Rite Aid Corporation

Good morning. My name is Rob and I will be your conference operator today. At this time, I'd like to welcome everyone to the Rite Aid Corporation fourth quarter fiscal year 2023 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, Vice President, Investor Relations, and Treasurer, you may begin your conference.

Thank you, Robin. Good morning, everyone. We welcome you to our fiscal 2023 fourth quarter earnings call. Elizabeth Dizzy Durr, Interim Chief Executive Officer, and Matt Schroeder, Executive Vice President and Chief Financial Officer, will begin the call with prepared remarks. Chris Dupal, 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.rightaid.com. While management will not be speaking directly to these slides, these slides are meant to facilitate your review of the company's financial 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 we will file or furnish to the FCC. 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 in the slides. And with that, let me turn it over to Bizi.

Welcome, everyone, and thank you for joining our Q4 earnings call. I realize that this is the first time that many of you are hearing from me as the Rite Aid interim CEO appointed by the board on January 9th. I'm thankful to the board for choosing me to manage the business during a critical time when urgency and focus is needed and happy to serve until such time as a permanent CEO is hired. As a board member for the last three years, this assignment is especially important to me. I'm singularly focused on making progress and ensuring we do not lose any time while conducting our search for a permanent CEO. Rite Aid, as you know, is a long-standing, trusted U.S. brand in the retail pharmacy space, as is Elixir in the PBM space. We've been a highly leveraged company for many years, which has limited our ability to invest in the business and keep up with our competitors. Before I share more on what we are doing to return our business to growth, I'll briefly cover Q4. Q4 adjusted EBITDA of $129 million was above the midpoint of our guidance and better than analyst expectations of $101 million and prior year Q4 of $106 million. The main drivers were front-end sales comps, excluding cigarettes and tobacco products, of 2.8%, SG&A improvements from cost reduction initiatives and store closures, and script comps of 5.2% or 9.7%, excluding COVID, demonstrating share gains over the last five quarters for a total of 50 basis points to 11.2%, according to Acuvia. As pleased as we are about Q4, our focus is on the future and what lies ahead. We anticipate many headwinds for fiscal year 24, none of which are a surprise, but we need to plan for them. As in the past several years, we expect reimbursement rates to be under pressure, cycling COVID benefits to add to the challenge, and wage inflation and shrink to eat into earnings. We've also lost ground in the PBM market from a loss of a large health plan account and the planned shrinking of our Med-D business. I know the litigation faced by us and many others in the industry is on your minds. We are actively managing those matters and defending ourselves. We've engaged excellent legal counsel, and the anticipated cost to defend ourselves is factored into our guidance. But as you all know, Litigation is a process that takes time. That being said, there are great opportunities for us to be very successful. There is a fundamental consumer need for pharmacy services for both individuals and companies. At Rite Aid, we serve these needs through both our retail and PBM businesses, respectively. We have a trusted and iconic brand, an attractive retail footprint, and a long history of serving millions of customers built over the years largely through our pharmacists. Specifically, the role of the pharmacist has become an increasingly important, trusted, ubiquitous, and efficient option for the delivery of healthcare services to consumers. And this is part of our core value proposition. We augment this with digital and remote capabilities to support customers in their preferred channels. We have a lot of work to do to seize the opportunity given the pressures I mentioned. there's a sense of urgency that the board and I have brought to Rite Aid. Simply put, we need to grow the core, prescriptions and retail, and grow the PBM, all while continuing to make the company more efficient. We will not be chasing long shots, but rather we are immediately focusing on the core areas of our business with initiatives that have high and near-term ROIs. We also need to do this while carefully managing our capital structure. On a macro level, last fall, Rite Aid started the implementation of an established turnaround model that has been used at numerous companies to successfully turn around their business. While you have heard the term turnaround used before, this is different. We are partnering with a leading consulting firm that has worked with several Fortune 150 companies to execute a highly prescriptive and programmatic model that has a rapid cadence, an analytical rigor, and currently engages associates from across the writing enterprise. We believe that this model that is geared to drive performance and acceleration across the enterprise will enable us to organize effectively and efficiently to capture value and drive growth. I am also well aware we need to prove it. It begins with leadership. And as you have seen, we are not afraid to make changes and significant ones as needed. To execute our turnaround, we have both eliminated some positions of up-level talent and capabilities by adding new positions and bringing in new perspectives. In addition to a new CEO, we've added a new head of marketing, a new head of merchandising, a new head of procurement, a new head of transformation, and a new head of FP&A to bring in new discipline and expertise to our operations and business. The turnaround model has given us visibility to the profitability opportunities we believe we drive. we can drive over the next three years by focusing on improvements and growth in our core businesses. Many of the opportunities are simply catching up to things our peers do better than us today. We believe this effort will position the core business for growth longer term. Here are a few examples of turnaround initiatives in the three core areas of the business. In our pharmacy business, we're continuing to invest in med adherence. For example, we've seen a nearly 150 basis point increase in adherence from our courtesy retail program. From industry benchmarking, we believe continued investment in this program has the potential to bring significant upside. We are scaling a successful Q4 pilot initiative that produced a 60 basis point reduction in abandoned scripts to enhance message timing and content. At scale, just a 1% improvement could drive a material impact on adjusted EBITDA. In the front end, we're optimizing inventory to improve our in-store experience and increase working capital. Initiatives include space productivity efforts and replacing categories that are overspaced with faster-growing categories. We were able to reduce inventory by 40 million in fiscal year 23, and we will be deploying further inventory controls this year. We're implementing a store clustering initiative to enable regional assortments and improve our product relevancy based on the success of the regionally focused product assortments at Bartels. We're improving our pricing analytics and capabilities by increasing the number of price zones and creating a variable price zone structure. We've begun to realize gross margin benefits from the initial pricing test. In Elixir, we're continuing to focus on client retention through things like improved reporting and pricing competitiveness. We have already secured three of our top five renewals. We're continuing our efforts to improve procurement economics, specifically through contributions from plan design administration, formulary, and rebate management services and network performance. We're taking steps to optimize our specialty in male pharmacies with expanded access to networks and new limited distribution drugs. We've already gained access to two of the four largest Medicare networks. Lastly, we're working on efficiency, productivity, and, of course, cost reduction across the business. Examples include rebuilding our indirect buying process and renegotiating vendor contracts. Tackling and reducing our lease burden through extensive lease renegotiation. Driving down prescription brand inventory by implementing new controls and deploying just-in-time ordering models. This is just a small selection of the initiatives in our turnaround program. So what does this mean for financial performance? In fiscal year 24, this means a down or reset year in profitability. We expect to see positive improvements in prescriptions and retail and cost savings, but these could be more than offset by the pressures I mentioned earlier. and reimbursement rates, lower COVID benefits, the loss of the elixir lives, a shrink wage inflation, and the investments we need to make in the turnaround program. We estimate the net result to be an adjusted EBITDA dropping by approximately $75 million, which may put free cash flow slightly negative for the year. However, we have $1.5 billion in liquidity at the end of fiscal year 23, which we believe is more than enough to get us through fiscal 24. we expect increased adjusted evita and working capital benefits in fiscal year 25 and 26 to drive an improvement in our liquidity position in the fourth quarter of fiscal year 23 we started the first phase of initiatives of our turnaround program these delivered approximately 10 million in adjusted evita and our turnaround program is not yet at scale and we have more initiatives in progress the turnaround model anticipates bringing more significant value starting in q3 and Q4 of this year. We are targeting adjusted EBITDA double-digit percentage growth in fiscal year 25 and 26 as initiatives begin to scale. Required investments are no longer needed to offset the improvements, and we're no longer cycling COVID's headwinds. We anticipate some slippage on our near-term leverage ratio. We do, however, believe that by year-end fiscal 26, our leverage ratio will come down into the low five range with improvements in adjusted EBITDA. We are also in the process of developing specific plans to address our 25 and 26 bond maturities. More to come as these plans develop. I know it has been challenging for you all as the company has faced the uncertainties of COVID and lackluster financial results. We have not, until now, applied an analytical, programmatic approach to turning the business around. What I commit to you is this. We have urgency, rigor, a rapid cadence, and an intense focus on those opportunities that we believe will bring us value in the near term. There are areas that have presented opportunity but have not been prioritized previously. There are things that our competitors do well that we just simply have not implemented until now. We appreciate all the support from our bondholders, shareholders, analysts, associates, customers, and leaders as we take this incredible brand and bring it back to where it should be. With that, I'll turn the call over to Matt with more Q4 and on our albums.