Rite Aid Corporation

Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Rite Aid Corporation fourth quarter fiscal year 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. Byron Purcell, Investor Relations. You may begin your conference.

Thank you, Rob, and good morning, everyone. We welcome you to our fiscal 2022 fourth quarter earnings conference call. Edward Donegan, President and Chief Executive Officer, and Matt Schroeder, Executive Vice President and Chief Financial Officer, will begin the call with prepared remarks. Andre Prasad. Executive Vice President and Chief Retail Officer, and Chris DuPaul, Chief Operating Officer of Elixir, will also join the call during the question and answer session. As we mentioned in our release, we're providing slides related to the materials we'll be discussing today. These slides are provided on our website, investors.briteaid.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 other documents that we file or furnish to the SEC. Also, we'll be using certain non-GAAP measures in our release and in the accompanying slides. The definition of the non-GAAP measures, along with the reconciliation to the related GAAP measure, are described in our press release and slides. With that, let me turn the call over to Hayward.

Hayward? Thanks, Byron, and good morning. Thanks for joining us, and welcome to our fourth quarter earnings call. Fiscal 22 was a strong year that exceeded our expectations. I'm so proud of the team who successfully managed through the second year of a pandemic. We made good strides in our retail pharmacy business despite some short-term challenges on the front end and turned the corner at Elixir, positioning ourselves for future growth. I'm really excited to talk to you today about our strategy for fiscal 23 and beyond. But before I outline our growth plan for fiscal 23, I'd like to talk briefly about our expectations for our business as we move beyond the height of the pandemic. As we all know, the past two years have been unprecedented, and companies like ours had to shift our focus and energy to help fight the pandemic and save lives. And as COVID becomes a part of everyday life now, we're eager to move forward to this new normal. It's important to note that COVID's impact on our business was not solely a tailwind. While we saw benefits from the pandemic-related services we provided, COVID also brought significant headwinds to our business. Those included supply chain pressures impacting our inventory and sales, store traffic shifting due to continued work from home, which especially impacts urban areas, and a tightening labor market. Though we were able to mitigate these impacts, all of these factors did put a strain on the business. Now we're seeing a reopening, and we're expecting the following trends to positively impact Rite Aid. As consumers reduce their masking or unmask completely and children go back to school, we're seeing an increase in scripts and over-the-counter products related to cough, cold, and flu. The super spreaders remain the kids. We're also seeing an increase in demand for maintenance scripts. In Q4, maintenance scripts are... year and versus two years ago. We are reviving our focus on ancillary vaccines. So remember, when people were getting COVID vaccines, they couldn't also get their ancillary vaccines. So we are really back to business on new and other important vaccines as consumers are catching up on their doses after the pandemic. And of course, we continue to vaccinate and test for COVID. And we're seeing an uptick in COVID antiviral prescriptions like Paxlovid. This becomes another tool that our pharmacy teams can use to help our customers. It's also back to business at Elixir, with companies now willing and able to move to new PBM partners. And we already have close to a million members in the 2023 pipeline. Overall, the pandemic underscored the critical role that the pharmacist has within the U.S. healthcare ecosystem. with consumers, many for the first time, getting a vaccine from their pharmacist. We administered 14.3 million COVID vaccines and 3.6 million PCR tests just in FY22. Now, as we see pharmacist clinical scope expanding in many of the states in which we operate, we're well positioned to deepen our customer relations. In summary, passing the peak of COVID represents a positive inflection point for our business, and we are excited to leverage what we learned, continue to be really nimble, and take advantage of the growth opportunities available to us. So let me talk about our growth strategy. We are squarely focused on the business of pharmacy. We are a full-service pharmacy company that engages with consumers to help them access life-saving and life-enhancing prescription drugs. The markets we're in today include dispensing, pharmacy benefits administration, medication adherence, and clinical services. The total addressable market for our business is $1 trillion in annual revenue and is growing by $40 billion a year. And yet, despite the size and maturity of parts of this market, there are still systemic needs that aren't being met. One in seven Americans live more than five miles from the nearest pharmacy. Twenty-nine percent of Americans fail to take their medications as prescribed because of the cost. And underutilization of medications drives $500 billion plus dollars a year in avoidable medical costs. We believe that supporting these unmet needs presents tremendous opportunity for us, and the price of entry for us is very low. Looking at the pharmacy services landscape today, the largest portion of the trillion-dollar market is pharmacy benefit management, followed by retail pharmacies. And yet the greatest amount of innovation is coming from emerging startups who are focused on addressing shifting consumer needs. But while these startups have entered this business, many lack the assets, scale, and customers to meet the full needs of the pharmacy marketplace. We have the assets to meet these needs at scale and win a greater share of this trillion dollar market, including over 6,400 pharmacists, over 2,400 convenient retail pharmacy locations with home delivery capabilities, a national specialty pharmacy, a national mail order pharmacy, a full-service PBM with scale, flexibility, and proven expertise, a best-in-class claim adjudication platform, a prescription discount card services platform, medication adherence and clinical services from health dialogue, and not to mention the 35 million plus customers and the relationships we already have across the retail and healthcare value chains. So given our existing scale and broad range of assets and capabilities, we see three vectors to drive growth. Our first growth factor is focused on deepening our market share and growing our current businesses. How will we do this? It's our mission to improve the health and wellness of our communities through engaging experiences that provide our customers with the best products, services, and advice to meet their unique needs. Improving adherence and vaccination rates fulfills this mission while delivering meaningful incremental scripts to our pharmacies. To achieve this, we have developed a portfolio of proprietary tools and programs proven to improve adherence and immunization rates. These analytics-backed tools and programs allow our pharmacists to identify, target, and tailor engagement through in-store, but also telephonic and digital channels. As the unprecedented demand for vaccines and testing abates, This will actually enable our pharmacy teams to leverage these tools and programs to improve adherence. This is important since an improvement in adherence of just 1% provides a $20 million gross profit benefit. With our focus on delivering a heightened digital experience, we expect to grow Rite Aid.com e-commerce sales and expect our buy online, pick up in store offerings. Revenues from our third-party delivery and marketplace channels grew by over 50% in fiscal 22, and we expect similar growth rates in fiscal 2023. We will roll out our newly designed own brand portfolio of products and gross sales. We launched our new loyalty rewards program, Rite Aid Rewards, to activate incremental customers, and we will scale our new beauty assortment. which showed 10% year-over-year growth in our pilot locations. And we will grow Elixir. We are on target to sell 300,000 new members for 1-1-2023. So, as you know, the first step to achieving net growth is retaining the business we already have. After accounting for previously known losses due to health plan consolidations, We're on track to retain 95% of our business for the 2023 selling season. And I'm excited to share that we recently renewed, in a very competitive situation, our largest Medicare Advantage client with a three-year contract. So the next step is to win new business. And to do that, we have to first be competitive on price. That's the price of entry. We're doing that through strong network pricing and our new rebate aggregator. Now we're getting to the finalist position on a regular basis where we are presenting a unique and compelling value proposition. Our results have shown that once we get to finalist, we are winning deals 35% of the time. While we are very early in the selling season, better pricing with a newly restructured sales team and a focus on our target market segments has led us to sell 35,000 new members already. We have 150,000 lives in the current finalist stage for 1-1-2023 and a current pipeline of nearly a million members and growing. Our Elixir Savings Cash Discount business continues to grow both in EBITDA and revenue. And I'm very excited now that we are spending more time refocusing on Elixir Specialty, our specialty pharmacy. We have identified meaningful EBITDA opportunities by improving our contracts, gaining access to more limited distribution drugs, and growing volume from PBM clients and other parties. As we have reported in the past, we are continuing to reposition our approach to the Elixir Insurance Part D business. We want to better manage the MLR of this business and reduce the cash burden. We also want to stabilize the EBITDA of a business that is under significant government reimbursement pressure. Therefore, our bid for calendar year 2023 will result in a purposeful shrinkage of membership and therefore loss of revenue. As I noted earlier, we just renewed our largest Medicare Advantage client and have won a number of new Medicare Advantage plans. health plans for 2023. Much of our success as Elixir has been in this growing healthcare segment and is a core competency that sets us apart. Our knowledge and expertise from managing our own Elixir insurance business has positioned us as a leader in managing Medicare Advantage plans, and we continue to be focused and committed to supporting the growth of those clients. So our second growth factor is expanding our offerings into new markets, including but not limited to extending our pharmacy footprint to improve access in underserved communities. Later this year, we will launch small format stores with a focus on pharmacy strategically located in markets where access to pharmacy is limited. We expect to achieve an IRR of over 25% on these stores. More to come on this exciting work. Revitalizing Health Dialogue to better serve the changing needs of our health plan clients is number two. Health Dialogue has robust analytics and adherence and medication therapeutic management service offerings that are resonating in the market. In the last few months alone, we've won four new contracts that will serve over 800,000 lives. collaborating with consumer-oriented brands and retailers to develop new store-within-a-store partnerships. These creative partnerships will leverage our space to provide exciting new products and services to our customers in a working capital-efficient manner. Excuse me. And then our third avenue of growth is focused on creating new offerings that leverage our portfolio of scaled assets to meet the evolving needs of customers and organizations, including growing our current healthcare health plan business to improve outcomes by leveraging our in-store pharmacists to engage with their members. We currently have contracts with five health plans with another dozen in the pipeline. Also, continuing to provide with access to our leading claim adjudication platform and adding other service offerings to these clients. And finally, establishing strategic partnerships with innovators to help them scale via access to our 35 million customer base. So in addition to growth, we are continuously evaluating our business to ensure we're optimizing our expense structure to drive maximum efficiency. Our key optimization initiatives include reducing SG&A by $170 million this year, executing on additional store closures, and investing in improvements in our supply chain. So in closing, we expect these various initiatives to enable us to grow our company over the next three years. As we look ahead to fiscal 2025, we project EBITDA growth of 10% to 20% from fiscal 2022 levels and a decrease of our leverage ratio from 5.4% to 4.5%. I am so excited, and I hope you can sense it. The entire Rite Aid team is really energized by what we're seeing in our business and really ready to realize the potential of becoming a preeminent full-service pharmacy company. Now I'll turn it over to Matt for some more commentary on the numbers for FY22.