Matt Schroeder - Group VP, Strategy, IR and Treasurer John T. Standley - Chairman and CEO Darren W. Karst - SVP, CAO, and CFO Frank Sheehy - CEO, EnvisionRx

Charles Rhyee - Cowen & Company Lisa Gill - J.P. Morgan Carla Casella - J.P. Morgan Karru Martinson - Jefferies Bryan Hunt - Wells Fargo Nathan Rich - Goldman Sachs John Heinbockel - Guggenheim Securities John Ransom - Raymond James

Ladies and gentlemen thank you for standing by and welcome to Rite Aid's Second Quarter Fiscal Year 2018 Earnings Release Conference Call. At this time all participant lines have been placed in a listen-only mode and we will open up for your questions following today's presentation. [Operator Instructions]. Today's presentation is available for download. To download click the blue files icon located in the lower left hand corner of your screen and select the file. It is now my pleasure to turn the call over to Matt Schroeder to begin. Please go ahead sir.

Thank you, Marie and good morning everyone. We welcome you to our second quarter of fiscal 2018 earnings conference call. On the call with me today is John Standley, our Chairman and Chief Executive Officer and Darren Karst, our Chief Financial and Chief Administrative Officer. On today’s call, John will provide an update on our business, Darren will provide a recap of the Walgreen's asset sale and our second quarter results, and then we will take questions. 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, www.riteaid.com under the Investor Relations Information tab. We will not be referring to them in our remarks but hope you'll find them helpful as they summarize some of the key points made on 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 Securities and Exchange Commission. Also, we’ll be using a non-GAAP measure in our release. The definition of the non-GAAP measure along with the reconciliations to the related GAAP measure is described in our press release. Also included in our slides are the non-GAAP financial measures of adjusted EBITDA gross profit and adjusted EBITDA SG&A and the reconciliations of those measures to their respective GAAP measure. With these remarks, I’d now like to turn it over to John. John T. Standley: Thanks Matt and thanks to everyone for joining us on the call this morning. As you know, last week we announced that our company took a critical step forward by securing regulatory clearance for the amended and restated asset purchase agreement with Walgreens Boots Alliance. Just to recap, through the amended agreement, Rite Aid is selling 1932 stores, three distribution centers, and related inventory to WBA for an all cash purchase price of $4.4 billion on a cash-free, debt-free basis. Once the transaction is complete, Rite Aid will retain ownership of nearly 2,600 stores along with six distribution centers, our pharmacy benefit manager EnvisionRx, RediClinic, and Health Dialog. While we still have some remaining conditions that are necessary to close the deal, securing this regulatory clearance gives us a clear path forward to complete the transaction and realize the benefits it has to offer. So before I turn it over to Darren who will provide some more specifics about the transaction and information about our second quarter results, I wanted to spend a few minutes discussing how we plan to work as a team to rebuild our momentum and grow our business. Our plan focuses on what we believe are six important areas of our business heading forward and they are to build our management team for the future, to redefine and enhance our customer and patient experience, to engage with our payor partners in creating a sustainable business model, to evaluate our pharmacy purchasing options to ensure we have a competitive drug cost, to streamline our operations, and to grow our pharmacy benefits manager EnvisionRx. This is an especially important time for Rite Aid as we move forward as a standalone company and we fully understand the importance of having the right leaders in place. To that end this morning we announced that Kermit Crawford is joining our team as President and Chief Operating Officer of Rite Aid Corporation effective October 5th. As many of you know Kermit served as Walgreens' Executive Vice President and President of the Pharmacy, Health, and Wellness Division where he was responsible for all aspects of strategic, operational, and financial management for the division. Kermit is a licensed pharmacist and a proven leader with extensive retail pharmacy experience. We’re extremely pleased to have such an innovative and well respected senior executive joining our leadership team. In addition, we recently announced the promotion of Bryan Everett to the newly created position of Chief Operating Officer of Rite Aid Stores. In this position Bryan will be responsible for store operations, merchandising, distribution, and logistics for our retail business. Since joining Rite Aid Bryan has had a significant positive impact on our store operations and in other areas of our business as well. We believe he is the right person to lead these key areas of our organization as we look to drive improved business results, provide a great customer experience, and deliver value for our stakeholders. We’re also pleased to have Jocelyn Konrad in place as our Executive Vice President of Pharmacy which is certainly an important role for us. Jocelyn is a valued member of our team with more than 25 years experience in retail pharmacy. She is a licensed pharmacist who is very passionate about the expanded role that pharmacists can play in delivering valuable health and wellness services to our patients. With her extensive knowledge and experience, especially in the areas of clinical pharmacy services, we believe that Jocelyn will help lead us in achieving our vision for providing a higher level of care at Rite Aid Pharmacies. With these and other key leaders in place, we have further enhanced our leadership team and have a strong foundation for guiding our associates in making the most of the opportunities ahead of us. Moving on to the second area of focus, we will build upon our strong health and wellness platform to redefine and enhance the customer and patient experience. It's important to note that our team has done a tremendous job in continuing to provide great service. In fact our internal metrics for overall satisfaction are higher year-over-year in both the front-end and the pharmacy. This gives us an important momentum as we look to further leverage the highly successful initiatives that are already providing a unique and engaging experience at Rite Aid. As you know our wellness store format has resonated with customers as these stores continue to outperform the rest of the chain in terms of same store front-end sales and script count. Following the completion of the transaction with WBA, more than 70% of our chain will be comprised of wellness and customer world stores. These stores along with the continued evolution of the wellness format will continue to be an important part of our strategy in both the short-term and the long-term. Our highly popular wellness plus customer loyalty program continues to be a key differentiator for Rite Aid. We've proven to be an innovator in the customer loyalty space and we will continue to build upon our successful loyalty program by adding new features and benefits in the months to come. In the pharmacy, immunizations will remain a significant opportunity both from a business standpoint and also in showcasing how our pharmacists can provide valuable services beyond filling prescriptions. As an example, our flu immunization campaign is off to a strong start and we've also increased non-flu immunizations by more than 20% year-to-date. We will also look to engage additional patients and medication therapy management at our OneTripRefills program which allows patients to fill all of their eligible maintenance medications in one convenient trip to the pharmacy each month. In addition we plan to leverage the capabilities of RediClinic and Health Dialog to deliver a higher level of care in the communities we serve. Now looking at our third area of focus, there's no doubt that reimbursement rate pressure has created challenges for our business. Now that our asset sale transaction has received regulatory clearance, we are in a better position to actively engage with our PBM and payor partners to address these reimbursement rate issues that have affected our business. Our goal will be to work with these partners to create a sustainable business model for Rite Aid. We believe these discussions will benefit from the fact that retail pharmacies and managed care partners share a common objective of taking care of patients by offering effective medication therapies and clinical services at a competitive value. As we engage with our payor partners we will also be highly focused on completing a comprehensive evaluation of our pharmacy purchasing options which is the fourth key component of our plan. As we announced last week the amended agreement with WBA gives us the option to purchase generic drugs that are sourced through an affiliate of WBA at a cost substantially equivalent to Walgreens for a period of 10 years. This aspect of the agreement gives us an attractive option to consider as we explore other strategic alternatives for the future. Our objective is to evaluate how we can best meet the pharmacy needs of our patients in a cost effective manner. Another important aspect of our plan is continuing our efforts to aggressively control costs which as Darren will address later have already made positive contributions to our performance. At this time we are also developing specific initiatives that will further streamline our operations in fiscal 2019. We expect these efforts to result in an expense reduction of about $50 million from our current run rate. The final area of emphasis is to grow EnvisionRx, our PBM business. Now that we're beyond the regulatory review process, there's a significant opportunity to refocus and invest in the growth potential of this important business. Darren will provide additional information about EnvisionRx in a few moments. We believe these six areas represent important opportunities for our business. Now that the amended agreement has received regulatory clearance we can move forward with a clear sense of purpose. When you also factor in the key benefits of the transaction with WBA such as a more profitable store footprint, enhanced pharmacy purchasing capabilities, and a stronger balance sheet and improved financial flexibility we're well positioned to implement our plan for delivering improved results. At this time I'll turn it over to Darren for some additional comments. Darren. Darren W. Karst: Thanks John and good morning everyone. On the call this morning I'll recap the financial impact of the revised asset sale and discuss the updated pro forma results that are included in our supplemental investor slides. I will also walk through our second quarter financial results, cash flow, and liquidity. As John said earlier we have obtained regulatory clearance for the amended and restated asset purchase agreement with WBA which clears the way for us to sell 1932 stores, three distribution centers, and related inventory to WBA for $4.375 billion. We expect to receive proceeds from the asset sale over a period of several months as WBA takes possession of the stores with receipt of proceeds beginning next month and ending sometime in the spring of 2018. The proceeds will be used to pay off approximately $270 million of net liabilities related to the divested assets which is predominantly trade payables and accrued liabilities, restructuring costs and transaction fees of approximately $100 million net of tax, and income tax payments of approximately $85 million. Our proceeds net of these amounts and including the merger terminations fee that we've already received are expected to be approximately $4.245 billion. Please keep in mind that some of these numbers are estimates and could move around a little but you can see we will have significant net proceeds to allow us to delever the balance sheet and give us the flexibility to strategically invest in our business. Once the transition is complete Rite Aid will retain ownership of nearly 2600 stores and six distribution centers. We will have a more profitable store footprint in key states and markets that include California, Oregon, and Washington on the West Coast and Pennsylvania, New York, Ohio, and Michigan in the East. Over 70% of the stores we are retaining at our wellness or customer world locations and per store sales and adjusted EBITDA at these stores is higher than the current chain average. In addition to the nearly 2600 stores that we will operate going forward we are also retaining our pharmacy benefits manager EnvisionRx as well as our RediClinic and Health Dialog businesses. This will give us a business model that is more diversified with less exposure to pharmacy reimbursement rates because a higher percentage of our adjusted EBITDA will come from our PBM business. As you can see in the supplemental slides that we filed this morning, we've also updated our pro forma financial information for the revised asset sale and to reflect our results for the last 12 months ended September 2, 2017. Pro forma net income for this LTM period would have been $172 million, adjusted EBITDA would have been $674 million, and our pro forma leverage ratio would have been 4.5 times. Please be mindful that we are not providing guidance at this time and so these pro-forma numbers should not be construed as guidance. I'll now turn to a review of our second quarter results. Revenue for the second quarter was $7.7 billion which was a decrease of $351 million or 4.4% from the prior year second quarter. Net income was $170.7 million or $0.16 per diluted share versus net income of $14.8 million or $0.01 per diluted share in last year’s second quarter. Note that our results benefited from the $325 million merger termination fee received from WBA during the quarter. Adjusted net loss in the current quarter was $15.6 million or $0.01 per diluted share versus adjusted net income of $36.4 million or $0.03 per diluted share in the prior year second quarter. Adjusted EBITDA was $213.3 million in the current quarter compared to $312.7 million in the prior year quarter. The decrease in adjusted net income and adjusted EBITDA is due to continuing pressures on retail pharmacy gross profit which is consistent with the trends we have seen in the past several quarters. Retail pharmacy segment revenue for the quarter was $6.3 billion which was $218 million or 3.4% lower than last year's second quarter. The decrease was due to lower pharmacy and front-end sales. Overall same store sales decreased 3.4% in the quarter. Front-end same store sales decreased by 0.9% due to a highly competitive retail environment and soft results in summer seasonal and back to school categories. Pharmacy same store sales decreased by 4.6% which had a negative impact of approximately 189 basis points from new generic drugs and was also negatively impacted by declining reimbursement rates. Pharmacy same store script count was down 1.8% on a 30 day adjusted basis which was caused in part by being excluded from certain pharmacy networks that we participated in last year. Retail pharmacy segment adjusted EBITDA in the quarter was $164 million or 2.6% of revenues which was $99 million lower than last year second quarter adjusted EBITDA of $262.6 million. The reduction in retail pharmacy segment EBITDA was driven by reduced gross profit partially offset by an improvement in SG&A expenses. Total retail pharmacy segment gross profit dollars in the quarter were $136 million lower than last year's second quarter or 119 basis points lower as a percent of revenue. Adjusted EBITDA gross profit was unfavorable to last year's second quarter by $144 million or 131 basis points as a percent of revenues. Pharmacy gross profit dollars and rate were unfavorable to the prior year due to the impact of reimbursement rate declines that we were not able to fully offset with generic drug purchasing efficiencies as well as lower prescription counts. We completed our rebid of prescription drugs with McKesson but the timing of that bid was delayed and it fell short of our expectations. We expect to continue to see pressure on pharmacy margins for the remainder of the year. Front end gross profit dollars were unfavorable to the prior year due primarily to the decline in front-end sales. Retail pharmacy segment SG&A expenses for the quarter were lower by $50 million compared to last year second quarter. SG&A rate as a percent of sales increased by 12 basis points but that was due to the deleveraging of our operating expenses as revenues have been declining. Adjusted EBITDA SG&A dollars were lower by $45 million but 12 basis points higher as a percent of revenues compared to last year second quarter. We continued our first quarter trend of expense reduction as our operating teams have done a good job executing on various initiatives to get more efficient which has helped us control payroll benefits and store operating expenses. We expect to have similar reductions in SG&A expense in the back half of the fiscal year. Moving on to the pharmacy services segment, Envision's adjusted EBITDA of $49.3 million was in line with the prior year second quarter as an improvement in customer mix drove a higher EBITDA margin which largely offset a reduction in revenue. The pharmacy services segment had revenues of $1.5 billion which is a decline of $142 million or 8.7% due to our strategic decision to not participate in certain Medicare Part D regions in 2017 and to focus on increasing our mix of chooser patients. Our Med D business at Envision has historically been heavily weighted towards the low income subsidy member and strategically we are seeking to grow chooser membership which we believe can be more profitable in the long-term. While the results of our 2018 bid are not yet final, we believe that we will grow Med D membership in 2018 by approximately 100 to 1000 members. We are pleased with the performance of the pharmacy services segment and believe the removal of the WBA transaction overhang and our improved leverage profile after we complete the asset sale will provide us with opportunities to invest in our PBM to grow lives. Our cash flow statement for the quarter shows a net source of cash from operating activities of $205 million as compared to $841 million use of cash in last year's second quarter. This improvement was driven by the WBA merger terminations fee of $325 million in the current quarter. Our current year cash flow activity also reflects a normal seasonal inventory build. Net cash used in investing activities for the quarter was $54 million versus $128 million last year. During the second quarter we remodeled 54 stores, relocated one store, expanded one store, and opened one store. At the end of the quarter we had completed and grand reopened 2532 wellness stores. For the second quarter front-end same store sales in our wellness stores that have been remodeled in the past 24 months were approximately 141 basis points higher than our non-wellness stores and script growth in these stores was 130 basis points higher. Now let's discuss liquidity, at the end of the second quarter we had approximately $1.4 billion of liquidity. We had $2.2 billion in borrowings outstanding under our $3.7 billion revolving credit facility and $59 million of outstanding letters of credit. Total debt net of cash was $6.9 billion. As I said earlier we expect our leverage to substantially improve upon completion of the asset sale. We are still working through our specific plans regarding our go forward capital structure but at a minimum we do expect to refinance our revolving credit facility to both extend the maturity and to right size the facility given our smaller store base. We're not currently planning to provide guidance for the remainder of fiscal 2018 as we work through and get more clarity on the specific timing of the store divestitures as well as further refining the financial impacts of the business initiatives that John reviewed a few minutes ago. We expect to resume providing guidance for fiscal 2019 when we release our year-end fiscal 2018 results. That completes my portion of the presentation and I'd now like to turn it back to John. John T. Standley: Thanks Darren before we begin taking questions I would just like to take a moment to thank our entire Rite Aid team. We've been pursuing an important strategic transaction for quite some time. Throughout the process the commitment that our associates displayed for taking great care of our customers has been nothing short of incredible. The fact that our customer service metrics have improved as I said earlier is a great example of how our associates have remained highly focused on delivering an outstanding experience. I'm proud of our entire Rite Aid team for displaying tremendous patience, professionalism, and dedication throughout this entire process. That concludes our prepared remarks for this morning. We will now open up the phone lines for your questions.

Thank you ladies and gentleman. [Operator Instructions]. Our first question comes from the line of Charles Rhyee of Cowen & Company.

Oh yeah, hey, thanks for taking the questions. Hey John, I just wanted to understand in terms of -- you made some comments about delays in the generic purchasing contracting with McKesson that kind of caused pressure. And then you talked about pressure for the rest of the year. Should we think that that pressure for the rest of the year is a little bit less as you gain the benefits from better contracting with McKesson and is that a result of the new ClarusOne organization? John T. Standley: So, thanks for the question, thanks for being with us here this morning, we appreciate it. So we completed the McKesson bid as Darren mentioned in his comments during the second quarter. I think Darren pointed out that the bids probably were a little bit short of our expectations as they came through the process. That bid was completed as part of ClarusOne that was a ClarusOne bid, and that I think was our first bid as ClarusOne coming to market. So we got some of those benefits in the second quarter. We’ll have those benefits as well in the third and fourth quarter, but as Darren also mentioned, we are still working our way through some reimbursement rate reductions for the remainder of the year that have also impacted the first and second quarters. So we're going to continue to see some pressure on pharmacy margin through the back half.

Thanks and can you expand a little bit, you kind of said that the bid was kind of short of expectations, can you clarify what you mean by that? Darren W. Karst: Sure, well as you, I think, are aware we contract reimbursement rates into the future and so we have to build on some estimates of what we believe generic cost reductions will be. So we know what rates that we can digest in third party contracts. So, in terms of what we plan for the McKesson bid was short of what we've built in.

Okay, I see. And as we think about -- as we deliver the balance sheet with the cash and we divest the stores, are there any other dysynergies we should be considering or was that all factored into sort of the numbers you've given us beyond the sort of pro forma number you've given us? Darren W. Karst: Yeah, I mean I think on the pro forma information that we provided, we did not build in either synergies associated with drug [ph] purchasing or we didn't build in any di-synergies. We did build in the payments that we would receive from WBA under TSA agreement. John T. Standley: I think our goal is to try and adjust our cost structure – that is 6 million goes away as stores transfer off the TSA that were bringing our cost structure in line. So we're going to try and minimize any dis-synergy the best that we can.

Understand it, and does that include when we look at the pro forma store profile, I mean you’ve still got a couple of states where you really only have a handful of stores, should we assume…? Darren W. Karst: I think we've dramatically, you know, one good thing that came out of this is we dramatically reduced the number of states where that was the case. So really there's just a couple of instances of that and I don't think those will be material to the overall operation of the business, the cost of those.

Great, and my last question would be Medicare Part D, we already sort of missed the bidding process for 2018, is it right to think that next year is your first chance really to rebid back into the Part D networks as a new organization? Darren W. Karst: That's right, that's right. I think we're pretty far down the line on contracting for the retail business for our fiscal 2019. So we have got a couple of -- well we have contracts that are open for next year but as it relates to Med D I'd say those rates are largely locked in at this point.

Okay, great, thanks a lot.

Our next question comes from Lisa Gill of J.P. Morgan.

Hi, thanks very much and good morning. I just want to follow up on your comments on the payor contracting. So John, you said you are fairly far along on fiscal 2019. Are you talking about on commercial rates with PBMs and health plans at this point and how are they thinking about you now that I would call you more like a super regional in different parts of the country? John T. Standley: Yeah, I am going to back rub right there. What I meant to say was we're pretty far along on Med D for 2019, we have a lot of work to do, on 2019 from a commercial perspective.

Is there any opportunities in calendar 2018 on the commercial side now that you've got the footprint of where your stores will be? John T. Standley: I think there is opportunity and exposure for 2018 from a contracting perspective. We've still got some work to do there to figure out how calendar year 2018 is going to shape up.

And you talked a little bit -- I am sorry, go ahead. Darren W. Karst: Which is one of the reasons why we're not out with guidance right now.

When do you expect that we will have some incremental color beyond the 600 -- the pro forma number of 675 rate when we think of this as a number to kind of start to think about, but when will you give us more clarity as we think about guidance going forward? Darren W. Karst: I think, Lisa our plan is to provide guidance for fiscal 2019, you know, when we get to the fourth quarter, that's our current plan.

Okay, and then if I could just ask one other question around the PBM, you talked about Medicare Part D but I'm just wondering how your selling season went on the commercial side of your book of business as we go into 2018? John T. Standley: So, I think we talked about Med D where I think we're in a pretty good position there. We don't have the landscape files yet so we're kind of waiting to see officially where we landed here but we feel pretty good about our first glance at this for next year. On the commercial side we did lose one large client as we were kind of going through this protracted review process here to get this transaction cleared. So that set us back a little bit on our calendar year 2018 selling seasons for commercial. So we're going to be soft on that side of the business for 2018.

Okay and so is it a material client, John? I mean kind of just as we start to think about how we put this through our numbers, is there any way to size that? John T. Standley: We're going to be probably slightly down in lives for 2018 on the commercial side. So we’re going to offset the gains we made in the selling season so we are going to be down a little bit in lives on the commercial.

Okay, thanks for the color.

Our next question comes from the line of Carla Casella of J.P. Morgan.

Hi, I think that's me Carla Casella. First question just on the 673 million of pro forma EBITDA, I just want to confirm that includes the 96 million of SG&A reduction that you expect over time as the TSA rolls off, is that correct? Darren W. Karst: That's correct.

And so what’s the time frame on that over an 18 month period, can you just remind us? Darren W. Karst: Well, it really is kind of built-in as they take on stores. So, yes I mean the TSA period is a two-year TSA. And they have an option for two additional six months periods. So in theory it could go for years but probably less than that.

Okay, great and then you said you’ll refine your guidance once you've got most of the timing of the store closed but should we for now just assume that the stores you are selling to Walgreen happen evenly over about the next six month period or is it more chunky than that? Darren W. Karst: I'd say it’s relatively, I mean it really is in waves for purposes of kind of operationally taking these stores on. So, there are certain number of stores that can be cut over to them over you know a given week. So relatively speaking I guess it's probably fairly smooth.

I think very early on it’s a little slower just because there's a process where we cut some stores over and there is an opportunity for everybody just to test and make sure that you know there's a process of closing, I just wanted to certify the IP system that TSA store is going to be using. There is a bit of a process to just kind of make sure it all works when we cut them over. So I would say the first month or two probably is a little slower then after that it starts to really ramp up. John T. Standley: I mean I think in terms of -- I mean I think in terms from a cash flow standpoint, in terms I am trying to figure out the numbers it's going to be just disco ops [ph] as we start the closing process on the first wave, we will move to some disco ops accounting on the stores that are being sold.

Okay, great but then the proceeds will come in kind of in-line with the number of -– is it like would you do it on a per store basis as you go or will that be more chunky? Darren W. Karst: I know, it’s on a per store basis.

Okay, great. And then as we look at the debt pay down should we assume you go in order of kind of maturity or seniority with the ABL being paid down with the first wave of stores and then the term loan with the second. How should we think about that because I know there's been a lot of focus in the debt markets on wins, there will in excess proceeds amount that we have to apply to bonds -- to buy back bonds at par and getting a sense -- trying to get a sense for is that something we could see this year, is that something that it's not until after you've paid down ABL on term loan? Darren W. Karst: I think what you said is correct, the first proceeds would go to the ABL in term loan and then we would be in a position to make offers to the unsecured notes.

Okay, great, thank you. John T. Standley: You’re welcome thank you.

Our next question comes from the line of Karru Martinson of Jeffries.

Good morning, just to follow-up on Carla's question. In terms of the excess proceeds offer what's the mechanism and how will that work and kind of what happens to those proceeds if folks don't take the offer? Darren W. Karst: If they don’t take the offer then those proceeds are available for us to repay debt as we would see fit, other debt.

Okay, so but it will be a par offer pro rata for those three tranches of 20’s, 21’s, and 23’s? Darren W. Karst: Yes.

Okay. And this is an old question that I used to ask all the time but in terms of those script files that remain, how should we be thinking about valuation. Historically you guys talked about a $10 to $20 per script valuation, is that still the case today in the industry? Darren W. Karst: That that is probably a pretty good range of what we see, as we often buy script files. You know how lenders view it may be different but that's the way we view it when we buy -- when we're buying script files.

Okay, and then when we think forward here, recognize that this will be kind of a couple of messy quarters as you transition stores but when should we be thinking about kind of the CAPEX spend, the wellness remodel pick up, the script file buys, does that kind of start day one or is that something that will gradually build as we go forward? Darren W. Karst: Well, I mean frankly on the file buy side we have ramped that back up. We were a bit in limbo during the merger period of time where we were rather limited in terms of what we could do on a file buy. By perspective, so it takes a little time to get that, an engine kind of back up and running. But we're pretty active right now out there and of course we're obviously looking at just market areas where the remaining company will be. On the CAPEX side we're continuing to do remodels as well. So that will ramp up. It was probably a little bit slow during the merger period but that's ramping back up as well. John T. Standley: That takes time, I think for fiscal 2019 we would be back to a more normal cycle of… Darren W. Karst: Yeah, for the size of the business we have. John T. Standley: So it takes a lot of time.

Thank you very much guys, appreciate it. John T. Standley: Thank you very much.

Our next question comes from Bryan Hunt of Wells Fargo.

Thank you for your time. I was wondering, you talked about the 100,000. Person increase in your Medicare D. I was wondering if you can just give us an idea of what kind of increase that is on a percentage basis in terms of your Medicare D lives on a PBM side? John T. Standley: Frank is with me here.

Yeah, it would be about a 20% increase in our overall lives.

Okay, thank you. I guess continuing on the balance sheet discussion, pro forma in fact you assume the pay down based on what's in a slide presentation your 608 [ph] will account for more than half of your balance sheet. I was just wondering philosophically does that make sense to have over half your debt in one tranche over the long-term? Darren W. Karst: Yeah, Bryan I think you know that's, we are continuing to kind of look at this and I think what we like to see is see this progress a little bit further and just see where we end up in terms of the application of proceeds before we really conclude on that.

Okay, is there any way you can give us an idea, I mean it seems like 70% plus your stores will be in updated formats. Can you give us an idea of maybe one, what you think kind of pro forma CAPEX may be and two, where you are going to allocate dollars going forward, will it be more towards file buys and trying to grow other businesses besides the pharmacy business? Darren W. Karst: Yeah, I think we're probably looking at -- for the remaining company CAPEX somewhere in the neighborhood of $250 million on a go forward basis. In terms of how that's allocated I think it will continue to be allocated to the stores. You're correct, 70% is -- we are in pretty good shape. We will still continue to remodel stores and add stores and we will also continue to buy script files. John T. Standley: Yeah, I mean I think -- Darren W. Karst: The other area is in -- we think there are some opportunities on the Envision front to be able to invest there as well. John T. Standley: Right, I mean I think we are going to be in a pretty good shape on the stores. There are opportunities I think we will be back and touch some stores we've done previously with some concepts that evolved over time. But we're excited about the store base that we have. We think there's opportunities to invest in the markets that we're going to be in. Our local strategy is going to be really focused on being very competitive and dense in the markets that we have left after the transaction. We're putting good money into technology. There are some things we can do to really operate our stores more efficiently with technology and we've got some things working right now that will hopefully come to bear in fiscal 2019 that will drive even more synergy and improve the quality of the experience for our associates as we put those things in place. And then maybe most importantly is really the opportunity to work with Envision to grow their business. If we have some technology opportunities over Envision and some things to invest in there and that's really where we think our real strong potential growth areas for us as we look forward. So we've got some exciting things to do with capital that we have.

Great, and two more quick ones. If I look to your pro forma EBITDA and kind of flush out what interest expense and CAPEX, and I imagine you have no tax liability going forward. It looks like you'll generate $300 million of free cash flow in round figures, 250 million to 300 million. Kind of what do you foresee putting that to use, is it acquisitions of additional businesses or are you solely focused on delevering the balance sheet? John T. Standley: I’ll tell you what, is that a great thing to be asking. I mean there is a conversation that we haven’t had for a very long time.

It's been a while. John T. Standley: That is what is so exciting about where we are as all these kinds of doors start to open for us. And the honest answer is we got a lot of work to do here to figure some of those things out. But there's just a lot of different things, opportunities that we're now looking at that we just really couldn't even consider before. So we're just really excited to get this transaction done, get ourselves repositioned here in the market, get a chance to refocus on the things we've talked about and generate that free cash flow so we can pursue some exciting opportunities. But then again there's opportunities to put some money back into the business, there's some things to look at. For Envision there's just a lot of different directions we could go here. But the primary focus right now is getting the core business some momentum back in that business, getting some of these things that got a little bit stagnant while we were suffering through the review process back on track like remodels and script file buys, private labels and other opportunities I think slowed down a little bit while we were winding our way through this thing that we're really working to kind of get jump started. And I think for Envision, getting the noise of this whole thing behind us I think would really help them as they come up to an excellent cycle here. I think just the overhang of this transaction will -- of this well and so getting that noise cleared away really I think opens up things for them as well. So we're all pretty energized here with what we've got and we're excited to get to that free cash flow number whatever it is. We don’t want to give guidance but we're pretty excited about what we've got here.

Alright, and my last question sorry about lingering, if we look at your peers results in the pharmacy gross margin you definitely underperformed based on the overhang associated with the WBA transaction. When we look at your peers and how they performed on a relative basis in this pressured environment what do we think the opportunity might be for you to improve your pharmacy profits as you work with your partners and your payors to align prices with cost better, that's it for me, thank you? John T. Standley: Yeah, that I think that's a great question. And so we've obviously been doing a lot of work here on pharmacy margin to figure out how we can be competitive in the marketplace but also have what I would call a sustainable business model. That's really I think the question of the day. And we do a lot of work to benchmark our cost versus competitors, what are the cost of those script, are we competitive on generic purchasing of those kinds of things. And we've obviously had the opportunity to gather a lot of market intelligence. And I think if you look at our gross margin over the last couple years its behavior is not dramatically different than what you have seen at Walgreen's and CVS. I think the difference is they've gained access to some lives with those investments where we haven’t. I think we lost them right here where there was no benefit of lives, where when I look at Walgreens and their similar rate declined they gained access to I think a lot of lives through Med D and through some narrow networks in the commercial space where we really haven't had those opportunities. I think now that it's clear that we're an ongoing business and what we are it should allow us to I hope have open dialogues about our opportunities to participate in those kinds of things. But I also think it's important that we also figure out how that model is one that works for both of us in terms of being an ongoing and a profitable business that makes a respectable return for its shareholders. But also a great partner for payors, that we deliver great service and that we're competitive in the marketplace. So that's kind of the balancing act that we're always working on but I think it got a little out of whack as we went through the merger process because people didn't view us as a long-term partner. They really probably viewed us more as a place to go to find value. And now I'm hoping that the conversations will represent both sides of the equation and not just one.

Thanks for your time and best of luck. John T. Standley: Thank you very much, appreciate it.

Our next question comes from the line of Robert Jones of Goldman Sachs.

Good morning, this is the Nathan Rich on for Bob. Good morning, could you talk about the process of evaluating whether or not to move your generic purchasing to Walgreens from McKesson and kind of how you will go about making that decision? And then also just around timing, given your current contract with McKesson, when you think you could move to WBAD if that's the decision you ultimately make? John T. Standley: Yeah, so as you mention our contract with McKesson goes through the end of March of 2019. I think we have until May of 2019 to exercise the WBAD options. So I am kind of thinking just sort of outside dates that's probably the outside of when it plays out. We're in -- obviously you should expect we are in conversations with McKesson about how the relationship will work going forward. There is a point in time in which we trigger the WBAD option under the under WBAD agreement and the merger and the asset sale agreement. And so what will happen here is as time kind of marches on here a little bit we will to a point where we have access to the WBAD purchasing option. There will obviously be an ongoing discussion with McKesson. We have the opportunity to do a cost analysis to kind of compare the two opportunities and from that we would make a decision. And I think the outside date that we could implement that decision is really April of 2019 if we can work through some opportunities that we have in our contracts with McKesson. It could possibly be sooner but I view that as kind of the outside date.

Okay, that's helpful. And then just as a follow up, I wanted to go back to your comments on SG&A and just make sure that I understood it correctly. So you talked about $50 million of opportunity potentially in fiscal 2019. You know also in the pro forma estimates that you had given I think that also included 96 million of corporate cost savings. So just wanted to make sure that the 50 million was in addition to that 96 million that I think is assumed in the pro forma? And then maybe just more broadly can you kind of talk about the areas of opportunity to lower costs and as you take a closer look at the business on a go forward basis are there other areas that you think could yield potential savings or efficiencies? John T. Standley: So the 50 million is incremental to the 96, they are different set of initiatives. We're really -- I think we are focused on trying to make sure that we -- that our stores are as easy to operate for our associates as possible. So we are giving them the right resources and tools to be successful in what we're asking them to do. So a lot of our energy and effort is really around how we, we use the term streamline but really make those processes more efficient and easier for our associates to use and thereby gain some cost advantage for doing that. We're also been looking at the way corporate administration is organized and some of the things that we do here. Corporately we've been very focused on our advertising costs and how we go to market there as well. And so I think those are kind of the general areas. Distribution we've found a lot of cost savings and synergy in the distribution side of our business. So those are all parts and pieces of how everything I think kind of comes together.

Okay, thank you.

Our next question comes from the line of John Heinbockel of Guggenheim Securities.

So John curious again when you think about your procurement options, right so the timing is important and lack of disruption is important. So do you have to get when you when you think about maybe you get more with WBAD, do you have to get 100% of the way there with McKesson to avoid disruption and maybe you do it quicker, so maybe talk about that trade off? And then sort of along the lines of that, if you if you think about the Walgreens relationship how much does Kermit help in understanding that and managing that and what do you think most importantly he brings to the table from a pharmacy standpoint? John T. Standley: Yes, so there is about five questions in there. So, let me go back to the beginning. So, on the purchasing options that we have just for background information for whatever it is worth we are actually building a whole process here to transition stores from McKesson to AmerisourceBergen as part of the whole Walgreens you know TSA process. So we will have built a pathway where if we choose to move we think we can move with a minimal amount of disruption if that's what we choose to do. So I do believe that if we're going to go with McKesson we have to be extremely confident that over the long-term they're going to deliver the value. We need to be competitive in the marketplace so they've got yes, they have to be 100% of the way there. So that's the answer to that one. And in terms of timing, again I think I kind of touched on in it a little bit earlier and it's really driven around the McKesson contracts and our ability to work through that with McKesson is really going to dictate the timing of how this thing I think plays out. In terms of Kermit, we're really excited to have Kermit join the team. I’ve known Kermit through NACDS and other industry function and really through competing against him for a very long time. I have great respect for Kermit, I have gotten to know him a little bit over the years. He brings very deep pharmacy experience here. He had experience in a number of different areas in pharmacy not just pharmacy operations but he did play a key role in the pharmacy benefit management business for a number of years during a period of time that it grew very rapidly. So he understands the third party side of this thing. He was responsible for Walgreens third party contracting for many years and so he has deep experience there. But he was also an innovator of Walgreens. He played a key role in a number of interesting things that Walgreens did over the year. I mean they were really the leader on flu shots and Kermit had a very key role in helping them bring the whole flu shot concept to market. And he drove a lot of their healthcare innovation. So I don't really see Kermit spending really very much of any of his time as it relates to the TSA or the transition with Walgreens. He's really going to be more involved in helping us forge the strategy for the future in pharmacy and how working with Jocelyn and Bryan really determining how we can bring better care to patients bring healthcare to local markets and really differentiate ourselves in the marketplace. That's really where I see Kermit having a huge impact on this thing.

And then the second topic, one of the things obviously in the retailers have been seeding margin right at the power of the PBMS. Do you think and when do you think maybe there's a philosophical shift among the PBMs, there's just not much more margin to be had right at retail and the focus has to go elsewhere, we need to see that -- are we going to see that anytime soon? John T. Standley: Well, I think the challenge for me answering that question is that it is a competitive marketplace and so there's certainly our situation I think others are in different situations and maybe have different philosophies about how their pricing to the marketplace. But from our perspective generic cost is really the smallest piece of the drug spend if you look especially at brands, you look at generic. I mean just in our book of business, specialty brand is really probably 70% plus of the spend and generic have less than 30. And when you look at what our relationship is with PBMs what we control, we really control generic cost. We buy brand in a fairly standard cost just like all of our competitors and that brand cost is determined by rebates that the PBMs receive, that's their job. Our job is to be efficient on the generic side and based on the work we've done we're very efficient on the generic side. So like you say I think there's a growing understanding that generics are getting to be a fairly mature book of business. They've been rebid over and over and over again for many years here and that generic costs while, there's still some ground to be made here. We're going to find some more value in generics overtime relative to the whole drug spend is really a very small piece of the puzzle. And I think that's a growing understanding in the marketplace isn't going to happen overnight John, but it's -- I think people are starting to get that. And we're working honestly in the marketplace with payors and consultants and others to help them understand those dynamics.

And then just lastly file buy a Target is 50 million to 75 million annual. Obviously it's going to be lower than what it used to be but is that a fair target of what you think you can do a year. Darren W. Karst: Yeah John, I think that's a fair number.

Okay, thank you. John T. Standley: Thanks John.

Ladies and gentlemen we have time for one more question. Our final question will come from the line of John Ransom of Raymond James.

Hi, good morning. I love being last, it's a challenging to be clever. John T. Standley: Don’t be clever.

So probably we've been talking to a bunch of investors lately about your group and I would say top of mind question of course is Amazon and potential disruption. So when you lay there at night at two in the morning worrying about Amazon what sort of things do you think you need to do particularly on the front end which we haven't talked about much today to Amazon proof your business and what weaknesses in the business model do you think are vulnerable to exploitation, thanks? John T. Standley: Yeah, well obviously that's a very -- that's a topic I do lay awake at night and worry about and that's a serious topic. And I think a key part of what we have are we have relationships with our customers, they are visiting our pharmacy, many of our friends and patients we developed hopefully a good relationship there. We have a strong loyalty program which makes us their competitive from a value perspective and work as a retention tool and really allows us to understand the behavior of our customers and patients so that we can deliver to them the best value and support that we can. That is also I think what Amazon is extremely good at. I mean they use a lot of data to analyze and understand their customers. They run a very efficient business model. They have a broad selection of products so it's a real challenge for us. In terms of things that I think we can do better, it's really I think we're very focused on improving the digital experience for our customers. So that it's not just what we’re doing in the store but it is how we are interacting with them day to day through other digital vehicles that's extremely important I think to building that relationship. And that's something that they're extremely good at. That's probably historically not our strength that we're very focused on improving. So if I point to one thing that's probably top of mind right there. But there's a lot to do.

Do you think you might, I know mail order is not new through a PBM but frankly the interface is pretty clunky, are you going to test home delivery from the stores, same day home delivery because you got to think Amazon would come in and for Prime membership they would give you a discount on the purchasing fees and just same day home delivery, their electronic interface would be more seamless that [Indiscernible] have your pills at your front door in 14 minutes, I mean are you thinking about any of that kind of stuff? John T. Standley: Absolutely and we do, we do home delivery today. It's probably not quite as seamless as you just described it but we do home delivery today and I think it's again those are the kinds of things that you're exactly right we've got to focus on, remove the friction in the relationship, make it easy for patients, and I know I behind the scenes somewhere maybe deep in the bowels of Amazon somebody is very focused on figuring that out as well. And so it's top of mind.

Okay, my other question is how much rebuilding do you have to do at the middle management ranks. I got to thank you you've had some attrition during this process so how much rehiring and how are you below the top six week [ph] positions? John T. Standley: You know we have actually done okay, better than you might expect in terms of holding this team together. I think we had a couple of high profile losses obviously as we came through the end here. But overall I have to say I'm very pleased with the way this whole team has hung in there through this whole process. So we're in pretty good shape from a management perspective at this point. We have got a couple of holes to fill but overall I think we're in pretty good shape with Bryan and Jocelyn and Kermit in place I think we really have the foundation on the Rite Aid side to build from and so I feel very good about where we are there. We've done I think pretty good on PBM side as well. We've got Frank and Don and their team hanging with us here as we kind of gone through this. I think they're pretty excited to get back into the market without have to answer 30 million questions about what is going on with -- and after here so I think we're pretty good.

Okay, and then my other one is, I don't remember personally a tougher environment then where we are now with generic deflation and flat scripts, Part D reimbursement pressure, more competition on the front-end. I mean you can do what you can do but if the environment doesn't get better how are we just not looking at declining EBITDA every year, I just can't see how you grow with these hurricane size headwinds? John T. Standley: I think at some point the pharmacy margin has to stabilize, it is my belief, I'm not saying it's tomorrow or next week or next quarter necessarily. But I think over the long-term that everybody Walgreens, CVS, we are all by and large consortiums today. My volume with McKesson is not that different in the way of WBA buys, or WBAD or CVS, [indiscernible]. You know there's only so far these generic manufacturers are going to go on costs and that starts to back up the supply chain right back to us. There's only so much we can do in terms of cost and what it cost to dispense a drug. There's a lot of regulation, there's a lot of focus on opiod abuse and other things that we all need to work on. At retail we've got to take great care of patients so there's somewhere down the line here where just by virtue of economics involved this thing has got to settle down a little bit.

Yes, okay. Well congrats and hope you can move forward successfully. Thanks very much. John T. Standley: Thank you, we appreciate it.

Thank you everyone for joining us this morning. We really appreciate it and we'll talk to you soon. John T. Standley: Absolutely, thank you.

Thank you ladies and gentlemen. This does conclude today's conference call, you may now disconnect.