Rite Aid Corporation

Good day and thank you for standing by. Welcome to the Rite Aid Corporation Fiscal Year 2022 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press par 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press par 0. I would now like to hand the conference over to your speaker today, Trent Kruse. Please go ahead.

All right. Thank you, Jerome, and good morning, everyone. We welcome you to our fiscal 2022 second quarter earnings conference call. On the call with me this morning are Hayward Donegan, Jim Peters, and Matt Schroeder. As we mentioned in our release, we are providing slides related to the material we will be discussing today. These slides are provided on our website, investors.rideaid.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 risks and uncertainties are described in our press release in Item 1A of our most recent annual report on Form 10-K and in other documents that we file or furnish to the SEC. Also, we will be using certain non-GAAP measures in our release and in the accompanying slides. The definition of the non-GAAP measures, along with the reconciliation to the related GAAP measure, are described in our press release and slides. And with that, let me turn the call over to Hayward. Hayward? Hayward, you may be on mute.

Please stand by. Hayward got disconnected. All right, Hayward now connected.

Trent, I'm sorry. I got kicked out. I'm back.

That's okay. Hayward, we're ready for you when you are.

Sorry about that. Good morning, and I apologize for our technical difficulties this morning. I want to thank you, Trent. Good morning, everyone. I'm very pleased with our second quarter performance, which we announced earlier this morning. Before digging into the results, I want to spend a moment on the big picture. Our Rx evolution strategy is showing promising results, and I'm encouraged that we're not only exceeding expectations, but also demonstrating that our strategy is gaining momentum. We all know the important role pharmacists play in the health of the communities we serve. Never has that been more obvious than during a pandemic. We're also seeing our retail and digital evolution drive new growth and demonstrate a new right age for our retail customers. And at Elixir, we're making progress on our competitive positioning, building out our leadership teams and integrating our various assets. As a reminder, we are relentlessly focused on three things, growing our business, reducing costs, and improving our leverage ratio. One recent example of our work to reduce costs is the announcement of our new remote-first work approach. This new approach will not only help us attract and retain the best talent in a very competitive labor market, while also providing our associates the flexibility they desire, but it will also deliver expense savings through our efforts to reduce our corporate real estate footprint. Our entire team is really excited about our reimagined workplace model. So while the environment we do business in will continue to be dynamic and at times, as we've seen, very unpredictable, I'm really optimistic about our company's future and excited about the new Rite Aid we're building. As for the second quarter, we grew our revenue 2.2% to $6.1 billion, including a 6.5% increase in our retail segment. And we improved our inventory turns by 7%. continuing our strong trend in inventory turns from prior quarters, demonstrating that people are really liking our new merchandise. Our results were driven by our vaccine administration, improved profitability at Elixir, and strong results in categories such as vitamins and upper respiratory. This generated adjusted EBITDA of $106 million, which exceeded our expectations. We also, importantly, amended and extended our revolving credit facility, successfully pushing maturity out to August 2026 as we continue to enhance our financial flexibility to drive and deliver on our RX evolution strategy. These results reflect our continuing efforts to serve our customers and communities, especially in this rapidly changing environment when they need us the very most they ever have. Now, let me briefly discuss our most recent COVID vaccine and testing efforts. We administered nearly 2.5 million COVID vaccines in the quarter, successfully meeting the continued and increasing demand of our customers. As of today, we have now provided over 8 million vaccines in total since we began administering the vaccine late last year. In addition, we saw COVID testing demand increase notably during the quarter and we conducted over 700,000 free PCR tests with turnaround times still averaging just over two days in spite of the volume. Also, in partnership with Health and Human Services, we supported summer school testing in several school districts to ensure schools are a safe environment for learning. And we believe that our support for testing has the potential to further expand and we're ready to grow our partnerships to support additional school districts for 2021 and 2022 school years. As we move ahead, we're working closely with all of our partners at the CDC and the White House, and we are preparing for increased vaccinations to support workplaces when it comes to their mandates and probably boosters, although it's still a little bit undetermined. Now, let me say a few words about ELIXIR. As a reminder, I'm now overseeing both Rite Aid and Elixir on a day-to-day basis. And as I mentioned earlier, I'm very proud that we own all the assets we need to be successful. Laker, which is the industry-leading adjudication platform, our own mail order and specialty pharmacies, and a large and growing cash card business, all of which provides the scale to drive increased economics for us and our customers. However, we still have much work to do to modernize and integrate our assets and finalize and launch the next phase of our new clinical and digital solutions. We continue to focus on preparing for the 1-1-23 selling season. To this end, we are making progress on a number of fronts. We recently announced that Lance Neal has joined Elixir as Chief Operating Officer. He comes to us from Centene and has additional senior leadership experience at Diplomat Pharmacy and Walmart, just to name a few. So clearly, he brings significant industry experience to Elixir. He's going to be overseeing our new team working on the business process and technology integration of our PVMs. And he has responsibility for core operations, including member eligibility, enrollment and billing, client implementation, and claims operations. He's also responsible for government programs and our own Medicare Part D plan, Elixir Insurance. In addition, given his experience, he will oversee strategy development for Elixir, ensuring that the company remains positioned for continued innovation and growth. We've also hired a new head of pricing and underwriting, and we're currently searching for key leaders to round out our current team. We're also close to selecting a single rebate aggregation partner to serve our health plan and employer PBM business. This critical initiative will enable us to deliver a significant increase in rebate value to our clients in the new year and benefit the Elixir bottom line. Moreover, it allows us to improve our pricing as we pursue new business. We introduced our new pricing in most recent proposals, and we are already seeing a sizable increase in the number of groups where we've been invited to the final stage of the evaluation process. More invitations to the final stage means more opportunity to introduce our enterprise value proposition to clients, and that means more opportunity to win our fair share of the regional health plan and mid-market employer business. In addition, we're completing the overall integration of Elixir and Rite Aid back office functions while stabilizing and modernizing our infrastructure and technology solutions. We continue to refine our go-to-market strategies and solutions to compete nationally in the segments where we are best positioned for success, leveraging our Elixir pharmacists and new clinical and analytic capabilities powered by Health Dialog. And I'm very excited about this. We're focused on growing Rite Aid-anchored limited networks in Rite Aid markets with Elixir, which leverage our in-store pharmacists who engage consumers in personalized health solutions. So far, we're seeing favorable responses from customers and consultants on these models. We anticipate an additional increase in opportunities in next year's selling seasons, and we believe the investments that we're making now and our focus on enhancing our product offering will enable us to win our fair share. Okay, so before passing it over to Jim, who hopefully is still on the phone, to provide an update on our retail business, I would like to make a few closing comments. We continue to prepare and adapt to the changing needs of our customers and communities, and at the same time, of course, focus on delivering strong results for our shareholders. To that end, and as Matt's going to discuss later in the call, based on our strong first task results and anticipated COVID vaccine and testing demands, we're raising our full year 2022 adjusted EBITDA guidance. Finally, I've said it many times before, but I can't say it enough, Our associates are the heart of Rite Aid, and our success begins and ends with them. I want to thank each and every one of you, you and them, for everything that they do to help our customers thrive. And now I'll turn it over to Jim for some comments on the retail pharmacy segment.

Thank you, Hayward. I still am on the call. And good morning, everyone. I'd like to start by echoing Hayward's comments about our team. I'm incredibly proud of our amazing associates who continue to hustle with humility to be there for our customers, communities, and each other. Looking at the quarter, we grew our business and executed well around COVID vaccine administration, while also significantly ramping back up our COVID testing activities to meet the needs of the communities and neighborhoods as positivity rates continue to increase. I continue to be inspired by the profound role pharmacies in general have assumed as the trusted everyday care connector for both individuals and for the broader healthcare system. As you've heard me say before, we will continue to work tirelessly together to serve our customers while also strengthening our business operationally through the ongoing implementation of lean methodology. Our lean work has already positively influenced the productivity and availability of our pharmacists to engage in consultations with customers, to build our business, enhance our working capital, to give COVID vaccines, and is helping to foster an environment of continuous improvement. At the heart of our retail operations are our pharmacists and store teams. The importance of our pharmacists has never been clearer as they are the frontline of defense in America's healthcare delivery system. As Hayward noted, We administered another 2.5 million COVID vaccines this quarter, while also beginning our administration of third series shots for immunocompromised individuals. And we conducted over 700,000 COVID tests. Now, as we look at our pharmacy results, we grew our 30-day adjusted comp scripts by 7.1% in the quarter and 9.9% on a two-year stack basis. In addition, maintenance scripts grew approximately 2.4% for the quarter and are up 7.1% on a two-year stack. And when excluding COVID vaccines, we saw acute Scripps grow 1.5%. However, on a two-year stack basis, acutes are still down 3.5%, which highlights that we're still not fully recovered to pre-pandemic levels. During the quarter, we successfully completed over 124,000 medication therapy management, or MTM, claims, which represents a nearly 58% increase in completed claims versus last quarter. These efforts allow us to provide a higher level of care, help our customers achieve better health outcomes, and reduce costs in the healthcare system. We continue to invest in our own online scheduling platform and now enable customers to schedule an appointment not only for COVID vaccine, but also flu and other vaccines. With these changes, customers have booked almost 700,000 future appointments. Our pharmacists remain committed to encourage customers to take advantage of the clinical services in our stores to ensure our customers are protected with all recommended immunizations. In fact, their focus has allowed us to increase the number of ancillary vaccines administered per store per week by nearly 140% compared to where we began the quarter. We also routine our pharmacists with education and training around focused health topics. For example, this quarter we focused on women's health and children's health. We developed and provided resources pertaining to traditional, alternative, and lifestyle therapies to help women feel and look good from the inside out. Additional resources incorporated a variety of ways to prevent common summer energies and illnesses, and tips to boost immunity and promote healthy habits as kids head back to school. We are excited to continue our efforts to truly unlock our pharmacists' full potential to drive increased productivity and meaningfully improve the profitability of our stores. Beyond the incredible work of our pharmacists, we continue to make progress on creating a more engaging and enduring consumer experience across our physical and digital touchpoints. The investments we've made over the past year to adapt to our customers' expectations and strengthen our competitive position are delivering results. While our front-end comps were down 2.4% for the quarter, we are up 3.0% on a two-year stack basis. We saw some pressure on the front end this quarter given the pandemic-induced buying surge of last year that you may recall. We saw continued encouraging signs in our front end business with strength in key categories for us, such as vitamins, color cosmetics, and baby care, three areas where the team has focused to enhance the assortment for our customers. Of note, our strategic focus categories on the front end were up approximately 7% in total on a two-year stack basis. Looking across our entire footprint, customers are continuing to see fresh, exciting product offerings as we work to improve our merchandise mix. As a result of our re-merchandising efforts, we continue to see improved inventory turns, including a gain of 7% this quarter. Turning to the physical rejuvenation of our store base, We progressed on our exterior refresh program with now almost 2,200 stores or 90% of our chain updated, and we expect to complete this work in the coming months. We are also continuing our test and learn approach for our new flagship prototype stores. These flagship store remodels are allowing us to test new concepts around merchandise, services, and workflow in a way that truly elevates the consumer experience. We know there's not a single one-size-fits-all solution that translates across geographies and demographics, and that each investment requires a surgical approach to accommodate the many differences that exist among the unique communities we serve. This work is helping to pave the way for an approach that will enable us to scale the right type of remodel for each particular store and market across our entire fleet. Now, shifting to the evolution of our own brands, We continue to make progress to reinvent our own brand's portfolio with product attributes our customers desire, like green, organic, and better for you. We're still at the start of this journey, but we've already completed the refreshed packaging and brand design of Pawtown within the pet category and are nearly complete with the redesign of our new baby brand. Both of these brands will be hitting shelves this fall with many more exciting new brands and updates to come thereafter. Own brands remains a critical component to our updated merchandise assortment, while also positioning us to deliver improved profitability, as they typically carry a margin rate about two times higher than that of national brands. Although ongoing supply challenges have affected our in-stock rates, we still saw our own brand sales grow versus last year and on a two-year stack basis in the second quarter. Speaking of these supply challenges facing all retailers, we feel pretty good about our positioning today, but continue to monitor and adjust as needed to mitigate any risks. In addition, the labor market continues to be pressured as well. Again, an industry phenomenon. To address these challenges, we continue to invest in wages for associates and have launched a new digitally enabled recruiting platform while also providing training and differentiated career development paths for our associates. Also, our digital experience remains a core priority for us, and we continue to see significant growth overall and in our on-demand delivery options, third-party marketplaces, and buy online, pick up at store. We also see strong growth in digital refills. In fact, we launched our latest delivery collaboration with Shipt, furthering our commitment to be everywhere our new target consumer needs to be and when she needs us. We delivered another strong quarter in our marketplace and delivery business with 183% revenue growth versus last year. These channels deliver incremental profitability and now represent nearly 75% of our digital business versus only about a third of our digital business at this time last year. We also continue to enhance the customer experience in digital and are seeing customers take more advantage of features like digital script refills, where we saw a nearly 34% increase in the number of refills processed digitally compared to last year. And I'm happy to report that we have now rolled out buy online, pick up at store to 1,600 plus stores. And our curbside experience will be fully rolled out by October. We expect these investments to have a continued halo effect across the rest of our business, attracting new customers, driving bigger basket sizes, increasing product availability, enhancing overall consumer experience, and improving sales across our chain. In closing, we continue to drive progress as we build top line momentum and maintain a relentless focus on improving profitability. Thanks to the energy, passion, and commitment of our teams, we are confident that we can continue to deliver on our strategy, build relevance, and gain market share both today and in the future. Thank you so much. And with that, I'll turn it over to Matt for some comments on our financial performance. Matt.

Thanks, Jim. And good morning, everyone. Before diving into the second quarter results in more detail, I want to touch on a couple of transactions that we completed during the quarter that strengthen our debt maturity profile and capital structure. As Hayward said earlier, we amended and extended our revolving credit facility, delivering a reduction in our interest expense while moving the maturity out until August of 2026. We now have no debt maturing before July of 2025. We also accelerated the annual sale of our CMS receivable splitting the transaction into three parts instead of the two parts from last year, which reduces the volatility in our liquidity during the fiscal year. We ended the second quarter with $1.7 billion in liquidity. Our strong liquidity and the steps we have taken to extend maturities gives us ample flexibility and runway to execute on our strategic initiatives. Our efforts to improve our performance and solidify our capital structure and maturity profile have been noticed by S&P, who upgraded our credit rating during the quarter. Now turning to the quarterly results, revenues were up $131 million or 2.2% from the prior year's second quarter, driven by growth at the retail pharmacy segment, partially offset by a decline at the pharmacy services segment. Second quarter net loss was $100.3 million, or $1.86 per share, compared to last year's second quarter net loss from continuing operations of $13.2 million, or 25 cents per share. Current year's higher net loss was due to a decrease in adjusted EBITDA, higher non-recurring litigation settlements, a higher loss in sale of assets resulting from the sale of the CMS receivable, and a loss on debt modification and retirements compared to a gain on debt modifications and retirements in the prior year second quarter. These items were partially offset by lower restructuring related costs. Adjusted net loss from continuing operations was $22 million or 41 cents per share versus an adjusted net income of $13.5 million or 25 cents per share for the prior year quarter. Adjusted EBITDA for the quarter was $106.2 million, a decrease of $45.4 million from the prior year's result of $151.6 million. The primary driver of the decrease was an increase in selling general administrative expenses due to cycling the prior year benefit from a change to modernize our associate paid time off plans, incremental costs from our recently acquired Bartell stores, and cost encouraged to drive COVID vaccines, partially offset by an increase in gross profit resulting from an increase in prescription volume in our retail pharmacy segment. Now let's discuss the key drivers of operating results in our business segments. Retail pharmacy segment revenue for the quarter was $4.3 billion, which was $259 million higher, or an increase of 6.5% over last year's second quarter, due to an increase in same-store sales and the inclusion of Bartels. Retail pharmacy same-store sales increased 2.6%, with same-store prescription count up 7.1%. Excluding the impact of COVID vaccines, maintenance prescriptions increased 2.4% on a same-store basis, while same-store acute scripts increased 1.5%. As Jim mentioned, although we are seeing continued increases in acute scripts, We are still down 3.5% on a two-year stack basis. Front-end same-store sales, excluding cigarettes and tobacco products, decreased 2.4%. The decline in front-end same-store sales was driven by the cycling of last year's COVID-related front-end sales gains. Second quarter retail pharmacy segment adjusted EBITDA was 69.4 million, or 1.6% of revenues. compared to last year's second quarter adjusted EBITDA of $122 million, or 3% of revenues. The decline in adjusted EBITDA was due to an increase in SG&A expenses, partially offset by increased gross profit. Retail pharmacy expense on adjusted EBITDA SG&A basis was 135.7 million higher and 177 basis points higher than last year's second quarter. The increase in SG&A dollars is primarily due to the following. Cycling the benefit from prior year's change to modernize our associate paid time off plans. The inclusion of Bartels SG&A costs and incremental payroll and marketing costs associated with increased COVID vaccinations in the current year quarter. After adjusting for these items, SG&A costs would have been in line with prior year's second quarter. I now shift to our pharmacy services segment, Elixir. For our second quarter, Elixir saw revenues decrease 140 million or 6.9% to 1.9 billion due to a planned reduction in our Elixir insurance membership and an expected decrease in membership in our PBM business. Elixir's second quarter adjusted EBITDA was 36.8 million or 1.9% of revenues. an increase over last year's second quarter adjusted EBITDA of $29.3 million, or 1.4% of revenues. The increase in adjusted EBITDA is a result of cycling the prior year negative impact from the rebate aggregator switch at Medtrak, plus improvements in our discount card business and network management, offset by cost pressures at Elixir Insurance. I'll now turn to our cash flows. Our cash flow statement for the quarter shows a source of cash from operating activities of $25.7 million compared to a use of $358 million last year. The difference is due to the early sale of the CMS receivable in the current year, plus timing-related changes in accounts payable and accrued liabilities. We expect to generate a working capital benefit in fiscal 2022 from continued inventory reduction initiatives. Cash used in investing activities was $35.8 million for the quarter. We completed a few additional store sale leaseback transactions that generated total proceeds of $6.7 million in the quarter. Our net debt balance was approximately $3 billion at the end of the second quarter. Now turning to updated guidance for fiscal 2022. As a result of the momentum we have seen in the first half of this year, and our expectation for an increase in demand for COVID vaccines and testing versus our prior expectations, we are raising our adjusted EBITDA guidance. Total revenues are expected to be between $25.1 billion and $25.5 billion in fiscal 2022. Pharmacy services segment revenue is expected to be between $7.7 and $7.8 billion. Net loss is expected to be between $197 million and $221 billion. Adjusted EBITDA is expected to be between $460 million and $500 million, and that's an increase over our previous guidance of $440 million to $480 million. Capital expenditures are expected to be approximately $300 million, with a focus on investments in our store base, file-by-purchases, digital and technology initiatives, and Elixir. This completes our prepared remarks. Jerome, could you please open the phone lines for questions?

Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. And to withdraw your question, press the pound key. Your first question comes from the line of Elizabeth Anderson with Evercore. Your line is open.

Hey, guys. Thanks so much for the question. I was wondering if you could talk about, on my math, it looks like the contribution from COVID on an EBITDA basis was probably about $43 million in the quarter. So I was wondering if, one, you could tell me if that seems correct to you. And, two, if you can talk about over the back half of the year, how you see the COVID contribution specifically and then the core EBITDA contribution specifically trending. Thank you. Matt?

Thanks, Hayward, and thanks, Elizabeth. Good morning. You know, first of all, I think your math is probably is directionally correct. I mean, we don't give a specific, you know, COVID impact just because there's so many moving parts to COVID contributions. But I would say your math is in the right zip code. You know, I think a couple things to think about for both the back half of the year and ongoing and, you know, the other factors in the business besides the vaccinations and the testing. You know, first of all, obviously, we still expect some vaccine activity in the back half of the year. You know, I wouldn't be so precise to say it's coming from boosters versus mandates versus other things. I mean, as everybody knows, it's a wildly changing environment, but we do expect to see continued demand. in the back half of the year, and honestly, continued demand going forward for vaccines in one form or another for COVID. Other things that we're kind of seeing in the business, you know, we're still seeing, you know, we operate in some of the most impacted markets, so we still see some depressed traffic levels, you know, in the stores in general result. Cough, cold, and flu certainly last year was very depressed. I would tell you that our guidance for the back half of the year contemplates, you know, cough, cold, and flu is probably better than last year, but not at historical levels. And then acutes continue to be down, you know, from a pre-COVID level. They're down 3.5% on a two-year stack basis. And I think we expect that trend to somewhat continue in the back half of the year. And the thing I would remind you that is that, you know, acutes being down hurts scripts, but it also hurts underlying rate because acutes have a higher generic penetration than maintenance does. And the generics are more profitable scripts than maintenance scripts. So those are kind of things we're looking at, Elizabeth. And, again, I think, you know, certainly still a very volatile impact in the back half of the year. A lot of things could go one way or another. But I think enough line of sight into vaccine demand that we're comfortable raising the guidance.

Got it. That's really helpful. And have you – can you also – I'm positive you mentioned it, sort of quantifies the contribution of Bartel in the quarter, maybe they're from a revenue or a profit basis.

Yeah, something that we haven't, you know, drawn out yet, I would say, you know, the contribution from Bartel on an EBITDA basis was probably relatively minimal. Okay, thank you. Expected to improve as we've now completed the conversion, though, and I think as we expect to now that we've completed the conversion, I think certainly expect to realize some more synergies in the back half of the year and in ongoing years, but it's going to take some time.

Yeah, well, I think we're ahead of plan on synergies and right against plan on the system conversions. But the Pacific Northwest has been particularly hard hit with COVID and has been slower to come back and a tougher labor market than the rest of the country. So I think they're kind of swept up in that with us.

Got it. That's helpful. Thank you.

And your next question comes from George Hill with Joyce Bank. Your line's open.

Good morning, guys, and thanks for taking the questions. I guess what I'd ask is you guys think about the rebrand and the store repositioning. Can you talk about how you're thinking about the portfolio? And, Matt, like you kind of called out the impact of the store's ex-cigarettes and alcohol in the quarter, I guess. Do you see those as categories that are going to continue to be important to the company? as you move forward with the store rebrand, or are there any categories you would consider exiting?

Well, we've already exited quite a number of categories. So we've actually reset 75% of our merchandise within the last year. So much more oriented toward better for you, organic, safe, and on-trend. in our beauty skin care lines and now launching our own brand. So we're really excited about offering and curating merchandise that is attractive to our target growth customer and also is generating the highest terms that we've seen in many, many years on inventory. We have been over time exiting categories of tobacco, so we were the first to exit vaping implement the age limits. We're being, in many states, regulated out of tobacco. We are not, at this point, exiting tobacco, but it's almost exiting itself over time. There's no short-term plan for us to exit tobacco, but it's clearly something that we're looking at. And we're, in the meantime, really focused on the rest of our merchandising upgrades.

George, I can just add a little to that as well that might give you color on kind of where we're really de-emphasizing and emphasizing in addition to what Hayward said. Really de-emphasizing areas like automotive and home electronics and hardware. Really emphasize, and general merchandise subcategories in general. And really emphasizing areas that have shown really strong lift in our remodels that you referenced. So, you know, in our early remodels, we've seen a significant lift, not only in scripts, but in the front end categories, double digit growth in areas like beauty and wellness and personal care. So, you know, that along with the benefits of inventory turns where we've also had double digit growth in these remodels and shelf productivity. we feel like we're onto something and are positioning ourselves to scale across our fleet.

That's helpful. And maybe just a quick follow-up for Matt, just to be clear, as we think about the guidance change for the balance of the year, it seems it's an increased contribution from, I guess, vaccines and tests. But is there any underlying change in any of the, what I would, I guess, the core performance metrics versus expectations a quarter ago?

George, the main driver is vaccines and testing and the demand. That's the main driver of the guidance change.

Okay. So just kind of nothing else in the core. Okay. That's helpful.

Thank you. Your next question comes from Lisa Hill with JP Morgan. Your line's open.

Thanks very much. Good morning. Just going back to Jim's comment around labor and that, you know, we're seeing this across the board. Both of your competitors actually called it out because it's such a headwind. Can you maybe just talk about what you're seeing and is that also weighing on your expectations for this year?

Well, first I just want to call out that we are already above minimum wage in the majority of our states. We've recently made adjustments in starting wages in a number of the states where we felt we were uncompetitive and expect to continue to expand these efforts. We also recently launched a new digitally enabled recruiting platform that's really showing great results so far, you know, cautiously optimistic. And we're also providing enhanced training and differentiated career development opportunities for our associates. So as a reminder, we do have wage increases baked into our guidance for this year and, in fact, utilize some of our strong first half results to continue to invest in wages overall at Rite Aid. So we'll continue to monitor them, but I just wanted to call out that we already are over minimum wage in the majority of our states.

That's helpful. And then, Hayward, as we think about the PBM selling season, you talked about really focusing on 2023, but when we think about the middle market, you're right in the heart of the selling season for this year. Can you give us any kind of update as to your expectations for 1-1-22 starts?

Well, there is very little for 1-1-22 because the season is essentially over. And so while we do have, you know, a few hundred thousand lives in the pipeline for 2022 that, you know, some of which could close and some of which have closed, it was – we've been – we are understaffed on our sales team, and we just hired our new sales leader. So we've really – While we're certainly responding to bids, we've really been focused on the health plan bids that are coming in for 23 and ramping up our sales team to get ready for the 23 sales cycle. So a lot of this just has to do with the fact that we haven't had the staff. And so we've been taking our teams and really focusing on operational efficiency for our clients, driving improved economics, which is really starting to pay off, as I mentioned in my comments, and getting our go-to-market strategy solutions and analytics teams oriented towards, with our consultants and sales teams oriented towards the employer and health plan sales cycle for 23.

And then if I can just squeeze one more in around the rebate aggregation. You talked about that you're looking at partnering with someone there. Can you maybe just give us an update around the timing of that? Would you anticipate that that will be in place in the next couple of months as we think about having an impact on the PBM side?

I'm sorry, I missed the question about something chimed when you asked.

I can maybe jump in. Hey, where is Matt? I can maybe jump in. Lisa, we would expect that arrangement to be in place for 1-1 of 2022. Okay, perfect. I appreciate that. So minimal impact on this year, but certainly an impact.

An impact for next fiscal year. Okay, great.

Thank you. Correct.

Your next question comes from William Reuter with Bank of America. Your line's open.

Hi. Good morning. I guess maybe if you could talk a little bit about what your expectations are for flu shot administration and whether you've seen hesitation, which people have talked that may be the case given the COVID vaccines as well.

Jim, why don't you take that?

Yeah, I think you've characterized it well. I don't know that it's hesitation, but we've seen volumes be slower than they have in past years. And so we're cautiously optimistic as flu season really ramps up that they'll pick back up toward prior levels. But they certainly are slower than they have been in past years.

Okay. And then I guess as maybe we were to think about the next six months, if you could do your best to aggregate, you know, the tailwinds from a better cough-cold season, you know, you weren't administering COVID vaccines at this time last year. Flu vaccine administration probably, I don't know, maybe it's up a little bit. I guess as a whole over the next six months, are those still going to be meaningful tailwinds or I guess could cough and cold? I don't know. I guess how do you view that all in sum?

Matt, I think you should take that.

Yeah, Bill, it's Matt. I'd say a range of outcomes, you know, on all of those things. So I think one of the reasons for, you know, the range that we have in our guidance, you know, for the full year, even with half the year, you know, already known is So I think cough, cold, and flu, again, our guidance really assumes it's going to be stronger than last year, but not as strong as other years. But it's frankly a little too early to tell how that's going to shake out. Jim talked about how immunizations are off to a slower start than last year from a flu standpoint. I would tell you at this time last year, people were rushing out to get flu immunizations kind of early in the season. And so it's, again, too early to call what the ultimate impact is going to be. We've tried to take our best estimate for the range of outcomes in these items and bake them into our guidance. But, you know, still, you know, kind of wide range of outcome on both of those. And, again, that's one of the reasons for a $40 million range, even with half the year gone.

Sorry for the complex question. I know it's just hard from an outsider's perspective. Okay, I'll pass to others. Thank you.

Your next question comes from Karu Martinson with Jefferies. Your line's open.

Good morning. In terms of the SGA run rate, especially in pharmacy, are we expecting those payroll investments that are baked into the guidance, the Bartel and the benefit from the time off, that will continue and that we're going to run out of this 25% of revenue for the second half of the year as well? Or how should we think about SG&A?

And Matt?

Yeah, Carew, the cycling of the benefit from the PTO adoption last year was largely a second quarter item. And so from that standpoint, it probably made the last year comparison artificially low. I think some of the rest of the SG&A, you know, run rate for the back half of the year is somewhat dependent on, you know, the level of vaccine activity that we have for the back half of the year. If we kind of exceed or if the vaccine level goes down, I think you're going to see the SG&A level go down because we have invested payroll and advertising and marketing costs into driving that vaccine volume. If there continues to be reasons for increased demand, and we need payroll to staff that, and we also feel like additional marketing dollars are a good spend to try to get more than our fair share of that, then you can see these run rate levels continue for the back half of the year. I think it's somewhat volume dependent.

Okay. And just on a look, sir, when we look at the investment and the cycle of winning the new sales for 2023, I mean, is the expectation that it kind of continues flat here quarter over quarter at this run rate, or should we be modeling in a little bit of a benefit as we do reduce some of those costs going forward?

Matt? Well, I think for the back half of this fiscal year, Karou, it's a run rate that's probably relatively similar to what we saw in the first two quarters. Too early to comment on next fiscal year. Okay.

Yeah, I would just say the level of investment in Elixir is not actually particularly that high. It's not a capital-intensive business. So our CapEx tied to Elixir is very nominal relative to the rest of the business. And the investments are largely right now in what I would call people-processed. improvements. Increasing the experience and talent of our teams, investing in our teams, and really, really investing in the reengineering of our business processes and technology. So it's not a significant dollar investment. It is going to generate, I believe, very strong improvements in the efficiency of the organization. We've already seen the savings from all of our integration within Elixir and Rite Aid. So while we won't comment on next year, I think of this more of just a business process and staffing investment. And right now, just finding talent and getting the efficiencies out of the business and getting prepared for the selling season.

Okay. And in terms of that staffing, what is kind of the magnitude, as you said, not a CapEx-intensive business, but on a staffing level, what is kind of the investment that you feel that you need to have the business be ready to compete for the 2023 business?

Well, Matt, you can correct me if I'm wrong, but we're not going to see meaningful increases in the cost of headcount. It's really about getting... the right people in the current right positions and with the experience to be able to drive the efficiencies. Matt, I don't know if you want to comment on that.

No, I agree. I agree with that Hayward. This is not something that's going to cause a meaningful ramp in SG&A dollars or rates.

Yeah. Yeah. Think of this over time as actually ramping down our SG&A costs just through efficiencies. So one of the key issues we have right now is the cost of handling the calls for Part D. And a lot of that is driven by what I would call upstream inefficiencies. So we actually believe there's going to be good savings available to us over the next couple of years by driving the efficiencies into the organization.

Thank you very much, guys. Appreciate it.

And your last question comes from Carla Casella with JP Morgan. Your line's open.

Hi. I had a question on that. Well, did you give the CMS receivable at the end of the quarter? And then some follow-ups on that.

Carla, it's Matt. We did not give the dollar value at the end of the quarter. What I would tell you is the way the transaction is structured this year is we have sold the receivable that built through June. So there is two months' worth of receivable on the books as of the end of August, and then we'll break it up into two more tranches where We sell the receivable that's incurred through September by the end of the third quarter and then through December by the end of the fourth.

Okay. So is this something you could go to a quarterly sale? Is that kind of how you're starting to set up or is it three times a year?

I think it's three times a year. The build in the first three months of the year is not meaningful enough to justify a quarterly sale.

Okay, great. And what kind of build should we expect in the back half? Is it still, I think you said somewhere around like 100 a month?

I would say that, I don't know if it's 100 a month. It's probably less than that, but it's going to be, you know, I think if you look at kind of some of the quarterly, you know, build over last year and model it out that way, it's probably get you in the ballpark.

Okay, great. And then I'm just wondering, as you look to sell this a few times a year, are you getting similar discount rates as you sell it, or are there any changes there in the structure of those deals?

No, the structure and the terms are very similar to prior year.

Okay, great. Thank you so much for that clarification.

Thanks, Carla.

Thank you, and that concludes the Q&A session of today's call. I'll hand the call back to Hayward Donegan for any closing remarks.

All right, still on the call. Thanks, everyone, for your questions as we close the call. I just want to acknowledge the likelihood that the second half of the year will continue to be volatile, particularly in light of the ongoing uncertainty surrounding the Delta and now the Mu variants. and the ever-shifting landscape on additional COVID doses, doses for kids, mandates and testing. But I will say, you know, the last 18 months have proven beyond a doubt the flexibility and resilience of our team and our business model. And it's in a weird way sort of thrilling to see that the elevated role of the pharmacist is really critical to the future success of Rite Aid and the health care system more broadly. So it's great to be doing good by doing good. And as pleased as we are with our results in the first half of this year and our ongoing strategic progress, much of the opportunity is still ahead of us, especially at Elixir, as we're transforming our business to be more relevant more competitive, and on the retail side, you know, really hyper-exciting for our target growth customers. And then overall, as a company, more efficient in how we operate. With that, we thank you for joining our call today and look forward to speaking with you again at the Credit Suisse Healthcare Conference this November. Thank you.

Ladies and gentlemen, thank you for joining Rite Aid Corporation Fiscal Year 2022 Second Quarter Earnings Conference Call. You may now disconnect.