Rite Aid Corp (RAD) Q1 2020 Earnings Call Transcript

RAD earnings call for the period ending June 1, 2019.

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Rite Aid Corp (NYSE:RAD)
Q1 2020 Earnings Call
Jun 26, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Kelly, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Rite Aid First Quarter Fiscal 2020 Earnings Conference Call. (Operator Instructions) To download a copy of today's presentation, click the blue file button on the lower left corner of your screen and select the file.

Thank you. I would now like to turn the call over to Byron Purcell. Please go ahead.

Byron Purcell -- Investor Relations

Thank you, and good evening, everyone. We welcome you to our first quarter earnings conference call. On the call today with me, are John Standley, Chief Executive Officer; Bryan Everett, Chief Operating Officer; Ben Bulkley, Chief Executive Officer of EnvisionRxOptions; and Matt Schroeder, Chief Financial Officer.

On today's call, John, Bryan and Ben will provide an update on the business. Matt will provide an update on our first quarter results and review guidance for fiscal 2020. 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 I 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 with the Securities and Exchange Commission. Also, we will be using certain non-GAAP measures in our release and then the accompanying slides. The definition of these non-GAAP measures, along with the reconciliation to the related GAAP measure are described in our press release and slides.

With these remarks, I'd now like to turn it over to John.

John T. Standley -- Chief Executive Officer

Thanks, Byron, and thanks everyone, for joining us on today's call. While first quarter results did not meet our expectations due to prescription reimbursement rate pressure in the retail pharmacy segment and margin compression in the pharmacy services segment, we are pleased with improvements in our top line growth and operating efficiency in the retail pharmacy segment and Medicare Part D revenue growth in the pharmacy services segment. We believe that enhancements made to the McKesson supply agreement, generic purchasing improvements, revenue growth and the benefit of actions we have taken to reduce costs should drive improved results in both segments for the remainder of the year. In addition, we recently formed two strategic partnerships that will help us better meet the needs of our customers heading forward. The key element of our strategy is to drive a digital transformation that delivers personalized and seamlessly connected experiences to our customers across all in-store and online touch points.

Last week, we announced an exciting new partnership with Adobe to leverage the Adobe Experience Cloud and helping us bring this vision to life. Through this partnership, we'll gain access to real time personalization, deep customer journey analytics, content management and advertising capabilities to enhance our digital and marketing solutions, while forming deeper relationships with our customers. This partnership will allow us to the combined Rite Aid's health and wellness expertise with strategic guidance and operational support from Adobe Specialists, as we seamlessly connect our pharmacy, retail stores and online customer journey.

We also know that expanding our own brand offering presents a tremendous opportunity to grow our business, while delivering outstanding value to our customers. To help make the most of this opportunity, we've partnered with UNFI to introduce their Wild Harvest brand to Rite Aid stores in the second quarter. The Wild Harvest product line includes natural and organic items that will expand our current offering and further support our wellness transformation in the front end. Bryan will have more information on this partnership later in the call.

We're excited to be partnering with both Adobe and UNFI and we'll continue seeking our best-in- class partnerships with industry leaders to accelerate innovation and provide engaging new experiences for our customers across all channels. As we transform our business, we're also making significant operational progress as reflected in our first quarter results for key areas of our business. Our continued success with clinical pharmacy services and other script growth initiatives help drive a strong 3.7% increase in same-store prescription count, which exceeded our expectations and is our best script count performance in four years.

In the front end, we generated critical top line momentum in our focus front end categories and delivered positive year-over-year growth of 0.3%, when excluding cigarettes and tobacco products. And we continue to demonstrate good cost control as we also benefited from steps we've taken to reduce our cost structure, which allowed us to more than fully offset the anticipated reduction in TSA revenue. We achieved these results in the phase of continued reimbursement rate pressure. We expect our quarterly run rate of EBITDA to improve as we complete our generic bidding activity and those cost savings are fully recognized in our results.

Now, pharmacy services segment, results for our EnvisionRxOptions PBM were impacted by margin compression in the commercial business and key investments we're making to support current year and future growth. At the same time, we continue to see strong growth in Medicare Part D revenue and are excited about the progress we're making in the current 2020 commercial selling season. We're also improving operational efficiencies, as we look to further leverage the unique offerings of Envision in delivering a higher level of patient care.

Looking ahead, we're taking significant steps to transform our business and deliver enhanced customer experiences as we accelerate our path to the future initiative. These efforts are helping us identify significant opportunities to drive further growth and operating efficiency, and include building solutions to work with regional health plans to improve patient health outcomes, optimizing SKUs in our front end offering to free up working capital, improve front end profitability and improve the customer experience, assessing our pricing and promotional strategy and a continued review of our cost structure, which includes opportunities to use technology and vendor partners to help reduce costs. While still early in the process, we expect these initiatives to drive significant value in fiscal 2021 and beyond, while reducing our reliance on traditional pharmacy reimbursement rate models.

With that, I'll turn it over to our Chief Operating Officer, Bryan Everett for additional details about our go-forward strategy and an update on our key initiatives. Bryan?

Bryan Everett -- Chief Operating Officer

Thank you, John. And thanks, again, to everyone for joining the call. I'd like to start by saying that I'm excited by the momentum we're building as a team and optimistic about the opportunities ahead of us as we begin to see our transformation come to life. A key highlight has been our success with clinical pharmacy initiatives that helped us deliver our fourth consecutive quarter of same-store prescription count growth, and as John mentioned, our best performance in four years. Additionally, we were able to follow up last year's record number of immunizations by nearly doubling our first quarter ancillary immunizations, which protect our customers against conditions like shingles, pneumonia, measles and whooping cough. To accelerate this growth, we're providing additional prompts for ancillary vaccines like Tdap. I'd like to thank our dedicated pharmacy teams for providing a high level of care and service to our customers resulting in this business growth. In addition to this organic growth, we also continued to invest in prescription file buys and have an increased plan of $60 million for fiscal year '20. We'll continue to closely monitor the marketplace for file buy opportunities.

Additionally, we continue to work with our payer partners to gain access to limited and preferred networks. As part of this effort, we recently regained access to Anthem's Managed Medicaid network. Our continued success in these areas will be critical as we implement our path to the future strategy and work to help payers provide a higher level of care. To achieve this, we will continue to focus on driving operational efficiencies that free up time for our pharmacists to deliver best-in-class clinical pharmacy services through our AIM strategy. We believe these pharmacy services represent our gateway into value-based care and our best opportunity to drive positive patient health outcomes.

We are also generating important momentum in the front end. Quarter one was the first quarter in 12 quarters that we delivered positive front end same-store sales, minus cigarettes and tobacco products. We have particularly strong sales in consumables, personal care and OTC items, while also benefiting from the Easter shift. As we reimagine our front end business, we continue to expand our health and wellness offering by introducing additional items, including more natural, organic and cleaner or free from products. As John mentioned, we recently entered into an agreement with UNFI to add over 180 new Wild Harvest food items to the majority of our stores. The Wild Harvest line is a brand of natural and organic items and starts to hit store shelves next month. Another area focus on the front end continues to be growing own brand penetration over the next few years. We believe this area presents enormous potential and our go-forward plan introduces new items, enhances our product mix and additional consideration to how we market and promote these items.

One example of our own brand focus is the successful recent expansion of our iconic Thrifty Ice Cream brand to Idaho, Oregon and Washington. We are currently planning to expand the Thrifty Ice Cream brand to additional markets in the east. We are also gearing up for the relaunch of our best selling Rite Aid Pharmacy OTC brand later in the second quarter. Also during the first quarter, we began piloting the sale of CBD creams, lotions and lip balms at Rite Aid stores in Oregon and Washington to better meet the needs and preferences of our customers in those communities, response from customers has been positive so far.

In April, we announced plans to remove e-cigarettes and vaping products from all stores, while also increasing the aides to purchase tobacco products to 21 throughout the chain. We stated that we would implement both of these changes within 90 days. We are ahead of schedule in meeting both of those commitments and plan to have these changes fully implemented by July 1.

As we focus on delivering a higher level of care in the pharmacy and transforming our front end business, we also know that today's consumers want to engage with brands in a number of different ways. Our digital business, although relatively small, grew 115% in the first quarter and continues to be an important priority for the company. We're excited to be creating an innovative retail offering that enhances our in-store experiences and creates a seamlessly connected journey for our customers across all touch points.

Our partnership with Amazon to launch Amazon lockers at Rite Aid stores will help us take these efforts to an even higher level. Through Amazon lockers, customers can visit select Rite Aid locations to pick up their Amazon packages from a secure locker. Today, we've installed Amazon lockers at over 300 store locations and our plan is to have this pickup option available in 900 stores by the end of quarter two. We've seen an increase in customer traffic in those stores and expect that to continue with the rollout of additional locker locations. A key aspect of our strategy is to grow our business by driving additional traffic into our existing network of stores to experience our retail offering and the high level service and care we provide. We believe that new initiatives like Amazon locker give us a tremendous opportunity to achieve this critical objective.

In addition to our same day, no charge prescription home delivery for wellness+ gold and silver members in the majority of our markets, we expanded our Instacart pilot to additional stores during the quarter. As we continue to test this online and mobile app-driven service to further enhance our home delivery capabilities. As we look to seamlessly connect our in-store and digital experiences, we're excited about our strategic partnership with Adobe and believe that will be a game changer in how we engage with our existing customers and attract new customers. By leveraging Adobe Experience Cloud and the expertise of the Adobe team, we'll be able to deliver highly personalized digital marketing offers and also make it easier to navigate and shop on our app and website in addition to the caring moments that our associates deliver to customers in-store.

To help lead our marketing and merchandising transformation, we're pleased to welcome Eric Keptner, who has been named to the newly created position of Chief Marketing and Merchandising Officer, and officially joined our team earlier this week. Eric is an experienced retail executive, who has proven that he can integrate and manage all aspects of an organization's marketing and merchandising assets to provide great customer experiences, operate efficiently and deliver growth. We're pleased to have Eric join our team and believe that combining the responsibilities of marketing and merchandising under one leader will help us further accelerate our efforts to create a seamlessly connected customer experience.

As I conclude my remarks, I want to take a moment to sincerely thank our Rite Aid store associates, field leaders, distribution center partners and corporate team members for all that they're doing. I'm truly inspired by the passion that our associates have, as I visit our stores and distribution centers and engage with our teams. Day in and day out, Rite Aid associates are working to bring our mission of improving the health and wellness of our communities to life and embracing this opportunity to test and learn from new initiatives. I look forward to working with our team as we excel our path to the future strategy and position our company for growth.

At this time, I like to turn it over to EnvisionRxOption CEO, Ben Bulkley for an update on the pharmacy services segment. Ben?

Ben Bulkley -- Chief Executive Officer, EnvisionRxOptions

Thank you, Bryan. Despite the margin compression John mentioned in the EnvisionRx first quarter result, we feel good about the progress we're making to grow our business. We're substantially ahead of prior year period in lives won in our commercial lines as well as in our Part D plan. The margin compression in quarter one is attributable to a few large off-market contracts that did not renew last year. The bulk of the unfavorable year-over-year comparison will play out this year.

I'm pleased to say, we've renewed a number of very important client contracts in this last period as a result of a more disciplined account-management process. We are also in process of modifying several contractual relationships that we expect will contribute positively to EBITDA in quarter two and beyond in fiscal year 2020. Our progress in obtaining more lives in the commercial business is because of our position as an independent pharmacy services alternative offering a transparency model. Not only do we see it in the numbers, but the clients and prospects I continue to meet share their strong support for EnvisionRx as an essential option in the marketplace. There are also from these conversations very clear ways we can extend our relationship in enhancing our services and new product capabilities.

I've had the opportunity to spend more time with our technology and (inaudible) teams. Technology is, of course, a key enabler of all of our businesses. Our adjudication systems' capability remains a strong core on which we can build. Our strategy looking forward is to increase our technology investments to enhance our platform and add new revenue sources to the business. We're in a unique position to introduce capabilities to certain segments of the market because of our pass through model. To support our continued growth and our investments is a step up in operational excellence as a way of doing business. There are significant opportunities for us to simplify the business, to limit the rework and improve quality for our teams and clients. We're very excited by the progress we're making here. Ultimately, our growth will always be based on providing better and better levels of service, delivering innovative new products and of course, disciplined execution.

I'd like to provide some additional details for the results -- of the efforts toward continued growth in the Medicare Part D enrollment. All told, over the past calendar year, we've gained approximately 108,000 lives in the Part D sector and now have roughly 648,000 enrolled Part D members for plan year 2019. Additionally, since the close of the plan year 2017, we have now increased our Part D membership total by well over 250,000 lives. In other words, the strategic decisions over the last few years are continuing to pay off. Most notably, our number of chooser members in our Med D plans has increased from 77,000 in calendar 2016 to 364,000 today. As with Medicare Part D enrollment, specialty pharmacy continues to be an important opportunity in our go-forward strategy and Envision specialty first quarter revenue continued its growth in this key area of our business. Year-over-year, specialty revenues for the first quarter are favorable by approximately 23% compared to the first quarter of the previous year.

We're also excited about the progress in the current 2020 commercial selling season with several regional and health plan RFPs in-house, a number of finalist opportunities and new regional health plans already in place. We now project our commercial membership total to increase by approximately 320,000 lives year-over-year that have several exciting prospects in the pipeline. Envision is well positioned to take advantage of the consolidation that is occurring in the marketplace. On balance, we're very enthused by the progress we're making and the prospects for future growth.

Thank you for your time. Now I'll turn it over to Matt Schroeder, our Chief Financial Officer for more information on our financial results.

Matt Schroeder -- Chief Financial Officer

Thanks, Ben. And thanks to everyone for joining us today. On this evening's call, I'll walk through our first quarter results and review our fiscal 2020 guidance.

Revenues for the quarter were $5.4 billion, which were essentially flat to the prior-year's first quarter results. Net loss from continuing operations was $99.3 million or $1.88 per diluted share versus a net loss from continuing operations of $41.7 million or $0.79 per diluted share in the prior-year's quarter. Current year net loss was impacted by severance and restructuring charges related to our strategic initiatives and a reduction in adjusted EBITDA. Adjusted net loss in the current quarter was $7.5 million or $0.14 per diluted share versus adjusted net income of $1 million or $0.02 per diluted share in the prior-year quarter.

Our decline in adjusted net loss was primarily due to a decline in adjusted EBITDA, which was $110.3 million in the current quarter compared to a $138 million in the prior-year quarter. This was partially offset by a reduction in lease termination and impairment charges due to store closures in the prior-year's quarter.

Retail pharmacy segment revenue for the quarter was $3.86 billion, which was $33 million lower than last-year's first quarter. Our increase in same-store sales was more than offset by the impact of store closures. Same-store sales increased 1.4% in the quarter. Front end same-store sales were down 30 basis points and pharmacy same-store sales increased by 2.3% with same-store script count of 3.7% on a 30-day adjusted basis.

Total retail pharmacy segment gross profit dollars in the quarter were $39 million lower than last-year's first quarter and gross margin was 78 basis points lower as a percent of revenues. Adjusted EBITDA gross profit was unfavorable to last-year's first quarter by $43.8 million and 90 basis points worse as a percent of revenues. We faced continued reimbursement rate pressures during the quarter that we were not able to fully offset with generic cost savings and same-store prescription count growth. As noted in our release, $12.5 million of the reimbursement rate decline was due to an adjustment to our estimated exposure for a retroactive billing from a state Medicaid agency.

Retail Pharmacy segment SG&A expense for the quarter was $6.9 million and 41 basis points higher than last-year's first quarter. The increase in SG&A expense was driven by an increase in restructuring related charges that were offset by an improvement of $23.7 million or 40 basis points as a percent of revenue in adjusted EBITDA SG&A. Our adjusted EBITDA SG&A improvement was driven by strong labor and expense control, including the effect of our previously announced restructuring, partially offset by lower TSA fee income from Walgreens.

Our pharmacy services segment had revenue of $1.57 billion, which was an increase of $23 million or 1.5%. The increase was due to an increase in our Medicare Part D revenues. Adjusted, EBITDA for the pharmacy services segment of $26.3 million with $7.5 million lower than last-year's first quarter adjusted EBITDA of $33.9 million. Gross profit and margin were negatively impacted by margin compression in our commercial business. The decline in adjusted EBITDA was also driven by increases in SG&A expense as we continue to invest for future growth.

Our cash flow statement for the quarter shows a use of cash from operating activities of $51 million. We funded the annual employer 401(k) contribution and bonus payments, which normally have a negative impact on cash flow in the first quarter. Timing of receivables and payables also had an impact. We expect our cash flow from operations to fluctuate from quarter-to-quarter due to seasonal inventory builds in our retail business and the timing of the build of the current year CMS receivable, which occurs primarily in Q2 versus receipt of the prior-year receivable from CMS, which occurs in Q3. We expect to generate positive free cash flow this year due to initiatives to reduce inventory and improve payable terms. Our debt balance net of cash was approximately $3.4 billion at the end of our quarter and our pro forma leverage ratio was 6 times adjusted EBITDA, which takes into account the pro forma impact of the sale proceeds from the remaining distribution centers to Walgreens. Our liquidity of approximately $1.7 billion at quarter-end was very strong and with no debt maturing until 2023, we had the flexibility and runway to execute our strategic initiatives.

Turning to fiscal 2020 guidance, which we are confirming at this time, our guidance assumes a continued decline in prescription reimbursement rates, partially offset by prescription count growth, improvements in drug costs and continued strong SG&A expense control. We expect our quarterly run rate of adjusted EBITDA for fiscal 2020 to improve, given expectations for same store prescription growth, the timing of drug purchasing improvements and actions we are taking to reduce costs. We expect total sales to be between $21.5 billion and $21.9 billion and same-store sales to be in a range of flat to an increase of 1%. We expect adjusted EBITDA to be between $500 million and $560 million. We expect adjusted net income to be in a range of a loss of $0.14 per share to income of $0.72 per share. Our net loss guidance includes an estimate of $55 million for restructuring expenses related to the rightsizing of our organization that we announced last quarter and our transformation initiatives. A large portion of the restructuring expense is for severance costs for headcount reductions, which were largely recognized in the first quarter. However, the restructuring expense estimate may be refined in future quarters, as we further develop these transformation initiatives. Keep in mind that this restructuring expense is not part of adjusted EBITDA or adjusted net income.

Our fiscal 2020 capital expenditure plan is to spend $250 million, which includes $60 million for script file buys and investments in technology design and to accelerate our digital and omni-channel offering. We are planning to open or relocate 8 stores and remodel 70 stores in fiscal 2020.

This completes my portion of the presentation. And I'll now turn it back to John.

John T. Standley -- Chief Executive Officer

Thank you, Matt. Before we open the phone lines for questions, I'd just like to state that as a company, we have a tremendous opportunity to build on our momentum in key areas of our business and ultimately, redefine what it means to be a neighborhood destination for health and wellness. We have a strong foundation for growth, thanks to our trusted and well-known brand, award-winning customer loyalty program, innovative wellness store format and expanded offering of clinical pharmacy services.

We have a clear and customer-focused strategy that leverages our strongest capabilities and capitalizes on our biggest opportunities to deliver value in the retail healthcare marketplace. We have ample liquidity and a cost structure that's much better aligned with our current operations, which gives us the time and flexibility we need to execute this strategy. And we have an outstanding team of talented Rite Aid associates who are passionate about delivering a great experience to our customers. When combined with our new strategic partnerships and the investments we're making to transform our business, we believe we're on the right path in positioning Rite Aid for future growth.

That concludes our prepared remarks for the call. We will now open up the phone lines to your questions.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Lisa Gill from JPMorgan. Please go ahead, your line is open.

Michael Minchak -- Analyst -- JPMorgan

Thanks, it's actually Mike Minchak in for Lisa this afternoon. Just in terms of the discussion around new value-based pharmacy reimbursement models, we've heard yourself as well as some of the larger payers have been talking about that. Just wondering if you could talk about what those models might look like, I mean, should we be thinking about incremental payments for keeping patient to inherent or would you be going at risk for some component of your reimbursement? And as we think about those models, when do you expect them to be implemented more broadly, is this a counter 2020 impact or are we thinking more 2021 and beyond? And then as a follow up to that, how should we be thinking about the profitability of those new models versus the current model?

John T. Standley -- Chief Executive Officer

Well, our goal is to drive profitability up over time. So the current sort of gross margin retail reimbursement models are pretty painful, obviously, based on our recent results. So our goal is to find additional ways to create value here and get paid for it. I think there's a few different things that we're working on. Today, we do participate through Medicare Part D and certain performance-type networks. Honestly, oftentimes they're designed in a way that makes it difficult for us to really achieve any gain sharing. So our goal is really to try and come up with some ways that drive value for both payer partners and Rite Aid. We can do that based on kind of specific type measurements, things that drive star ratings, closed gaps and care and do things like that, and find a way to get compensated for that, some of that could be at risk potentially, but we can also be focusing more broadly on outcomes as well. And we've had our model like that in the marketplace previously. So I think we're kind of running down some parallel paths to really find the right solutions that meet the needs of our regional partners and the payer space.

Bryan Everett -- Chief Operating Officer

Mike, it's Bryan, I might just add that it is probably -- is an FY '21 calendar year '20 in terms of when we realize some of that additional income.

Michael Minchak -- Analyst -- JPMorgan

Got it. And then just wondering if you could provide any more color on the PBM selling season. Where do you stand in terms of your retention rate, how much of your book is left to be renewed for 2020 at this point? And then obviously with all that's going on in the marketplace, your pass through pricing model is probably seeing a lot of interest there. Is that interest sort of broad based across all customer verticals or sort of limited to a certain customer category?

John T. Standley -- Chief Executive Officer

It is across all segments we're seeing it, and we're nearly double the place we are now versus last year in our progress. So we're seeing really good momentum here. And we continue to see that pipeline grow, so we feel really good about that. Retention rates are above our goals, actually. So we feel good about overall where we are.

Michael Minchak -- Analyst -- JPMorgan

Got it. Appreciate the color.

John T. Standley -- Chief Executive Officer

Pieces of book of business, right, for this year?

Bryan Everett -- Chief Operating Officer

That's right.

Michael Minchak -- Analyst -- JPMorgan

Thanks for the color.

John T. Standley -- Chief Executive Officer

Okay.

Operator

Your next question comes from the line of Robert Jones from Goldman Sachs. Please go ahead, your line is open.

Kevin Hartman -- Goldman Sachs -- Analyst

Hey, this is actually Kevin Hartman on for Bob today. Thanks for taking the question. So just first, your adjusted EBITDA guidance would appear to require a pretty meaningful ramp in growth off 1Q levels, even though you'll have to manage through the TSA's potentially rolling off in the back half. So obviously the retroactive billing won't repeat, but outside of this, could you give more specifics on the biggest drivers of the ramp in growth? And what you think the biggest swing factors might be between you getting to the high end versus the low end of guidance?

John T. Standley -- Chief Executive Officer

Sure, I'll start Matt and you can clean up on this one. The first thing is we have reimbursement rate changes go into effect in the first part of the year. We are now largely through our biggest generic bid of the year that's coming in line or maybe just a little bit better than our expectations. So we have the value of those generic savings for the remainder of the year. We continue to have script count growth, which is going to help us push this thing forward. We're making really good progress on cost savings and we believe we have things lined up here, which we'll continue to fully offset the TSA fees as they ramp down later in the year. So although the first quarter obviously isn't where we wanted it to be, I think a lot of the things are lining up the way we expected to hit our results down the stretch here.

Matt Schroeder -- Chief Financial Officer

Yes, I -- the only thing I would add -- couple of things I would add to that, Kevin are -- we expect to see continued strong prescription count growth and we referenced getting back into some plans this year that are actually going to help further drive that prescription count growth, so I think that's going to be a positive. And then on the PBM side, there was some of the benefits on drug cost and that we talked about our off spin and flow through on the PBM as well in addition to some of the adjustments that Ben talked about in his commentary.

Kevin Hartman -- Goldman Sachs -- Analyst

Thanks. And then quickly on, you guys have mentioned last quarter there was an open reimbursement contract, I think, for fiscal '20 which you were still working. So I was wondering, if you could just give us a quick update on how that's going, if it's completed and if it was within what you were expecting?

John T. Standley -- Chief Executive Officer

Still working on it. Yes.

Kevin Hartman -- Goldman Sachs -- Analyst

Awesome. Well, thanks guys.

Operator

Your next question comes from the line of Carla Casella from JPMorgan. Please go ahead, your line is open.

Carla Casella -- JPMorgan -- Analyst

Hi. Can you give us what the amount of the TSA was in the quarter?

Matt Schroeder -- Chief Financial Officer

The TSA fee was probably about $40 million, Carla, down about $9 million from last year.

Carla Casella -- JPMorgan -- Analyst

And is that a good runway for the year?

Matt Schroeder -- Chief Financial Officer

No, it's going to ramp down even more throughout the year as we have stores roll off the TSA.

Carla Casella -- JPMorgan -- Analyst

Okay, and then --

Matt Schroeder -- Chief Financial Officer

I think what we said publicly, Carla, is we expect the TSA income this year to be about $40 million by half of what it was last year, so.

Carla Casella -- JPMorgan -- Analyst

Okay. That's great. And then on the -- you mentioned there are a few large off-market contracts that you didn't renew. That's all pharmacy services, right? Is that what you're referring to?

John T. Standley -- Chief Executive Officer

That's correct.

Carla Casella -- JPMorgan -- Analyst

And did that -- should that help gross margin going forward or I mean -- we didn't see it impact the gross margin this quarter. Is it something that's late in improvement or how should we think about it going forward? And are there others that you're considering not renewing going forward?

John T. Standley -- Chief Executive Officer

This year -- so experience at this year is dilutive. Next year, we will not feel that effect.

Bryan Everett -- Chief Operating Officer

So it's a contract. Just to back it's primarily one larger contract and there's a couple, I guess. But one larger one and it's a client that didn't renew last year.

John T. Standley -- Chief Executive Officer

Correct.

Bryan Everett -- Chief Operating Officer

That last year -- these are not competitive. They simply didn't renew.

Carla Casella -- JPMorgan -- Analyst

Okay. And the amount of the FILO outstanding, is that still $450 million?

Matt Schroeder -- Chief Financial Officer

That is correct.

Carla Casella -- JPMorgan -- Analyst

The face value. Okay.

Matt Schroeder -- Chief Financial Officer

Yes.

Carla Casella -- JPMorgan -- Analyst

But your liquidity number, the $1.7 billion. Is that FILO included in your ABL availability?

Matt Schroeder -- Chief Financial Officer

So the availability calculation is really based upon how much more we can draw on a revolver, Carla. There is a borrowing based component in the credit facility that also basically works into the FILO. But at the end of day, the $1.7 billion is additional draws we could do in a revolver.

Carla Casella -- JPMorgan -- Analyst

Okay. Great, thank you.

Operator

Your next question comes from the line of William Reuter from Bank of America Merrill Lynch. Please go ahead, your line is open.

William Reuter -- Bank of America Merrill Lynch -- Analyst

Good afternoon, it sounds like you've made some good progress on the commercial side on Envision. I think that you've accelerated the number for the 2020 season from last quarter. Is that number a net number or a gross number? And I guess do you expect to -- if it is a gross number, do you expect it to be offset by any losses?

John T. Standley -- Chief Executive Officer

It's a net number, including our projected sales through the rest of the year. And it does include -- it does include expected and anticipated losses. The good news is, we've signed the most important contracts at this point for renewal.

William Reuter -- Bank of America Merrill Lynch -- Analyst

Okay, that's helpful. And then would there be any changes in terms of your Medicare Part D preferred networks for 2020 plan year? Do you have an expectation there?

John T. Standley -- Chief Executive Officer

I mean we're always adjusting. There is not a substantial change in our strategy there.

William Reuter -- Bank of America Merrill Lynch -- Analyst

Okay. And then just lastly from me, I think that you will continue to get proceeds from the sale of the DCs to Walgreens. Do you have an expectation -- and I think it's a $160 million? Do you have an expectation for when you will be receiving those?

Matt Schroeder -- Chief Financial Officer

So, William, this is Matt. We -- under the TSA agreement, we would not receive. We don't have -- Walgreens doesn't have to take possession of these DCs until the end of the TSA, which is October of 2020. So the receipt of those proceeds could be as late as then.

William Reuter -- Bank of America Merrill Lynch -- Analyst

Okay, that's all from me. Thank you.

Operator

Your next question comes from the line of Karru Martinson from Jefferies. Please go ahead, your line is open.

Karru Martinson -- Jefferies -- Analyst

Good afternoon. Just on the $12. million (sic) [$12.5 million] charge for the retroactive billing, could you provide a little more color? Is that cash going out the door here in the next quarter or two? Or -- and does that fully cover you or will there be additional adjustments there?

John T. Standley -- Chief Executive Officer

So Karru, it's cash that's going to go out the door here probably over the next six to 12 months depending on the timing of all the retroactive billings. We've made our best estimate of what we think the amount of those retroactive billings is going to be. Until we kind of get the final billings, the number could maybe move a little bit off of that, but I'm pretty confident with the $12.5 million.

Karru Martinson -- Jefferies -- Analyst

Okay. And then when you talk about on the PBM -- in investing for future growth. Is this kind of the SG&A run rate that we should be using going forward? Or are these kind of onetime investments that enhance the scalability and then you can kind of leverage the growth off of that?

John T. Standley -- Chief Executive Officer

There's actually a little bit of both. It's elevating some to cover the volume increases. But there are some additional investments in our systems and our process capabilities. So we can scale with this increased volume.

Karru Martinson -- Jefferies -- Analyst

Okay. And just lastly, can you provide an update on the CEO search?

John T. Standley -- Chief Executive Officer

I can. So our Board has retained a nationally recognized search firm to assist with the search process. And with their assistance, the Board has identified several qualified candidates. The Board is currently working through the interview and selection process, recognizing that the search is the Board's highest priority. The board is making significant progress toward selecting a strong leader that will help Rite Aid to be successful.

Karru Martinson -- Jefferies -- Analyst

Thank you very much, guys. Appreciate it.

Operator

And we have one last question remaining. Your last question comes from the line of David Cook from Wells Fargo. Please go ahead, your line is open.

David Cook -- Wells Fargo -- Analyst

Hi, it's David Cook on for Bryan. One first touch on the retail side. I'm curious in the quarter, did you all see an impact to sales with regard to your tobacco 21 move as well as your move to a no longer sell vape and e-liquid products or is that just kind of organic consumption declines?

Ben Bulkley -- Chief Executive Officer, EnvisionRxOptions

Yes, we answered this question. So that's why if you kind of take those things out, the comp actually flips to positive. So we've kind of given you the impact there we're minus 30 bps with it and we're positive 30 bps without it.

David Cook -- Wells Fargo -- Analyst

Okay. And then the stores with the Amazon lockers, is there anyway you can provide kind of a relative lift in sales at the stores where you have those?

Ben Bulkley -- Chief Executive Officer, EnvisionRxOptions

First of all, we can see they're getting utilization from data that we get back. We need a little bit of time here to quantify and measure the sales impact of this thing. So you've got to give us little time to work with it and we'll see how it goes.

David Cook -- Wells Fargo -- Analyst

Okay. And then the pharmacy segment -- services side, I guess similar to Karru's question, the growth kind of related SG&A investments that's been a theme for a while now, I guess at what point do those kind of level off?

John T. Standley -- Chief Executive Officer

I think that we'll continue to see additional investments because we want to accelerate our growth. I think we'll begin to see some of it level off toward the end of this year. But we'll also know a lot more coming into next year on our selling season. So we may make some adjustments if we have significantly higher uplift.

Bryan Everett -- Chief Operating Officer

So you're going to continue to be a little elevated year-over-year. But in terms of run rate, you're in a pretty good place except for whatever you might do to bulk up for business season, right.

John T. Standley -- Chief Executive Officer

That's right.

Bryan Everett -- Chief Operating Officer

Yeah. So I think we're kind of -- I think we're getting close to a steady state. I think there's also some opportunity for efficiency that they're thinking about. And then it depends on how we do in Med D and whatnot and what enrollment looks like. But we may have to prolong some temporary help just to get through open enrollment and things like that.

John T. Standley -- Chief Executive Officer

Which is typical.

Bryan Everett -- Chief Operating Officer

Which is typical, yeah.

David Cook -- Wells Fargo -- Analyst

Okay. And then lastly, the $43 million of add backs for restructuring charges, what percentage of that or what amount of that is a cash restructuring charge?

John T. Standley -- Chief Executive Officer

It's predominantly cash restructuring charges. But one thing to keep in mind is a lot of severance costs were recognizing the expense upfront, but the actual payments are going to happen kind of come out over a period of time.

David Cook -- Wells Fargo -- Analyst

Okay. That's all from us. Thanks.

John T. Standley -- Chief Executive Officer

Okay. Well, I think that's all the questions that we have for this evening. So thanks everyone for joining us. We appreciate it.

Matt Schroeder -- Chief Financial Officer

Thank you very much.

Bryan Everett -- Chief Operating Officer

Thank you.

Operator

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

Duration: 45 minutes

Call participants:

Byron Purcell -- Investor Relations

John T. Standley -- Chief Executive Officer

Bryan Everett -- Chief Operating Officer

Ben Bulkley -- Chief Executive Officer, EnvisionRxOptions

Matt Schroeder -- Chief Financial Officer

Michael Minchak -- Analyst -- JPMorgan

Kevin Hartman -- Goldman Sachs -- Analyst

Carla Casella -- JPMorgan -- Analyst

William Reuter -- Bank of America Merrill Lynch -- Analyst

Karru Martinson -- Jefferies -- Analyst

David Cook -- Wells Fargo -- Analyst

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