for us, but given the advent of COVID-19 and the need for all diagnostic tests I mean, we've been up 100%.

Just year over year when these kids didn't exist.

So I do think that to your specific question. We are on the return and we think that that trajectory will continue.

Yeah, and I think the other thing is that you got.

Anyone who's got kids or firms with kids are or even my own husband, there was a horrible respiratory virus going around and there is a very bad cold going around my husband is hacking away as we see an excellent fit for like 90 days. So there it's not the COVID-19 with Hercules.

Right now it's these other viruses and so we are seeing people really you know go back out and go back to school and then they're becoming the Super Spreaders of this other stuff, which does really generate a great business for us.

That's helpful Hayward, they're seeing the same thing on my.

They're super agile.

Yes.

So the kids could be back at the World. It's also good for our business.

I have one more if I, if I can handle that.

And just on.

The strategic priority of growing the business, reducing costs and improving leverage I guess on that point with the goal of reducing leverage any sort of parameters on what parameters you can have around that weather.

Again, it timeframe kind of the key tools you have to get there at this point.

Thank you.

Yeah.

One of the things when I came to this company for the board was one of the most important thing for us to do as a company is to reduce leverage because that will give us the ultimate freedom and so you can see that we've taken significant steps over the last two years to do so whether it be securitizing, the CMS receivable answer.

Elixir insurance business or sale lease back.

Yeah.

So all the good work that Matt and his team have done to push out the debt and to buy back some bonds at a discount.

And.

Everything that we did including reducing about $280 million in working capital type of inventory. So we've made meaningful progress now we took a step back on it because we got so hard hit by the pandemic last year in the fourth quarter that impacted our EBITDA, but we're back on track and I'm feeling good.

About it and I think.

We're building out the plan to continue to incrementally pay down debt to improve our EBITDA and <unk>.

Use every opportunity we can to reduce working capital we still have a big target to do so this year and to also take opportunities like sale lease back, but it will be.

It will be incremental and I think it's the combination of all of the tools. It's not one big thing that we can do at this point because I am committed to.

Keeping rite aid, keeping elixir and growing that business organically as much as we can.

Yes.

Yes, Gena the one thing I would add is I think that the fact that we don't have any debt due until 2025.

Gives us the opportunity to find that right balance between generating some free cash flow to pay down debt, but also make any investments that we need to to grow this business because thats really the key to gaining leverage ratio down.

He is driving EBITDA growth here in the outer years.

Okay. Thanks, so much.

Thanks.

Your next question comes from the line of William Reuter Bank of America.

Good morning, I just have two so the first is on the store closure plan at Sao.

<unk> did you choose 63, because that was what seemed like a manageable number to go after right now and I guess.

If we were to look at the remainder of the stores, how many are losing money and what would be the EBITDA drag that the other unprofitable stores represent.

Bill I'll answer Bill. Thanks for your question, let me jump in first of all I'll answer the second part of your question first we're still kind of looking through the portfolio I think its more to come.

Sorry about that that was me.

No I think more to come in the fourth quarter on the on kind of the total scope of this we're still working through.

Our assessment, so I think more to come on.

The full dollar value in the full amount.

The only thing I'd add is I just want to be clear when when our new leadership team not so new anymore, but when we came together at Rite aid just over two years ago, we committed to strategically assessing the whole store base market by market and store by store, we bought martell in the Seattle market, we invested in Remodels across Boise, and the Virginia Beach markets.

And after careful and very thoughtful analysis, we were very excited to actually enter into the execution phase of this strategic store closure program. We certainly expect it will increase the vitality and strength of our core base.

Of our stores and it allows us frankly to concentrate investments on stores in markets that are poised for growth so more to come but this is something that we believe.

Is it is very strategic in nature.

And there is there is some level of just how much store do you need if you are an omni pharmacy. So for example in New York City. So to use New York City example, you have a company like capsule, who has a virtual pharmacy note stores just delivers the drugs all over the city.

So we do that ourselves.

We don't promote that we don't think about that maybe people don't think about that for us but from every pharmacy that we have in New York City, we can deliver to you in any of the five boroughs and you can order.

Prescription from us digitally on our App.

So.

The notion of omni pharmacy, that's what we're really getting at does not require that you have as much real estate, we do want to continue to have stores because people do want.

Many people do want to go to a store to engage with the pharmacist and to pick up other items, but we have seen so much growth in our delivery service that that leads us to believe this is a really a great opportunity.

Okay and then.

There's been a lot of discussion around the potential reduction in Covid vaccine administration, that's going to hurt profitability that should be offset I guess with increased coffee cold as that dynamic plays out over the next.

Year. So do you think that the some of the profitability or the reduction in vaccination will be offset more or less by the increase in sales of coffee cold.

Matt, Yes, no I wouldn't make a direct link between cough and cold being a direct offset for COVID-19 vaccines of Covid vaccines are pretty profitable, but I think what we tried to get across in our discussion about kind of an initial glimpse into 'twenty three is theres a lot of other factors.

In the business that are playing into 'twenty three than we think.

Kind of help us offset what we think is going to be.

The reduction of benefiting Covid vaccines next year.

Understood I appreciate the comments thank you.

Your next question comes from <unk> Martinson of Jefferies.

Good morning.

Glad to hear that you guys deliver here in New York City.

I guess that raises the question, though if you have the omni channel and pharmacy capabilities and the consumer doesn't know about them.

What do you need to do and what spend do you need to do to kind of take advantage of your 50 <unk> license.

Well, we have first let me say that.

It's too bad but people don't know that we do delivery, we actually have done a significant amount of advertising around our delivery service and Thats why we have seen a 900% increase.

And.

Some like the Uber eats in postpaid.

And we do use script dropped for pharmacy delivery I personally use it all the time and all of that and is the digital app and get everything paid for and delivered and I don't have to talk to anyone but I go in store to talk to the pharmacist when I have a concern and that one I like to engage.

So we have done.

Significant amount of advertising, we do have to continue to build awareness and you will hear a lot more about this in the coming months as we launch this new program and also.

We'll be able to access all 50 states, which by the way we do with our mail order facility now we do ship medications to all 50 states to our elixir members now we're going to come.

With a direct to consumer offering that we will share with you more about.

The economics of which are included in the comp.

Comments that Matt made about next year.

Okay, but the infrastructure behind it is in places is more of a question of getting the.

And play the mail order facility, the specialty pharmacy, and all of our digital Omnichannel delivery is all in place and has been up and running for over a year.

Okay.

And then when we look at the store closures are they geographically centered are you targeting certain markets.

Heard a lot about stores pulling back from San Francisco and others.

Or is this just a broad based.

Overall.

Tim why don't you comment on that as I mentioned earlier, we are looking at both we're looking at our full fleet of stores and you can imagine the ways that we may rank those in terms of where we focus first.

We also look at market to market because market dynamics are obviously important as well as it relates to reimbursement the presence of regional health plans competitive.

Environment et cetera. So our goal is really to maintain access and our communities and make sure that we're not over stored and look I think the benefit that we had as we came in as a new leadership team is to recognize that we did have an opportunity to rationalize the fleet and the way that provided a much stronger base from which we can.

Growth.

Okay, and then just lastly, looking at your guidance.

Sequentially certainly down in the fourth quarter from third quarter can you talk to what Youre seeing in terms of the seasonality that you guys normally have in the fourth quarter and help explain some of the variance there between third quarter to fourth quarter.

Yes, Chris its Matt I mean, the variance for three to four quarters, largely driven around Covid vaccination assumptions, we don't expect to do as many vaccinations in the fourth quarter as we do in the third I think from a seasonality standpoint, we're actually expecting a pretty solid cough cold and flu season, probably not as good as it was two years ago, but certainly a lot better.

Sure.

Alright, Thank you very much appreciate it.

We have time for one more question. Your next question comes from the line of Carla Casella of Jpmorgan.

Hi, just a couple of follow ups on prior questions.

So it's a full charge for the store closures does that taken in fourth quarter, while there'll be into I'm, sorry in third quarter will there be additional charges.

And fourth and in will some of that calendar first quarter next year.

So carla the charges for the 63 stores that we announced are included in this quarter.

Okay and did you say how much is cash versus noncash while the charges all noncash what'll happen is it.

That is that there'll be a reserve set up for that charge and then there will be an increase in basically R. R.

That rent charge that ran add back cash outflow that will will occur. This 63, we'll have a pretty nominal impact on that.

Okay.

And then the Capex.

Reduction is that a better run rate to use going forward or is that something you would scale as you grow EBIT dah and is that a pullback on wellness plus.

On Remodels.

Yes, the reduction is really more about just kind of timing and what we can spend this year and I would not use it say that it is definitely the run rate I mean, I think in an ideal kind of capex spend Karl I think wed like to see the number closer to around 300. Some of it gets to what can we what what's priorities what do we have staffing.

For what do we how do we kind of manage capex and manage to a free cash flow numbers. So we can pay down some debt, but but as we grow EBITDA.

I think a better run rate number to use is probably the starting point of 300.

Okay, and then just on the TVN that full year guide implies fourth quarter revenue from the TBM down about 20%.

What's driving it.

In that quarter specific or is there something timing related driving that quarter, specifically on the <unk> on a one one.

Timber 31 cycle for the vast majority of the business for news on one one as we mentioned earlier, our elixir insurance business. The part D business renewed on one one we purposefully.

Significantly reduced the membership in that business and that is one key driver in the second key driver is the commercial health plan client on the PVM that I talked about earlier that got rolled up.

Another.

Okay, Great and then one last follow up.

<unk>, how does that includes the full quarter.

I'm sorry, what was that growth was from small.

Included for the full quarter I'm, just trying to get to yes, we bought foretell we closed on martell in mid December of last year. So it's in this year's fourth quarter not in any of last year's quarter going forward is going to be in the numbers for both years.

Perfect. Okay, great. That's all I had thank you.

Thank you.

This concludes today's conference call as far as the question remarks, I will now turn the call back over to Heyward.

Thank you thanks, everyone for your questions.

Very exciting and we are.

We're so pleased with the quarter so the.

He asked about our future as we close the call I do I know everyone says.

I really do want to acknowledge these incredible associates, especially the.

The ones that are working in the stores and the distribution centers because of the incredible impact that not just the COVID-19 pandemic has had but frankly, what's happening now is we have so much volume because it's front end.

It is tied to cough cold its tied to test its tied to doing and administering our path, it's tied to administering not only flu vaccine, but COVID-19 vaccines and booster and other vaccines and now people are getting their medications. So our volumes are up.

<unk> percent and we're in the biggest labor.

Mark that crisis, since probably one or two as we all know that affects everyone in retail and in healthcare and I just I just want to acknowledge how hard. This work has been and also how purpose driven this work is because we know that our associates are among today's health care.

So it is my greatest privilege to work along with tremendous team.

And the team at elixir, as well and our corporate associates and I'm forever grateful for their passion and commitment to our company our customers and each other it's been an unbelievable two years.

Relatively launching the next evolution of our strategy in the fourth quarter and we're looking forward to a strong quarter and speaking with you all again.

Earnings call and I want to wish all of you a very safe.

Maybe not so healthy.

And happy holiday season.

Going to be quite quite a house.

Holiday seasons, So kester test hits your homecare keep us supply at home I do.

Make sure you use rite aid for all of US here over the counter prescription if you want them delivered just go onto our App and you can get that done and we.

Thank you all for your support.

Okay.

Yeah.

Q3 2022 Rite Aid Corp Earnings Call

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