At the end of the quarter we had 535 million outstanding under our 1.75 billion senior secured revolving credit facility. We also had outstanding letters of credit of 117.1 million at the end of the quarter.
Total debt since the beginning of the fiscal year has increased 11.2 million but advances from the sale of accounts receivable have decreased by 5 million.
So if you treat the advances from the sale of accounts receivable as debt, that redefined definition of debt balances since the beginning of the fiscal year have increased a net 6.2 million.
The 400 million accounts receivable securitization agreement continues to be a very good source of liquidity. At the end of the quarter we had utilized the securitization agreement for 325 million.
Regarding required maturities in fiscal 2007, on September 15, 2006, which is after the end of the quarter, we used the revolver to fund the 142 million of required maturities of the 12-1/2% note.
Regarding our remaining required maturities in fiscal 2007, we will refinance those either through draws on the revolver or as part of the financing for the acquisition of Brooks-Eckerd.
Finally, let’s discuss guidance. We are confirming our guidance previously given for fiscal 2007 for sales, same-store sales, adjusted EBITDA, net income or loss and capital expenditure.
We are estimating fiscal 2007 sales to be in the range of 17.4 billion to 17.65 billion. Sales guidance is based on same-store sales estimates of 2% to 4%.
17
We are estimating fiscal 2007 adjusted EBITDA to be in the range of 650 million to 725 million.
Our guidance reflects the fact that fiscal 2007 is a 52-week year and will benefit from an increased number of new generics, the planning of which is quite dynamic. Fiscal 2007 guidance also reflects our estimate of the effect of the planned timing and number of new and relocated stores.
We have included in our guidance the full-year effect of reduced reimbursement rates and increased prescriptions from the new Medicare Part D drug benefit plan that was introduced in late fiscal 2006.
And finally, we have included in our fiscal 2007 guidance, estimates of the negative impact from the Medicaid reimbursement rate reductions that may occur.
We are estimating our net operating results to be in the range of a net loss of $5 million and net income of $40 million. Or a loss of 7 cents per diluted share to net income of 2 cents per diluted share.
Attached to our press release is a table that reconciles our adjusted EBITDA guidance to our guidance for net income or loss.
Capital expenditures before sale and leaseback proceeds are estimated to be in the range of $450 million to $500 million for fiscal 2007. We estimate sale and leaseback proceeds to range from $50 million to $100 million.
This concludes our prepared remarks. (Patrice), we are now ready to take questions.
18
Operator: At this time if you would like to ask a question, please press star then the number 1 on your telephone keypad. We’ll pause for just a moment to compile the Q&A roster.
Your first question comes from Mark Husson with HSBC.
Mark Husson: BC. You probably haven’t had a chance to sort of think about this or bring it into your guidance. But you probably saw this morning Wal-Mart has decided to offer 290 generics in the Florida market at a $4.00 co-pay.
And on a conference call that they just had for press, they said that they wouldn’t be charging the insurance company anything more than the $4.00 co-pay for that generic product.
And clearly the reimbursement rate that Wal-Mart is getting for these products right now, that you’re also getting for these products is very, very significantly higher than that.
What do you think they’re doing and what will your response be? And what will happen if this gets rolled out across the country?
Mary Sammons: Well Mark, we just read the press release that came out this morning, as you have. And you’ve actually probably got more info because you got to listen to the - their call.
We’ll be interested to see the results of the pilot program in Florida. We don’t currently operate in Florida. But in terms of on a go-forward basis, it’s really going to depend on what happens in the Florida pilot and which other states Wal-Mart may initiate this kind of pricing.
19
As far as why they did it, I expect they should have said something on the call. But there could be any number of reasons that they’re doing it. And I think I need to spend a little bit more time understanding what they’ve done before I speculate on that.
Mark Husson: Well they say that the reason for doing it is that they want to make a difference to the lives of their customers. And that people have had to choose between - presumably, uncovered people are choosing between the cost of drugs and food, for instance.
But they have said they want to roll it out across the country. And because they’re making a big PR song and dance about it right now, you know, it would be extremely poor PR on their behalf to actually go back on that.
I mean our speculation is that they’re importing a significant number of generics from overseas markets and, you know, avoiding the Tevas and so on in this country.
You know, is there something you can do to your generic supply chain to improve the pricing of generic drugs to allow you to participate in competing?
Mary Sammons: I know on generics on a go-forward basis we think we have opportunities to also do some more direct buying, as you mentioned Wal-Mart is doing.
Mark Husson: Okay. And my final question is how many of the plans in which you operate, in the other states in which you operate would have, you know, pricing implications if for instance, the reimbursement rate on certain generics was to drop for cash customers to $4.00?
20
How many plans would that bleed over to? In other words, is there a minimum cost or a minimum price provision in some of these plans that would automatically also get that $4.00 co-pay?
I ask you because you had changed your retail prices — I want to say a couple of years ago — to reduce the cash cost of prescriptions. And then you moved them back up again because it screwed up some of the reimbursement rates in your plans.
Mary Sammons: Yeah. There were a number of instances when we did that when I think it dropped it below usual customary pricing. It would really be too early for me to give - try to give you that number. It’s something that we will certainly be looking at. We have a lot of homework to do around this issue.
Mark Husson: Okay. But there would be some bleed-over?
Mary Sammons: I expect there would be, just based on how the rules work today.
Mark Husson: Okay. Great. Thanks very much.
Operator: Your next question comes from Meredith Adler with Lehman Brothers.
Meredith Adler: Following up on Mark’s question about - by the way, congratulations on a good quarter.
Mary Sammons: Thanks Meredith.
Meredith Adler: You know, following up on his question, do you know right now whether the usual and customary language holds true when a generic drug has been (maxed)?
21
Mary Sammons: I believe it does.
Meredith Adler: Okay.
Mary Sammons: I don’t think that has any bearing on it. I think it applies in any instance.
Meredith Adler: Okay, which sounds like Wal-Mart is bringing their entire pharmacy business down hugely by this move.
Mary Sammons: Well now they didn’t do all of the generics because, like we’d have about at least 1500 generic products available in total. And they said - they mentioned about 300.
So they’re obviously picking a subset of them for economic reasons and they’re going to evaluate what they’re doing. And - but they’re by no means taking all of the generic products down.
Meredith Adler: Probably fair to say they’re picking older generics where the price is already pretty low?
Mary Sammons: That’s what - I would speculate that’s the case.
Meredith Adler: Okay. And then I was just wondering, on the Medicaid cuts we have been hearing some speculation that CMS is going to delay implementation of the move to AMP. Have you guys heard anything about that?
Mary Sammons: Probably no more than you have, that it still seems uncertain as to timing. So we haven’t heard that there will definitely be a delay. It would, I think be
22
good - very good for everyone if there is, to give them more time to really understand what they’re doing.
Meredith Adler: And so far there hasn’t been anything out of CMS about, you know, what AMP drugs - what cost will - what drugs will cost under AMP, right? I mean they haven’t done anything yet.
Mary Sammons: No. They haven’t published anything at this point in time. I think a lot of it they’re still attempting to determine how they keep prices updated and how they make sure that it’s a reasonable cost that really reflects what, you know, retail pharmacies are paying. And that’s still been one of the big sticking points.
Meredith Adler: My final question is just about pharmacy file buys and are you continuing to see a lot of opportunities? And is it actually in fact picking up because we’re hearing in the marketplace that even pretty well-run pharmacies are thinking about selling out.
Mary Sammons: Well I know that our file buy pipeline is very full. And I mentioned in my comments that a lot of them we expect to come through in the back half of the year. We allocate some pretty good dollars towards it.
But we also have very strong criteria for what we buy to make sure that it really is targeting the stores that we want to be able to pour the file in, that the mix of the scripts matches up with what we’re looking for, that we’re able to retain the pharmacy team. And I think that gets us high-quality buys and we take the time to develop them.
Meredith Adler: And my final question on that is have you seen any change in the pricing environment for the file buys?
23
Mary Sammons: | The pricing over the last several years has gone up somewhat. But I haven’t noticed anything dramatically different over the, say last six months. |
| |
Meredith Adler: | Okay. Thank you very much. |
| |
Mary Sammons: | Thanks Meredith. |
| |
Operator: | Your next question comes from Alexis Gold with UBS. |
| |
Alexis Gold: | Hi. Good morning. |
| |
Mary Sammons: | Good morning. |
| |
Alexis Gold: | Just a follow up on the, you know, the Wal-Mart question. You know, I think as we sit here and we look at where some of the - your competitors’ stocks are (trading), can I just kind of get a sense for - I know it’s really - how you think they might react? And how you think, you know, the drugstores as a whole might have to react to changes in the mass channel? |
| |
Mary Sammons: | I’m not sure I heard all your question because there was a lot of static. |
| |
Alexis Gold: | Oh, sorry about that. |
| |
Mary Sammons: | But I think from a competitive standpoint I mention that we don’t operate in Florida. So I think we’ll see what other competitors do in terms of what Wal-Mart has done and then we will evaluate from there. |
| |
Alexis Gold: | Okay. I guess, you know, back to, you know, the - I don’t know how much you can comment on the Rite Aid-Coutu merger. But just trying to get a sense |
24
- I know that you filed an 8-K this week. That was really helpful with follow-up and recently asked - and frequently asked questions.
But, you know, can you give us a sense - you know, I know we continue to hear noise out of the bondholder groups. You know, how closely are you working with any of these groups? And do you think that’s going to continue to the close or do you expect any kind of settlement beforehand?
Mary Sammons: You’re - - hold on just a minute. I think your question related to what kind of discussion is going on with the bondholders and et cetera. And I’ll let Kevin just kind of give you a brief update there.
Kevin Twomey: We respond to all the questions. And as a result of the volume of questions, we thought it best to in fact sort of capsulize those into the frequently asked questions and answers document that we filed on our Web site, as well as the file on 8-K.
I’m not quite sure, Alexis, I understood your question. We do expect to assume the 8-1/2% note.
Alexis Gold: Right. No, I think we realize that you expect o assume them. But obviously I think there has been, you know, two pretty - two different camps out of the bond universe. And I think, you know, there’s a group that (unintelligible) and a group that does.
And I know that, you know, we’ve heard a lot of noise about bondholder groups forming and just wanted to get a sense for how you’re working with them, how closely you’re working with them or if you’re not working with them at all. And just, you know, continue to believe that the 8-1/2s are going to be assumed and there’s no reason to work with them.
25
Kevin Twomey: We’ve not been contacted by any bondholder group.
Alexis Gold: Okay. That’s helpful. And then, you know, you talked about addressing the 1800 associates. You know, it sounds like the response has been pretty good. But obviously the results we have seen out of Coutu have been probably less than stellar over the last couple of years.
Just trying to get a better sense for - you know, it sounds like it is a good group. But maybe, you know, what changes you can make early on that they were not able to actually make themselves in order to really drive results as a stand-alone.
Mary Sammons: It’s important to remember that your store and field associates have to execute the interaction with the customer. And that’s in spite of what may be going on from a corporate point of view.
So when there were integration difficulties, it can reflect on a store when a store may not have had really any control over what happened.
And I would say that for - from what I’ve seen of the Brooks-Eckerd associates, they’re committed to the business. They work very hard to deliver a very positive customer experience. Culturally, we share the same kinds of values, they share the same that we have and we believe we’re bringing really good team members to our team.
And the issues that they had - that Brooks-Eckerd had were really ones of not having enough infrastructure to really handle this, to roll out systems without having to go and try to develop them first. They didn’t have management depth to do this and - whereas we don’t have that situation.
26
We’ve spent the last number of years building strong infrastructure, building the right kinds of system that we can convert these stores to. We have depth in our management team. We all have experience in M&A activity. So we’ve got the capabilities to handle this and handle it well.
Alexis Gold: Great. Thanks very much.
Mary Sammons: Thank you.
Operator: Your next question comes from John Ransom with Raymond James & Associates.
John Ransom: Hi.
Mary Sammons: Hi John.
John Ransom: Good morning. Just as a refresher, as we look at your store base today, and this is before the Brooks-Eckerd, what percentage of your stores would you say that are in the format that you’re happy with? And what percent still need to either be relocated or renovated?
Mary Sammons: John, we have - we’ve obviously gone through that process and we have about 400 stores that we’ve identified as relocation candidates. And of course, we’ll be reviewing all of this in light of, you know, the new store base and geography as we move forward too.
And then certain other stores are what you’d call “remodel candidates.” And then a part of our strategy is where we are obviously missing stores in a given neighborhood or part of a market. And that also fits into our growth initiative.
27
John Ransom: | And remind me what percentage of your stores now are freestanding with 24-hour pharmacy. |
| |
Mary Sammons: | About 55% of them are freestanding stores. |
| |
John Ransom: | Okay. |
| |
Man: | Fifty-four. |
| |
Mary Sammons: | Fifty-four percent. |
| |
John Ransom: | Fifty-four percent are freestanding. Okay. And as, you know, certainly your comps has lagged a couple of the companies out there. Do you think as you look at market share stats by market - you obviously have very high market share in some slower growing markets. |
| |
| But does your data show that you’re taking share, holding your own or are you still losing a little bit of share in your core markets? |
| |
Mary Sammons: | Well one of the reasons it was important for us to have a growth initiative is that by - when we weren’t growing for a number of years, our competitors were entering our marketplace with more stores. |
| |
| If you look at our individual store sales, our sales per store have improved. So that tells me in the neighborhoods we have stores, we have gained market share. |
28
But from the total market perspective, there are going to be places that we need to regain the position that we have. And that’s what our growth initiative was all about.
John Ransom: But are you looking at market-by-market data from say an IMS or somebody? Are you - do you know kind of where your market share trends look like market by market and what they look like over the last couple years?
Mary Sammons: Yes. And we track against what’s in metro market year over year and we look at all that kind of data. We look at category data in terms of market share and where our opportunity is. So store market share as well as category market share.
John Ransom: And what’s your conclusion looking at that data? That you’re gaining share, holding on or losing share still?
Mary Sammons: It’s going to depend by market. It really does. I mean there are going to be markets that, you know, you can clearly look to where we gain market share as a result of just improving our customer experience in those markets, even without adding a lot of stores.
There are going to be other markets where our share has gone down because competitors have opened up a lot more stores. But that’s where we’ve really focused our growth initiative. And I mentioned that we fully intend to continue that growth initiative, even with the acquisition.
And those core markets may alter slightly. But for the most part they’re going to remain the same as we identified a few years ago in terms of where we’re going to put those about 800 to 1000 stores over the next five years.
29
John Ransom: Okay. Got you. And then my other just, again kind of big-picture question, if you go back to the turnaround, you know, yourself and your predecessor, the story was, you know, our gross margins are lower because our sales per square foot is lower.
As you look today versus kind of where you started, you know, with the mess that you were left with, are you happy with kind of the sales per square foot numbers that you’re producing now because I mean it seems to me like you’re - - kind of been in an EBITDA flatline, you know, plus or minus for three or four years.
And I guess looking back, you know, maybe the sales productivity numbers might have been - people might have been thinking that might have been a little different than where they are.
Are you happy with them? Or do you think maybe the market’s expectations were a little inflated, just given the magnitude of the job you had to do?
Mary Sammons: Well obviously we’re very pleased that our trends have been strengthening over the last - heck, now it’s going to be four quarters and - because it is important for us to get the productivity in the existing stores up.
And that - particularly on the pharmacy side of the business. That’s where we focused our attention. It’s where we still have a gap to close.
So I believe we have a lot more opportunity out there. And we intend to keep working initiatives to continue closing that gap.
John Ransom: Okay. Thanks.
30
Mary Sammons: | Thank you. |
| |
Operator: | Your next question comes from Steve Chick from JPMorgan. |
| |
Steve Chick: | Hi. Thanks. |
| |
Mary Sammons: | Hi Steve. |
| |
Steve Chick: | Hi. Just a question on your - the pharmacy gross profit margins for the quarter - up two basis points. I guess with the, you know, with the high-profile generics during the quarter, I thought that would have been a little more. |
| |
| Did that, you know, did that meet your plan? And can you just speak to how you’re feeling about that generally? |
| |
Mary Sammons: | Well remember, I think we said it would probably take us a good year to get the Medicare part of it in terms of volume to the levels that we thought it was going to be. And then the generics to the levels that they needed to be to really offset the negative impact from Medicare Part D. |
| |
| You know, we’ve had nice growth in our Medicare Part D base. It was 11% in Q1. It’s almost 13% now and it has been growing week to week. And yet it’s going to take that significant growth to offset the reimbursement that comes along with that script. |
| |
| And generics have been a real positive in helping offset some of it but they don’t yet offset all of it. As the generic penetration continues to improve and I mentioned last quarter that our goal is 66% of our mix to be generics by June of next year, we believe that that is going to be key to offsetting that reimbursement hit. |
31
