Q2 2023 Rite Aid Corp Earnings Call
Our release, we're providing slides related to the material we will be discussing today. These slides are provided on our website investors thought 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 will include certain forward looking statements. These forward looking statements are presented in the context of certain risks and uncertainties that can cause actual results to differ.
These risks and uncertainties are described in our press release in item <unk> of our most recent annual report on Form 10-K, and other documents that we file are 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 with that let me turn the call over to Heyward.
Thanks, Byron and good morning, everyone.
Thanks for joining the call today and welcome to our second quarter earnings call.
Q2 saw continued to build on our momentum to become a leading full service and modern pharmacy.
We are 53000 associates strong, including a team of 6400 pharmacists that together are caring for our communities and customers to drive better health outcomes.
Revenue for the quarter was $5 9 billion compared to $6 1 billion in the same quarter last year.
Q2, adjusted EBITDA was $78 5 million compared to last year's second quarter, adjusted EBITDA of $1 2 million.
Retail pharmacy sales and gross profit dollars were negatively impacted by the expected decline in demand for Covid vaccines and PCR test.
We've made good progress on key initiatives during the quarter, including driving prescription growth improving operating margins at elixir and achieving significant reductions in SG&A expenses across our business.
Our front end performance, however, trailed expectations due to cautious consumer spending in this environment and continued supply chain challenges.
Diving into our segment results, starting with our retail pharmacy business revenues decreased one 1% over the prior core year quarter, driven by the expected reduction in covered vaccine and testing revenue as well as planned store closures.
Overall comparable sales increased five 6%.
Total same store prescriptions increased two 1%, excluding COVID-19 immunization with same store maintenance prescriptions, increasing one 2% and same store acute prescriptions, increasing five 3% we.
We also improved our overall prescription market share by 14 basis points for same stores, bringing us to over 11% share.
This demonstrates the strength of our local pharmacy teams and their customer relationships as well as our ability to navigate volatile labor market and increase our participation in limited pharmacy networks with Pbms.
While we're early in the flu season, we are already seeing more demand for flu vaccines. We've received 2.7 million flu vaccines with more on the way to ensure our teams can protect customers during the height of the flu season in third and fourth quarter.
We've also seen strong demand for Covid bivalent vaccines, just over the last few weeks.
Using our health dialogue clinical analytics, we have identified customers, who are more likely to agree to the co administration of two or more vaccine.
At the same time as a result, almost 40% of those who got their Covid bivalent vaccine also received another vaccine.
One of the key areas of improvement for Rite aid is to drive increased medication adherence for our customers.
Every 1% increase in adherence provides $20 million and gross profit to the company.
One way, we encourage medication adherence is our courtesy refill program.
600000, new customers have enrolled in our program since July .
We expect this initiative to add $10 million in pharmacy gross profit in FY 'twenty three with most of the benefit accruing in the second half of this year.
This is just the beginning we expect more customers to continue to enroll and courtesy refill and we plan to engage in strategic partnerships to help drive further adherence.
What's important about improving our customers' adherent to their medications is not only did it drive script growth for the company, but it also drives better health outcomes and lower healthcare costs for our customers.
We saw an increased demand for OTC antigen tests in the second quarter with over 3 million test kits dispensed and while the availability of antigen test has reduced the demand for PCR tests, our new partnership with quest diagnostics, which commercialize P.
See our test has allowed us to expand our offering of PCR tests to every store in our footprint.
We're excited to work with quest going forward to provide testing for flu. This season, and we expect there to be a lot of flu this year.
And we look forward to exploring other convenient testing options for customers as a result of this partnership.
Okay.
Front end same store sales were soft in the second quarter declining 30 basis points excluding.
Excluding cigarettes and tobacco products. However, we increased by 20 basis points.
We saw good results in seasonal health and consumable categories.
All set by underperformance in prior years very strong alcohol results overall general merchandise beauty and personal care.
Beyond this we experienced unexpected headwinds this quarter from plant and shrink, particularly in our New York urban stores.
Given the current economic environment, we expect to see a cautious consumer in the back half of the year in.
In addition, the current supply chain environment has challenged our ability to remain in stock, particularly in our over the counter and private label products. We do expect these challenges to continue to pressure front end sales during the remainder of the year, which is the reasons for the adjustment to the full.
Year retail pharmacy EBITDA guidance.
Matt will discuss in more detail.
Despite these sales challenges we are seeing some positive indicators.
In our markets are fun and margins have improved due to the change in our loyalty program, which reduced the amount of markdowns.
We have seen strong improvements also in the brand positioning of the Barts health drug banner as measured by the <unk> brand equity survey in fact Martell is the number one drugstore brand in the Seattle market now.
We have also seen improvements in the brand position ranking for Rite aid.
Brand equity improvements as you know are an early indicator of increased traffic to our stores.
On the electrical side of the business. We've continued to build on momentum from last quarter, driven by improved rebate and network performance management as well as meaningful cost control.
There continues to build on its operational capabilities to drive improved efficiencies enhanced automation and better service and reporting to our customers and as we've noted before.
There is so much more than a P b M.
Our assets include mail order pharmacy, specialty pharmacy, and lake or our adjudication platform as well as a cash card adjudication and analytics business.
We have substantially integrated the back office functions of Elixir and Rite aid and are now integrating all of the platforms and processes across both segments.
While our P. B M business remains competitive and we are still winning new business. Our sales growth has slowed as more potential clients are sticking with their incumbent vendors.
We expect sales to accelerate again, given that we expect more companies will be willing to change pbms in the coming year.
We're closing in on our retention for our renewals for a one 123 business and the current outlook for retention is 78% overall and if you exclude the one client loss, we previously reported.
Okay.
We are at 96% retention, which is high.
For our second quarter Elixir reported revenues of $1 7 billion compared to $1 9 billion for the last year's second quarter.
This was primarily due to a planned decrease in elixir insurance membership.
A previously announced client loss due to industry consolidation.
Partially offset by a combination of higher drug spend and utilization.
Listeners second quarter, adjusted EBITDA was $47 1 million versus last year's second quarter, adjusted EBITDA of $36 8 million due to strong rebate and network performance management as well as a reduction in SG&A expense.
We expect our first half EBITDA run rate at elixir to continue through the rest of the fiscal year and therefore, we are raising guidance for elixir.
Back to the business overall, we've been focused on driving SG&A reductions and productivity improvements achieving a reduction in SG&A of 85 million in the first half of the year.
And based on this momentum and additional planned reductions in payroll store operations and corporate administrative expense in the back half of the year, we expect to achieve SG&A savings.
190 million in fiscal 2023, and this is just the beginning.
We're in the process of a large scale reinvention of our front end operations called the right way.
We expect this initiative to contribute $20 million to $40 million and productivity and labor improvements in FY 'twenty four.
We are also investing in automation of our supply chain, starting with our distribution center in Seattle, which came with the Barts health acquisition.
This will provide our stores with better more reliable service and improve our productivity, we expect a 40%.
ROI for this supply chain initiatives.
This will also drive benefit in distribution and handling costs in FY 'twenty four.
We also demonstrated strong digital and omni channel engagement with our customers over the last quarter, creating a more personalized customer experience and ultimately exceeding our expectations with respect to overall digital customer engagement.
This increased engagement drove a 70% year over year increase in digitally driven revenues and gross profit.
The growth focused in our first party third party and delivery marketplaces, where.
We're in the process of launching new capabilities for our customers with customer convenience top of mind.
In addition, we're building further digital pharmacy capabilities to make it simpler to transfer prescriptions from other pharmacies to rite aid and receive helpful pickup reminders offering the option of having their prescriptions delivered to their homes or offices or picked up in.
Sure.
We're on track to open four new small small format stores in underserved markets in Virginia, and New York before the end of the year.
These are the start of a pilot to achieve meaningful growth by locating a pothecary pharmacies and underserved market.
Turning to our financial position.
As you'll hear momentarily from that we continue to make progress on our capital structure as you know during the quarter, we executed a successful bond tender offer that resulted in a $40 million reduction of our outstanding debt.
We remain confident in our ability to generate free cash flow for FY 'twenty, three and we remain committed to achieving our target of a 4.5 times leverage ratio by the end of FY 'twenty five.
To close despite the challenges in our front end business. We are really encouraged by our strong script growth and solid elixir results.
I'm excited to keep driving the business forward encouraging our teams to take advantage of growth opportunities.
<unk> additional market share and positively impact our operating results this year and into next year, we're committed to committing long term value for our shareholders. Even in this difficult economic environment as we grow our modern pharmacy business with that.
I will turn things over to Matt to go over financial performance Matt.
Thanks, Heyward and good morning, everyone.
Revenues for the quarter were down $211 9 million.
Or three 5% from the prior year second quarter, driven by a decline in Covid testing and vaccine revenue the impact of closed stores and lower membership at elixir.
Second quarter net loss was $331 3 million or $6 seven per share compared to last year's second quarter net loss of $103 million or $1 86 per share the.
The increase in net loss in the current quarter is due primarily to a charge of $252 2 million or $4 62 per share for the impairment of goodwill related to elixir.
Net loss was also impacted by higher facility exit impairment charges driven by the company's previously announced store closures. These.
These items were partially offset by a gain on sale leasebacks are two of our distribution centers and certain stores and the gain on debt retirement, resulting from the bond tender offer that we completed this quarter.
A few words on the impairment charge at elixir, we've begun the process of developing the operating budget for fiscal 2024.
While we were at the beginning of this process and have several months of work ahead of US there are certain factors that we've noted that caused a triggering event for the assessment of goodwill impairment under generally accepted accounting principles.
These factors include an update to our estimate of lives for 2023 based on the latest selling season, the elixir insurance bid results and other business factors.
The impairment was recorded based upon an update of our evaluation related to fiscal 2024 and future years.
As I said, we have much work to do to build out our detailed plan for fiscal 2024 and are not prepared to give any additional color on the fiscal 2024 outlook at this time.
Now, let's discuss the key drivers of operating results and our business segments.
Retail pharmacy segment revenue for the quarter was $4 $3 billion, which was 44 $45 4 million lower than last years second quarter, driven by the expected decrease in Covid related revenue and store closures, partially offset by an increase in both maintenance and acute non COVID-19 immunization prescriptions.
Retail pharmacy segment same store sales increased five 6% with an increase in same store pharmacy sales of 8%.
We administered 875000 Covid vaccines in the second quarter of fiscal 2023.
Third a $2 5 million in last year's second quarter.
We also cycled a reduction in PCR testing demand offset somewhat by the impact of increased antigen testing sales.
Outside of the Covid vaccine impact maintenance scripts were up one 2% and acute scripts were up five 3%.
Front end same store sales, excluding cigarettes, and tobacco products increased 20 basis points versus last year.
Front end same store sales were driven by increases in health and consumable products offset by decreases in alcohol in general merchandise.
And sales were less than our expectations due to a cautious consumer and supply chain challenges.
Gross profit was impacted by a $5 million increase in shrink as we recorded the annual impact of physical inventories on a disproportionate number of our urban stores.
Front end margin benefited from a reduction in markdowns, resulting from the change to our loyalty program.
Second quarter retail pharmacy segment, adjusted EBITDA was $31 5 million or 7% of revenues compared to last year's second quarter, adjusted EBITDA of $69 4 million.
Or one 6% of revenues the decrease in adjusted EBITDA and EBITDA margin is attributed to lower Covid vaccinations and testing front end sales pressures and higher shrink results offset by increase in October prescription volumes and reduced SG&A.
Hey, where noted through courtesy refill, we have begun to increase our rate of dispensing generic prescriptions as a percent of our total during the quarter. We expect this to provide a $10 million benefit to adjusted EBITDA in the back half of the year.
Retail pharmacy segment, adjusted EBITDA, SG&A expenses were $45 million or 80 basis points better as a percent of revenue than the prior year second quarter due to lower payroll occupancy and store operating expenses driven by store closures and our cost reduction initiatives.
Based on this momentum and additional planned reductions in payroll store operating and corporate administrative expenses in the back half of the year. We now expect to achieve SG&A savings of $190 million in fiscal 2023 compared to the $170 million that we discussed in our year end earnings call.
Okay.
Before moving to <unk> I want to spend a couple of minutes talking about the quarterly cadence and adjusted EBITDA in our retail business. Our front end sales and gross profit will fluctuate quarter by quarter due to demand for over the counter and seasonal products, which are our highest margin products.
Because of this our fourth quarter is typically our strongest quarter for front end gross profit.
Pharmacy gross profit is sensitive to fluctuations in demand and cough cold and flu prescriptions, which are typically highest in our first and fourth quarters and for demand for flu immunizations, which are highly profitable and administered almost exclusively in the back half of the fiscal year.
These factors contribute to our second quarter, typically being our weakest quarter in our retail business.
Additionally, as I just noted we are reducing SG&A expense by additional $20 million in the back half of the fiscal year with efforts focused on retail and corporate admin expenses.
I'll now shift to our pharmacy services segment elixir.
For our second quarter Elixir saw revenues decreased $171 million or 9% to $1 73 billion due primarily to a planned decrease in elixir insurance membership and a previously announced client loss, partially offset by increased utilization of higher cost drugs.
<unk> second quarter, adjusted EBITDA was $47 $1 million or two 7% of revenues versus last year's second quarter, adjusted EBITDA of $36 8 million or one 9% of revenues.
Current quarter benefited from increased gross profit, resulting from strong rebate of network performance management as well as a reduction in SG&A expense, partially offset by the decline in revenue associated with lost clients.
I'll now turn to our cash flows and balance sheet.
Our cash flow statement for the quarter shows a use of cash from operating activities of $199 million driven by the build of the CMS receivable, which we expect to securitize later this year.
Increases in inventory due to seasonal build in inflation and the timing of payments for interest and bonus expense.
All of these are timing items that we expect to reverse later in the year.
Cash provided by investing activities was $4 million for the quarter included a net investing activities were script Fob sales attributed to our store closings and sale leaseback proceeds of $46 million.
Our net debt balance is approx approximately $3 2 billion at the end of the quarter as we continued to build out our CMS receivable and seasonal inventory in our retail business.
We expect our leverage ratio to be in the lower five times range by the end of the fiscal year and to generate positive free cash flow for the year.
Now I will turn to guidance.
Upon second quarter front end results and anticipating pressures on front end sales and supply chain and continue throughout the remainder of our fiscal year. We are lowering our retail segment adjusted EBITDA guidance for the year, we are raising our guidance for elixir based on our expectation that the results. We saw in the second quarter will continue for the remainder of the year.
The net impact is that $10 million reduction in our previously announced EBITDA guidance for fiscal 2023 from our previously announced range of $460 to $500 million.
To our new range of $450 million to $490 million.
Adjusted EBITDA in the retail pharmacy segment is expected to be between $305 $335 million.
As discussed earlier there are several factors that drive our second half retail EBITDA performance that is higher than the first half, including the benefits of flu immunizations. The recent rollout of bivalent vaccines, the impact of cough cold and flu in Q4 on both our front end and pharmacy businesses and continued management of markdowns to driving through front end.
Offsetting these gross profit benefits is an expectation that front end sales trajectory in the back half of the year will be similar to the front half and that continued supply chain challenges will decrease the benefit that we expected from the rollout of our own brand products at the beginning of the year.
We achieved significant retail SG&A reductions in the first half of the year due to store closures retail labor efficiencies and reductions in store operating expense.
We expect to reduce SG&A further in the back half of the year driven by additional reductions in store labor store operating in Corp, admin costs.
This is in contrast to the second half of last year, which saw an increase in retail SG&A expense in the second half of the year due to vaccine demand.
Adjusted EBITDA at Elixir is expected to be between 145 million and $155 million, we expect the rebate and network performance management and SG&A trends that we saw in Q2 to continue through the remainder of the fiscal year. Despite the reduction of lives that won't Curt will occur on January one.
Total revenues are expected to be between $23 six and 24 billion.
Adjusted net loss per share is expected to be between 97 and $1 52.
<unk> per share.
Capital expense expenditures are expected to be approximately $225 million, we continue to make investments to grow our business, including pursuing prescription file purchases and investments in digital.
We also continue to seek to enhance our efficiency by automating our supply chain and transforming our processes and technologies at elixir.
Interest expense is projected to be approximately $216 million and reflects the impact of the latest round of rate increases announced last week.
And we expect to generate positive free cash flow to continue to pay down debt.
This completes our prepared remarks, Eric could you. Please open the phone lines for questions.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad.
Thats Star then the number one to ask a question.
Yeah.
Your first question comes from Elizabeth Anderson with Evercore ISI.
Hi.
Thanks, so much for the question.
My first question is I noticed that you noted.
Supply chain challenges have you seen any sign that they're easing yet.
Elizabeth it's good to hear from you again and.
Actually the supply chain has eased in quite a number of areas.
Problem now is that it's isolated in some areas that are important to us and I'll, let andre comment on the specifics.
Thanks, Erin iOS with nice.
With you.
When we look at our supply chain the in stock rate has improved.
But its flattened out.
One of the biggest challenges we're seeing right now commitments from suppliers on schedule dates in categories that are important to us are being pushed out further.
Further and further based upon their capacity labor constraints.
And the ability to manufacture so so thats really the headwind we're challenged with for the rest of US here at this point in time, yes.
Yes, we've seen a relief at the ports, we have seen relief in trucking the issue I think seems to be labor now.
And I'll comment on our own labor.
For a little bit of color the depression.
Because this gives you an indication of cough cold flu and Covid people are getting sick and.
People getting sick. They go out and then across the board, both our own supply chain and our own.
<unk> stores and our own associates are impacted by that.
A key part of the issue right now a lot of people are talking about wages and.
The tight labor market, but some of it is actually due to illness.
Got it okay, and when I think about your retail EBITDA in the quarter.
31, 5 million it seems like at least if you did.
875000.
Vaccines in the quarter.
And obviously the test that you also it seems like it.
Our EBITDA might have been negative on a core basis ex ex COVID-19 is that the right way to think about that.
Matt I'll, let you answer.
Elizabeth It's Matt Thanks for the question no I think thats.
Pretty aggressive redid the benefits of vaccines and testing we did do 875000 vaccines in the quarter so that certainly.
Had an impact on <unk>.
On EBITDA, but but at kind of our $20 a script estimate that certainly doesn't get you to a negative number.
Testing, we had a slight headwind in but we actually made up some ground on the <unk>. The other thing, though that impacted the quarter that are.
Issues that we're currently working through that we talked about but I don't expect to occur on an ongoing basis are one.
The disproportion amount of shrink that we recorded this quarter.
<unk> two inventory many of our urban stores and seeing the results there and the second part is when you have flat flat running comps that is something that certainly on the long term, we would not expect to continue and had a depressing impact on the quarter as well.
But if you pull out just the vaccines.
Youre still a positive EBITDA for the quarter, thanks to even with the shrink in the challenging front end headwinds. Thanks to the work we did on SG&A.
Got it and why it was the shrimp did you quantify I'm sorry, if I missed just to quantify the impact of shrink in terms of dollars in a quarter.
It was $5 million worse than it was in last year's second quarter.
Got it thank you.
Your next question comes from the line of Lisa Gill with J P. Morgan.
Alright, thanks, very much good morning.
Just kind of following up on that line of questioning when we think about your back half guidance you talked about flu vaccine co vaccine cough cold flu is there a way to kind of put some numbers around that how we should think about one the number of vaccines that you currently have and your expectations and then secondly, how do we think about the profitability for <unk>.
Examples of flu vaccine.
I know that once the public health emergency if done perhaps we see managed care pay for Covid vaccines more like flu vaccine. So just any color you can help us think about them.
How do you think about the things in the back half of the year would be great.
Yes, Lisa Thank you happy to address that so first of all start with flu vaccines we.
We plan to do close to 3 million flu vaccines. This year and almost all of them are planned to be in the second half of the year that is a pretty big tailwind in the second half of the year for us.
Flu vaccines are about $25 gross profit per script or they are very profitable vaccination incidentally touching on your question about Covid I don't think it happens this year, but.
Some point when Covid stops being sponsored by the government and goes to a more commercial product program. My expectation is that's probably somewhere in that lineup.
And that ZIP code is oriented up on COVID-19, but for the moment, we're still seeing the same kind of margins we saw last year.
Further we did about $2 5 million.
Vaccines in the first quarter.
Our guidance for the back half of the year assumes we do something pretty right around that number in the back half of the year with the bivalent vaccines, which I think is a pretty reasonable assumption.
Cough cold and flu.
We have had.
As we tried to lay out what we thought cough cold and flu is going to have as an impact on us for the back half of the year you really got to go back to pre Covid to kind of go back to what I would call a normal cold cough cold and flu season, but I think we're going to see one this year given kind of indications, we're seeing out of summer southern hemisphere and given that.
Absent another implementation of lockdown measures, which I don't see happening I would expect a pretty normal cough cold and flu season, and that's going to give us a pretty nice benefit in gross profit gross profit dollars in this quarter. The other thing to think about from a guidance standpoint is that we.
We are with the store closures that we've done some of which we were still executing on actually closing during the first and second quarters and then the additional SG&A cuts I expect our run rate on SG&A to improve.
Comparing first half to second your SG&A actually get lower by about $20 million to $30 million as well with the initiatives. We're taking and you contrast that to last year, where SG&A actually got higher just because we were almost overwhelmed the vaccine demand. We've got a much I think better bead on what we need to accomplish with fulfilling these vaccines efficiently. So.
I'll pause here, but those are really some of the kind of indicators in the second half that give us confidence in the guidance that we have.
I would just add sorry, Matt I would just add that we are seeing much higher volumes of tamiflu just in the last few weeks prescriptions for flu. So we do think that number one it will be a pretty heavy flu season, all indicators and.
And number two COVID-19 is still raging.
No. It does it feels that way right, if you're okay with that.
I never thought that.
But.
Wanted to just follow up on one quick thing and that was your comment.
We think about elixir.
We understand that the lines are going to roll off but I'm. Just curious are there any changes to plan design for January one I know, we don't have a limited impact just given the timing of your fiscal year end, but as we think about your <unk> going forward you've talked about the benefit of rebate you talked about the benefits of network, but is there anything going to be incremental.
January one start dates that could impact the fiscal 'twenty four numbers.
Matt.
I hand, it to you and maybe Chris could add color.
Yes, I think from a pure numbers standpoint, Lisa the best I can probably comment on for fiscal 'twenty four and then we got a lot more work to do to build out the plan as I would expect.
<unk> down in lives in fiscal 'twenty four given.
The result of the selling season combined with the loss of the client that we talked about.
We're still finalizing our ultimate live estimates, though so it would be premature for me to give you an exact number I do expect the benefits we're getting from network management to continue at a minimum into into fiscal 2024, I think we have some opportunities outside our book to grow into specialty business.
But clearly from a pure life standpoint, we would expect to be down and Thats what drove the goodwill impairment that we took.
Okay, great. Thanks for the comments.
Okay.
Your next question comes from.
Your next question comes from the line of George Hill with Deutsche Bank.
Yes.
Morning, guys and thanks for taking the question I guess, Matt and Heyward I wanted to ask a little bit about the new promotional and discount program, which Matt I know any question to about a little bit during the quarter. I guess can you talk about maybe where the impacts you're seeing on customer loyalty and Matt just kind of from a financial and accounting perspective can you talk about how the changes in kind of the accounting around the loyalty program.
Graham impacts front end comps.
And kind of like if there was if there was a call out there that we can quantify.
Sure Hey, George.
Let me just say that the change in the loyalty program has driven significant improvements in our margin I would say.
Matt can quantify them, but they are large and they are better than we expected and you can see them rolling through the numbers.
By many I would say by many indicators, we would say that this change in the loyalty program has been a very good move for us, including the fact that we have added a significant number of new customers to rite aid, which the goal for the change to the loyalty program.
Program was to eliminate these very significant discounts and markdowns and introduced a digitally oriented new loyalty program that was more modern and more in line with our competitors that would attract our target growth market with.
Losing our current customers in the process Andre you wanted to comment on how we're doing there.
Yeah, Thanks, Hey, good morning, George.
It's six months into the program now and we did have a big Bang launch over the summer.
When we look at our numbers when we made the conversion from the old to the new.
We've retained.
99% of what we call it or premium customers in the oil program.
Also exciting is that this is a digital first program and early adopters of this program. What we're seeing is that they are making incremental trips to stores.
And we're also have.
The ability right now, which we have started to be a much more personalized in our offers to.
To drive incremental trips to the stores for folks in the loyalty program.
George I'll jump in you asked a question about benefit and the benefit we're seeing in the loyalty program right now is actually on the margin line because with the elimination the old program at a 10%, 20% discount element to it that you got to if you were into certain got to a certain level and the program reader script purchase.
Script, Phil fulfillment or front end purchases and then once you've got that you were getting that 20% to 20% discount on everything you bought regardless of whose automation or not.
Switch to a much more kind of item based kind of very specific promo based.
Program, we're able to eliminate markdowns and that markdown eliminations had about a 200 basis point benefit to our to our front end margins.
Can you quantify that impact for the first half of the year.
Which is kind of masked by public numbers by in total margin by the impact of cycling all the noise and the pharmacy side and also the fact that our front end comps had been soft, but the margin benefits been good.
Okay. That's helpful. And then maybe just a quick follow up when we kind of get this went from investors we had the.
The goodwill write downs as it relates to <unk>. This morning, and we've had some kind of other new charges.
Kind of pop up in the prior quarter.
Yes.
Matt I was just as you are incumbents around underlying earnings quality I guess like just how do you feel like the earnings quality of the businesses and kind of on a go forward basis, how should investors be thinking about whether or not we see another step down in elixir or kind of more store closures.
And you talked about some of the initiatives that are being taken to kind of it seems like theres a lot of moving parts as it relates to <unk>.
Kind of forecasting underlying earnings I guess I, just kind of ask you to comment on earnings quality.
Yes, I think for all the reasons I laid out in the comment on the back half of the year I think our earnings quality is certainly as you look to EBITDA, which is I think the right measure from an earnings quality standpoint is solid.
And we expect that EBITDA to increase in the back half of the year. The goodwill impairment for <unk> is really driven by a triggering event from a change in.
In our estimate of lives for next year and we've been open about the fact that we expect lives to go to go down and so that that is what drove the impairment on <unk>.
The goodwill for elixir on the store closures.
I would argue that closing these unprofitable stores is improving earnings quality, a great deal because we've wound our way through about 150 stores in the fleet that just were were a drag on EBITDA and we're going to be continue to be a drag on EBITDA and so while the charges or terminate those leases are <unk>.
Italy substantial.
Our noncash charges I'll remind you.
There are substantial the underlying EBITDA benefit of $60 million in this year that we're getting from those closures actually improves our earnings quality.
George Let me just jump in.
Everything that said it is true listen I'm committed to organic growth and paying down debt at the bottom line. That's what matters. We have a very strong growth culture, we have demonstrated in the quarter.
Grip growth, taking market share improvements and elixir sales specialty pharmacy growth significant SG&A reductions and productivity improvements both at elixir and Rite aid. So we are going to do everything we can to achieve EBITDA growth.
That we can within our control now there are factors out of control, particularly now the macro economy issues.
The change in Covid landscape, but at the end of the day. This company can grow and will grow organically to the best degree. We can we can do and I think there are indications that that even but I know, it's kind of a noisy quarter.
And then maybe he would have been if I could jump in with one last quick one just as it relates to elixir could you just remind us again, how many PDP lives elixir serves and I assume that the expectation as we think about calendar 'twenty three is that that number's, probably a step down again, given the PDP appears to be shrinking segment nationally.
Yes, the number we serve right right now is around 600000 that number will step down next year.
Okay. Thank you.
And while that number is actually said shrinking nationally.
<unk>.
The benefits of that business to us have been the expertise that we have in supporting Medicare Health plans government health plans, along with commercial health plans, who are interested in getting into that space from a Medicare advantage, our MA PD perspective, and that is where we are showing growth and as you know we were.
Retained.
Our largest Medicare health plan as well for one one.
Yeah.
Yes. Thank you I appreciate it.
Thanks George.
Your next question comes from the line of William Reuter with Bank of America.
Good morning.
My first question on Elixir sounds like you were somewhat disappointed by the ability to gain lives.
For the next calendar year based upon more companies staying with their incumbent but you also expect that this is an opportunity and that youre going to do better in the future.
What do you think occurred this year that left.
Companies less likely to change and why do you think that will improve in future years.
Good.
Good good question in light of the environment well, what's happened by all indicators from what we've heard from the consultants is that because of coming out of the pandemic companies have been very distracted and frankly, I think under a lot of economic pressure and.
It requires resources to change a TPM, it's not it's not a flip the switch and historically you would see levels of retention around 70%, 75%, meaning that the rest of the companies are actually switching vendors in this environment we've seen.
Retention rates up at around 85%, which means fewer companies are switching TBM vendors and so that has benefited us in the sense that if you take out that one client we lost our retention rate at 96%, which is very high in this environment, which I think it's just an indication of.
What's going on so we do all the consultants do you believe that that will go back to normal levels. We have had our strongest sales season in three years. So.
So we have sold more lives this year than we sold in the last three years and we still are closing business, but it was a slower cycle given how much pipeline, we had than we expected.
Got it that makes sense and then.
After the round of sale leasebacks that were completed in the quarter is there any way you can ballpark a range for what the value of remaining real estate, both distribution centers, which there may not be any more of those but maybe an estimate of the value of the stores that you continue to own.
Hey, Bill it's Matt Thanks, Robert Thanks for the question. So we do not have any further opportunities on the distribution center side for sale leasebacks.
The store side, we've probably got about 75 to 100 owned stores left in the portfolio now not all of them are going to be candidates for sale leaseback for a variety of reasons.
But that's kind of the number of owned stores that were still working with that theres at least a possibility to do a transaction with.
Got it and then just lastly for me.
Sounded like one of your first questions that you asked was about the supply chain and you mentioned that it would be important products that youre not able to get so it sounds like more or less your private label is where you're experiencing challenges is there any way to think about what the drag maybe this year on that supply chain disruption in private label and then therefore, what would be the tail.
Next year, our opportunity next year to get some of those gross profit dollars back.
Andre.
Maybe not okay. Matt go ahead.
Yeah, I'll jump in first of all and kind of what we have built into our guidance and then Andre can give more color I think as we kind of started to first set our guidance for beginning of the year, we had a pretty.
And.
<unk> supply private label rollout program that we're pretty excited about and that we're expecting to give us about a $15 million EBITDA gross profit slash EBITDA benefit in the year I think.
A large part of that number is at risk now for the year, which is one of the.
Kind of puts and takes are factored into what has changed in our outlook for the back half of the year.
But improving private label owned brand presentation.
Penetration excuse me.
It is a benefit when you can get that out so I do think there still is an ability to capture that benefit in future years.
Okay.
Perfect Alright, that's helpful.
Alright, sorry, sorry, I was just going to say, thanks, but you Couldnt continue.
No that's fine thank you.
Okay.
Your next question comes from the line of <unk> Martinson with Jefferies.
Good morning.
Stores that Youre closing.
What do we get for those script file sold in or are we still looking at script file valuations of the 10 to 20 per script.
Hey grew its Matt the short answer is yes, I mean, it will vary obviously, depending on facts and circumstances just like it does in the buy side.
On the Scripps side, but in general that's the right range from the standpoint of.
The value of a script file.
Okay, and how much did we get for those referrals sold.
I'll have to go back and look I think between the two quarters, we've probably gotten about $40 million, but will verify that for sure Guru and follow up with you, Okay and when we look at the increased shrink.
And some of the urban markets and the store closure programs do we have one.
Is there insurance for this shrink and does this change your mindset what stores you should be closing.
Andre I think let's why don't you comment on how I would say I mean, just to Pat ourselves on the back we've done pretty well with shrink until this quarter and then I think.
Andre you guys can comment on the insurance and what you think this means the reason we pointed out this is new.
Europe is because that was already a market, where we have been shrinking our footprint Andre.
Thanks Heyward.
First is there isn't any insurance on the gross margin heads.
The second is over the last 24 months the team has done an incredible work.
On improving our product protection.
Proving.
Organized retail client program I think the headline here is the environment that we operate in particularly in New York City.
Not conducive to.
Reducing shrink just based upon everything you read and see us.
Social media in the news in the city.
And can you just comment on some of the pilot work, we're doing to alleviate some of these issues and still serve our communities.
Our goal is sustain the communities.
We're piloting looking.
Looking at how do we just operate a pharmacy only pharmacy prescription only format and some of the communities.
We have two community wants us to do this we're looking at literally putting everything behind showcases to ensure the products there for our customers who want to buy it.
And then lastly.
We've even had to go to the extent of easing off duty police officers and some of the restore system into some of these communities also.
Okay.
Where are we on liquidity today, and where do we feel that we will end the year.
We're at about $1 2 billion right now.
Liquidity and as I talked about on the call. The timing of this build of the CMS receivable in the second quarter as well as some of the timing and our interest payments accruals in inventory always causes a if we don't have CMS secured receivables keratitis in particular, we're always causes.
Q2 to be the kind of a low point from liquidity standpoint, we talked about getting back to a leverage ratio in the low fives by the end of the year and coupled with that would be an expectation that we would have liquidity back in the $1 8 billion range.
And the CMS facility normally is call. It 600 700, depending on how it builds during during the year, but you guys securitize.
Yes, probably closer to six to seven but yes.
Okay. Thank you very much guys I appreciate it.
Thanks, Chris.
Yes.
And there is time for one additional question. Your final question comes from the line of Carla Casella with Jpmorgan.
Great. Thanks for squeezing me in.
I'm wondering on that CNS facility are you seeing any change in the spending or cost or the discount rate that you have to offer to get those into the market changed at all.
It has carla the pricing tracks very close to the pricing that's in kind of the LIBOR benchmark rate, it's not at LIBOR, but SaaS at indices.
Move the same way that LIBOR does so it will be.
Not dissimilar to.
Our other cost of funds there will be an increased cost to securitize that receivable, but there will be an increased cost we kept it on our revolver to so net net we're still getting as good a deal as we can get.
Okay, great and it's still an attractive.
The funding over the revolve are cheaper.
It's around the same cost as a revolver and what it does is it the reason I like it. So much is it basically frees up liquidity because.
You are getting.
Just frees up the amount of liquidity because the CMS receivable in that that itself is a something that collateralize any of the other debt that we have.
Okay, Great and then on the sale leaseback can you give us a sense.
Hey, Brian .
I would say with that implied cap rate.
So the cap rate on the latest round of sale leasebacks. We've done this quarter is just under 7%. So we've seen the market move a little bit on us, but still just given.
All the disruption.
In the market is still a pretty attractive cost of funds for us all things considered.
Okay, that's great and then one last one.
There's been a lot of press on different opioid settlements away from you.
And I'm wondering where do you have remaining cases ongoing settlements.
Settlements you did last year in Ohio, and Michigan does that complete dose date.
Okay.
So some counties to outstanding and then <unk>.
Any other major to call out nationwide.
Yes, Carla besides the.
Settlement of West, Virginia, which got announced by West Virginia to really haven't been.
A lot of movement, what we previously discussed we had the settlements with several counties in Ohio, and New York, We had seven West Virginia, you know a lot of discussions still ongoing and really can't provide any more color than that.
Okay great.
Thank you.
Okay.
I will now turn the call over to Heyward donigan for any closing remarks.
Thanks for your time today, and I'd be remiss, if I didn't once again mentioned that we do anticipate a very robust flu season, then ongoing COVID-19 infection, and there isn't new bi valent vaccine available, which covers both the old screen and the new strains of covered and I My.
And I, just got both our flu shot and our bivalent vaccine to protect ourselves for the season ahead and I highly encourage you all to get yours to protect yourselves and your families and we wish you all well thanks for your attention today.
Thank you for participating you may disconnect at this time.
Okay.
Okay.