Matt Schroeder - Senior Vice President, Chief Accounting Officer and Treasurer John Standley - Chief Executive Officer Kermit Crawford - President and Chief Operating Officer Darren Karst - Senior Executive Vice President, Chief Financial Officer and Chief Administrative Officer

James Auh - Cowen & Company John Heinbockel - Guggenheim Securities Nathan Rich - Goldman Sachs William Reuter - Bank of America Merrill Lynch Carla Casella - JP Morgan

Good afternoon. My name is Mike, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Rite Aid Fiscal 2019 Third Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Matt Schroeder, Chief Accounting Officer. You may begin your conference.

Thank you, Mike. Good afternoon, everyone. We welcome you to our third quarter earnings conference call. On the call with me today are John Standley, our Chief Executive Officer; Kermit Crawford, our President and Chief Operating Officer; and Darren Karst, our Chief Financial and Chief Administrative Officer. On today’s call, John and Kermit will provide an update on the business, Darren will provide an update on our third 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 to 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 certain non-GAAP measures in our release and in the accompanying slides. The definition of the non-GAAP measures, along with the reconciliation to their related GAAP measure are described in our press release and slides. I’d now like to turn it over to John.

Thanks, Matt, and thanks to everyone for joining us on the call today. Our third quarter results show that we’re making critical progress in growing our retail and pharmacy benefits management businesses. Like last quarter, this growth is important because it validates the key elements of our strategy are gaining traction. Today, we announced an important news that will further support the growth of our Retail Pharmacy business. After a careful and comprehensive review of our drug purchasing options, today we announced that we’ve agreed to key terms of an amendment to our drug purchasing agreement with McKesson, which will continue our relationship for an additional 10 years. Under these terms, McKesson will continue to source all of Rite Aid’s branded and generic pharmaceuticals and provide direct-to-store delivery to all of our pharmacies through March of 2029. Securing the ability to purchase prescription drugs at a competitive price has been an important strategic objective, and accordingly we undertook a rigorous review of our options. Based upon this review, we believe that extending our contract with McKesson provides our company with the most favorable terms that we can achieve in the marketplace. McKesson has been a valued partner of Rite Aid for more than 20 years, and we’re pleased that these new terms will continue our partnership, while helping to ensure we have a competitively priced supply of drugs and industry-leading delivery capabilities to provide the highest levels of service to Rite Aid stores and customers. This extension represents a significant step in strengthening our pharmacy business, as we continue to focus on gaining additional access to preferred and limited networks and executing key script growth initiatives like further expanding our clinical pharmacy offering. As stated in our release this evening, we also expect to complete a refinancing of our senior secured credit facility in the coming days. This refinancing will extend our debt maturities to 2023 and provide additional liquidity. Darren will discuss our refinancing in more detail during his remarks. In addition, as part of our ongoing focus on servicing customers, where and how they want to shop, we are pleased to announce that we’ve signed a letter of intent with Instacart, a technology-driven, on-demand delivery service to pilot a delivery program beginning this spring. We’re excited about the potential this pilot has to further strengthen our omni-channel capabilities and provide even higher level of convenience and value to our customers. We’ll be sharing additional information about this pilot closer to its expected launch in Spring. And finally, yesterday, we announced that Justin Mennen, a seasoned leader in the digital space with more than 20 years of technology leadership experience, is joining our team as Senior Vice President and Chief Information Officer. Justin most recently served as Chief Digital Officer and Chief Information Officer at CompuCom Systems Inc., and he has a successful track record of driving value and results through innovative technology solutions. His experience will be extremely valuable, as we look to further invest in technology and innovation to enable growth and enhance the experiences of our valued customers and associates. We welcome Justin to our team and look forward to working with him to further develop and execute our technology strategy. In terms of our results for the quarter in addition to driving revenue growth in both segments, we delivered our best same-store sales comps in 13 quarters and our strongest same-store prescription count performance in 10 quarters. We also continue to see a stable – stabilization of reimbursement rates during the quarter. In the Retail Pharmacy segment, we met our flu shot goal for the year and continue to see significant growth in our immunizations business. In the Pharmacy Services segment, we continue to see increased enrollment in Medicare Part D, which was a critical factor in our strong results from EnvisionRxOptions. These were all key drivers behind our topline growth and solid operating results. We delivered adjusted EBITDA from continuing operations of $142.8 million compared to $142.1 million in last year’s third quarter. Darren will provide more color on our financial results in his comments. Heading forward, we are highly focused on building from this momentum to continue executing the key elements of our strategy. We remain focused on delivering against three strategic priorities: serving as the trusted advisor to our pharmacy customers, providing our customers with a convenient and personalized shopping experience, and building a winning value proposition for payers and providers. These priorities are designed to leverage our attractive store footprint and unique suite of healthcare businesses to grow the top line, improve efficiency, and deliver value. To achieve these priorities, we continue to implement a number of key initiatives, including improving payer relations to continue stabilizing reimbursement rate pressures, working to expand access to limited and preferred networks, enhancing our pharmacy clinical capabilities to improve outcomes, leveraging our valuable wellness brand, refining our merchandising, expanding our omni-channel capabilities, and growing our PBM EnvisionRxOptions. Finally, we are also focused on continuing to control and right-size cost through a leaner, more efficient structure. As we execute our strategy, we will also focus on continuing to seamlessly execute the TSA with WBA, which we expect to generate revenue through at least October 2019, when the initial two-year agreement expires. WBA has the option for up to two six-month extensions. As the agreement winds down as part of our ongoing cost control efforts, we have plans to reduce SG&A as stores roll off the TSA. As we’ve stated before, our goal is to take out $96 million of costs, as we better align our organization to our new store footprint. We’re well on our way to achieving this goal and have plans in place to help ensure that we meet this objective. Before I turn it over to Kermit, I’d like to share some more specifics regarding EnvisionRxOptions. We are pleased with Envision’s results for the quarter which included a $1.2 million increase in adjusted EBITDA, primarily driven by continued growth in Medicare Part D enrollment. All told, over the past year, we’ve gained approximately 200,000 lives in the Part D sector and now have more than 595,000 enrolled Part D members for planned year 2018. In terms of open enrollment for the planned year 2019, we added 93,000 new lives, but saw larger than expected disenrollment in geographies where Rite Aid divested stores, resulting in approximately 25,000 net new D – new Med D members. We expect Med D membership to grow over 10% for planned year 2019. Over the past few years, we’ve made some important strategic decisions involving Envision, and these decisions are beginning to pay off. Most notably, our number of [indiscernible] members in our Med D plans has increased from 77,000 in planned year 2016 to 351,000 in planned year 2018. We’re also excited about the interest and momentum building for the 2020 commercial selling season, with several regional and health plan RFPs in-house, a number of finalist opportunities and a new regional health plan already in place. We believe Envision is well-positioned to take advantage of the consolidation that is occurring in the marketplace. As I mentioned earlier, we’re making significant progress on a number of fronts. At this time, I’d like to turn it over to our President and COO, Kermit Crawford, who will share additional details about our key initiatives. Kermit?

Thank you, John, and thanks to everyone for joining us today. As a team, we’re making important operational progress in many areas of our business, as we continue to execute on our near-term strategy and drive top line growth in both Retail Pharmacy and Pharmacy Services segments. Continuing on our recent success and improved performance, we had a particularly strong quarter in the pharmacy, where as John said, we recorded our best same-store prescription count performance since the first quarter of calendar 2016. In addition to cycling network exclusions from the prior year, we continue to have success in executing on various script growth initiatives, with growth in immunizations being a key driver. Supported by our integrated Flu Free Community Marketing Campaign, we have protected more than 2.1 million patients against the flu, an increase of 19% compared to last year’s results for go-forward Rite Aid stores. We’re currently on pace to achieve a record number of flu shots for the year and remain focused on engaging with all customers to ensure they know about the convenient and professionalism they can expect by getting a flu shot from our Rite Aid Certified Immunizing Pharmacist. Beyond flu shots, we’ve also been successful in growing our ancillary immunizations business and protecting customers against conditions, such as shingles, pneumonia and whooping cough. Non-flu immunizations have increased by 72% year-to-date, driven in part by high demand for the new Shingrix vaccine. We’re pleased that more and more customers are turning to Rite Aid pharmacist to be a trusted healthcare advisor and provide convenient preventive healthcare services like immunizations. Another key area of focus in the pharmacy has been improving medication adherence. One component of this strategy has been to convert eligible prescriptions from 30-day to a 90-day supply. As a result, we continue to see growth in 90-day scripts year-over-year. Driving positive healthcare outcomes through medication adherence will continue to be a priority, as we execute a multifaceted approach that leverages text message alerts, automated courtesy refill and one-trip refill program. To further support script growth, we continue to ramp up our prescription file buy program. During the quarter, we completed $11 million in file buys, as we aggressively pursue this opportunity to increase prescription count and leverage existing pharmacist labor. As we continue to expand our clinical pharmacy capabilities and grow script count, we also remain highly focused on strengthening the economics of our pharmacy business through stabilizing reimbursement rates and obtaining efficient drug pricing. As John said, the 10-year extension with McKesson is a key step to ensuring that we have competitive drug cost and a distribution strategy that helps us provide the highest level of service to our stores and pharmacy customers. At the same time, we have secured commercial contracts with our top three payers that include generic effective rate protection, which ensures greater predictability in reimbursement rates going forward. While gross profit trends improved during the quarter, taking steps to further stabilize reimbursement rates remains a key priority. And finally, we continue to work closely with our payer partners to add value and gain additional access to limited – limit – limited and preferred networks with an eye towards making further progress for calendar 2020. In terms of marketing, merchandising and our front-end business, we continue to leverage our trusted and well-known brand, as we drive innovation in our aisles, introduce exciting new product line and strengthen our omni-channel presence. We continue to see better engagement with customers as we grow our highly popular wellness+ rewards loyalty program, which continues to deliver great values each week to our $13 million active members. Accordion [ph] transactions accounted for over 77% of front-end sales during the quarter. Another key area of progress has been the expansion of our highly successful wellness store format, which we continue to believe is the best store format in our industry. During the quarter, we completed 22 store remodels and now have a total of 1,748 wellness stores, which represent nearly 70% of our entire store base. Wellness stores remodeled within the past 24 months continue to outperform the rest of the chain in terms of front-end sales and script count, as the store showcase our latest innovation and merchandising initiatives. On a parallel path, we continue to evaluate underperforming stores, as we look to control costs and operate as efficiently as possible. With that said, we have additional locations scheduled to close in Q4, bringing our total for fiscal year 2019 to 82 stores. In terms of front-end strategy, we continue to prioritize health, beauty vitamins and consumable as key categories that drive top line growth and improve the customer experience. We remain focused on customizing our assortment to be relevant in every store, while enhancing our multicultural assortment and introducing more better-for-you items and brands. One example involves our efforts to elevate our beauty experience. As announced, we recently became the first drugstore retailer to offer Kokie Cosmetics. Kokie is a prestige quality cruelty-free full-line indie cosmetic brand that offers the latest beauty trends at an affordable price. We now have this exciting product line available at more than 2,300 Rite Aid stores and at riteaid.com. Two other better-for-you brands we added this year include e.l.f [indiscernible] and Cake Beauty. e.l.f is a high-quality vegan and cruelty-free cosmetics and skincare line at the extraordinary value and is now becoming a customer favorite at Rite Aid. And last month, we launched Cake Beauty, an award-winning collection of vegan and cruelty-free hair care and body products. These brands represent over 300 new items and we are pleased with the initial sales and customer response. We will continue introducing additional beauty brands that focus on value and relevancy for all our customers. In the consumables area, we have added over 150 better-for-you snack and grocery items this year and have 1,000 active items using our BY [ph] shelf labels that allow for easy identification of food and beverage items that fit our customers’ wellness needs. Also, we recently tested a new innovative grocery concept. And based on early results and consumer feedback, we plan to expand this concept to additional stores. While we introduce new products and brands, we’re also investing in inventory for top-selling items throughout the store to ensure that we’re in stock on key items that our customers want. As we further enhance the in-store customer experience, we’re also working to strengthen our omni-channel capabilities to better meet the needs of today’s customer. A key factor has been the evolution from mass marketing vehicles to a highly personalized and more efficient marketing program. Over the past three years, our mix has evolved from 85% mass vehicles, primarily circulars, to just over 50% mass vehicles year-to-date. At the same time, we have ramped up our CRM and digital marketing capabilities. Our one-to-one marketing focus includes new personalization capabilities, which deliver better content and value to our customers. Meanwhile, weekly visits to our Rite Aid mobile app increased more than 8% for the quarter and are up 9% year-to-date. A specific area of success, both with our app and online, has been prescription refills, which grew by 33% during the quarter, thanks in part to new features such as two-way text messages, which improves the overall customer experience. We will continue our relentless focus on creating a seamless experience throughout all channels, whether our customers are shopping with us in-store on their mobile device or from their comfort of their own home. That’s why we’re so excited about our partnership with Instacart and the potential to deliver an even higher level of convenience to our customers. Before I turn it over to Darren, I’d like to say that our Rite Aid team is doing a tremendous job, executing our near-term strategy, as we drive top line growth and offer a more convenient and personalized customer experience. We look forward to continuing these efforts to deliver a strong finish for the fiscal year and position Rite Aid for continued long-term growth in the retail, healthcare marketplace. Thank you for your time. Now, I’ll turn it over to Darren Karst for more information on our financial results. Darren?

Thanks. Thanks, Kermit, and thanks to everyone for joining us today. On this evening’s call, I will provide a review of our third quarter results and an update on the refinancing of our senior secured credit facility. Also note that any financial information I refer to today will be for our continuing operations. Revenues for the quarter were $5.5 billion, which was an increase of $97 million from the prior year quarter, or 1.8%. Net loss from continuing operations was $17.3 million, or $0.02 per share versus a net loss of $18.2 million, or $0.2 per share in the prior year’s quarter. Lower overall SG&A expense, including a decrease in depreciation and amortization expense was offset by a reduction in gross profit and a lower income tax benefit in the current quarter. Adjusted net income in the current quarter was $14.7 million, or $0.01 per diluted share versus adjusted net income of $8.5 million, or $0.01 per diluted share in the prior year quarter. The year-over-year reduction of SG&A expense drove most of this difference. Adjusted EBITDA was $142.8 million in the current quarter, compared to $142.1 million in the prior year quarter. Retail Pharmacy segment revenue for the quarter was $4 million, which was $18 million, or 0.5% higher than last year’s third quarter, due to an increase in same-store sales and scripts, partially offset by the impact of store closures. Same-store sales increased 1.6% in the quarter. Front-end same-store sales were down 1.5%, but pharmacy same-store sales increased by 3.1%, with same-store script count up 2.4% on a 30-day adjusted basis. The increase in script count reflects the cycling of the impact of being excluded from certain pharmacy networks in the prior year, the strong performance of our immunization program in the third quarter and overall growth in our pharmacy business. As we have said previously, we continue to work with our payer partners to gain additional access to preferred and limited networks with a focus now on calendar 2020. Front-end sales were negatively impacted by soft performance in our tobacco and liquor categories and a slow start to the Christmas holiday season. Additionally, our front-end sales suffered somewhat as a result of inefficiencies associated with the realignment of stores within our distribution, our network of distribution centers that was necessary, given the sale of a distribution center to WBA in the current quarter. Total Retail Pharmacy segment gross profit dollars in the quarter were $8.3 million lower than last year’s third quarter and gross margin was 33 basis points lower as a percent of revenues. Adjusted EBITDA gross profit was unfavorable to last year’s third quarter by $10.7 million and 40 basis points worse as a percent of revenues. The decline in gross profit was driven primarily by an increase in distribution expenses, which was caused primarily by the realignment of our stores within our network of distribution centers that I just mentioned. This realignment drove an increase in labor costs and freight expenses in our distribution centers. Front-end gross profit was also lower than the prior year’s quarter, due to the reduction in sales. Partially offsetting these items was an improvement in pharmacy gross profit, as our strong script performance and generic cost reductions offset a decline in reimbursement rates. Retail Pharmacy segment SG&A expenses for the quarter was $24.3 million lower than last year’s third quarter, while SG&A rate as a percent of revenues improved by 73 basis points. Adjusted EBITDA SG&A was $10.2 million better than the prior year and 37 basis points better as a percent of revenue. Our SG&A improvement was driven by the inclusion of $17.9 million of TSA fee income from WBA in the current quarter, partially offset by increases in employee-related expenses and legal fees. Adjusted EBITDA in our Retail Pharmacy segment was flat to our prior year actual results. Our Pharmacy Services segment had revenues of $1.5 billion, which was an increase of $81 million, or 5.6%, primarily due to an increase in our Medicare Part D membership. As we have discussed on previous calls, we had a very successful 2018 Medicare Part D bid and have seen strong enrollment activity throughout the year. We are now covering over 595,000 lives, which represent an increase of approximately 50% over the prior year. Adjusted EBITDA for the Pharmacy Services segment of $41.6 million was $1.2 million higher than last year’s third quarter adjusted EBITDA of $40.4 million. The increase in revenue was partially offset by some margin compression in our commercial business and other operating investments, as we invest for current year and future growth. Our cash flow statement for the quarter shows a source of cash from operating activities of $351 million. The main driver was the receipt by Envision of its 2017 CMS receivable in the third quarter. You should note that the 2017 planned year was partially covered by reinsurance, and therefore, we remitted a portion of this receivable payment to the insurer early in our fourth quarter. Partially offsetting this cash flow benefit was the use of cash for our typical seasonal inventory build. Net cash used in investing activities for the quarter was $58 million versus $70 million last year. During the quarter, we remodeled 22 stores and spent $11 million on file buys. Cash from investing activities and discontinued operations showed a source of $61 million. This included the proceeds from the sale of one of the three distribution centers we will sell to WBA, which took place in the third quarter. We expect to complete the sale of the other two distribution centers to WBA prior to the termination of the TSA agreement. At the end of the quarter, we operated 1,748 wellness stores within our continuing operations, which is about 70% of the store base. We continue to be pleased with the performance of our wellness stores. For the third quarter, front-end same-store sales in our wellness stores that have been remodeled in the past 24 months were approximately 87 basis points higher than our non-wellness stores and same-store script growth in these stores was 207 basis points higher. Turning now to our outlook. We are narrowing our full-year fiscal 2019 guidance for revenues, same-store sales, adjusted EBITDA and adjusted net loss. We expect revenues to be between $21.8 billion and $21.95 billion for the full-year, and same-store sales are expected to range from an increase of 0.5% to 1%. Adjusted EBITDA is expected to be between $545 million and $570 million. Adjusted net loss for the full-year is now expected to be between $14 million and $33 million. Adjusted net loss per share is now expected to be in a range between $0.01 per share and $0.03 per share. Our revised guidance for adjusted net loss and adjusted net loss per share reflects an anticipated store closing charge of approximately $25 million that we expect to take in the fourth quarter related to the scheduled store closures that Kermit referred to earlier. Our debt, net of cash was approximately $3 billion at quarter-end, and our leverage ratio was approximately 5 times trailing pro forma EBITDA, or 5.1 times trailing pro forma EBITDA after adjusting for the effect of the sale of the remaining distribution centers to WBA and the payment to our reinsurer of their portion of the 2017 CMS receivable that we made early in the fourth quarter. Our liquidity today is strong at over $1.4 billion. Before I turn things back over to John, I’d like to finish with an update on the status of refinancing our $2.7 billion senior secured credit facility, which is scheduled to expire in January of 2020. We have substantially completed a refinancing that replaces this facility, with a new $2.7 billion senior secured asset-based revolving credit facility and a new $450 million senior secured asset-based term loan facility advanced on a first-in, last-out, or FILO basis. These new credit facilities are expected to mature in 2023. The interest rate on the revolver is expected to be LIBOR plus 125 to 175 basis points based on a borrowing grid, and the rate on the FILO term loan is expected to be LIBOR plus 300 basis points. We expect to close on this facility in the coming days and we’ll provide more details to the market at that time. Upon completion of this refinancing, we will have no debt maturing before 2023. In addition, this refinancing will provide us with even greater liquidity and provide us additional flexibility to achieve our strategic objectives. And with that, let me now turn it back over to John to wrap up our prepared comments. John?

Thanks, Darren. I’d like to make two quick points before we begin taking questions. First, we were pleased to see that our company improved by two full letter grades in the most recent who is minding the store report card. This annual report is part of the ongoing campaign launched by Safer Chemicals, Healthy Families, a leading watchdog group encourages retailers to replace chemicals of concern with safer alternatives. In this year’s report card, we are in the top 10 ranking and we are among the most improved retails for 2018. A key factor behind this was our expanded products chemical policy, it was published in September. And I’d like to thank everyone on the team who played a role in expanding our policy and our broader efforts to ensure the products we sell meet the expectations of our customers. Secondly, I’d like to thank all of our Rite Aid associates for their outstanding commitment and dedication to executing our strategy and providing our customers with great service. For a third consecutive quarter, our customer satisfaction rating has reached an all-time high, and our team has worked together to achieve this, as we also celebrate a number of key initiatives to drive our business. We have an extraordinary team here at Rite Aid, and it’s one of the many reasons that we’re excited to continue executing our strategy in the weeks and months ahead. While we have a tremendous amount of work ahead of us, we have full confidence in our strategy, our team and our company to succeed as we build significant momentum for the future. That concludes our prepared remarks for the call. We will now open the phone lines for your questions.

[Operator Instructions] Your first question comes from Charles Rhyee from Cowen & Company. Your line is open.

Hi. This is James on for Charles. I guess, my question is regarding the updated guidance range. It implies about $107 million to $131 million of adjusted EBITDA, which is well below consensus 4Q was at $150 million prior to today’s earnings. Can you maybe talk about the puts and takes for 4Q adjusted EBITDA and maybe where the disconnect with the Street may have come from?

Well, I think – yes, thanks for the question. I think that the implied numbers are a little bit higher than that, but we do have a couple of things kind of stirred into the fourth quarter. We’ve got a new generic drug, Advair that is expected to launch. It could slip a little bit, but that has a bit of a burden on the fourth quarter, because it’s a single source at that point. We’ve also got some rate step downs that are working their way through that, and we don’t have the benefit of next year’s generic bid on the cost side, so that’s not reflected in the quarter yet. So those are the – probably the main things going on in the quarter. I don’t know, John, if you had anything to add.

No, I mean, I think the range is a little higher than that. I mean, it’s…

Yes, James, the one thing I would point out is, when we kind of restated the way we did EBITDA to pull off the loans deferral in the second quarter, it adjusted kind of what our number was in the first quarter, so the range is about $150 million to $140 million.

Okay. And can you maybe talk about your decision to extend your distribution agreement with McKesson rather than exercise the WBAD [ph] option. Maybe what some of the key reasons behind that is, and when the new pricing terms take into effect and maybe how much of an improvement it is over the prior terms?

Sure. So, I think, as I said in my comments, we’ve, over the last several months, undergone a very rigorous process to evaluate the various options that we had in terms of going forward, one of which was to WBAD option. As we work through that process, string together a number of factors, pricing, operating flexibility, alignment with kind of where we’re going strategically, as we put all the pieces together in one place, I think, we determine that McKesson was the best answer for us. Moving forward, it is an enhancement in value from our current existing contract, so there’s additional value for us here, but in terms of guiding what that value is, we’re not going to do that for a couple of reasons. One is, we’re always battling reimbursement rate kind of on the other side of this thing. Two is, there are a pretty confidential commercial terms in this agreement that we don’t really want to get into the specifics of that. And three is, we’ll probably make some decisions as we go forward how we invest the benefits of the contract in terms of growth versus earnings or other reinvestments.

Okay, great. Thank you.

You’re welcome.

Your next question comes from John Heinbockel from Guggenheim Securities. Your line is open.

So, John, let me start on the McKesson contract. So you would always like the idea that you would buy at Walgreens level for a long period of time. So I guess, I take this that McKesson gave you comfort that you can – within their platform, you can get very close to where you believe Walgreen is acquiring drugs for us, is that right?

Yes.

Okay.

Obviously. I mean, obviously.

And you’re pretty confident with that, right? So you’re able to put the two side-by-side?

We did a lot of work here, John, over the last several months to really kind of stare at this. I think, I want to be careful here at Walgreens. WBAD is a great procurer of drugs and also created value for us. But in working through all the elements of this, I think, we determined that McKesson was the right path forward for us.

And then timing-wise, let’s say, you pick a number right – half of your procurement benefit or whatever it is to put back into the business, is the idea that you put it back into the pharmacy side on selectively more aggressive preferred network bids? And is that right? And then timing-wise, would that be more sort of a mismatch in timing that you get the benefit of procurement earlier and reinvest later?

Yes. I mean, realistically, 2020 is still the target that we’re looking at for new preferred or narrow networks. Obviously, we’ve made some investments also in writing 2019. In calendar year 2019, fiscal 2020 for us, we do, as we just mentioned, have rate step downs and investments that we – this will also help us walk our way through.

All right. And then lastly, on the realignment. So, when you think about and I guess, some of that was step miles and freight, but can you mitigate that before you cycle it, or you simply have to cycle the transfer of that DC? And then I guess, the remaining two that will move over to Walgreens, is the disruption likely to be much lower than what you saw here?

So, I’ll take a stab at this and then probably Darren or Matt or somebody [indiscernible]. But there were a couple of things that went on in the quarter here for us on the distribution side. We had kind of an unusual event, a bit of a tragedy in one distribution center. We had the realignment that we had to go through to position stores in the network to facilitate alignment with the TSA and supporting Walgreens and the sale of the one warehouse. In doing that, we did incur, I would say, some unusual costs that we would normally not incur in a quarter. So a piece of what we’re looking at here was really – is confined in the quarter. There is an element of this related to the new alignment, where we are going to incur a little bit, because we’re going to be running our stores at a fewer DCs. There’s a little bit more distance to travel for certain stores and we get all done with this. So there’s a little bit of cost in here that, that will continue going forward. We made a couple of steps in the process. I would say that most of the stores are close to their final home, but there’s probably one more iteration of store movement that we’ve got to kind of go through to get home on this. And then it will be kind of, I think, where it needs to be well-positioned for the future distribution sales as well.

Yes. Another thing I would add to that is the reason that most of the stores have found their ultimate home in one of our distribution centers is the sale of the first facility kind of cascaded the need to ultimately get stores in the Rite distribution centers. So that our stores are in our distribution centers and the Walgreens stores were in the other facilities.

And they’re still, I think, there were – most of it where there was sort of one more step to go to kind of Rite Aid.

Right.

Okay. Thank you.

You’re welcome.

Your next question comes from Robert Jones from Goldman Sachs.

Hi, this is Nathan Rich on for Bob this evening. Thanks for the questions. Just wanted to start on the Retail Pharmacy segment. You highlighted the stabilization and reimbursement rates. And I think you also said pharmacy gross profit was up, which I think is an improvement in what the – from what the trend had been. So how should we think about this kind of going forward? And how do you feel about the predictability of reimbursement rates as you enter some of these new contracts that you cited? And can you maybe help us think about what the key factors are that can cause kind of reimbursement to swing relative to kind of what you know today?

So I’ll start and then I’m going to kick it to Kermit. So I guess a couple of things. Yes, we have, as Kermit talked about, we do have a higher percentage of contracts with GERs, BERs [indiscernible] and everyone on the call, that do help with with some insight here. There’s a couple of things though that happened along the way. One is, there are a lot of different networks at every PBM and there are some mix amongst all these different networks. So we don’t – we won’t know until we get a little bit into the year exactly, how many clients chose a preferred network versus staying in a broad network or other things like that, they can cause some volatility in reimbursement rates. Secondly, there can be some mix among PBMs between winners and losers and what networks they move our clients to, as they transfer business between PBMs. And the last piece I’ll just add in is, we are seeing more performance networks in the marketplace. So we have the IRRs and Part D, but we also have some commercial networks that have performance features as well. And so that can cause some movement in recovery rates or reimbursement rates as we go through the year and work on those opportunities. So those are some of the big things. Kermit, I don’t know what?

And Nathan, I guess I would add two additional things is, if we think about the preferred networks, I mean, we evaluate each of these preferred networks. We determine what type of market share we think we can gain in those networks, and how we may have to reprice some of our existing business, where we are in the open network of versus the preferred network. We think that evaluation is in the process. I think the other factor is add some of these new generics are released how they impact our overall business. Sometimes, generics don’t actually hit the market when anticipated. In some cases, that helps us. In other cases, that could hurt us depending on the number of manufacturers that participate in the new release of generics.

That’s helpful. And then, John, just may be a follow-up. I know it’s a little bit early. But just as we think about fiscal 2020, it sounds like, yes, it’s kind of been trending EBITDA in the $140 million, $150 million range, maybe a little bit lighter in 4Q. What should we think about is the right jumping off point, as we get into next year? And can you talk about some of the puts and takes, what are the key variables are in your mind as we think about the EBITDA progression into next year?

Sure. Well, why don’t we give guidance?

We’ll give guidance on year-end call.

Yes, at our year-end call. So we’ll give guidance with our year-end call. I would just say, we have done a lot of work on the reimbursement rate side. We’ve obviously just done a bunch of work on the drug purchasing side, those are big dynamics in here. And we’re building pretty aggressive plans on the front-end part of our business in order to really try and get front-end same-store sales really trending in the right direction. So, as I kind of look at next year, lots of work again on the pharmacy network side, lots of work on the drug purchasing side. We’ve got work on the merchandising side and go-to-market strategy on front-end. I mean, those are kind of some of the big things.

[Multiple Speakers] initiatives driving the growth.

Yes, big focus on clinical initiatives. So we’ve got a lot of irons in the fire here, and we’ll bring it all together for you when we give you guidance for next year.

Okay, I appreciate the comments. Thanks for the questions.

You’re very welcome. Thank you.

Next question comes from William Reuter from Bank of America.

Good afternoon. I just have two, and I’m not sure if you’ll be willing to comment on this. But on the question of the contract you’ve signed for the generic drug purchasing, can you say whether you think it will more than offset your reimbursement pressures maybe over the first 12 months of the contract, such that we would expect some margin expansion from that?

We will – yes, we’ll again, we’ll guide for next year on the next earnings call.

Okay. And then the second question, in terms of, I think, we’re still expecting to receive one more payment of $160 million. Can you talk about the timing of that? And I guess, will you use those proceeds to pay down just your ABL at that point, or what are the thoughts there?

Yes. So we’ve got what you’re referring to is the sale of the lot – the other two distribution centers to WBA.. Those will be sold sometime during the term of the TSA agreement, but it could be as late as the very end of the TSA agreement, which ends in October of the coming year. But keep in mind, WBA has the option to extend the TSA for two additional six-month periods. So it will be, at some point, we just – I can’t tell you exactly when. But the amount is the $160 million roughly that you referred to.

Okay. That’s all from me. Thank you.

And we – I’m sorry, and we would anticipate to use that to repay debt.

Definitely to repay debt, there may be a small excess proceeds offer that we would have to do with the DC proceeds. So…

It still repays that.

Which still repays debt as a matter of visit against 2023 bonds or the revolver.

All right. Thank you very much.

Our last question will be from Carla Casella from JPMorgan. Your line is open.

Hi. I’ve got two questions here. I missed. Do you see the number of store closures you expect for fourth quarter, I think, I missed that?

No, I would say, 82 for the fiscal year.

Yes.

Right. So we closed 26 through the first three quarters, you can do the math.

It’s around $150.

Okay. And then I just want to understand better the CMS, the liability that you include in the pro forma debt. When you say your pro forma debt calculation, you take out the asset sale proceeds assuming those go to pay down debt and then you have a draw rate, or an addition of debt from the CMS liability. What’s the timing on that? And is that part of the reason why your receivable, as it related at all to the working capital gain this quarter? Is it a timing issue?

It is.

Yes, Carla – yes, let me clarify that. So we received the CMS receivable in the third quarter, the entire amount, but we have to remit a portion of that over to the reinsurer. And the timing of that didn’t occur in the third quarter, it occurred in the fourth quarter. So we just in order to make it sort of a straddle the quarter, we wanted to make it sort of a fair calculation of what we thought our real leverage was.

Okay, great. And I was hoping you said in the fourth quarter?

Yes. It’s already been paid to the reinsurer. So I mean, it just occurred a couples of weeks after the end of the quarter.

Okay, great. And then I have a couple of questions on that Medicare Part D. As you go after that business as industry consolidates, who you are competing most with [indiscernible]? And is there any kind of changes in the methods of competition or negotiating tactics there?

Well, it’s – I think, as you know, it’s an annual bid process. So, the challenge and the opportunity is that every year you need to put forth a competitive product into the marketplace. Our positioning has been more in the future market. We’ve had very competitive premiums in the marketplace. I would say, this year, maybe versus the prior year, we saw more competition in that space, three or four more people kind of get down into our premium range and probably a little bit closer to our plan design. And so that’s I think kind of where we’re at right now. I’m not sure…

Okay. What percentage of your business now is Medicare Part D?

Well, you’re talking about – I’m talking about on the PBM side. If you’re talking about…

Okay.

Sell-side, it’s 18% or something I’m guessing, Kermit?

20%.

20%, something in that range.

Okay. And you don’t break it down the PBM side, sort of even a valid way to look at it?

We have given you the life. We have given you – we’re about 600,000 lives.

Yes.

Okay.

Okay.

Great. And then just a quick one on Instacart. We’ll be able to deliver prescriptions as well, or is that just for front-end merchandise?

Yes. We’re initially focused here on front-end merchandise. We have our program and we already have home delivery at almost two-thirds of our stores today. Obviously, we’re looking for ways to further enhance and improve our patients’ experience But Instacart initially will be chasing the front-end with this.

Okay. And then on the just refinancing, when you – what do you expect the outstanding amount to be on the revolver as well, 450 on the FILO or should we assume $780 million, which would be the difference between that FILO and what’s outstanding on the revolver now, or is there additional pay down with some of the excess cash you have sitting on the balance sheet with the new facility?

I think, probably, I think we mentioned liquidity days about $1.4 billion, that number is going to jump up roughly by the amount of FILO that we drop. Initially, the incremental FILO will reduce the revolver of outstanding.

Okay, great. That’s all I have. Thank you.

Well, thanks, everyone, for joining us this evening, and we appreciate your interest in our company and we’ll talk to you….

And happy holidays.

…happy holidays, everybody, and we’ll talk to you next quarter. Thank you.

Thank you.

This concludes today’s conference call. You may now disconnect.