Rite Aid Corporation

Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rite Aid Corporation Fiscal Year 2023 First Quarter 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, press star one again. I would now like to turn the meeting over to Brian Purcell. Please go ahead.

Thank you, Regina, and good morning, everyone. We welcome you to our fiscal 2023 first 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 Persaud. Executive Vice President and Chief Retail Officer, and Chris Dupal, Chief Operating Officer at Elixir, will also join the call during the question and answer session. 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.rightaid.com. While management will not be speaking directly to these slides, these slides are meant to facilitate your review of the company's results and to be used as future reference documents 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'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 measures, are described in our press release and slides. And with that, let me turn the call over to Hayworth.

Thanks, Byron, and good morning, everyone. Thanks for joining us, and welcome to our first quarter earnings call. Coming out of fiscal 22, we continued to make strides, transforming Rite Aid. Our first quarter saw us build on the momentum and deliver solid results across the business. I'll take a few minutes to update you on our quarterly results, and then I want to spend some time talking to you about some of the key actions we're taking within our three strategic pillars and the measurable progress we're making. Revenues for the quarter were $6 billion compared to last year's first quarter revenues of $6.16 billion. Our adjusted EBITDA this quarter was $100 million, compared to last year's first quarter adjusted EBITDA of 138.9 million. This decrease was in line with our expectations. Our ability to weather the height of the pandemic, delivering life-enhancing and life-saving medications and vaccines and testing was really remarkable. And I'm proud of our team for getting back now to the core business and showing strong results. Now we're refocusing on becoming a leading full service and modern pharmacy with a team of 6,400 expert pharmacists and another 43,000 associates caring for our communities and customers we serve to drive better health outcomes. This is what we stand for as a company. And allow me to explain a little bit more. So defining the modern pharmacy, On our last earnings call, you heard me speak about what the modern pharmacy means to our marketplace. To recap, despite the size and maturity of parts of the traditional pharmacy marketplace, like much of healthcare, there are still systemic unmet needs. We have not lost sight of the fact that 60 million Americans are living in rural communities and do not have access to high-quality healthcare. One in seven Americans live more than five miles away from the nearest pharmacy. 29% of Americans fail to take their medications as prescribed because of the cost. And most notably, underutilization of medications drives $500 billion plus a year in avoidable medical costs. And even those who can afford their prescriptions and or have access to pharmacies They are overworked and stressed. A trip to the pharmacy is viewed as yet another errand on top of their three to four stops a day. But remember, these are prescriptions. They're life-saving and life-enhancing medications, so it's really important people get their prescriptions on a timely basis. All of this is why we have placed a relentless focus on expanding the possibilities of the pharmacy teams to meet customers and communities wherever they are. Rite Aid has advanced well beyond the single option of coming into a store. We have a significant infrastructure in place across channels to offer customers convenience and multiple ways to interact with a member of our pharmacy team 24 by 7, including chat. We're enhancing our digital capabilities advancing buy online, pick up in store, and expanding both our mail and delivery services options. These services encompass both prescriptions and retail goods to create a one-stop shopping experience. This is the modern pharmacy. So how do we continue to grow to improve both the health of our company and the health of our customers? This brings me to the growth pillars that I outlined on our Q4 call. We're focused on winning in three key areas, deepening our share in the markets and segments we currently serve, expanding our offerings to new markets, segments, and customers, and creating new offerings by leveraging our portfolio of assets to meet the evolving needs of customers and other stakeholders. Let me begin with deepening our market share and the segments we serve. Starting with our retail pharmacy business, Q1 saw a complete rebound in acute and maintenance scripts better than pre-pandemic levels. For maintenance scripts, Q1 was up 1.4% versus FY22 and up 12.3% versus FY20. For acute scripts, Q1 was up 11.9% versus FY22 and up 1.1% versus FY20. As people are going back to the doctor and also going back to living their lives, we are seeing an increased need for acute prescriptions, most notably cough and cold. We have been full steam ahead activating a number of adherence initiatives that will not only help our customers live a healthier life, but also deliver meaningful improvements in gross profit this fiscal year. Examples of these initiatives are increasing customer enrollment and courtesy refill and improving our 90-day fill rate, both driving adherence. To give you a sense of how this will impact our business on a go-forward basis, an improvement in adherence of just 1% provides $20 million in gross profit dollars. You'll also recall that last year we launched Rite Aid Rewards, a new customer loyalty program that makes it easier for more customers to engage and save. In the coming quarters, we'll speak to how we plan to further maximize this program and drive higher consumer engagement in both pharmacy and front end sales. We continue to enhance our new beauty assortment in the front end and had encouraging results on our new line item launches in our color cosmetic business. This resulted in a 5.7% revenue growth in the color cosmetics department this quarter. People are wearing lipstick again. And relative to inflation, our top goal is to stay competitive on prices while preserving gross margin. And looking forward to the rest of the year, we expect to do the same. We're also keeping a very close eye, like everybody, on inventory. Like others, we project some seasonal issues relative to the weather and delays in shipments. But overall, we plan to continue to show reductions in our inventory levels. Turning to our specialty pharmacy business, we have continued to increase access to a number of LDD networks And we're also actively working to grow dispensing volumes, both in the Elixir book of business, as well as expanding network participation across a broader set of payers. We're also focused on driving down our overall cost to fill in both our mail order and specialty businesses with an eye toward developing white label solutions to drive mail order volumes. Now, to turn to the PBM services business, Our strong network contracts, new rebate capabilities, innovative clinical services, and expertise in government programs have enabled us to add 80,000 new lives for January 1, 2023 start date. These are more new lives than we sold last year. And additionally, the selling season is still in progress, and we've got close to 1 million lives remaining in the pipeline, for January 1, 2023. On the Elixir Insurance side of the business, our Part D plan, we have recently submitted our bid for 2023. And as we've discussed before, we expect to reduce our membership as we've signaled that we need to manage the profitability of this business and continue to focus on growing our own customers in the government business. Our next growth pillar is expanding our offerings to new markets, new segments, and customers. As consumer discretionary spending comes under significant pressure, we're investing in our own brands, which provide value and options for the customer. As we've discussed, we've been on a journey to repackage, rename, and relaunch our own brand portfolio. This quarter, we launched 546, or 23%, of our newly designed products, and we have exciting new launches coming in the back half of this year. We're also on track to open our new small format pharmacies this year in underserved rural markets in Indiana, upstate New York, and Virginia. And speaking of rural markets, we recently announced our partnership with Homeward. a company that's aimed at re-architecting healthcare for the 60 million Americans I mentioned earlier living in these communities. Beginning this summer, with a partnership in rural Michigan, we'll be working with Homeward to provide an integrated pharmacy and clinical services offering to our mutual customers. And finally, we're creating new offerings by leveraging our portfolio of assets to meet the evolving needs of customers and other stakeholders. We've been focused on leveraging technology to enhance the customer experience and the overall health and wellness of our communities. Our recently announced partnership with Afterpay further enables us to do that. We were the first national drugstore chain to offer Afterpay's flexible payment solution to shop online and pay later. We were able to help our customers access and have flexibility when paying for everyday goods. Also, we're launching a new direct-to-consumer digital platform later this summer, and we'll discuss this in our next earnings call. These are just examples of how we're diversifying our business for long-term success. Turning to our financial position, as you'll hear momentarily from Matt, we continue to remain on solid footing and optimize our capital structure. We reduced retail SG&A expenses by $40 million this quarter, closed 87 stores ahead of schedule, and are taking steps to drive further efficiency through our business. We're on track to meet our annual savings target of $170 million that we outlined last quarter. As a reminder, we have no debt due until 2025, and we are constantly looking for opportunities that will help us achieve our target of a 4.5 times leverage ratio by the end of fiscal 2025. Our $1.7 billion in liquidity provides additional runway to invest in our business and continue to innovate our offerings. And we expect to generate free cash flow to pay down additional debt this year to further strengthen our financial position. So to close, I'm really energized by where Rite Aid is today, and I'm really excited for the future as we get back on track, back to our arcs evolution that we planned before the pandemic hit. And as we continue to execute on our strategy, I do believe that Rite Aid will be an investment that will yield meaningful long-term returns for all of our stakeholders. Now I'll turn it over to Matt to go over the financial performance.