Q4 2022 Rite Aid Corp Earnings Call
[music].
Good morning, My name is wrong and I will be your conference operator today.
At this time I would like to welcome everyone to the Rite Aid Corporation fourth quarter fiscal year 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number.
One on your telephone keypad, if you would like to withdraw your question again press the star one.
Byron Purcell Investor Relations you May begin your conference.
Thank you Robin and good morning, everyone. We welcome you to our fiscal 2022 fourth quarter earnings Conference call Heyward, Donigan, President and Chief Executive Officer, and Matt Schroeder Executive Vice President and Chief Financial Officer will begin the call with prepared remarks Andre Prasad.
Executive Vice President Chief Retail Officer, and Christopher <unk>, Chief operating officer of Elixir also during the call during the question and answer session.
As we mentioned in our release, we're providing slides related materials will be discussing today.
Slides are provided on our website investors stop rite aid Dot 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 risks and uncertainties that can cause actual results to differ these.
These risks and uncertainties are described in our press release in item <unk> of our most recent annual report on Form 10-K , and other documents that we filed or furnished to the SEC.
Also we'll 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 with that let me turn the call over to Heyward Hayward, Thanks, Byron and good morning, Thanks for joining us and welcome to our fourth quarter earnings call.
Fiscal 'twenty two was a strong year that exceeded our expectations I am so proud of the team has successfully managed through the second year of a pandemic. We made good strides in our retail pharmacy business. Despite some short term challenges on the front end and turned the corner at elixir positioning.
Ourselves for future growth.
I'm really excited to talk to you today about our strategy for fiscal 'twenty three and beyond.
Before I outline our growth plans for fiscal 'twenty, three I'd like to talk briefly about our expectations for our business as we move beyond the height of the pandemic.
As we all know the past two years have been unprecedented and companies like ours had to shift our focus and energy to help fight the pandemic.
And save lives and as Covid becomes a part of everyday life now we're eager to move forward to this new normal.
It is important to note that COVID-19 impact on our business was not solely a tailwind.
While we saw benefits from the pandemic related services. We provided Covid also brought significant headwinds to our business. Those included supply chain pressures impacting our inventory and sales store traffic shifting due to continued work from home, which especially impacted urban areas.
And a tightening labor market.
So we were able to mitigate these impacts all of these factors did put a strain on the business.
Now, we're seeing a reopening and we're expecting the following trends to positively impact rite aid as consumers reduce their masking or unmask completely and children go back to school.
We're seeing an increase in scripts and over the counter products related to cough cold and flu the Super Spreaders remain the kids were also seeing an increase in demand for maintenance scripts in Q4 maintenance scripts.
Since year end versus two years ago.
We are revising our focus on ancillary vaccines. So remember when people were getting COVID-19 vaccines. They couldnt also get their ancillary vaccines.
So we are really back to business on new.
And other important vaccines as consumers are catching up on their doses after the pandemic.
And of course, we continue to vaccinate and test for Covid, and we're seeing an uptick in COVID-19 any viral prescriptions like Pac slogan. This becomes another tool that our pharmacy teams can use to help our customers.
It's also back to business that elixir with companies now willing and able to move to new <unk> partners and we already have close to 1 million members in the 2023 pipeline overall.
Overall, the pandemic underscored the critical role that the pharmacist has within the U S healthcare ecosystem with consumers. Many for the first time getting a vaccine from their pharmacists.
We administered $14 3 million Covid vaccines, and $3 6 million PCR tests, just in FY 'twenty two now as we see pharmacist clinical scope expanding in many of the states in which we operate we are well positioned to deepen our customer relations.
In summary, passing the peak of Covid represents a positive inflection point for our business and we are excited to leverage what we've learned continue to be really nimble and take advantage of the growth opportunities available to us.
So let me talk about our growth strategy. We are squarely focused on the business of pharmacy. We are a full service pharmacy company that engages with consumers to help them access lifesaving and life enhancing prescription drugs the.
The markets. We're in today include dispensing pharmacy benefits administration medication adherence and clinical services.
The total addressable market for our business is one trillion dollars in annual revenue and is growing by $40 billion a year.
And yet despite the size and maturity of parts of this market there are still systemic needs that aren't being met.
One in seven Americans live more than five miles from the nearest pharmacy.
29% of Americans fail to take their medications as prescribed because of the cost and.
And underutilization of medications drives a 500 billion plus dollars a year and avoidable medical costs.
We believe that supporting these unmet needs presents tremendous opportunity for us and the price of entry for us is very low.
Looking at the pharmacy services landscape today, the largest portion of the trillion dollar market as pharmacy benefit management, followed by retail pharmacies.
And yet the greatest amount of innovation is coming from emerging startups, who are focused on addressing shifting consumer needs.
But while these startups have entered this business many lack the assets scale and customers to meet the full needs of the pharmacy marketplace.
We have the assets to meet these needs at scale and win a greater share of this trillion dollar market <unk>.
Including over 6400, pharmacists over 2400 convenient retail pharmacy locations with home delivery capabilities.
A national specialty pharmacy, a national mail order pharmacy.
Full service PVM with scale flexibility and proven expertise.
Best in class claim adjudication platform.
A prescription discount card services platform.
Medication adherence and clinical services from health dialog and not to mentioned the 35 million plus customers and the relationships, we've already have across the retail and health care value chain.
So given our existing scale and broad range of assets and capabilities, we see three factors to drive growth.
Our first growth vector is focused on deepening our market share and growing our current businesses how will we do this.
Our mission to improve the health and wellness of our communities through engaging experiences that provide our customers with the best products services and advice to meet their unique needs improving adherence and vaccination rates fulfills this mission, while delivering meaningful incremental scripts to our pharmacies to.
<unk>. This we have developed a portfolio of proprietary tools and programs proven to improve adherence and immunization rates.
These analytics back tools and programs allow our pharmacist to identify target and tailor engagement through in store, but also telephonic and digital channels.
As the unprecedented demand for vaccines and testing abates. This will actually enable our pharmacy teams to leverage these tools and programs to improve adherence.
This is important since an improvement in adherence of just 1% provided a $20 million gross profit benefit.
With our focus on delivering a heightened digital experience, we expect to grow Rite aid Dot Com E Commerce sales and expect our buy online pickup in store offerings Rev.
Revenues from our third party delivery and marketplace channels grew by over 50% in fiscal 'twenty, two and we expect similar growth rates in fiscal 2023.
We will rollout our newly designed own brand portfolio of products and gross sales with.
We launched our new loyalty rewards program Rite aid rewards to activate incremental customers.
And we will scale, our new beauty assortment, which show 10% year over year growth in our pilot locations.
And we will grow elixir, we are on target to sell 300000, new members for 112023.
So as you know the first step to achieving net growth is retaining the business. We already have after accounting for previously known losses due to health plan consolidation, we're on track to retain 95% of our business for the 2023 selling season and I'm excited to share that we recently renewed.
And a very competitive situation, our largest Medicare advantage client with a three year contract.
So the next step is to win new business and to do that we have to first be competitive on price. That's the price of entry, we're doing that through strong network pricing and our new rebate aggregator now.
Now, we're getting to the finalists position on a regular basis, where we are presenting a unique and compelling value proposition. Our results have shown that once we get to final list. We are winning deals 35% of the time.
Yes.
While we are very early in the selling season better pricing with a newly restructured sales team and our focus on our target market segments has led us to sell 35000, new members already.
We have 150000 lives in the current finalist stage for 112023, and our current pipeline of nearly 1 million members and growing.
Our elixir savings cash discount business continues to grow both in EBITDA and revenue.
And I'm very excited now that we are spending more time refocusing on elixir specialty our specialty pharmacy, we have identified meaningful EBITDA opportunities by improving our contracts gaining access to more limited distribution drugs and growing volume from PVM clients and other parties.
<unk>.
As we have reported in the past we are continuing to reposition our approach to the elixir insurance part D business.
We want to better manage the MLR of this business and reduce the cash burden. We also want to stabilize the EBITDA of our business that is under significant government reimbursement pressure. Therefore, our bid for calendar year 2023 will result in a purposeful shrinkage of membership and therefore loss of revenue as.
I noted earlier, we just renewed our largest Medicare advantage client and have won a number of new Medicare advantage plans.
Our plans for 2023.
Much of our success as elixir has been in this growing healthcare segment and is a core competency that sets us apart.
Our knowledge and expertise of from managing our own elixir insurance business has positioned us as a leader in managing Medicare advantage plans and we continue to be focused and.
<unk> committed to supporting the growth of those clients.
So our second growth factor is expanding our offerings into new markets, including but not limited to extending our pharmacy footprint to improve access in underserved communities.
Later this year, we will launch small format stores with a focus on pharmacy strategically located in markets, where access to pharmacy is limited we expect to achieve an IRR of over 25% on these stores more to come on this exciting work.
Revitalizing health dialog to better serve the changing needs of our health plan clients as number two health dialogue has robust analytics.
<unk> adherence medication therapeutic management service offerings that are resonating in the market in the last few months alone. We've won four new contracts that will serve over 800000 lives.
Collaborating with consumer oriented brands and retailers to develop new store within a store partnerships.
These creative partnerships will leverage our space to provide exciting new products and services to our customers and our working capital efficient manner.
Excuse me.
And then our third Avenue of growth is focused on creating new offerings that leverage our portfolio of scaled assets to meet the evolving needs of customers and organizations, including growing our current health care health plan business to improve outcomes by leveraging our in store pharmacist to engage with.
Their members.
We currently have contracts with five health plans with another dozen in the pipeline.
Also continuing to provide.
With access to our leading claim adjudication platform and adding other service offerings to these clients.
Okay, and finally, establishing strategic partnerships with innovators to help them scale via access to our 35 million customer base.
So in addition to growth we are continuously evaluating our business to ensure we're optimizing our expense structure.
Drive maximum efficiency.
Our key optimization initiatives include reducing SG&A by $170 million this year.
Executing on additional store closures and investing in improvements in our supply chain.
So in closing we expect these various initiatives to enable us to grow our company over the next three years.
As we look ahead to fiscal 2025, we project EBITDA growth of 10% to 20% from fiscal 2022 levels and a decrease of our leverage ratio from five four to four five.
I am so excited and I hope you can sense that the entire rite aid team is really energized by what we're seeing in our business and really ready to realize the potential of becoming a preeminent full service pharmacy company now I'll turn it over to Matt for some more commentary on the numbers for FY 'twenty two.
Thanks, Heyward and good morning, everyone.
Fiscal 2022 was anything but business as usual as the pandemic continued to bring new challenges to our segments as we executed on our strategies.
In the midst of this environment, we grew revenue significantly improved adjusted EBITDA and generated free cash flow.
All while taking steps to stabilize and grow the company.
We grew our fiscal 'twenty, two EBITDA by $68 million, 16% over the prior year.
Our fiscal 2022 revenue grew $525 million driven by a 12% increase in pharmacy sales.
At Elixir, we entered into a comprehensive rebate aggregation agreement that has enabled us to expand gross margin and made us more competitive in the marketplace.
We completed our integration of Bartell drugs solidifying our lead position in the important Seattle market.
And we took the following steps to improve our capital structure.
We paid off the remaining $91 million of our 6%, 8% 2023 bonds using availability under our revolving credit facility.
We amended and extended our credit facility through August of 2026 as a result of this extension we have no debt maturing until July of 2025.
As a result of our improved adjusted EBITDA and our success in extending our debt maturities. We received an upgrade to our corporate credit rating for both Moody's and S&P.
And finally through the generation of $245 million in free cash flow, we reduced our net debt by over $200 million in fiscal 2022 and ended the year with over $1 9 billion in liquidity and a leverage ratio of five four times, which is an improved.
<unk> of well over return from last year end.
Now I'll review, our fourth quarter results in more detail.
Revenues for the quarter were up $149 million or two 5% from the prior year's fourth quarter drew.
Driven by an increase in retail pharmacy segment revenues offset by a decrease in <unk> revenues.
Fourth quarter net loss from continuing operations was $389 1 million or $7 18 per share compared to last year's fourth quarter net loss from continuing operations of $18 5 million or <unk> 34 per share.
This increase is due to our current year charge for impairment of goodwill related to elixir and higher facility exit and impairment charges driven by the company's closed store decisions.
Additionally, during the quarter the company reassessed its historical policy for estimating its allowance for manufacturer rebate receivables at elixir and.
And concluded that due to changes in business practices and other conditions.
Certain amounts within the outstanding receivable had an increased risk of non collection.
As a result, the company increase its allowance for manufacturer rebate receivables by $15 $1 million.
Which is recorded as an increase to cost of revenues in the current period.
This change in estimate is a nonrecurring item that is excluded from adjusted EBITDA.
Our adjusted EBITDA This quarter was $106 $1 million compared to last year's fourth quarter, adjusted EBITDA of $41 $3 million.
Now, let's discuss the key drivers of operating results and our business segments.
Retail pharmacy segment revenue for the quarter was $4 $43 billion.
Which was $319 million higher than last year's fourth quarter, driven largely by an increase in same store sales.
Retail pharmacy same store sales increased eight 3% with same store prescription comps up eight 7%.
We administered $3 3 million Covid vaccines in the fourth quarter of fiscal 2022.
Compared to 500000 in last year's fourth quarter.
And as Heyward mentioned.
Slide of Covid maintenance scripts were up 1% and acute scripts were up 9%.
On a two year stack basis maintenance scripts were up four 2% in quarter, four and acute scripts, excluding COVID-19 vaccines were down seven 3%.
Front end same store sales, excluding cigarettes, and tobacco products increased three 2%.
The increase in front end same store sales was driven by increases in upper respiratory diagnostic and seasonal products.
These drivers were partially offset by supply chain issues and decreases in alcohol sales, which had a 300 basis point negative impact on comps.
We obtained access to same day test kits during the fourth quarter and sold $2 million of them.
We record most of these sales the sales of these kits in the pharmacy instead of front end in order to enable our customers to easily access insurance coverage for these kits.
If we had reported all of these sales in the front end our front end comps would have been approximately 300 basis points higher.
Fourth quarter retail EBITDA retail pharmacy, adjusted EBITDA was $102 4 million.
Compared to last year's fourth quarter, adjusted EBITDA of $6 million the.
The increase in adjusted EBITDA is attributed to higher pharmacy same store sales.
Higher front end same store sales as we cycled prior year's cough, cold and flu headwinds and a reduction in markdowns offset by pharmacy reimbursement rate pressures.
Okay.
Retail pharmacy segment, adjusted EBITDA, SG&A expenses were $79 $7 million higher than last year's fourth quarter, but flat as a percent of revenues.
This was due to higher pharmacy salaries to support Covid vaccination of testing higher front end salaries due to wage increases the cycling of last year's PTO changes and higher self insured medical and bonus expense.
We do expect to see continued wage pressures due to market conditions, which is taken into account in our fiscal 2023 guidance.
I'll now shift to our pharmacy services segment elixir.
For our fourth quarter Elixir saw revenues decreased $176 million or nine 4% to $1 7 billion due primarily to a planned decrease in elixir insurance membership and a previously announced client loss that was driven by industry consolidation.
<unk> fourth quarter, adjusted EBITDA was $3 $7 million versus last year's fourth quarter, adjusted EBITDA of $35 2 million.
This was due to a decline in revenues and increase in the medical loss ratio at Elixir insurance and a write off of accounts receivable related to our decision to exit a line of business.
Without the impact of the medical loss ratio adjustment and the receivable write off elixirs Q4, EBITDA would have been similar to what we achieved in the third quarter of fiscal 2022.
So Alex for SG&A for the fourth quarter improved due to cost reductions that we made to align our structure with the reduction in lives that incurred on January one.
Now, let's turn to guidance.
As the pandemic continues to wane, we expect a financial benefit that we saw from Covid vaccines in the retail business to be significantly reduced.
However, as heyward outlined earlier in our call. We are seeing indications that our investment in our long term strategy is beginning to bear fruit, we expect to grow core business revenues improved margins and will reduce our cost structure.
Adjusted EBITDA is expected to be between $460 and $500 million adjusted.
Adjusted EBITDA in the retail pharmacy segment is expected to be between 320 and $350 million, while adjusted EBITDA at Elixir is expected to be between 140 and $150 million.
Following are some key assumptions that underlie our guidance range.
We do expect some contribution from Covid boozers, including demand for the second booster that we've seen over the past two weeks.
We expect COVID-19 vaccines to decline to levels of 20% to 30% of the levels. We saw in fiscal 2022.
We expect to see continued growth in comp sales and script growth in our core business after excluding the impact of Covid.
We expect our loyalty card program changes and owned brand penetration initiatives to drive an incremental $30 million and gross profit dollars.
Our 145 store closures will drive an incremental EBITDA contribution of $60 million in fiscal 2023.
Note that this number include the $1 45 includes the 63 that we disclosed at the end of our third quarter.
And our efforts to drive corporate administrative efficiencies will yield a $40 million benefit.
With these savings plus additional opportunities in the field around store labor and efficiencies, we expect expect to drive a total of $145 million in retail pharmacy cost savings during this fiscal year.
Included in our guidance is an assumption that we will grow EBITDA at elixir, we've taken steps to reduce SG&A it'll extra by $25 million due to the reduction in lives and tight expense management.
And while our gross profit dollars of elixir will be negatively impacted by a reduction in lives and revenue. We expect this impact to be offset by the increased rebate value from a rebate aggregation arrangement.
Total revenues.
<unk> are expected to be between $23 1 billion and $23 5 billion.
The reduction from prior year is due to the impact of store closures and the reduction in lives at elixir.
Adjusted net loss per share is expected to be between <unk> 53.
And a $1 <unk> loss per share.
Capital expenditures are expected to be approximately $250 million. In addition to regular maintenance spend this includes important investments to grow our digital business.
Transform our member support systems at Elixir.
Modernize our distribution centers refresh stores in the key market and aggressively pursue prescription file purchases.
In addition, we are investing over $300 million in capital over the next three years to enhance our digital experience and to modernize the technology that powers, our pharmacies stores and our PVM driving efficiencies and productivity in our back office and significantly growing our digital business.
Interest expense is projected to be approximately $200 million.
This assumption includes assumes fed rate increases of 150 basis points occurring over the fiscal year.
We expect to generate a working capital benefit of $60 million from inventory reductions and to generate positive free cash flow to continue to pay down debt.
And as we look long term, we expect to grow the elixir membership and look to not only grow our core business, but expand into some of the other exciting areas of Hayward discussed. We believe these initiatives can grow EBITDA by 10% to 20% over the fiscal 'twenty two levels by the end of fiscal 2025 and now.
We can reduce our leverage ratio to four five times by the end of fiscal 2025.
This completes our prepared remarks, Rob please open the phone lines for questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad. Your first question comes from the line of Lisa Gill from Jpmorgan. Your line is open.
Hey, good morning, its actually Mike Ms. Jaclyn for Lisa. This morning, Thanks for taking the questions. So first off just given the Covid vaccines and testing has been one of the larger swing factors in your results over the last few quarters and just based on a number of inbound questions. We've gotten over the past few weeks or so just wanted to see if you could provide some incremental color on the profit associated with vaccines and testing.
In order to just get a better sense for the performance of the underlying business I think you've given some color in the past around profit for Covid vaccine administered so just wanted to confirm that and then how should we think about the contribution from from Covid tests, both in store tests in OTC.
So, let's Hayward, let me Hey, Mike Let me just start by saying that we have actually reduced our assumptions around the volume of testing and Covid vaccines from our last discussion and so that is reflected in these numbers and then I will because I think it's really important that we.
The actions, we need to get back to business and not assume that we're getting the same level of vaccines, but Matt can speak to the profit.
Sure.
Thanks, Mike and good morning look on the Covid vaccine I would say they had a they.
They had an EBITDA contribution range in the $20 per vaccination range on the testing side. The PCR test was.
Around the 10% to $15 per EBITDA contribution range antigen tests are around $5.
So those are some numbers you can use from the standpoint of your modeling.
Got it that's very helpful. And then just over the course of the pandemic. It seems like one of the more significant headwinds in your pharmacy business with lower acute script volumes I guess, you talked about the fact that those are largely higher margin generics.
I think you talked about in the quarter acute scripts were down 9%.
Although I guess, we're comping against sort of a very weak cough cold flu and the prior year I guess just wanted to get a sense for where acute volumes currently stand as compared to pre pandemic levels.
Sort of what's incorporated in the fiscal 'twenty three guidance do you assume a recovery to pre pandemic levels. There and then I guess just as a follow up more broadly how would you characterize the pharmacy reimbursement environment are you seeing.
Is that sort of consistent sort of year to year.
So Mike maybe I'll jump in and start so first of all just to be clear, we were up 9% in Q scripts in the fourth quarter.
Which I think is what you meant but I may have heard you say down. So just wanted to clarify that we are down over two years ago and kind of a two year stack level about 7%.
We're expecting cough cold and flu and other acute scripts to get back to kind of pre pandemic levels and I would tell you. It's very early but in the first six weeks of this year. We are seeing some strong results and cough cold and flu scripts and also an OTC products as well and the other thing we're expecting is including in our in our guidance is flu immunization.
Over the last couple of years have been down from where they were pre pandemic due to I think immunization fatigue is a way I would talk about it and we expect those numbers to get back.
<unk> to our pre pandemic levels as well as people kind of step back from everything being all COVID-19 and start thinking about getting immunized against other types of conditions.
Reimbursement rate front.
We've got really good line of sight into their into the contracts for fiscal 2023, and I would I would characterize the rate pressures as being there and probably consistent with what we've seen the last couple of years, no movements up or down either way.
Far as that goes.
Yeah.
Got it appreciate the color. Thanks.
Thanks, Mike.
Your next question comes from the line of Evelyn Anderson from Evercore. Your line is open.
Hi, guys. Thanks, so much for the question I, just wanted to dig into the $170 million and cost initiative savings and make sure I understand where the relative buckets are coming back.
Thank you said $60 million from store closures, and maybe $40 million from corporate expenses, So that's sort of implying that $70 million.
The aggregate benefit I, just want to make sure.
That I am thinking about all of those buckets correctly. So if you wouldn't mind parsing that out that'd be super helpful.
The overall 170 as SG&A reductions so it doesn't have anything to do with the rebate aggregation.
We are highly confident that we can achieve the $170 million and we have already made significant inroads into that number.
So Matt maybe you could just break it out sure. So here's the bridge the 170 and good morning, Elizabeth closed stores is a $60 million benefit and Thats, a net EBITDA benefit so youre going to see.
On a gross basis and even larger reduction in SG&A cost with some reduction in gross profit dollars in revenue, which is why our our revenue guidance one of the reasons. Our revenue guidance is lower this year $40 million is going to come from corporate administrative back office costs.
Another $45 million is going to come from a reduction in retail SG&A and it's a combination of store labor control initiatives as well as some sourcing and procurement initiatives around.
Things like repair and maintenance store supplies and other type expenses and then the other 25 is that elixir and really cut. So we have already made as of one one to to rightsize the business with some of the reduction of lives. So you take those numbers and that adds up to the $1 70 and benefit.
Got it that's super helpful.
Just maybe as a follow up to that sorry about that that'd be there. So what is the benefit from the net benefits of 23% rebate aggregator unchanged as you see it right now.
Yes, I think I think that's really squarely in the thank you Elizabeth Elizabeth I think they said as Elisa.
So alright.
Sorry about that but.
We see the rebate aggregation benefit now and are very excited about putting this other stuff behind us on the elixir side of the business.
So maybe yes, I don't think we gave a specific number for the rebate aggregation benefit, but I would say I would think about <unk> from the standpoint of on a gross profit dollar standpoint, we are going to see some gross profit dollar degradation from the losses and lives and we see that the rebate aggregation benefit more than offsetting that number and helping us.
Get that bridge, the 140 to $1 50 guidance and it also we pass a lot of that benefit through to our clients and that's how we become.
Even more competitive than we were before and then Matt speaking about the stuff that stays with us and helps us propel our business forward.
And then maybe one last question on the SG&A labor side.
You mentioned, obviously that $45 million reduction in detail SG&A I assume that maybe you need less staffing if you're doing fewer vaccine.
Maybe help us balance that versus some of the comments, we've heard from your competitors and across the broader economy about.
<unk> costs going up and sort of help us balance out those two elements.
Yes, let me, let me provide kind of a clarifying comment and then I'll turn it over to Andre So what when you think about the 170 <unk> initiatives to drive a 170 reduction suddenly what goes against that number is an anticipated increase in just wait.
Wage rate cost some of that being performance based some of that being market based.
That wage rate increase that we expect is about $45 million headwind I'll turn it over to Andre to give some more color around just the environment.
Thanks, Matt good morning.
Let me address the comments for the question on the vaccines labor.
And our our labor pool for such as that we are have the ability to complete the vaccines, we project within the projected labor spend.
As Matt shared we are projecting a significantly lower vaccine volume this year versus last year.
Thus a corresponding labor reduction there.
For your question.
As far as the broader labor market I think is a tale of two stories for us in our footprint first is that.
We operate in collective bargaining agreements in states, where we're very comparable on rates compared to others and then in other states we have made.
Target is strategic investments to keep our current associates and track New associates and that's all in our current guidance is mats are shared.
Separately and concurrently we started over the last two years meaningful work to make rite aid an employer of choice and building a career with rite aid at all levels.
I would tell you the work we've done on our store managers and technician training.
Comes to light on that.
And lastly, we're using a much more robust recruiting platform to attract a much higher quality candidates at the top of the funnel.
And then lastly on.
Labor in general just like everybody else within the retail industry.
We've seen an exit of workers industry, but we're very focused on reducing our turnover.
And talent staffing continues to be top of mind for the entire senior leadership team within our retail pharmacy business.
Got it thank you very much.
Okay.
Your next question comes from the line of George Hill from Scotiabank. Your line is open.
Good morning, guys first thanks, and I. Appreciate you taking my question and its Deutsche Bank and that Scotiabank I Havent moved again.
Unless somebody has told me I guess heyward.
Wanted to start with.
Okay.
Thanks, Thanks for their sense of humor.
Would you reiterate just your 2025 comments I want to make sure that we all got that down and I want to make sure that you didn't misspeak. When you said 2025 versus 2023, and then I guess if it was 2025 could you and Matt just kind of walk through what are the big assumptions that underline I thought you said double digit EBITDA growth visibility through fiscal 'twenty five we want to make sure I heard you correctly.
Yeah, I'll, maybe jump in and start up.
On the numbers just to be clear so that.
We had an EBITDA of $506 million that we closed this year out and we think over a three year period, we can grow off that EBITDA base in a range of 10% to 20%.
Kind of our long term target if you will George and in the our long term target, we talked about was with that EBITDA growth and with the generation of free cash flow setting a target of four five times leverage ratio by the end of fiscal 'twenty. Five so think of those two numbers is kind of reset three year targets yes.
No not in.
It's here.
Okay. So that's super helpful and I guess I would just ask you can you kind of go one level down there or like what are the implications for script growth what are the implications for reimbursement how much of that is elixir versus the core pharmacy business again.
That's a given if you look at the trends.
Retail pharmacy over the last decade.
That would be a dramatic change in direction from what we've seen.
At a macro level I would just love any incremental color you can provide around that yes, well I would say it's not just retail pharmacy is is not is we arent going to show growth for sure and it is a growing business as you can see we're expecting strong results both in scripts in pharmacy, but the it's the other air.
<unk> of the business that I would point to as other key growth opportunities that we had discussed in the script, which includes the.
The PVM and not just the PVM, but all of the other businesses within the Pbms, So specialty pharmacy mail order pharmacy.
Our own cash.
<unk> discount card services program, the Laker adjudication platform <unk> as a service.
Our health plan business, our health dialog business.
New store formats, new markets, which we start this year and expect to expand that.
And rate of return continues to be more than 25%.
Well some of our new partnerships, whether it's store within a store.
Opportunities or some of the new and exciting things that we talked about both in my talking points and some better.
To be announced so it's think.
Think of it as this is really we think of this again is a full service pharmacy business, we've only begun to tap the opportunities into the business that is beyond retail pharmacy.
No that's super helpful, I'll say, Matt and Heyward I'll keep going for a second here until you guys telling me to be quiet.
When you think about the growth in a lot of those businesses in the <unk> segment can you talk about how much of that the platform already exists for and how much of that growth might require inorganic initiatives yes.
Yes.
To give you a ballpark sense of.
The $250 million in Capex only about $25 million is tied to elixir on all of the assets within elixir and so as I said as I said earlier, we do not need to throw a lot of money at these new opportunities we already have the assets.
We're up and running with all of these assets already. So this is a very capital light set of initiatives that we're talking about and certainly we're going to continue to invest in these but think of it I think in that context, which is we already have the assets now it's about growing the business and that's what we're so excited.
Cited about because we're just tired of talking about covered all the time back to business at all of the assets within elixir, which include the ppm, but not just the PVM.
We have a discount card services platform, we have the Laker adjudication platform that currently serves as an adjudication platform software as a service for other Pbms, we have the specialty pharmacy, which of course is the highest growth most expensive type of drugs. In this business, we have a mail order pharmacy that we.
Thank other smaller innovators would like to use as well. So we also of course have the retail pharmacy business and health dialog, which we have completely.
<unk> around and is now growing George I would jump in and say the other thing I would say is one of the reasons I talked about our three year Capex plan in my script around what we're going to invest in digital and technology is is I think there's some really important investments that we are starting to make and continue to make in building out our digital capabilities in our retail business and also strengthening.
The platts the existing platforms, we have at the Pbms to really drive some of these additional services and I think the last thing and it's probably all the color I can give on a three year target is.
Quite a bit of this growth we expect to come into PVM. Another piece of the growth that I think is going to be outsized from what it is today proportionally is the growth of our digital business and that would include ecommerce. It would include third party marketplace sites. It would include digitally and we're digitally.
Delivery and we're starting to put a lot more of our allocation of dollars proportionately towards that type of investment while still working on addressing the store base, but thats, where we see the growth drivers grew 50% last year and we expect it to exactly the same amount this year and we just rolled out buy online pick up in store.
Yes.
Okay.
And then Matt I guess the last one I'll throw at you for now and I know, we'll follow up is that when you look at the $170 million cost savings initiative as you look broadly across the business. How many more opportunities are rounds of shots of 170 are there given the $21 billion business that we're talking about so.
Does that number in the scaled the business isn't necessarily a huge number and I guess, how do you think about like what is the opportunity for future cost savings initiatives and how much of that future EBITDA growth should we think of as coming from business growth versus cost savings.
Well right now I would say, it's largely coming outside of the $170 million from business growth. So there is opportunity I believe I don't just believe I know there is significant additional opportunity on efficiencies, especially in our <unk> organization. We are in the process of a project.
Which we actually haven't talked about yet because we just haven't had the chance called project fusion. So while we've already integrated all the backroom operations between elixirs organizations and Rite aid elixir in and of itself is about 10 different organizations and so the opportunity to integrate the two.
Current pbms at Elixir and.
And move them to the common incidence of Laker and all of the surrounding technologies and all of the surrounding processes will provide significant additional efficiencies within elixir and then we also expect to continue to drive efficiencies at mail order and specialty and retail pharmacy.
So more to come on that and George I would add on the other opportunity we have on over this three year timeframe on efficiencies as we are doing a lot of work around modernizing our back office accounting financial reporting systems, which as we complete the modernization should drive a lot of a.
A lot of cost efficiencies as well.
Okay I'll hop back in the queue. Thank you for the color.
Thank you George.
Your next question comes from the line of Jenna Giannelli from Goldman Sachs. Your line is open.
Hi, Thanks, so much for taking my question. My first one just a clarification I think there is some may be up a little bit of confusion around this.
You mentioned, the $20 EBITA benefit where box last year is that an adjusted number just trying to think about the contribution to overall EBITDA last year, we did that on $14 million from a vaccine.
That suggests about a $280 million of.
Of EBITDA of the 500 <unk> you did last year is that right way to think about it or is there some SG&A offset that we need to consider thanks. So much.
Well the $20 as an EBITDA contribution so the gross profit dollars on a vaccine is actually higher than that but as we've talked about throughout the year and as we've talked about in our SG&A variance explanations every quarter, there's a significant amount of payroll cost.
<unk> gets put to that but the 286 as a net number and.
If you are thinking about kind of bridging from last year. This year, that's kind of the headwind that you start with.
From the vaccine at the 280 is like your kind of headwinds to Starwood from a vaccine reduction standpoint.
Okay perfect. That's super helpful. I appreciate you clarifying that.
And then just additionally, as you ramp up the store closures I'm getting $60 million EBITDA can you just remind us of the cadence. If you will be scheduled at this point, how much more opportunity might there be for closures and how much of the fleet at this point is cash flow positive.
Yes. Thanks.
Let me start with one clarification that $2 80 number is just a 14 times a 20%. So that's kind of a starting point of the total vaccine contribution, but remember we do expect vaccines at levels of 20% to 30% of the prior year numbers. This year. So that there is a number of vaccines that we will do so I think on a net.
On a net headwind from Covid vaccines, you have to take both those numbers into account. So just want to clarify that for everybody who's kind of penciling out their model map.
<unk>.
So on the store closures I think the one the one we've done a very comprehensive review over the last six months of our store fleet literally store by store.
We're at the point now where I think we have.
Gone through what I would call the pruning of the fleet from the standpoint of a onetime kind of catch up process review, we will continue to look at stores for opportunities. So I wouldn't say there is not going to be more store closures and theres not some additional opportunity, but we've got a set of kind of underperforming stores that are now kind of all watch lists where we're looking at moderate.
Conditions in improvements in Ontario.
Thank you and good morning.
The 145 that we have decided to close I mean, the reality is we looked at how those stores operated in.
Is the right decision to close those stores ongoing as Matt shared we have a very robust process in place on looking at our store performance store by store.
And are addressing core performing stores, particularly as stores come closer to kind of curb on lease.
So the headline here is that we are keeping a very close eye on a store by store performance and ensuring that every store moving forth contributes to the profitability of the organization. Yes. So think of the ones that we havent close by June <unk>.
On the bubble and so.
So largely cleaned up the ones that were obvious and I think going forward as Andre said, its really going to be a lot about the leases and the performance pick up on the stores under careful management.
Okay perfect. Thanks, and then just one final one if I can.
Great. Thank you. Thank you and you guys expect to be free cash flow positive. This year. It looks like there's a little bit of a working capital benefit and now supporting that as well should we think about.
And largely a reduction of inventory or is there anything else.
And now I'm.
Well, Matt first accounts that we should be thinking about.
Thank you.
So the working capital benefit is definitely a reduction of inventory I think we have opportunities in two places even with some of the inflationary headwinds that are in the business that could offset some of these opportunities. One is we do have an opportunity to reduce the amount of of brand drugs in our stores. We're taking a hard look at that the second opportunity is we are converting certain.
Lines of business or goods on the front end to pay on scan, which is going to be.
A nice one time inventory reduction as we as we go from holding that inventory to not had not holding that inventory.
So those are the drivers of working capital benefit.
Okay. Thanks again.
Thank you.
Our next question comes from the line of William Reuter from Bank of America. Your line is open.
Good morning.
Just have two so its helpful.
You've provided in terms of.
The net impact you expect from reduced Covid.
Administration is there any way that you can think about the offsetting factors to help us bridge to your guidance in terms of.
EBITDA associated with cough, and cold or associated with increased flu immunizations acute scripts can you provide any help there.
Yes, I think.
We did lay out the pieces bill of the expense reduction and I think we laid out very specifically to $30 million and gross margin benefit from owned brand and loyalty I would I would say on the on the pharmacy side, there's going to be an EBITDA impact from from non script improvement I would say that as <unk>.
Largely be somewhat offset by rate pressures and on the front end. If you think about kind of the opportunity from sales growth.
There's probably a number of about $40 million there that's like a sales growth opportunity in the front end. In addition to the numbers we talked about there. So I think those with all the other items. We went through I think give you will help you do the bridge from the.
From 'twenty to 'twenty three.
Okay, and then secondly, secondly, just following up on John's question.
Do you have a number that you have an expectation of in terms of working capital benefit this year versus.
Based upon scan based trading and inventory reductions.
It's embedded in the overall $60 million of working capital benefit that we talked about it.
Okay, I think I missed that number alright. Thank you.
Sure. Thank you.
Your next question comes from the line of <unk> Martinson from Jefferies. Your line is open.
With kids back to school.
Those little Super Spreaders.
Is a normalized cough and cold and flu season to you guys. When we think back to kind of pre pandemic.
Whats the magnitude of what that would contribute to your bottom line, yes, you might recall that it kind of fell through the floor.
<unk>.
Is it not last quarter, but the quarter fourth quarter of the prior year and obviously, that's a big business for us and these kids definitely keep us in business and so.
Matt you want to just talk about the magnitude or Andre Andre.
Good morning.
Q4, upper respiratory or comparable of front end sales were up over 50% <unk> because last year, we did not have a cough and cold season.
I would say, while it was up 50% it still was below what we would look at a couple of years ago as a record cough and cold season, and I think because they're just reopening crestor schools right now so little.
A little bit of this I think is timing.
Okay.
Okay.
We still see upside upside this year in our plan on conference call.
Okay, I think I think to give a finer point on the cough cough and cold a lease on the scripts I would expect cough cold and flu scripts to be up at least $2 million 2 million scripts over well over what we saw last year cruise. So that's like and those are pretty profitable pretty profitable scripts for us. So thats I think a good benchmark to think about I think.
It's way up but it hasn't reached the levels that we think it could reach and so.
So as allergy yes.
Okay. So some tail ones there.
And when we look at kind of a normalization are learning to live with Covid. What are you seeing on the traffic trends as people come back to work.
Or are you seeing that traffic and basket start to pick up.
Yes.
I will share with US Peru is that we are seeing uptake on traffic and basket in urban centers, where people are returning to work.
The flip side of that is the return to work has been a lot more cautious than one would have expected.
So when you look at traffic over two years ago in those certain stores were still down but it is encouraging year over year Cigna.
Significantly up over last year at this point in time in those markets and one of the things that we considered when we did the store closures was that we don't believe that people will go back to the office full time ever and so some of these urban markets that were tied to big office complex that was a consideration for us as well.
Okay and in terms of the selling season for the Pbms.
And kind of static for two years.
What are the expectations for I guess with us will be for calendar 2023 fiscal 'twenty four.
Of that selling season opening up at the end of this year.
Well as I said, we're very early in the 2023 season for employer business and we are in the 2024 season for health plan business. So health plans have a longer lead time for implementation. So just in the past few months, we have sold 35000, new members and.
Have barely gotten started and thats against a total of 55000, new members of the prior year. Our pipeline is almost a $1 million I'm, sorry, 1 million members right now and that is growing on a weekly basis.
We're in the finals for 150000 additional members.
Members right now as we speak and as I mentioned earlier, we're closing 35% of the business when we're in the finals position and the sale itself season really doesn't really start to heat up until around the July .
July August timeframe, and then employers make decisions generally as late into the November timeframe. The health plan cycle is just getting started that pipeline will grow during 2023 and that that business will largely go not all but largely go into effect in 'twenty four.
So early days, but I think very compelling and exciting.
So far.
Thank you very much guys I appreciate it.
And we have time for one more question. Your final question comes from the line of Carla Casella from Jpmorgan. Your line is open.
Thank you well I'm glad I squeezed in.
Couple of follow ups.
The Capex guidance <unk> does that include style buys and can you talk about the file by market and what Youre seeing there.
Yes, yes, yes, I'll call it good morning.
It does include file buys.
Probably about $35 million to $40 million worth of file buys is what we're planning for next year I would say the market is is still robust obviously it depends on kind of what area you are looking at but.
As we've talked about in past calls there is a lot of churn in the pharmacy business, especially around the <unk>.
Independent level and there are some.
I think other players whether it's supermarkets or other players that are making our thinking about whether or not they want to be in our pharmacy business and thats.
Providing a lot of what I would call kind of deal flow and ability for us to take advantage of that.
Okay, and then could you say, how many remodels you plan to do this year I may have missed that.
We didn't give a specific number I would tell you it's going to be probably a lower number than we've targeted in prior years, we're going to be focusing our what I would call our store capex efforts on.
Focused remodels in one of our key markets and Theyre going to be Remodels that I think are at a level of really refreshing and cleaning up the stores as opposed to an extensive remodel and then they are.
Store Capex side and that we're really going to focus on this year is the pilot that we talked about with launching some smaller format pharmacy focused stores and some contiguous markets to us.
Okay, and just on the timing here closing 145.
Did you say the timing and also how many you would be opening of the smaller format.
So smaller format is yet to be determined.
Certainly a relatively small number this year, but we're still working through the exact number the 145 timing we should have most of those closed by the end of June .
And probably at this point as we speak today, but won't have them are closed already.
Okay.
Okay, and then just one last follow up on the PVM.
And Nextera.
The margins on that business on a gross margin basis.
This quarter was on assuming that included the big.
A big piece of that charge.
I mean, what's a normalized gross margin on that I think we've seen that as high as the high 70% range can it get back there could it go higher than that given the kind of as you're selling it but it would be lower just because youre using AI.
Because you consolidate the purchasing on the pricing on the with prime.
So on a gross margin level I think we expect it to get to 7% to 8% next year and a gross margin level, we expect for for.
For fiscal 2023, as we had kind of a scale back in lives. We expect the revenue dollars go down, but actually the gross margin rate to improve and the improvement is tied into this this.
Rebate aggregation agreement and the ability to drive some of those additional rebate dollars into the margin line.
Yeah.
Okay, great. Thank you so much.
Thank you Carla.
And that concludes our question and answer period, I will turn the call back over to Heyward donigan for some closing remarks.
Thanks, everyone for your questions and of course, I can't say this enough im incredibly proud of our over 50000 associates, who again delivered a strong result in the midst of a really challenging year that required our team to be super fast flexible and innovative and we're really excited to turn the page on COVID-19 .
Get back to executing on the strategy I outlined earlier in the call. We have an extremely talented workforce, a clear strategy and a set of assets to day that we are ready to leverage and grow and we're equipped to capitalize on the <unk> COVID-19 brought us and get past the headwinds we've experienced over the past two years.
Years.
So we're energized laser focused and entering the next evolution of our company, Thank you and be well.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Yeah.
Okay.