Rite Aid Corporation

Good day and welcome to the Rite Aid Corporation fiscal year 2023 second quarter earnings conference call. Please note today's conference is being recorded. 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 followed by the number one again. Thank you. At this time, I will turn the conference over to Byron Purcell, Vice President of Investor Relations and Treasurer. Mr. Purcell, you may begin your conference.

Thank you, Erica, and good morning, everyone. We welcome you to our fiscal 2023 second quarter earnings conference call. Hayward 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 DuPaul, Chief Operating Officer of Elixir, will also join the call during the question and answer session. As we mentioned in our release, we are providing slides linked 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 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 1A of our most recent annual report on Form 10-K and 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. With that, let me turn the call over to Hayward.

Thanks, Byron, and good morning, everyone. Thanks for joining the call today, and welcome to our second quarter earnings call. Q2 saw us continue to build on our momentum to become a leading full-service and modern pharmacy. we are 53,000 associates strong, including a team of 6,400 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 1.6.2 million. Retail pharmacy sales and gross profit dollars were negatively impacted by the expected decline in demand for COVID vaccines and PCR tests. 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 1.1% over the prior year quarter driven by the expected reduction in COVID vaccine and testing revenue, as well as planned store closures. Overall, comparable sales increased 5.6%. Total same-store prescriptions increased 2.1%, excluding COVID immunizations, with same-store maintenance prescriptions increasing 1.2%, and same-store acute prescriptions increasing 5.3%. 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 markets 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 by valent 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 vaccines 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 in gross profit to the company. One way we encourage medication adherence is our courtesy refill program. 600,000 new customers have enrolled in our program since July. We expect this initiative to add $10 million in pharmacy gross profit in FY23, 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 in courtesy resale, and we plan to engage in strategic partnerships to help drive further adherence. What's important about improving our customers' adherence to their medications is not only that it drives 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 tests has reduced the demand for PCR tests, our new partnership with Quest Diagnostics, which commercializes PCR tests, 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. Front end, same store sales were soft in the second quarter, declining 30 basis points. Excluding cigarettes and tobacco products, however, we increased by 20 basis points. We saw good results in seasonal, health, and consumable categories, offset 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 flood 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 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 reason for the adjustment to the full year retail pharmacy EBITDA guidance that Matt will discuss in more detail. Despite these sales challenges, we are seeing some positive indicators in our markets. Our front end 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 Bartels drug banner as measured by the Ipsos brand equity survey. In fact, Bartels 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 elixir side of the business we've continued to build on momentum from last quarter driven by improved rebates and network performance management as well as meaningful cost control elixir 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, Elixir is so much more than a PBM. Our assets include mail order pharmacy, specialty pharmacy, and Laker, 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 PBM 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 years. We're closing in on our retention for our renewals for our 1-1-23 business, and the current outlook for retention is 78% overall. And if you exclude the one client loss we previously reported, 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 and a previously announced client loss due to industry consolidation, partially offset by a combination of higher drug spend and utilization. Elixir's 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 of 190 million in fiscal 2023. And this is just the beginning. We are in the process of a large-scale reinvention of our front-end operations called The Right Way. We expect this initiative to contribute $20 to $40 million in productivity and labor improvements in FY24. We are also investing in automation of our supply chain, starting with our distribution center in Seattle, which came with the Bartels acquisitions. This will provide our stores with better, more reliable service and improve our productivity. We expect a 40% ROI for this supply chain initiative. This will also drive benefit in distribution and handling costs and FY24. 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 with the growth focused in our first party, third party, and delivery marketplaces. 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 home or offices or picked up in store. We're on track to open four new 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 apothecary pharmacies in underserved markets. Turning to our financial position, as you'll hear momentarily from Matt, 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 FY23, and we remain committed to achieving our target of a 4.5 times leverage ratio by the end of FY25. 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, capture 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'll turn things over to Matt to go over our financial performance. Matt?